An Open Letter to Columbia Acorn Founder Ralph Wanger
We discuss our concerns about the Acorn funds.
Mr. Ralph Wanger
Founder, Advisor, and Trustee
Columbia Wanger Asset Management
Dear Mr. Wanger:
For many years, Morningstar analysts have praised the stock-picking skills of the managers and analysts at your firm, Columbia Wanger Asset Management (WAM). We have been impressed by the team's ability to navigate a variety of market conditions, employing a conservative growth approach that stood apart from those of many aggressive small-growth offerings on the market.
However, we have grown increasingly concerned in recent years about issues surrounding Acorn's retail funds. These worries have grown sharp enough that we have found it increasingly difficult to recommend the Acorn funds to investors--despite the stock-picking skills of the WAM team.
Looking back, the sale of WAM to Liberty (and Liberty's subsequent sale to FleetBoston and then Bank of America (BAC)) has not served fund shareholders particularly well. At first, we believed the sale wouldn't be particularly problematic. After all, WAM remained a stand-alone stock-picking firm, and the Acorn funds retained their own board of trustees.
While we think that the board has done a good job of helping to preserve WAM's stock-picking philosophy, we are concerned by a host of other problems that have arisen as a result of WAM's sale to Liberty. First, we think it's unfortunate that new investors to the Acorn funds are required to pay much higher expenses than they would have for Acorn's closed no-load shares. Second, we have seen several major management departures from WAM since the sale: Mark Yost, Margaret Forster, Roger Edgley, Marcel Houtzager, and John Park, not to mention the retirement of both you and Leah Zell. That string of exits has been enough to make us wonder about WAM's ability to retain a large, highly trained analyst staff, especially on the international side where the departures have been particularly significant. Third, the fund's parent company--Columbia Management--recently found itself at the center of one of the worst market-timing fund scandals that we analysts have seen. We were dismayed to learn that Acorn funds were among those timed. We were even more troubled to read statements in the New York Attorney General's complaint indicating that Acorn managers' concerns over market-timing were essentially ignored and overridden by the funds' distributor. In other words, the complaint indicated that the distributor had considerable power over the Acorn funds--despite WAM's supposed independence from its parent firm.
Because of these problems, we are writing this open letter to you to urge you and the rest of the Acorn board to consider making substantive changes to the Acorn funds.
First, we would urge the board to explore ways to lower expenses--especially on the loaded share classes. At more than $12 billion in assets, Columbia Acorn (ACRNX) is the largest offering in the small-growth category. However, the front-loaded A shares cost 1.33%. Although that's not exorbitant by small-growth standards, it is very high given the fund's enormous size. Moreover, the fund's A shares cost a full half percentage point more than the no-load Z shares. Part of that huge gap can be explained by the A shares' 0.35% 12b-1 fee--itself an extremely high fee for an A share and costlier than 12b-1 fees on many other A-share Columbia funds. But why must the A shares cost even more than the no load shares--above and beyond the 12b-1 fee? To make matters worse, the remaining Acorn funds are even costlier than flagship Columbia Acorn.
Thus, we'd encourage the board to find ways to narrow the gap between expenses on Acorn's closed no-load shares and its loaded share classes. The board could start by lowering the A-shares' 12b-1 fees to a more reasonable 0.25%, but it should include other efforts at cost cutting.
Mr. Wanger, you yourself criticized high-cost funds at last year's Morningstar Investment Conference, stating that a fund "with a 5.5% load and a 1.5% expense ratio wasn't a compelling value proposition" in the current market environment. Why wouldn't you hold the Acorn funds to the same standard?
Second, we'd encourage you and the Columbia board to find other ways to promote Acorn's independence from its parent firm, Columbia Asset Management. As we said, we think the board has done a good job helping to preserve Columbia Wanger Asset Management's independence as a stock-picking firm. But as the market-timing scandal demonstrated, an independent advisor isn't enough if the organization selling your funds isn't acting in the best interests of the funds' shareholders.
We were happy to see in the Acorn board's recent letter to shareholders that the board has established a compliance committee to oversee issues related to market-timing and other compliance-related matters. However, we think such a committee is only a first step. We would urge you to carefully evaluate the fund's contract with its distributor in the coming months. We hope that you can build a relationship with the fund's current distributor that better respects Acorn funds' shareholders. This is particularly important given the fact that Columbia Management is now owned by Bank of America--which was involved in a huge timing scandal of its own. Although both Columbia's parent company, FleetBoston, and Bank of America reached settlements prior to the merger, we continue to have concerns about the corporate culture of WAM's parent company. And if the Acorn board cannot get the best deal possible with Columbia Funds Distributors, we would urge it to consider other fund distribution firms as potential alternatives.
We hope that these concerns are addressed in the coming months. We still have a high regard for the investment philosophy at Columbia Wanger Asset Management, but stock-picking skill alone is not enough. We would hope that concern about preserving your legacy at WAM would drive you and the board to make some significant reforms. We hope to see better news from the Acorn funds in the months and years to come.
Senior Mutual Fund Analyst
Emily Hall does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.