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Fund Times

Fund Times: Amerindo Founders Jailed on Fraud Charges

Plus, fee changes at Fidelity, news at Citigroup, and more.

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Fund investors previously had little reason to stick around, but any rationale for owning  Amerindo Technology  (ATCHX) is completely gone now.

Federal agents arrested comanagers Alberto Vilar and Gary Tanaka in late May on suspicions that they used investor money to donate to charities and buy racehorses. Moreover, the fund's board has removed the duo from the fund and shut off new sales, effectively taking control of the offering. The fund will remain in limbo while a search for a new advisor is under way. (The latest news indicates that a judge ordered the appointment of a monitor to watch over client accounts.)

Fortunately, the charges don't relate to the mutual fund. The official report indicates only that the alleged fraud involved other business ventures at the firm. However, the investigation is continuing, so that doesn't rule out the possibility that improprieties occurred at the fund. What's more, the money Vilar is accused of inappropriately directing to charities came from a single investor. The allegations, if true, raise serious questions about management's ethical standards.

We've argued for some time now that investors had reason enough to avoid this fund. For one, its 2.25% expense ratio is much too high. For another, its narrow tech- and biotech-stock focus and highly concentrated portfolio (fewer than 15 holdings as of January 2005) make it too volatile. While the fund was capable of delivering some jaw-dropping returns, as it did in 1999 and 2003, such showings don't make up for below-average returns in other years.

Fidelity Lowers Fees on Bond Funds
Fidelity announced Wednesday that it was cutting expense ratios on its investment-grade taxable-bond funds effective June 1. Over the past year Fidelity has made a number of fee cuts, including the elimination of sales charges on its sector funds and the reduction of expense ratios on some of its index funds.

Fidelity has built one of the best fixed-income management teams in the country, so this is welcome news. Fidelity said it has cut expenses at its 12 no-load investment-grade bond funds to a uniform 0.45%. Those funds' expense ratios had ranged from 0.50% to 0.65%.

Among big fund companies, Fidelity now ranks second-cheapest behind Vanguard, whose taxable-bond fund expenses range from 0.17% to 0.28%. There are some other no-load boutiques that offer funds with expenses similar to Fidelity's. For example,  Dodge & Cox Income (DODIX) and  Payden Core Bond (PYCBX) charge 0.44%.

Fidelity also cut expense ratios at its eight investment-grade taxable-bond Advisor funds--which makes these offerings much more attractive relative to rival load funds--and one variable insurance product--by 10 basis points (0.10%).

Fidelity pointed out that "expenses will be fixed at this level contractually, meaning that expenses cannot be raised without a vote of the funds’ Board of Trustees."

Citigroup in Hot Water
In a follow-up to a story that first broke in October 2004,  Citigroup  (C) recently agreed to pay $208 million to settle charges with the Securities and Exchange Commision. Two of its subsidiaries (Citigroup Global Markets Inc. and the advisor to Smith Barney mutual funds, Smith Barney Fund Management) illegally profited from transfer-agency fees at the expense of fund shareholders. The SEC document says that Smith Barney funds earned nearly $100 million over a five-year period. It also states that the subsidiary purposely misled the fund's board of directors when representing the true nature of the transfer agency. The complaint states that Smith Barney Fund Management, which subcontracted transfer-agency work at reduced rates to First Data Investor Services Group, kept most of the cost savings for itself. In exchange for the work, the outside vendor agreed to channel investment-banking and asset-management business to Citigroup.

Etc.
William Blair is launching a new fund, William Blair Emerging Markets Growth, per a new prospectus filed May 24, 2005. The fund will primarily invest in emerging markets outside of the United States, Canada, Japan, Australia, New Zealand, Hong Kong, Singapore, and most of Western Europe. It will be comanaged by Jeffrey A. Urbina, W. George Greig (who also runs the solid  William Blair International Growth (WBIGX)) and Todd M. McClone. Finally, expenses will be capped at 1.65% for the first year, which is well below the diversified emerging-markets fund average of 2%.

 Charles Schwab (SCH) joins the life-cycle party per a new prospectus dated May 22, 2005. The company is launching five target-retirement funds: Schwab Target 2010, Schwab Target 2020, Schwab Target 2030, Schwab Target 2040, and Schwab Retirement Income. The underlying funds include six Schwab and four Laudus funds. Compared to the typical life-cycle offerings, the asset allocation on these proposed funds leans toward the aggressive side. For example, the Target 2010 fund invests 64% of portfolio in equity funds, whereas the more conservative  Vanguard Target Retirement 2015 (VTXVX) devotes only 48% of assets to stock funds. What strikes us as odd is that, unlike three of the target-retirement offerings from Fidelity, Vanguard, and T. Rowe Price, the Schwab funds will charge a fee above the underlying fund costs. As such, we'll recommend that investors go with one of these rivals rather than Schwab's new offerings.

 Bridgeway Ultra-Small Company Market (BRSIX) reopened to new investors on June 1, 2005. Admirably, the fund company warned investors that micro-cap stocks have had a strong run over the past six years, and therefore expectations for similar results going forward are likely unrealistic. Despite a rough start to 2005, the fund's 21% annualized returns for the trailing five-year period through June 1, 2005, have bested the Russell 2000 Index by more than 15 percentage points. As such, only investors with a long time horizon--and those willing to stomach the potential volatility of micro-cap stocks--should consider this fund.

Dieter Bardy does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.