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Fund Times

Fund Times: NASD May Bring Action Against Evergreen

Plus "new" Weitz fund and more.

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Evergreen Investment Services (EIS) said on Wednesday that the National Association of Securities Dealers (NASD) could bring enforcement action against the firm's mutual fund broker/dealer. At issue is whether EIS directed mutual fund trades to certain brokerage firms, one of which was an EIS affiliate. In exchange, the brokerage firms agreed to recommend Evergreen funds to their clients. The practice, called "directed brokerage," is against NASD rules because the brokerage firms executing the trades may have an incentive to recommend mutual funds that aren't in clients' best interests. In addition, fund shops engaging in these arrangements may not receive best execution for their trades. According to the filing, EIS specifically "arranged for fund portfolio trades to be directed to broker-dealers (including Wachovia Securities, LLC, an affiliate of EIS) that sold Evergreen fund shares during the period of January 2001 to December 2003 and provided non-cash compensation by sponsoring offsite meetings attended by Wachovia." Evergreen is complying with the NASD, but contends that it did nothing materially wrong, stating, "The rules governing these practices were subject to interpretation."

Evergreen Giveth, a Little
Evergreen has taken efforts to reduce costs; however as the most recent example illustrates, they still have a long ways to go.  Evergreen Balanced (EKBAX) is lowering transfer-agent (TA) fees (transfer-agent fees pay for such services such as maintaining shareholder records and providing automated phone lines) per account from $21.75 to $21.50. Evergreen's transfer-agency fees are still on the high side, however. Prominent fund families such as Fidelity and Vanguard charge less than half that amount, and larger shops like American Funds charge just one third of that. While investors should be more concerned with a fund's overall expense ratio (as that is an aggregate of all of the fund's expenses), looking at the expense ratio's components, including TA fees, provides insight into how carefully the board is watching the overall fee structure.

Weitz to Convert Partnership to Mutual Fund
Longtime  Weitz Value (WVALX) and  Weitz Partners Value (WPVLX) manager Wally Weitz filed documents with the SEC to convert Weitz Partners III Opportunity, a limited partnership, into a traditional mutual fund. Limited partnerships (often referred to as hedge funds) are limited to 99 partners, can undertake any type of investment strategy, and are not subject to the same SEC regulations and disclosures as are open-end mutual funds. Weitz decided to convert the partnership into a mutual fund to increase the fund's availability beyond the 99 partner limit, but a minimum investment level of $500,000 will guarantee that the fund will still remain out of reach of all but the most well-heeled investors. Weitz has had encouraging long-term success with a former limited partnership turned mutual fund-- Weitz Partners Value (WPVLX)--but Partners III Opportunity has a much more wide-open style that includes heavier use of derivatives and short sales.
Physical Investments Lost in Bankruptcy?
 Leuthold Core Investment (LCORX), a wide-ranging moderate-allocation fund, invests a small percentage of its assets in actual physical metals--it currently holds just over 6% of its assets in metals such as copper, aluminum, zinc, and nickel. Just over a month ago, the company that "administers" those metals was sold to Refco Inc.,  the financial-services conglomerate that recently filed for bankruptcy protection. Leuthold Core Investment has hired lawyers in an effort to ensure that the metals remain safe during the bankruptcy proceedings. Manager Steven Leuthold said he does not expect there to be a significant loss to the fund's assets.

Putnam Manager Departs
Putnam Investments, which has seen a slew of manager departures over the past two years, is losing another one. Peter Hadden, who had been one of two comanagers on  Putnam International New Opportunities (PINOX) with lead manager Stephen Dexter, is leaving Putnam. Dexter said he doesn't plan to immediately hire a replacement for Hadden.

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