NEWS ANALYSIS
Turmoil at Strong hits Edvest
Investors wondering whether this is where they really want to be
By KATHLEEN GALLAGHER [email protected], Journal Sentinel
Sunday, September 14, 2003
Two years ago, the state and Strong Capital Management Inc. rolled out a new college savings plan with a bus tour that stopped in six Wisconsin cities.
Many who signed up for that plan, called Edvest, are wondering now whether this is a bus they still want to be riding, given New York Attorney General Eliot Spitzer’s recent allegations against Strong, which is based in Menomonee Falls.
Strong has a five-year contract with the state, which began in 2001, to administer and manage Edvest’s $369 million in assets, said Jack C. Voight, Wisconsin’s state treasurer.
All of the Edvest investment options are Strong funds. One of those options, the Strong Growth Fund, is among the five Strong funds Spitzer has singled out. Spitzer said the investment company allowed a New Jersey hedge fund to market-time the fund, or trade it more often than other investors could.
Spitzer also alleged Strong provided Canary with lists of portfolio holdings for the Strong Growth and three other Strong funds more often than other shareholders got them.
Marty Olle, the Edvest program manager, said Edvest’s board will discuss Spitzer’s allegations against Strong at a regularly scheduled meeting this month, but it probably won’t make any changes.
“We’re not in a position to evaluate if there were any increased costs,” he said.
Investors in Edvest and Tomorrow’s Scholars, another state- sponsored college savings program that contains Strong and American Express funds, have nearly $182 million, or about 19%, of the $936 million of assets in both programs, in the Strong Growth Fund, according to Olle.
Spitzer’s allegations have prompted a number of class-action lawsuits against Strong and captured the attention of federal securities regulators. Investors in Wisconsin’s college savings programs are allowed to transfer their assets to another plan once a year. So, should they get out of the Strong Growth Fund?
Experts say that they don’t think Strong’s current woes will directly hurt fund shareholders financially but that there may well be other reasons to bail.
“Strong’s not going to go out of business,” said Arman Rousta, president of 401kid Inc., a registered investment adviser in New York whose online product helps families do financial planning for education. “If anything, they’re going to get a slap on the wrist and pay a $20 or $30 million penalty.”
Christopher J. Grant said the problem Spitzer alleged has most certainly stopped.
“Whatever costs there are are fixed — it’s not going to happen in the future,” said Grant, a portfolio manager at Grant Koehler & Levin Ltd. in Mequon.
Still, Strong is the only one of the four funds Spitzer highlighted that hasn’t said it will reimburse investors if it finds the hedge fund’s trading came at their expense.
“My bottom line right now is I want to see Strong provide a public statement to all account holders that they will make every investment account with Strong whole like other vendors have,” Voight said.
Paul Herbert isn’t waiting for that. He says he thinks there are reasons to exit Wisconsin’s plans even without considering Spitzer’s allegations.
The direct-sold Edvest program has fees of 1.15%, nearly twice as high as the 65 basis point fees such programs in Minnesota and Iowa carry, said Herbert, a mutual fund analyst at Morningstar Inc. in Chicago.
Participants in the Wisconsin plan aren’t getting “best of breed” performance for their higher fees, either, Herbert said.
Still, Rousta says he wouldn’t be so quick to jump out.
“Especially if you’re a Wisconsin resident who is benefiting from a state tax deduction — that’s something you don’t want to give up quite yet,” he said. Participants in the Wisconsin plan can take deductions related to as much as $3,000 of annual contributions.
Wisconsin residents, however, may want to consider putting any amounts in excess of $3,000 a year in other states’ plans, Rousta said.
“They might want to put it with someone . . . like Vanguard — which has low fees, has fired almost no one and is owned by shareholders,” Rousta said.
As for issues participants might have with allegations that Strong put the hedge fund’s interests ahead of those of mutual fund shareholders, participants have an immediate way to make a statement, Grant said.
“What are your other options here — Fidelity, Merrill Lynch — everyone’s engaging in similar unethical activities,” Rousta said.
“You’re rolling the dice whenever you go into a mutual fund — I hate to say that and scare investors, but they should know that before they take the risk.”
To read Spitzer’s complaint and exhibits against Strong: www.oag.state.ny.us/press/2003/sep/canary complaint.pdf
