Nov. 12–As state and federal investigators look into alleged improper trading at Strong Capital Management, data from mutual fund tracker Lipper raises new questions about two of the firm’s funds.
According to Lipper, investors have cycled millions of dollars in and out of Strong’s Asia Pacific fund and Overseas fund since 1999.
Experts said the extremely active trading exceeds industry norms. It’s a practice Strong has implied it discourages, but has allowed for certain investors.
“Any (fund that’s) consistently above average in this regard, you wonder what kind of customers do they have?” said Jeff Tjornehoj a research analyst with Lipper. “There may be a very good reason for it but until I hear it, I’m curious.”
In 2002, investors put $316.3 million into the Asia Pacific fund and redeemed shares worth $290.1 million from it, according to Lipper, of Denver. The redemptions were worth 4.6 times more than the fund’s average net assets of $63.1 million for 2002.
By comparison, Lipper reports other Pacific region funds had 2002 redemptions worth only 74 percent of their average net assets.
Between 1998 and 2002, the Asia Pacific fund posted yearly redemptions worth between 2.4 and 5.8 times its average net assets. The Strong Overseas Fund also posted above average redemption rates.
Experts cautioned the data in no way prove market timing — active trading that takes advantage of price discrepancies such as differences in closing prices between U.S. and foreign markets. But they said the presence of such heavy trading in a Pacific region fund a target for market timers did raise red flags.
“If there was market timing, that’s exactly what you’d expect to see,” said Michael Goldstein, a finance professor at Babson College in Wellesley, Mass.
In a statement, Strong spokeswoman Stephanie Truog said, “In September 2002 Strong implemented a 1 percent (early) redemption fee on its international funds designed to limit disruptive market timing … The proceeds from the fee are paid to the funds, directly benefiting the investors.”
A September complaint by New York Attorney General Eliot Spitzer alleged that Menomonee Falls-based Strong had given a New Jersey hedge fund market timing privileges in several Strong funds. Though market timing is not illegal, Spitzer’s office suggested Strong might have misled investors by implying it would discourage timing practices.
Market timers sometimes trade in funds with Asian holdings to exploit pricing inaccuracies which occur when U.S. companies announce important news while Asian markets are closed. Jeff Tjornehoj said Strong’s “fairly low-cost” 1 percent redemption fee might not be enough to deter market timers.
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