Cash flees families of funds in inquiry
Withdrawals for Strong, others top industry rate
By AVRUM D. LANK [email protected], Journal Sentinel
Saturday, October 18, 2003
Money flowed out of mutual funds owned by Menomonee Falls-based Strong Funds and three other firms implicated in a Wall Street scandal at a rate higher than that for the industry as a whole during September, a report released Friday says.
The Lipper FundFlows Insight Report says that about 25% of the total outflow from funds in September came from funds owned or managed by Strong, Bank of America’s Nations Funds, Banc One and Janus.
“Their aggregate mutual-fund assets as of August 31 were slightly over 6% of the industry total, so one does see an out-sized flow in relation to relative size,” the report says.
On Sept. 3, New York State Attorney General Eliot Spitzer implicated the four companies, but did not charge them, in a scheme to allow a New Jersey hedge fund to trade in and out of some of their mutual funds more often than other shareholders.
The Lipper report notes that “one cannot assign specific cause- and-effect to dollar amounts, since many factors drive flow totals.”
The report says that the four fund families had aggregate net outflows of about $7.9 billion in September. Contacted Friday, Lipper officials declined to release information for specific funds or fund companies.
Strong has said investors in September withdrew $69 million from its stock funds and $199 million from its bond funds, a total of $168 million.
The Lipper report says:
“The four firms had an average 0.87% net outflow of assets per month during the first eight months of 2003 (prior to . . . Spitzer’s announcement), while the rest of the industry’s outflows were a minuscule 0.01% per month. In September, the four firms saw 1.85% flow out while all others in aggregate had a 0.36% outflow (mainly in money funds). The difference was larger in September than in any month since January.”
In a statement, Stephanie J. Truog, spokeswoman for Strong Financial Corp., said that the $69 million outflow from its stock funds in September represents “less than one-third of one percent of total equity assets under management,” which she said amounted to $20.9 billion as of Sept. 30.
Meanwhile Friday, Fidelity Investments, Morgan Stanley and Franklin Resources Inc., three of the biggest U.S. asset managers, became part of a widening probe by Massachusetts Secretary of the Commonwealth William Galvin into alleged illegal mutual fund trading.
A salesperson at Fidelity, one at Morgan Stanley and a former employee of Franklin may have coached Prudential Securities brokers to avoid detection when making short-term trades that violated fund policies, a person familiar with the inquiry said.
Galvin’s investigation began by focusing on brokers at Prudential and Morgan Stanley in Boston and on possible wrongdoing by Putnam Investments.
“It’s a huge investigation that is getting exponentially larger every week,” said Tom Dewey, a partner at Dewey Pegno & Kramarsky, a New York law firm that specializes in defending securities firms.
“This investigation is going to go on a long time and have very serious consequences.”
Kathleen Gallagher of the Journal Sentinel staff and Bloomberg News contributed to this report.
