(July 24 – 11:10 ET) – The Financial Times says the United States Securities and Exchange Commission is looking into the issue of fund companies that deliver one return to retail investors and another to institutional investors on near identical portfolios.
Retail investors and the SEC have noticed that some mutual funds do better for their institutional investors than for their retail clients despite holding the same portfolios under identical management.
FT cites the example of the Quasar funds, managed by Alliance Capital. It says the firm offers two separate funds for small stocks — one for institutions and one for retail. Although the portfolios are similar, the institutional fund has a yeart-to-date return of 32.36% , while the retail fund has a 12.22% return, according to fund researcher Morningstar.
The fund says extreme volatility and a large redemption by an institutional unitholder created the gap. The shareholder redeemed its units, worth 58% of the portfolio, causing the fund to sell a large amount of illiquid small-cap stocks. Small-cap stocks took off just as the fund began selling, and by selling into the market managers earned an extra 20% for the institutional fund.
FT quotes Jeff Davis, chief investment strategist of global fundamental strategies at State Street Global Advisors, who says, “Volatility is a nightmare for fund managers who are guru stock pickers; the technical side can really kill you. Maybe the communication [with the back office] isn’t quite good enough and a few hours later you realise you have a big infusion of cash to deal with. And that’s when all hell breaks loose.”
-IE Staff