The case of Atlas Global Growth
illustrates this point. In March 2006, we gave the fund a C on our five-factor stewardship scoring system. While Atlas Advisers scored well on regulatory matters, we assigned the mutual fund board a "Poor" grade, due to conflicts of interest and the board's failure to align itself with shareholders. (For more on the function of a mutual fund board, click here
). In May 2006, we noted the irony of the fact
that while Atlas scored poorly for stewardship, its parent company, Golden West Financial, was a paragon of corporate governance. Its founders, Herb and Marion Sandler, won Morningstar's CEOs of the Year Award in 2004, partly because they treated stockholders well.
Golden West Financial has since been acquired by Wachovia
. And the news isn't good for the shareholders of Atlas Global Growth. The following is a cautionary tale of how mutual fund stewardship problems can end up harming fund investors.Whither Goes Atlas Global Growth?
As a result of Wachovia's acquisition of Golden West, most Atlas funds are merging into Wachovia's Evergreen Investments unit. Several of Atlas' funds had been subadvised in the past, meaning that the Atlas board hired outside management teams to run the funds. This commendable arrangement, which involved the board conducting arms-length analyses of managers and ultimately sharing revenues with them, is coming to an end. Atlas shareholders are now being asked to approve several fund mergers. They will likely become owners of various Evergreen funds in May 2007.
Unlike most of its siblings, Atlas Global Growth is not merging into an existing Evergreen fund. Instead, the fund is being "reorganized" into a new fund to be called Evergreen Intrinsic World Equity Fund. An Evergreen subsidiary called MetWest Capital (not to be confused with the bond-shop of the same name) will manage the portfolio.
This is problematic for a few reasons. First, it takes the portfolio out of the hands of Oppenheimer Funds, a superb subadvisor that had run the fund for Atlas since its 1996 inception. Bill Wilby and his successor, Rajeev Bhaman, managed the Atlas Global Growth portfolio essentially as a no-load, near-clone of Oppenheimer Global
. We think so highly of the Oppenheimer fund that we designated it a Fund Analyst Pick in the world-stock category.
What is worrisome is that the fund's investment approach seems set to change as a result of the merger. Whereas Oppenheimer Funds ran this as a growth fund, MetWest is a value manager. Value-oriented funds have beaten growth offerings since 2000. Is this really the best time to be taking assets out of the hands of a growth investor? That's especially true because manager Bhaman is a patient, value-sensitive growth manager who has gravitated toward out-of-favor developed-markets blue chips such as Microsoft
, and eBay
. This move is reminiscent of all the value investors who gave up on their style in the late 1990s after so many years of growth dominance.
In exchange for a proven quantity running their fund, shareholders are set to get a lesser-known one in exchange. To be fair, Evergreen provided MetWest's track records on institutional accounts that were focused on U.S. large-cap value and international equities, and they look strong. But institutional records are different than mutual fund records. Institutional managers don't have to deal with expenses, taxes, and asset flows in the same way that mutual funds managers do, which is why success doesn't always translate. Also, MetWest doesn't have a track record running a global fund, whose performance is determined not just by stock-picking but also by allocation decisions (U.S. versus foreign allocations, for instance).Where Was the Board?
According to a prospectus supplement dated Nov. 20, 2006, "the Atlas Funds' Board of Trustees unanimously approved proposed reorganizations." Some Atlas Global Growth shareholders might be asking how the board could have signed off on this change in particular. After all, a fund board is intended to be an advocate for fund shareholders, not to act as a rubber stamp for merger integration plans. Perhaps the Atlas fund board was considering the interests of Wachovia, which benefits financially from managing the fund in-house as opposed to farming the assets out to a subadvisor.
That's not as surprising as it sounds when you consider the composition of the Atlas fund board. As we point out in the fund's Stewardship Grade text, Marion Sandler, former co-CEO of Golden West, chairs the board. Golden West president Russell Kettell is also a trustee. These executives serve two constituencies: Atlas fund shareholders on the one hand and Golden West shareholders on the other. As Morningstar and others have pointed out many times, the interests of these two constituencies are often in conflict. That's why we support a proposed SEC rule
that would require boards to elect independent chairmen.
One clear way for boards to align their interests with those of fund shareholders is to invest in the funds they oversee. According to Atlas Global Growth's April 2006 Statement of Additional Information, Marion Sandler was the only member of the board who owned shares of the fund. Russell Kettell did not invest in the Atlas funds. Neither did two of the four independent Atlas trustees. The two remaining trustees owned shares of only one stock fund, Atlas Growth Opportunities
, and one of them owned shares valued at less than $10,000.
So, the only board trustee affected by Atlas Global Growth's reorganization is Marion Sandler. We know from the SAI that Sandler's stake in the fund is worth more than $100,000. But it's pretty safe to assume that the Wachovia buyout made a bigger impact on Sandler's personal net worth than anything that could happen with Atlas Global Growth. Sandler owned more than 500,000 shares of Golden West, and Wachovia paid Golden West shareholders $18.65 per share, a 11% premium to Morningstar's fair value estimate for the company. You do the math.
Less cynically, in accepting Wachovia's buyout offer, Sandler arguably was best serving the shareholders of Golden West. Whether Atlas fund assets were even part of the terms of the acquisition is unknown. But it's hard to imagine Sandler rocking the boat for the sake of what, in the scheme of the overall merger, was small potatoes. For the rest of the board, the reorganization of Atlas Global Growth is just an abstract concept, a logical outgrowth of the merger of two financial services complexes with overlapping asset-management divisions.
Just to make clear that fund boards don't always have to rubber-stamp management's moves, it pays to recall the actions of the Clipper
board in late 2005. When the management company that ran Clipper hastily replaced retiring managers from an outside firm with a team from another shop that it owned, Clipper's fund board rejected the move. The board went out and hired a different team to run the fund. They even negotiated a better management contract, which meant that fund's fees dropped as a result. Like the Atlas fund board, the Clipper board was chaired by a fund company executive. But unlike the Atlas board, all the Clipper fund trustees were heavily invested in the fund.
As for Atlas Global Growth, you can add its tale to the long annals of fund boards that have failed to act in fundholders' best interests. Check out the board-quality section of your funds' Stewardship Grades to gauge how well those fund boards might stick up for you.