Trading Data Raise Red Flags at Several Fund Firms

The Securities and Exchange Commission says about half of the 80 largest mutual fund firms have accommodated some form of abusive trading, according to the data supplied by fund firms. How can investors tell if their funds will turn up on the scandal sheet?

Market-timing practices aren't easy to detect, since no set of data can unearth conclusive evidence. However, there are some ways to crunch the publicly available data from fund firms to find red flags for excessive or abusive trading within certain funds.

One method for hunting for potential market-timing abuses -- which involves cross-referencing two key pieces of data on redemptions -- raises concerns about rapid-fire trading at funds not yet mentioned by New York Attorney General Eliot Spitzer or other regulators, including several offerings from MFS Investments and Amvescap's(AVZ Quote - Cramer on AVZ - Stock Picks) Invesco and AIM funds.

The method -- which raises only red flags, not smoking guns, on market-timing activity -- involves screening for funds with high redemption levels compared with net assets, and then comparing those funds' redemption levels as compared with sales.

Here's how it works, and why it may yield clues on market-timing: The average fund has redemptions as a percentage of its net assets of about 25%, according to mutual fund research firm Lipper. In other words, investors hold the fund for about four years. Funds with redemption levels that far exceed net assets indicate that an enormous amount of money has moved through the fund. For instance, at AllianceBernstein Technology fund -- which has been named as a fund that allowed market-timing -- redemptions as a percentage of net assets totaled 1,249% in 2002, an enormous sum.

But high redemption levels, on their own, aren't conclusive evidence of market-timing. There are many simple reasons why redemption levels may be high: underperformance or an out-of-favor investing style, for instance. That's why it's important to cross-reference high redemption levels with redemptions as a percentage of sales, to see if the amount of money going in comes close to matching the amount of money going out.

Typically, a mutual fund's redemptions in a given year are considerably higher or lower than the amount of new cash coming in -- depending on how much money flows into and out of the fund. If a fund that has seen an exorbitant amount of redemptions has also seen a high and nearly identical amount of sales, this raises eyebrows, because market-timers tend to funnel large amounts of money into and out of funds for quick one-day trades. When a fund's redemptions as a percentage of sales hover close to 100% -- as in the case of AllianceBernstein Technology's 102% -- it constitutes a red flag on market-timing when taken in tandem with high redemption levels.

TheStreet.com asked Lipper to run a screen for mutual funds with the highest redemption rates as a percentage of sales, and to include the fund's redemptions compared with sales. Lipper screened all funds with at least $500 million in assets for the year 2002. The chart above shows the 15 funds with the highest redemption levels, and all of them had redemptions-sales figures within 11 percentage points of even. (Note: Mutual fund firms vary on the dates of the ending of their fiscal years. The PBHG fund and the Invesco sector funds, for instance, ended their fiscal year on March 31, and MFS and AllianceBernstein funds end their fiscal year on Nov. 30.)

Redemption Song The following 15 funds have a combination of high redemption levels as a percentage of assets -- they have redemptions in excess of 200%; the average is 25% -- and redemptions that nearly equal sales. This suggests that a nearly identical amount of money moved into and out of the fund in a given year, and the amount was far in excess of assets under management.
Name of Fund	Total Net Assets 12/31/02 ($ Mil's)	Redmp ($ 000's)	Redmp as % End-Yr Assets	Redemp as % Sales
PBHG Growth	1,209.2	17,674,625	1,462%	105%
AllianceBernstein Technology *	1,001.5	12,505,262	1,249	102
MFS Emerging Growth	2,304.1	17,842,024	774	105
AIM International Growth	1,039.7	5,418,382	521	104
Invesco Technology	888.3	4,604,481	518	100
AllianceBernstein Premier Growth	1,848.9	9,454,946	511	107
Invesco Dynamics	3,390.5	14,785,336	436	104
RS Investors Emerging Growth	1,310.2	5,364,479	409	104
MFS Research	1,470.3	5,934,592	404	106
Invesco Health Sciences	965.4	2,989,734	310	106
MFS Mass Investors Growth	5,863.7	15,568,437	266	102
Waddell & Reed Advisors International Growth	693.6	1,761,071	254	106
Invesco Small Company Growth	768.8	1,817,549	236	109
T. Rowe Price New Asia	542.8	1,157,585	213	103
Invesco Financial Services	821.1	1,647,803	201	111
*AllianceBernstein recently revealed that this fund allowed market-timing. Source: Lipper, a Reuters Company

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