Trading Data Raise Red Flags at Several Fund Firms

"Some of those redemption rates are just scary," said Morningstar director of fund research Russ Kinnel, after seeing the chart. "It's also scary how often Invesco funds turn up on the list."

A spokesmen for Invesco directed queries to Ivy McLemore at AIM Investments, which, like Invesco, is owned by Amvescap. McLemore declined to comment on the data provided. However, in July, AIM's board of directors agreed to institute a 2% redemption fee to deter rapid-fire trading within its funds.

There are some important caveats regarding the screen. Funds that have aggressive mandates tend to see higher redemption rates, because rapid-fire traders drawn to aggressive funds tend to move in and out frequently. A spokesman for PBHG declined to comment for the story. However, the fact that the PBHG Growth fund had redemptions roughly 15 times greater than net assets is mitigated by the fact that the fund is well-known for its aggressive, momentum style of investing. That's the type of investor it draws, though the fund's performance has left something to be desired. The fund doesn't impose any redemption fees, and the prospectus makes no mention of any efforts to deter market-timing.

Another caveat: International funds, which are well represented on the list, have higher redemption levels as a percentage of assets -- 87.7%, according to Lipper. Indeed, the inclusion of T. Rowe Price New Asia, for instance, would hardly seem to suggest any improper activity that the firm cottons to. Indeed, T. Rowe Price earns high marks for aggressively combating market-timing in its funds via measures such as redemptions fees and fair-value pricing. "At T. Rowe Price, we clearly do everything we can to limit market-timing in our funds," said Brian Lewbart, a spokesman at T. Rowe Price. "We follow our cash flow daily, and if we see something suspicious, we pursue it."

Furthermore, the redemption levels tell us nothing about whether a fund firm actually wittingly allowed or made arrangements with hedge funds or other select parties to allow market-timing -- as is the case with the four fund firms first flagged by Spitzer and other fund firms incriminated in market-timing, such as Putnam.

If nothing else, Kinnel says, "the high redemption rates raise the question if these fund companies are really doing a good job when they say they are policing abusive trading."

Market-timing strategies are not illegal, but they can hurt the returns of long-term investors in a fund. It may rise to the level of illegality if fund firms and managers falsely claim to prevent market-timing in their funds in their prospectuses and then allow a select few to do so.

David Oliveri, a spokesman for MFS, said the firm has a few problems with the methodology Lipper used in determining the redemption data. However, "we are reviewing the portfolios," he said, adding, "we don't have any special arrangements with market-timers." On the firm's Web site, CEO John Ballen said MFS funds prohibit after-hours trading and "provides for market-timing to be restricted when it may be counter to the best interests of the shareholders in the funds." The funds, the site says, "have procedures in place designed to prevent excessive trading from harming the interests of our shareholders."

Officials at RS Investments and Waddell & Reed didn't return calls in time for publication.

Linda Chatman Thomsen, the SEC's deputy director of enforcement, declined to mention any new fund firms that have come under their radar for abusive trading or how the agency is screening for such improper activity. "All I can say is, we're working expeditiously, following every thread, every road and every path," Thomsen said.

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