The problem with establishing a history is that it sticks with you. That's what executives at
Stein Roe Mutual Funds
are learning about their
Capital Opportunities fund.
Just a month after announcing it would merge the lagging Capital Opportunities out of existence by folding it into its new
fund, Stein Roe canceled the move on Thursday.
In a press release, Stein Roe said it determined that Capital Opportunities, with $600 million in assets, would wind up as the "surviving entity" in a merger.
Securities and Exchange Commission
would have none of it.
"Our research suggested that this transaction was reasonable, but the SEC took a different view," says spokeswoman Marilyn Morrison. "We certainly respect that view."
Growth Investor is a grownup-focused version of the $1 billion
Young Investor fund, which is aimed at encouraging children to start investing early. That fund has become one of Stein Roe's most popular offerings.
The SEC routinely reviews proposed mergers of mutual funds to make sure the surviving fund accurately reflects the size and track record of the combined funds, says Edward Nelling, a professor at
Georgia Tech University's
DuPree College of Management. He recently co-authored a report on mutual fund mergers, and says similar mergers have been blocked in the past.
"Usually the bigger fund would be the survivor," Nelling says.
By folding Capital Opportunity into Growth Investor, Nelling says Stein Roe may have been trying to sweep Capital Opportunity's track record -- it had a negative 1.6% return in 1998 -- under the rug.
"Ostensibly they created this Growth Investor fund to give adults the opportunity to have a more mature-sounding type of fund," Nelling says. "But a possible side benefit of that would be to use it as an opportunity to get rid of any of the funds that were laggards and erase their performance history."
Morrison denies that.
"We would really like the public to understand that this was not about bearing a track record, but about giving our shareholders access to a proven and compatible investment strategy," Morrison says. "If our sole concern was bearing a track record, we would have opted to merge the fund into another fund that wouldn't raise the same sorts of concerns."
But lately there have been other concerns about Stein Roe, a unit of
Last month, Stein Roe
announced a restructuring that included the departure of Capital Opportunities manager Gloria Santella and
fund manager Gerry Sandel. That's when the company proposed the Capital Opportunities-Growth Investor merger, to be managed by Erick Gustafson and David Brady.
Canceling the merger puts even more pressure on Gustafson and
Brady, arguably Stein Roe's last two remaining stars. Gustafson will be managing $2.3 billion in assets and Brady $1.5 billion. Their duties now include co-managing Capital Opportunities as a separate, aggressive growth portfolio. They also co-manage Young Investor and Growth Investor. On top of that, Brady manages
Large Company Focus and Gustafson manages
Brady didn't seem phased by his new responsibities Thursday afternoon.
"There's no question about it -- it's a lot more work. I'm spending a lot more time at the office," said Brady, returning a call by cell phone from a golf course.
Thursday's events, and other shakeups in the past, make at least one financial planner wary of using Stein Roe's funds.
Stein Roe "is one that I've traditionally avoided because of the manager turnover," says Lou Stanasolovich of
Legend Financial Advisors
in Pittsburgh. He says the latest problems at the firm only highlight difficulties that midsize nonboutique companies have in competing in the mutual fund industry.
"I don't think these mid-sized firms have done a good job adequately addressing the compensation of their managers in the form of an equity stake. And I think that's why there's a lot of turnover," Stanasolovich says.
Manager turnover is a fact of life in the industry, Morrison says.
"We operate in a competitive industry and ... sometimes that means people are going to leave on their own to pursue other opportunities, and that sometimes we'll review fund manager performance to make sure that its in line with the expectations of our shareholders," Morrison says. "Over time, that might create some change for the organization."