John LaForge posted an enviable track record over the past five years as a contrarian small-cap stock-picker. He racked up a 15% annual gain in ( PDSAX) Phoenix Small-Cap Value Fund, better than most of his peers and way better than the broad market. Investors who paid a hefty fee for access to his stewardship looked forward to his guidance in this difficult year. And yet many may not know that LaForge, who served as manager of the fund since 1997 from an office in Florida, was quietly fired by The Phoenix Cos. ( PNX) on Oct. 31 and replaced by an in-house manager with a subpar record in what the company describes as a cost-cutting move. His exit provides one more example of ways in which mutual fund companies take advantage of ambiguous disclosure rules, act in ways that benefit professionals over private investors and may actually harm fund shareholders in an attempt to benefit their own company shareholders. In this case, several financial institutions with funds under LaForge's control learned of his termination in late October, quickly withdrew their money from Phoenix and followed him to his new operation under the aegis of FA Asset Management, a division of investment bank First Albany ( FACT). But private investors and small financial advisers were not informed of the manager change until two months later. And new investors would need to ask the right questions, or read between the lines of a long prospectus, to learn that management of the fund -- with the strong record in Morningstar and Lipper databases -- had changed. Paul Moroukian, a financial adviser in New York who had personal and client money in the fund, said Phoenix "hardly" told him about the change. Instead, it simply sent him a single form letter on Dec. 8, headlining the fund's new name without articulating any reason for the management switch.
"Phoenix left us in the lurch," he said. "We understand they've got to do what's in the best interests of their company, but at least tell us why it benefits us to substitute a manager with a good track record for one that doesn't
have one." LaForge, moreover, said he has heard from several financial advisers who had recommended the fund to clients that they did not learn of the management switch until they called him to discuss his outlook this year. "They had no idea," he said, noting that advisers are inundated with mail from fund companies, particularly at year's end.
During the subsequent bear market, the performance of most of the mutual fund products created by those purchased firms was demonstrably subpar. ( PHGRX) Phoenix-Engemann Capital Growth, for instance, declined 18% in 2000, 35% in 2001 and 25% in 2002, for a five-year return of -8.9% -- thudding to the 88th percentile of its class. Phoenix, which too late determined that it had bought into the asset management business at the top of the cycle, began bleeding money and assets. Bears, critical of the company's losses at a time when other insurers were doing fine, pushed the stock down as low as $6 per share in early 2003 from prior highs in the mid-$20s. Shareholders demanded improved expense control, and Phoenix obliged last year by closing down several subsidiaries and consolidating staff.
Likewise, in a 34-page Statement of Additional Information about the Phoenix Small-Cap Value Fund, there is no mention that a change in management has occurred. For all anyone knows, Neel could have been a member of the fund's prior management team, which he was not. Of course, it's hard to pull this sort of stunt on professionals. So while retail fund owners were forced to accept his replacement or forfeit their 5.75% initial sales charge, LaForge was allowed, with Phoenix's blessing, to take the accounts he managed for state, municipal and labor-union pension funds to his new firm. "Our record was so good that they knew no institutional clients would stay at Phoenix anyway, if they were going to switch their accounts," he said. Moroukian and other financial advisers are now stuck in the uncomfortable position of having to tell clients they should now exit Phoenix Small-Cap and pay a new 5.75% sales charge to another fund company. He said he has studied the Phoenix/Zweig style that Neel represents and does not think its demonstrably mediocre market-timing and asset-allocation model works. In fact, he's so frustrated with Phoenix over this change and lack of communication that he's also considering firing the company as his own firm's retirement plan administrator.