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Morningstar Advises Investors to Drop Alliance

November 13, 2003|From Times Wire Services

Alliance Capital Management Holding, enmeshed in the spreading scandal over improper trading of mutual fund shares, got a thumbs down Wednesday from widely followed fund tracker Morningstar Inc.

Morningstar, which rates 12,000 mutual funds, said investors who owned Alliance funds should consider selling them. Morningstar based its recommendation on Alliance's statement two days ago that it held two executives overseeing its mutual fund unit responsible for permitting some investors to engage in improper market-timing trades.

"Even if Alliance Capital prevails in thwarting future market-timing arrangements in its funds, we still have grave concerns about [its] corporate culture," analyst Dan Culloton wrote on Chicago-based Morningstar's Web site.

Alliance spokesman John Meyers declined to comment on the Morningstar report.

It was the seventh time in two months that Morningstar called on investors to reconsider their holdings in companies implicated in the investigations of the $7-trillion U.S. fund industry.

Morningstar previously said investors might want to sell the funds of Janus Capital Group Inc., Bank of America Corp., Bank One Corp., Fred Alger Management Inc. and Strong Capital Management Inc. Shareholders of Putnam Investments funds shouldn't add any more money to their investments, Morningstar has said.

All of the companies have been named as targets of investigations led by New York Atty. Gen. Eliot Spitzer, the Securities and Exchange Commission, Massachusetts Secretary of the Commonwealth William Galvin or other authorities. Putnam was charged with fraud by Massachusetts and the SEC.

Morningstar previously had recommended that investors withhold further investments from Alliance.

The apparent knowledge of senior executives of market-timing agreements obligated Morningstar to recommend a new course of action, said Russel Kinnel, Morningstar's director of fund analysis.

Lehman Bros. analyst Mark Constant dismissed the "Morningstar effect" on fund sales.

"Contrary to popular opinion, we believe that Morningstar's real impact on fund flows has been grossly exaggerated," Constant wrote in a note to investors.

Janus and Morningstar engaged in a dispute over Morningstar's "sell" recommendation, with Janus Chief Executive Mark Whiston criticizing the fund rater's "recklessness and irresponsibility."

Also Wednesday, Alliance learned that it might lose a contract to oversee $7 billion in assets for the state of North Carolina.

North Carolina State Treasurer Richard H. Moore has ordered a "thorough review" of Alliance, which has managed money for the state's $56-billion retirement system since 1987.

Alliance ranks as the largest publicly traded U.S. money manager, with $453 billion of assets at the end of October.

In other mutual fund developments Wednesday:

* Janus said it had been asked to submit information to the NASD, formerly known as the National Assn. of Securities Dealers, as part of the NASD's investigation into the fund industry.

The brokerage industry's self-policing group asked for information about agreements to distribute mutual fund company shares through broker-dealers, Janus said in a filing with the SEC.

Janus said it was cooperating with all regulators who had requested information.

* The Nevada Public Employees Retirement System voted to fire Putnam from its role in managing a $400-million portfolio.

Dana Bilyeu, executive officer of the system, said the assets that had been handled by Putnam were being transferred to BNY Asset Management and Mellon Capital. Bilyeu said she recommended the move because of the civil fraud charges filed against Putnam and because of its low performance for the system.

* Regulators have asked Bank of New York Co. to provide information about other participants in the $7-trillion mutual fund industry. The bank said it was cooperating with the requests, but declined to say who issued the requests, or whether the bank has received subpoenas, as have many companies embroiled in the probe.

Bank of New York, the 11th largest U.S. bank, is a leading securities servicer, whose broker-dealer servicing operations include mutual fund services.

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