What Does a Mutual Fund's Average Credit Quality Tell Investors?
By: Geng Deng, Craig McCann, and Edward O'Neal
The SLCG study explains that the Average Credit Quality statistic as typically calculated by the mutual fund companies and by Morningstar significantly overstates bond mutual funds' true credit quality. This statistic is based on Standard & Poor's and Moody's assessment of the credit risk of the individual bonds in the portfolio and is reported to mutual fund investors using the familiar letter scale for rating the credit risk of bonds.
The study concludes that, for instance, funds that...
Structured Products in the Aftermath of Lehman Brothers
By: Geng Deng, Guohua Li, and Craig McCann
SLCG's prior research showed that structured products were poor investments because they were significantly overpriced when offered and were, at best, thinly traded thereafter. SLCG concluded that overpriced structured products survived in the marketplace because structured products' opaqueness obscured their true risks and costs and the high fees earned by underwriters and salespersons.
The current SLCG study presents a brief history of the structured products program at Lehman Brothers...
Charles Schwab YieldPlus Risk
By: Geng Deng, Edward O'Neal, and Craig McCann
From June 2007 through June 2008, investors in YieldPlus (SWYSX and SWYPX) lost 31.7% when other ultra short bond funds had little or no losses. Schwab had marketed YieldPlus as a low risk, higher yielding alternative to money market funds.
The report concludes that YieldPlus's extraordinary losses occurred because the fund held much larger amounts of securities backed by private-label mortgages than other ultra short bond funds. In doing so, Schwab's fund violated concentration and...
Regions Morgan Keegan: The Abuse of Structured Finance
By: Craig McCann
Investors in six Regions Morgan Keegan (RMK) bond funds lost $2 billion in 2007. The RMK funds held concentrated holdings of low-priority tranches in structured finance deals backed by risky debt. We provide five examples of the asset-backed securities RMK invested in: IndyMac 2005-C, Kodiak CDO 2006-I, Webster CDO I, Preferred Term Securities XXIII, and Eirles Two Ltd 263.
RMK did not disclose the risks it was taking until after the losses had occurred. In fact, RMK misrepresented hundreds...
