Independent Directors and Independent Action
“Independent director” has long been considered the cushiest job in the fund business. It generally involves an annual vacation, a little paperwork and some exercise with a rubber stamp in exchange for a nice paycheck.
The Securities and Exchange Commission has encouraged directors to take a more active role in examining their funds, but the rubber stamps remain the norm.
Recently, the independent directors of one fund put their rubber stamp down and tossed their fund manager. But maybe it isn’t such a good thing that they did.
Welcome to the twisted case of the Navellier Series Aggressive Small Cap Equity Portfolio, a study in how the system can simultaneously serve and fail investors.
Navellier Series Aggressive Small Cap Equity Portfolio was started about three years ago by Louis G. Navellier, renowned stock picker and publisher of the MPT Review newsletter.
Of his three Navellier funds--he manages two funds under another corporate label--only Aggressive Small Cap Equity carries a sales charge (3%) on new investments. The $190-million fund, with an average annual return of about 20% for the last three years, has been closed to new investors for some time.
“We wanted to repackage this fund and move it and our family into the mutual fund supermarkets offered by Schwab, Fidelity and others,” Navellier said. “In essence, it would be the same fund, but without the load and with lower expenses.”
It sounded great. The fund’s independent directors thought so too. The problem was in the details.
Navellier wanted to merge the fund into a new one, Navellier Aggressive Small Cap Portfolio.
“Equity” would no longer be in the name. That little change was intentional: The funds were to be virtually identical except for the load, the ability to sell in the supermarkets and new independent directors.
The merger was broached at a board meeting in April 1996, when, depending on whom you listen to, it was either voted down or tabled until further information could be brought to the board. In any case, no information was forthcoming.
Fast forward to a few weeks ago. Navellier’s contract as fund manager was about to expire; there still was no paperwork.
Navellier filed a last-minute proxy statement detailing his plans, clearly stating that he would quit if the deal was not approved.
The independent directors felt they did not have either the time or the information to make a sound decision. Though they admired Navellier’s investment acumen, the missing paperwork raised questions about his abilities as an administrator; the trustees felt they were being backed into a corner.
So the board gave Navellier the boot.
In his place, it hired MFS Investment Management, which put the renamed MFS Aggressive Small Cap Equity under the direction of John Ballen, who, in his management of MFS Emerging Growth, demonstrated a stock-picking ability at least the equal of Navellier’s.
At some point, Navellier’s old fund will probably be merged into an existing MFS fund, most likely Emerging Growth.
“Whatever the facts that brought the crisis to a head, when the explosion occurred, the directors seem to have made a pretty prudent decision,” says Burton J. Greenwald, a Philadelphia-based industry consultant. “They felt it was necessary, then went out and hired a great manager to replace the one they were losing; that’s in the best interest of the investors.”
Or is it?
Talk to the players in this mess and you step in the middle of what might be called a urination contest between skunks. Everyone has his own agenda, and the loser is the shareholder.
Clearly, shareholders bought Navellier’s fund to get his expertise. Now, to retain a piece of Louie, they must move their money--taking a tax hit--to Navellier’s new fund, indeed called Navellier Aggressive Small Cap Portfolio, which opened two weeks ago after his firing. So far, about $50 million has left the old fund.
The corporate governance issues that make such a mess possible are invisible to shareholders, who don’t necessarily care whether the dots and crosses are in place on a fund’s legal documents.
But any fund that plays fast and loose with the rules is begging for trouble, and directors are there to avoid problems. Big problems often start with minor rule infractions.
Surprisingly, the directors of this fund acknowledge that no concern at all was expressed as to whether the fund should reopen to new investors; small-cap funds that grow large become inefficient, which is bad for shareholders. Alas, no one worried about that, even though it should have been on everyone’s mind.
It’s unfortunate that independent directors’ doing the right thing should anger some of the very investors the directors are there to protect. But don’t let this case skew your thinking. If you should find that you own a fund in which the manager is squabbling with the independent directors, side with the people who are trying to represent you and to uphold the rules of the fund game. Better yet, try to avoid this kind of ugly situation altogether. With thousands of funds to choose from, it shouldn’t be that hard.
Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe.com or at the Globe, Box 2378, Boston, MA 02107.
