Investing: Bank of America must put mistakes behind it
Question: I am a disgruntled Bank of America Corp. shareholder. Is there reason to expect improved results?
Answer: The question for shareholders is how quickly the company can put mistakes behind it, significantly improve its controls and use its enormous size to greater advantage.
It became the biggest U.S. bank after acquisitions of Countrywide Financial and Merrill Lynch, but in coming months it’s likely to slip into second place in assets, behind JPMorgan Chase & Co. Sluggishness stems from bad loans from acquisitions and from lax practices in the past.
It agreed to pay $8.5 billion and set aside $5.5 billion to settle claims by institutional clients that bought toxic mortgage securities. That settlement, under investigation by the New York attorney general, helped lead to a record $8.8-billion loss in the second quarter.
Meanwhile, an arbitration panel ordered a Merrill Lynch clearing unit to pay $63.7 million in damages to a California hedge fund management company for “unexpected margin calls” that the company said caused losses.
Bank of America shares are down 24% this year so far. The company is expected to face a hit from a settlement between banks and state attorneys general over mortgage-servicing practices, as well as additional litigation and ongoing federal scrutiny.
Nonetheless, this consumer and small-business bank is dominant in growing regions. Its deposit base provides it with low-cost funding, and management says it has ample capital. It operates in all 50 states and more than 40 countries.
Improving operations and pulling together disparate business units is key. Terry Laughlin, its negotiator of settlements for bad loans and foreclosure, has been named chief risk officer, starting late in the third quarter.
Consensus analyst rating of Bank of America shares is between “buy” and “hold,” according to Thomson Reuters, consisting of eight “strong buys,” nine “buys” and 14 “holds.”
The bank received the highest score for consumer-data safety among top U.S. card issuers for the fifth consecutive year in a study by Javelin Strategy & Research.
This fund’s managers invest in it
Question: What is the outlook for Primecap Odyssey Growth fund?
Answer: This contrarian fund is run by five experienced managers, each granted autonomy to make buy-and-sell decisions for a percentage of its assets.
The managers believe in their fund:
Four hold more than $1 million of their own money in it, and the fifth holds between $500,000 and $1 million. That’s a good sign for shareholders.
The $2-billion Primecap Odyssey Growth fund (POGRX) is up 29.3% over the last 12 months to rank in the lower half of large growth funds. Its five-year average annualized return of 7.0% places it in the top 40% of its peer group.
It’s “a growth fund but also goes against the grain of the market, at least in the short term, and this has worked out well for it,” said David Kathman, mutual fund analyst with Morningstar Inc. “It looks for temporary valuation issues that can be out of sync with the market but have longer-term prospects.”
The fund is diversified enough to be a core holding, Kathman said.
Eight analysts assist. The fund’s small asset base permits it to emphasize mid- or small-cap stocks when it wishes.
More than one-third of assets are in healthcare, with smaller concentrations in technology and industrials.
Top holdings recently were Roche Holding, Amgen Inc., Seattle Genetics, Immunogen Inc., Dendreon Corp., Altera Corp., Cepheid, Google Inc. and Medtronic Inc.
This fund requires a $2,000 minimum initial investment and has an annual expense ratio of 0.68%. It imposes no sales charge.
Andrew Leckey answers questions only through the column. Write to him at yourmoney@tribune.com.
