Faltering Invesco is suspect and no longer a good bet

Dollars & Sense

December 21, 2003|By MORNINGSTAR.COM

Investors should consider selling their holdings in Invesco Funds.

The securities and consumer fraud charges recently filed against the firm and its chief executive officer by state and federal authorities are more demerits for a fund family that has been in decline. Even before it was implicated in the widening mutual fund trading scandal, Invesco had been struggling with poor performance, significant manager changes, an extensive restructuring and rising expenses.

Learning that the fund family accommodated market-timers in the face of evidence that the rapid trades may have impeded portfolio managers and harmed long-term shareholders convinces us that the complex doesn't deserve investors' money.

Before selling, fund investors should be sure to consider potential commission and tax costs of any trades. In addition, participants in 401(k) plans should be careful before dumping a fund if it is their only way to access an important asset class.

The charges against Invesco are grave, but they're also different from those leveled at other large firms, such as Putnam Investments and Pilgrim Baxter & Associates. Authorities haven't accused Invesco managers of rapidly trading their own funds or firm executives of directly enriching themselves through improper trading relationships.

Rather, Invesco Funds Group Inc. was the first company to get into trouble solely for the way it interpreted and enforced its own prospectus. The fact that Invesco and its corporate parent Amvescap have said they did nothing wrong and have vowed to fight the charges and defend the implicated executive also sets this situation apart.

The complaints filed by New York Attorney General Eliot Spitzer, Colorado Attorney General Kenneth Salazar (Invesco is based in Denver) and the Securities and Exchange Commission say that from at least July 2001 to October this year, Invesco made exceptions to its prospectus policy on trading for certain large clients without telling its funds' owners or independent directors. Meanwhile, it rousted other investors who tried to market-time its funds without the firm's approval and promoted long-term investing in its marketing materials and shareholder reports, according to the complaints.

The timing arrangements went right to the top, authorities say. Executives such as Raymond R. Cunningham, chief executive officer; Timothy J. Miller, chief investment officer; Tom Kolbe, senior vice president of sales; and Michael Legoski, "timing police" chief; are accused of developing a policy for letting clients with $25 million or more in assets exceed the firm's trading restrictions, the complaints say.

Authorities also allege that Invesco referred to these customers as "Special Situations." The firm's policy toward them eventually included rules for "sticky money," or "money that the Special Situation places in [Invesco] funds and is not actively traded."

Between July 2001 and October 2003, Invesco let more than 60 brokers, hedge funds and advisors rapidly trade at least 10 of the family's funds, the complaints say. At any given time, market-timers accounted for up to $1 billion of the fund group's assets, according to the complaints. The complaints say one of the largest Special Situations was the infamous Canary Capital Partners LLC, which in September paid $40 million to settle charges of improper mutual fund trading brought by Spitzer.

Invesco denies it ever sold market-timing privileges for sticky assets, but doesn't dispute that it allowed market-timers into its funds. Indeed, Invesco portrays its decision to open its doors to timers as an effort to protect its long-term shareholders. The firm has argued that it was better off striking deals with large market-timers and that setting limits on their trading was better than leaving itself at the mercy of "uncontrolled short-term traders who would go in and out of the funds when they chose."

The firm argues that its funds' prospectuses allowed them to modify its policy limiting investors to four trades per year as long as the change was in the best interest of the fund and it notified fund owners of alterations that affected all shareholders 60 days before the exemptions took effect. Since the firm allowed only some investors to market-time, technically the Special Situations didn't affect all shareholders and didn't require notification, Invesco officials argue.

The charges have hit Invesco in a weakened state. The family that was one of the fastest-growing fund firms of the late 1990s has faltered in recent years. Eye-popping returns from aggressive-growth funds such as Dynamics, and sector offerings such as Invesco Technology and Invesco Health Sciences helped the family grow from $9 billion in 1995 to $39 billion by August 2000. By the end of the decade, its stature was gaining on cross-town rival and bull market darling Janus. In 2001, Invesco paid $60 million for the naming rights to the Denver Broncos' new football stadium.

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