Corporate & Securities Law

The nation's two worst-performing bond-focused mutual funds over the past year are booting their in-house management in favor of outsiders.  Morgan Asset Management Inc., a unit of Regions Financial Corp., announced that it had been replaced to oversee these two and five other bond funds for Regions, based in Birmingham, Alabama.  All the funds were managed by James Kelsoe.

"Coming aboard is Hyperion Brookfield Asset Management Inc., which manages $22 billion.  New York City-based Hyperion Brookfield, a unit of Brookfield Asset Management Inc., would take over the portfolios, and new boards of directors would be nominated.  Hyperion Brookfield had been serving as an independent valuation consultant for the funds.

Two of the funds with the worst returns were the Regions Morgan Keegan Select Intermediate Bond Fund, which is down 73% in the past 12 months, and the Regions Morgan Keegan Select High Income Fund, which is down 70% in the same period.  The biggest reason was their investment in mortgage-backed securities, including low-quality mortgages, and complex securities like collateralized debt obligations.

In the past, these funds were doing well, partly because of these exotic investments.  However, as the housing slowdown got under way last summer, hurting mortgage securities, these funds quickly started losing value.  As the net asset value of the funds declined, investors started pulling out, forcing the managers to sell securities in an illiquid market to meet redemptions.  It dragged down the funds further.

In December, investors in Tennessee filed a lawsuit against two of the funds.  The firm also settled an arbitration claim with an Indiana charity, which said it had bought the Intermediate Bond Fund on the understanding that it was a safe investment."

SNSFE continues to investigate the Morgan Keegan Funds to determine whether or not they were suitable for investors and whether or not investors received all information pertinent to making their investment in those funds.

Source:  The Wall Street Journal