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December 4, 2001
THE HOLDINGSEnron Causes 5 Major Japanese Money Market Funds to Plunge
By KEN BELSON
The funds are managed by some of Japan's largest banks and brokerage firms. Shares of UFJ Holdings, a banking giant, plunged nearly 10 percent, and Nikko Securities, a leading brokerage firm, slid 3.4 percent. Each ran major funds with big positions in Enron bonds. The weakness in financial stocks helped push the Nikkei 225-stock index down 3.1 percent.
The stampede left investors with few places to turn for steady returns and low risk. In Japan, bank deposits pay almost no interest, so money market funds have been popular with pension funds and other investors that seek security with a reasonable return. In the United States, each share of a money market fund generally carries a face value of $1 and an implicit guarantee that the price will not fall below that amount, preserving investors' principal; there have been a few exceptions.
The losses by the Japanese money funds on Enron bonds led skittish investors to withdraw cash last week, producing a net outflow for November of some 3 trillion yen ($24.2 billion).
An alternative for investors is Japanese government bonds, but they, too, have given investors a scare in recent weeks. Major rating agencies have lowered Japan's sovereign credit rating and said more cuts may be coming. The country's debt rating is now near the point where banks that hold government bonds will have to reserve capital against the chance of a default.
"This is a big headache for safe- haven investors," said Akio Yoshino, head of investment research and chief economist at SG Yamaichi Asset Management in Tokyo. "Investors are becoming very keen about avoiding credit risk, so brokers who recommended these trusts will continue to see a huge outflow," he said, referring to the funds.
Managers of funds are hoping to shore up the confidence of investors by disclosing their bondholdings and other assets more frequently — they are now obliged to report on them only twice a year — and perhaps by restricting themselves to issuers with credit ratings of A or better, analysts said.
If the money market funds stop buying debt of lower-rated companies, it could be a serious blow to Japan's steel makers, retailers and other highly indebted companies.
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Copyright 2001 The New York Times Company | Privacy Information
Mutual funds hit hard
Kathleen Pender
Tuesday, December 4, 2001
©2001 San Francisco Chronicle
If you own shares in a mutual fund, chances are you didn't escape Enron's bloody slide into bankruptcy.
Until recently, Enron stock was owned by almost every broad-based index fund, by most utility and energy funds and by many aggressive growth funds.
The financial firms with the most Enron shares as of Sept. 30 were Alliance Capital Management, Janus Capital, Putnam Investment Management, Barclays Global Investors, and Fidelity Research and Management. Together, they owned 154 million Enron shares, or about 20 percent of the company, according to LionShares, a division of FactSet Research Systems.
Although some of that money was in institutional accounts, a lot was in mutual funds held by small investors looking for professional stock picking and diversification.
As it turns out, a lot of professionals got snookered by Enron, whose stock has fallen from almost $85 last December to 40 cents yesterday amid allegations of accounting shenanigans. So it's a good thing those mutual funds -- for the most part -- were well diversified.
The nation's two largest funds -- Fidelity Magellan and Vanguard 500 Index - - were Enron's sixth- and fifth-largest mutual fund shareholders, respectively,
according to the latest rankings from Morningstar.
Yet Enron accounted for a small fraction -- less than half a percent -- of those fund's assets, so the debacle shouldn't have a big impact on their performance.
Until last week, Enron was part of the Standard & Poor's 500 index, so funds like Vanguard 500 index essentially had to own it.
Unlike the indexers, a handful of mutual funds actively decided to place huge bets on Enron. Some of these were the same funds that fell head over heels for tech stocks.
"Enron was seen as a new-economy play because it was so revolutionary, and the bulk of its business was coming through Enron Online and it talked about getting into broadband. It was seen as an aggressive growth stock by a lot of managers," says Morningstar analyst Dan Culloton.
No fund group made a bigger bet on Enron than Janus. On April 30, the last time it reported individual fund holdings, 11 Janus funds collectively owned more than 5 percent of Enron.
The one with the biggest absolute stake was the flagship Janus fund, which owned 16.1 million Enron shares -- 2.15 percent of Enron's total. That represented 2.9 percent of the Janus fund's total assets.
The funds with the biggest relative exposure were Janus Fund 2 and Janus Special Situations, which each had 4.6 percent of their assets in Enron, followed by Janus Orion, which had 4 percent of its money in Enron.
As of Sept. 30, Janus still owned more than 5 percent of Enron. Since then, it has liquidated its entire position. "We have been the biggest sellers since September," spokeswoman Jane Ingalls says.
She adds that the Janus fund started buying Enron in January 1999, when the stock was in the low $30s.
"Although we didn't escape totally unscathed, we participated in a great amount of appreciation in 1999 and 2000," Ingalls says.
She doesn't know whether the Janus funds overall made a net profit or loss on their combined positions. The firm is still trying to figure that out.
Another fund that made a huge bet on Enron was Alliance Premier Growth, which owned 16.7 million shares or about 2.2 percent of Enron on Sept. 30. That represented 4.1 percent of the fund's assets.
Alliance officials didn't return phone calls yesterday, but Culloton says that when he spoke to Al Harrison, the Premier fund manager, in early or mid- November, he still owned Enron.
At the time, the stock was trading around $8 a share and Harrison "was hoping to eke something out of the Dynegy deal."
Dynegy's decision not to acquire Enron set off Enron's final descent into bankruptcy.
Another company that made a disastrous bet on Enron was Merrill Lynch Focus 20, which at the end of July had 5.5 percent of its assets in Enron.
The fund's manager at that time has since resigned and his deputy took over.
Enron "was one of their many problems," Culloton says. "They had a whole lot of tech. Price was no object. It was very focused and had high turnover."
It is believed that most mutual funds -- with the possible exception of energy and utility funds -- sold their Enron positions before the bitter end. We won't know for sure for a while because most funds only disclose their holdings twice a year.
With Enron trading at 40 cents a share, most of the damage has already been done. Funds are priced each night on their net asset value, so the decline in Enron's stock price is already reflected in their share price and performance to date.
Although investors may be tempted to dump funds that made big bets on Enron,
most experts caution against making a hasty decision.
"Who can point fingers on this Enron thing? Analysts were taken in, mutual fund managers were taken in, the press was taken in," Culloton says.
Craig Litman, of the money management firm Litman/Gregory, says Enron wouldn't be the sole reason he'd fire a manager.
"Every manager has a stock that has blown up on them," he says. "You have to look beyond that. How has the manager's track record done? Is the manager still consistent with what (investors) want going forward? To blindly fire a manager because they picked a bad stock is a mistake," Litman says.
That may be. But for a lot of investors, I'm betting Enron may be the last straw.
Who owned Enron . CHART(1): LARGEST HOLDERS This chart ranks mutual funds by the number of Enron shares owned, as of latest reporting date. In some cases, the fund's Enron holdings made up a small part of its overall assets on the reporting date. . % of fund assets % of Enron Reporting Fund in Enron shares owned date Alliance Premier Growth 4.10% 2.23% Sept. 30 Janus Fund 2.87 2.15 April 30 Janus Twenty 2.78 1.19 April 30 Janus Mercury 3.60 0.88 April 30 Vanguard 500 Index 0.33 0.82 June 30 Fidelity Magellan 0.22 0.76 Sept. 30 AIM Value 1.0 0.60 June 30 Putnam Investors 1.66 0.49 June 30 Morgan Stanley Dividend Growth 0.94 0.47 Sept. 30 Janus Growth & Income 2.74 0.46 April 30 . CHART(2): TRUE BELIEVERS This chart ranks funds based on their percentage of total assets in Enron, as of latest reporting date. Note that reporting dates vary widely and some funds say they no longer own Enron stock. . % of fund assets % of Enron Reporting Fund in Enron shares owned date Rydex Utility 7.95% 0.01% March 30 Fidelity Select Natural Gas 5.69 0.06 Aug. 31 Dessauer Global Equity 5.58 0.01 July 31 Merrill Lynch Focus Twenty 5.48 0.09 July 31 AIM Global Infrastructure 5.34 0.00 July 31 Janus 2 4.68 0.05 April 30 Janus Special Situations 4.62 0.13 April 30 Stein Roe Focus 4.16 0.01 Sept. 30 Alliance Premier Growth 4.10 2.23 Sept. 30 Merrill Lynch Growth 4.08 0.18 July 31 . Source: Morningstar©2001 San Francisco Chronicle Page B - 1
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