Advertisement
investing

Two Morgan Keegan Funds Crash and Burn

After years of flying high, Jim Kelsoe's bond funds have lost half their value this year.

For years, bond funds run by Morgan Keegan's Jim Kelsoe soared. Then, like Icarus, Kelsoe strayed too close to the sun and came crashing back to earth with melting wings.

Kelsoe's losses so far in 2007 have been stunning. Regions Morgan Keegan Select High Income (symbol MKHIX) plummeted 56% through December 5, and Regions Morgan Keegan Select Intermediate Bond (MKIBX) collapsed 45%. Results of four closed-end Morgan Keegan fixed-income funds also managed by Kelsoe have also been disastrous.

Advertisement - Article continues below

To top it off, an Indiana charity has filed an arbitration complaint against Morgan Keegan for alleged misrepresentation of risk of the Regions MK Select Intermediate Bond fund, which, on the surface, seems to be a plain-vanilla, low-risk bond fund.

Until this year, Kelsoe, the chief-fixed income investment officer of the Memphis-based brokerage's Morgan Asset Management, posted outstanding results. For example, from 2000 through 2005, Regions MK High Income landed in the top 1% of high-yield bond funds every year but 2003, according to Morningstar.

What happened? Two separate but related factors crushed Kelsoe's funds.

First, reaching for yield, he allocated a large chunk of his funds to exotic and illiquid asset-backed securities (and relatively little to standard high-yield corporate bonds) that have been devastated by the earthquake in credit markets this year.

Advertisement
Advertisement - Article continues below

For example, as of June 30, 45% of Intermediate Bond's assets was invested in collateralized debt obligations and home-equity loans. He also stuffed his portfolios with airline leasing obligations, which have suddenly been buffeted by market turbulence this year. So the values of his funds' assets plunged.

Advertisement - Article continues below

Second, and equally devastating, was the rising tide of shareholder redemptions, which forced Kelsoe to sell illiquid assets (investments that are not readily marketable) at the worst possible time. In both July and August, for instance, shareholders yanked more than $100 million out of High Income, which at last word held $291 million in assets.

"Investors get their statements in the mail, see the losses, panic and sell," says Lawrence Jones, a bond-fund analyst at Morningstar. "This forces a fund manager to liquidate segments of a portfolio in an uncertain, illiquid marketplace at prices that will be absolute bargain basement. This is a case study that illustrates what can happen in illiquid markets when redemptions come."

For example, Jones says, there are only a handful of trading desks in the country that handle airline lease-related securities. Assets such as these will recover when markets stabilize, but that's of little consolation to a fund manager forced to sell today because of shareholders running to the exits. With the benefit of hindsight, it's clear that illiquid assets such as these are ill suited to open-end funds, which are subject to abrupt and mass redemptions.

Kelsoe declined to be interviewed, but he has explained the predicament to his dwindling ranks of customers in letters to shareholders. "In the current market, many of the normal dealers that typically provide the trading liquidity of these securities are no longer providing such liquidity," he wrote in a letter dated November 7. "In many cases where there is no trading activity, bonds fall into a vacuum and are valued based on models projecting future cash flows. There are no optimistic projections at this time!"

The Morgan Keegan disaster is a reminder that investors need to undertake a bit more investigation than usual when they contemplate buying into a bond fund that has delivered abnormally high returns. That requires some understanding of theassets the fund holds. In general, you shouldn't invest in what you don't understand.

As for Jim Kelsoe, his annus horribilis continues to unfold.

Advertisement
Advertisement

Most Popular

Social Security Recipients, Veterans Must Act Now to Get Extra $500 Stimulus Check
Coronavirus and Your Money

Social Security Recipients, Veterans Must Act Now to Get Extra $500 Stimulus Check

The deadline for seniors and veterans to request an additional $500 stimulus check for a dependent child is approaching fast. See how you can claim yo…
September 25, 2020
Trump Promises $200 Prescription Drug Card for Seniors
Medicare

Trump Promises $200 Prescription Drug Card for Seniors

Medicare beneficiaries will soon receive a debit card in the mail that they can use to pay for prescription drugs.
September 25, 2020
Election 2020: Joe Biden's Tax Plans
taxes

Election 2020: Joe Biden's Tax Plans

With the economy in trouble, tax policy takes on added importance in the 2020 presidential election. So, let's take a look at what Joe Biden has said …
September 18, 2020

Recommended

10 of the Best Target-Date Fund Families
mutual funds

10 of the Best Target-Date Fund Families

The best target-date funds are a 'set it and forget it' approach to your retirement, but which fund family should you trust your money?
September 17, 2020
Best Bond Funds for Every Need
Investing for Income

Best Bond Funds for Every Need

In a changing market, it’s important to remember why we hold bonds in the first place.
September 15, 2020
How to Build a Bond Portfolio
Becoming an Investor

How to Build a Bond Portfolio

No single bond (or even bond fund) can do it all. We'll help you match your goals with appropriate fixed-income picks.
August 27, 2020
Time to Buy Japanese Shares?
Foreign Stocks & Emerging Markets

Time to Buy Japanese Shares?

In a weak global economy, T. Rowe Price Japan finds firms with healthy balance sheets.
August 27, 2020