News Releases

Mutual Funds' Biggest Choice
Weighing Which Portfolio Team To Run the Show Is
Key Decision; Silence Greets Mr. Brady's Offer
(Wall Street Journal/Tom Lauricella)

July 29th, 2005: David Brady thought he had made an offer the board of trustees of Columbia Young Investor fund couldn't refuse. He proposed taking over the mutual fund, which he formerly ran, and charging investors substantially less. He asked several times to make a presentation to the board.

The board didn't bite.

Thomas Theobald, the independent chairman of the board that oversees the fund, says the board has no plans to consider Mr. Brady's offer, even though the fund has had subpar performance and could be folded into another Columbia portfolio.

The situation highlights a key question for mutual-fund investors: Is the board overseeing their fund doing everything it can to make sure the best possible manager is running the fund?

In this case, the board's response raises questions about whether it is fulfilling its duty to act in the best interests of fund shareholders. Some legal experts and industry veterans say the board owes it to shareholders to formally weigh Mr. Brady's proposal, even if it decides to stick with the current manager. "I don't think you can simply ignore the proposal," says Julie Allecta, an attorney who advises fund boards. "It's not Columbia's money, it's the shareholder's money," adds John C. Bogle, founder of Vanguard Group.

Mr. Theobald, who sits on the boards of 118 Columbia funds and was paid $172,500 last year, says the Young Investor board wasn't obligated to consider bringing back Mr. Brady because, based on performance numbers provided by Columbia Management, Mr. Brady was a bottom performer when he managed the fund from 1994 through early 2003. According to Morningstar Inc., however, Young Investor did better than the competition during Mr. Brady's tenure. The Young Investor fund has a dual mandate of making money and educating children about investing.

Boards rarely face such a situation, but in the past, some boards have given a full hearing to competing managers. Three years ago, directors of Japan Fund were dissatisfied with performance and, when ownership of the management company changed hands, the directors threw out the managers in favor of Fidelity Investments.

In explaining why the board won't consider Mr. Brady's offer, Mr. Theobald pointed in an interview to statistics provided by Columbia Management, a unit of Bank of America Corp., which compared Mr. Brady's performance with Lipper Inc.'s multicapitalization core-category tracking funds that don't tilt toward any particular style or size of company, against which he performed poorly. But when Mr. Brady managed the Young Investor fund, it was compared in shareholder reports with large-cap growth funds that invest in big, fast-growing companies. When measured against these funds, Young Investor provided better returns than roughly 80% of the competition during Mr. Brady's tenure, according to Morningstar. (Morningstar switched the fund to its large-cap blend category 11 months after Mr. Brady's departure.)

Mr. Theobald, who served on the board while Mr. Brady was a manager, said he stands by his comment that both the trustees and Columbia Management were dissatisfied with Mr. Brady's investment performance. A Columbia executive declined to comment on Mr. Theobald's statements and pointed to the performance data in the annual reports.

For the past two years Mr. Brady, now 41 years old, has been managing about $7 million for friends and family.

Mr. Theobald also told Mr. Brady that the Young Investor fund might be eliminated in a merger with another Columbia offering, though Columbia says there are no current plans to do so. If that happens, Young Investor shareholders would be put into a different fund from the one they purchased, while Columbia would continue collecting management fees from shareholders, which totaled $4.8 million in the year ended Sept. 30.

Young Investor opened its doors under the now-defunct Stein Roe label in early 1994, and Mr. Brady became co-manager late that year. The fund quickly rose to the top of the charts. Like many funds focusing on fast-growing stocks, Young Investor was stung by the collapse of the technology stock bubble, though not as badly as many funds. Mr. Brady nevertheless was unhappy with the results and in 2002 retooled his stock-picking approach.

Morningstar analysts often praised the performance of Mr. Brady and co-manager Erik Gustafson. But after Stein Roe was acquired by Liberty Financial Group and then by Columbia, the companies sharply raised fees, moves that Morningstar criticized for hurting both investors and the managers. In the year ended in September 2004, Columbia's no-load shares deducted fees totaling 1.6% of assets from shareholder accounts, well above average for a fund of its size and type.

Mr. Brady was dismissed in early 2003. He says he had complained about rising fees and efforts to sell the fund through brokers. At the time he left, Morningstar data showed Young Investor's no-load share class had beaten 71% of its large-cap growth peers over the previous 12 months and 58% of the competition over the prior three years, which included the worst of the bear market. For the previous five years, the fund was below average, reflecting a slow year in 1998, when it lagged behind because it held a larger percentage of small-company stocks at a time when the biggest stocks outperformed.

In late 2003, regulators alleged that Columbia executives, along with Mr. Gustafson, had allowed favored customers to engage in short-term trading in the Young Investor fund at the expense of long-term shareholders. Columbia, whose parent company was in the process of being acquired by Bank of America, eventually agreed to pay fines and reduce fees to settle charges related to the trading. Mr. Gustafson also settled without admitting or denying the allegations. Mr. Brady says he didn't know about the agreements.

In the two years since Mr. Brady's departure, the fund has had six different portfolio managers and has trailed the average fund in its category, beating just 44% of other large-cap blend funds in Morningstar rankings.

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