Denver-area children with an interest in Wall Street may have gotten more of an education than they bargained for when they attended the “Mutual Fund Saturday” program at a local bank. An Invesco mutual fund marketed to children through the program in recent years was “whipsawed” by heavy market timing activity that contributed to its steep losses in the bear market of 2000 to 2003, according to a fraud complaint filed by New York state regulators.
Civil charges filed by New York Attorney General Eliot Spitzer Tuesday as part of his wide-ranging probe of the mutual fund industry focused on the Invesco Dynamics fund, a high-flyer of the 1990s that fell on hard times in the long bear market. It was during those years, according to the complaint, that the fund became a favorite of market timers including Canary Capital Management, which already has settled charges of improper trading activity.
The heavy market timing activity of Canary and other investors raised the concern of at least one Invesco employee who wrote a memo last year warning of high costs to long-term shareholders.
“The Dynamics Fund is whipsawed by large dollar amounts of market timing activity,” said the memo from an unidentified staff member to James Lummanick, chief compliance officer for Denver-based Invesco. The memo suggests that executives should consider reducing the amount of market timing allowed, noting pointedly that the fund “is marketed to children and their families at the monthly Mutual Funds Saturday program held at the Young American’s Bank.”
Executives at the bank, a unique Denver institution founded in the 1980s by cable television magnate Bill Daniels, said they were extremely surprised to hear that their mutual fund program was singled out. The state-chartered bank, which operates at a loss, is described as the only such institution in the world operated solely for the benefit of children ages 0 to 21. Depositors who turn 22 are sent a friendly “senior citizen letter” and asked to take their business to the less-sheltered environment of a real-world bank.
In the 10 years the bank has been hosting the monthly mutual fund programs, fewer than 1,000 children have opened accounts with longtime sponsor Invesco, estimated C.J. Juleff, vice president of programs at the Young Americans Center for Financial Education, which runs the bank. The Mutual Fund Saturday program was never hugely popular, she said, and interest has dwindled in recent years with only about five young people attending the latest monthly sessions.
She stressed that the bank has always been careful to make the distinction between the federally-insured savings accounts it offers and riskier investments like mutual funds offered by Invesco. “We are very clear to our clientele that it is not an FDIC-insured investment and that, like all investments, it is risky,” she said.
The mutual fund program is offered in a basement classroom, physically separated from the main lobby of the bank. Bank representatives discuss savings and investment vehicles in general, leaving it up to Invesco representatives to describe their mutual funds. Because the program is targeted to students in the 12-21 age range, the mutual fund company accepts opening investments as low as $250 or $25 a month.
But Juleff agreed that students who attended the sessions or invested in mutual funds certainly would have gotten an education.
The 26-year-old Dynamics fund singled out in the memo and complaint focuses on mid-cap growth companies and became a high flyer of the 1990s, generating returns of more than 71 percent in 1999 on an asset base that grew to more than $8 billion. But with a heavy concentration of stocks in tech and telecom, the fund was slammed in the bear market, when its net asset value plunged more than 70 percent.
That was just the time when senior executives of Invesco welcomed market timers, which they described as “special situations” and exempted from the normal rules applying to timing, according to the complaint. The rapid in-and-out trades, which are legal but were supposed to be discouraged by the fund, allowed Canary to turn a gross profit of $50 million, or 110 percent, in the fund during a two-year period when long-term Dynamics investors suffered a loss of 34 percent.
In one small class of the fund favored by market timers, in-and-out trading activity was equivalent to more than 6,300 percent of the total assets in the class. In a separate memo made public as part of the New York state complaint, Invesco chief investment officer Tim Miller said Canary’s “day trading” of Invesco funds was “costing our legitimate shareholders significant performance.”
Invesco said it believes the federal and state charges are “not merited” and will contest them “vigorously,” according to a statement issued by its corporate parent, Amvescap. “Unlike late trading — which is clearly illegal and which (Invesco) never knowingly facilitated or permitted — market timing is a lawful activity,” the company said in the three-page statement. Invesco “never put its financial interest ahead of the best interests of the funds’ shareholders.”
Although Invesco’s prospectus allowed shareholders to make up to four exchanges per fund per year, the published guidelines also gave fund managers the flexibility to allow more exchanges when deemed appropriate, Amvescap said.
Juleff said she hopes Invesco continues its financial support of the Young Americans Center, which amounts to at least $50,000 a year, making the company its biggest corporate sponsor. The money is used largely to fund the Young AmeriTowne program, which offers thousands of Denver area children the chance to run a lifelike miniature town for a day as the culmination of a six-week classroom program.
Students who attend the program each get a job for the day and are paid in AmeriTowne dollars. Among the positions available — investment adviser at Invesco, located just two doors down from Towne Hall.