RENO, Nev. - Navellier & Associates' institutional clients have done little more than put the money manager on a watch list following the ouster of the firm as manager of an aggressive small-cap mutual fund.
By contrast, investors have pulled at least $40 million from the Navellier Series Fund - Aggressive Small Cap Equity Portfolio, which had about $160 million.
Investors began to cash out after the fund's independent trustees forced Louis G. Navellier to resign as portfolio manager earlier this month. Trustees appointed MFS Investment Management, Boston, to take over the fund, now known as the MFS Aggressive Small Cap Equity Fund.
Mr. Navellier predicted the fund would have only $20 million to $30 million by the time shareholders vote - in two rival proxy resolutions - on who will manage it.
On the institutional side, investors have remained "incredibly loyal," said James H. O'Leary, institutional sales director.
None of the firm's 36-plus pension, endowment and foundation clients - which trust Mr. Navellier with about $500 million to manage mostly in a highly quantitative, midcapitalization equity strategy - has done more than put the company on watch.
Some of Navellier's institutional clients are Aloha Airlines, Honolulu; OshKosh B'Gosh Inc., Oshkosh, Wis.; California State University-Hayward Educational Foundation, Hayward; Mack Trucks Inc., Allentown, Pa.; Louisiana District Attorney's Retirement System, New Orleans; State of Nevada Department of Museums & History Foundation, Carson City; and Chicago Firemen's Annuity & Benefit Fund.
In fact, the $40 million endowment of the University of Wyoming, Laramie, hired Navellier to manage $2 million in midcap equities less than a week after Mr. Navellier's trouble with mutual fund trustees became public and MFS took over the fund, said the endowment's consultant, John Vann, of The John Vann Co., Dallas.
Mr. O'Leary said he expects the firm to be in at least four finalist presentations before April 25. That's the day by which mutual fund shareholders must decide which manager will control the small-cap fund.
"It's fair to say we've been watching (Navellier), but we don't see any undue problems now with the company's management for us," said Douglas C. Shafer, vice president and treasurer of Tektronix Inc., Wilsonville, Ore.
"We've been very pleased with their management and performance. We just aren't jumping to conclusions," Mr. Shafer said.
Navellier manages midcap stocks for Tektronix' defined benefit and defined contribution plans, which total about $350 million. Mr. Shafer wouldn't say how much the firm runs for the funds.
How big a distraction?
Navellier's quantitative equity strategy reassured some consultants that money management activities won't be unduly affected by the distractions of the proxy fight.
Navellier's investment style relies on heavy quantitative analysis to select stocks using a momentum style across several market capitalizations. The style is used for all separate accounts, the two mutual funds Navellier manages in-house and the two mutual funds it subadvises for Northstar Investment Management Corp., Greenwich, Conn.
In an interview, Mr. Navellier said his ouster was "embarrassing," but it isn't affecting management of the separate accounts.
Mr. O'Leary added: "Despite the name of the firm, Louis insists on a team approach. . . . He is not a one-man band."
But Mr. Navellier has been visiting larger clients, like the Chicago Firemen's fund, to reassure them that the firm is in good shape.
He's also spending a lot of time on the phone with the press and the extensive network of brokers he relies on for separate account business.
Consultant Mr. Vann said he's known Mr. Navellier since 1981 and continues to recommend the firm to his pension clients.
"This trouble with the mutual fund is a complete non-event for institutional clients and is even rather laughable. Navellier has a real, firm, evolving commitment to investment management technique and institutional separate accounts will not suffer . . ." Mr. Vann said.
Others are not so sure Navellier will be unaffected.
"From the standpoint of money management, any protracted situation is not going to be good for Navellier," said mutual fund consultant Geoffrey Bobroff, president of Bobroff Associates, East Greenwich, R.I.
"You've got to ask yourself if the money manager is going to be concentrating on money management. . . . This kind of situation can weigh much more heavily on a boutique firm like Navellier, where Mr. Navellier is a portfolio manager, chief strategist, publishes a newsletter and does a lot of other things," Mr. Bobroff said.
Curt Cerulli, president of Cerulli Associates Inc., Boston, agreed. "His name's on the fund, for heaven's sake. It's got to be a huge distraction for him and the whole firm. . . . He's got a lot at stake and if it gets down to a fight, which it looks like it's going to, the distraction can't help but affect money management activities."
Getting a favorable shareholder vote looks to be a labor-intensive effort for Mr. Navellier.
Roy W. Adams, counsel to the special trustees of the Navellier Series Fund, said trustees have "absolutely no intention of convening a shareholder meeting so Mr. Navellier can conduct a vote on his shareholder resolution. If he wants a meeting, he's going to have to call it, arrange it and run it. And he doesn't have a lot of time to accomplish all that."
History of the breakup
Mr. Navellier and the small-cap fund's independent board came to blows when Mr. Navellier proposed a merger of two mutual funds he manages.
Mr. Navellier wanted to combine the small-cap fund, which carries a front-end load, with the $95 million Navellier Performance Funds-Aggressive Fund, a midcap, no-load fund.
He said he wanted to include the small-cap fund in mutual fund supermarkets, which he couldn't do with a load fund.
Mr. Navellier said the Securities and Exchange Commission advised him to propose the fund merger by proxy, which he did March 5.
In the proxy, Mr. Navellier said he would not continue to manage the small-cap fund if it remained separate.
But trustees did not feel they had the information necessary to evaluate the proposal by March 15, the legal deadline for the board's review and authorization of agreements, Mr. Adams said.
"Navellier management repeatedly failed to supply information to trustees and shareholders . . . which would allow the trustees to evaluate the merits of the merger. . .," Mr. Adams said.
Mr. Navellier said in an interview he did provide all documentation to trustees that is required by law.
Mr. Adams also noted Navellier's dismissal was not performance-related. Indeed, the small-cap equity fund has had annualized returns since its inception of nearly 20%.
In a March 1997 letter to clients, Mr. Navellier said the merger of the two funds would have eliminated the board.
"We are convinced that their own self-interest was the motivation for their actions," the letter said.
He speculated MFS may have been eager to accept management of the fund, which is approaching its all-important three year-anniversary. The fund has been closed to new investors, except through brokers, since April 1996, when it hit $200 million under management.
When it became clear trustees would not accept the merger proposal and might terminate him, Mr. Navellier resigned. But trustees ignored the normal 60-day transition period and found a new manager immediately.
MFS spokesman John Reilly termed his firm's involvement as "sort of a white knight in shining armor." "We are managing the small-cap fund and . . . trying to stay out of the fire."
Mr. Reilly said the company is now deciding whether to keep the fund separate or merge it with another MFS fund.
Investment management of the fund has changed radically. MFS' small-cap style, said Mr. Reilly, is bottom-up, research-driven with very low portfolio turnover. Turnover is about 20% a year, compared with Navellier's average of 400%, he said.
And redemptions have been rampant, a point on which both Mr. Adams, and Mr. Navellier agree. Mr. Adams suggested Mr. Navellier may be encouraging brokers to pull their assets.
MFS has been forced to invoke a standard clause in the fund management agreement to extend clearing requirements to seven days, rather than same-day clearance, to meet liquidity demands. Mr. Reilly said same-day clearance will be reinstated after a cash management plan is in place to ensure sufficient liquidity to meet redemptions.
Mr. Navellier is confident of victory. "There is no doubt we will win. I know who bought this fund and I know they will vote for the small cap fund to be merged."
Whatever happens, Mr. Adams noted the current board of trustees will be gone. "They will resign if Mr. Navellier wins his proxy and will be replaced if MFS is approved as the fund manager, according to their regular trustee selection process," he said.