Aug. 3, 2004 — Evergreen Investment Management Co. said the Securities and Exchange Commission is considering possible enforcement action against the company over improper trading in its mutual funds.
Wachovia Corp (WB), Evergreen’s parent, said it and certain current and former executives also face possible enforcement action by the SEC in connection with stock trades and disclosure issues related to Wachovia’s 2001 merger with First Union. The disclosures by Wachovia and Evergreen were made in regulatory filings on Tuesday.
Evergreen said it was notified of the potential action on July 28. Regulators allege that under an arrangement involving a former Evergreen employee, a broker, on behalf of a client, made trades in a fund that exceeded limitations mandated in the fund’s prospectus, Evergreen said.
The allegations also involve share purchases and sales between September, 2001, and January, 2003, by a former Evergreen portfolio manager in the fund he managed at the time, Evergreen said.
Evergreen and Wachovia said they plan to tell the SEC that it should not initiate the enforcement actions. Wachovia said it believes the stock trades and disclosures related to the First Union merger “complied with applicable law.”
Evergreen also said it has received subpoenas and other requests for information from regulatory agencies investigating market timing and other improper fund trading practices in the fund industry and is cooperating with the probes.
Evergreen said it does not believe the enforcement action or the investigations would have a “material adverse impact” on its funds. Any penalties or restitution that the company would have to make in connection with the action would be paid by Evergreen and not by its funds, the company said.
A spokeswoman for Evergreen could not immediately be reached for comment on the SEC allegations.
Contact Robert F. Keane with questions or comments at: [email protected].
Quick Take: Despite their recent gyrations, stocks still appeal to Susan Suvall, lead portfolio manager of the $1.1-billion TCW Galileo Value Opportunities Fund/I (TGVOX).
As the U.S. economy strengthens, and concerns about events in Iraq and the presidential election subside, companies “will continue to show good numbers” that will be reflected in stock prices, she says. “I think the market looks good across the board right now,” she adds.
The numbers put up by Suvall’s fund have been good, too. TCW Galileo Value Opportunities was up 7.6% this year through June, versus a rise of 6.4% for the average mid-cap value fund, and a gain 3.4% for the Standard & Poor’s 500-stock index. For the five years ended in June, the TCW fund returned 17.5% on average, versus a gain of 9.3% for its peers, and a loss of 2.2% for the index.
Suvall and co-manager Nicholas Galluccio look for profitable, financially sound companies whose stocks have gotten depressed because of a problem the managers view as transient.
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Traumatized companies can recuperate in the TCW Galileo Value Opportunities Fund, provided their convalescence is expected to be relatively short.
In overseeing the fund, Susan Suvall (formerly Schottenfeld) says she and Nicholas Galluccio look for businesses experiencing “an earnings trauma” because of a problem the portfolio managers consider only temporary.
The pair hunt for undervalued stocks of profitable companies that generate free cash and have strong balance sheets. Shares trading at the low end of their historical range are on their check list, too. Their buying decisions are based on what they think a company will earn over the next two years. The fund focuses on companies with market caps of $500 million to just over $10 billion, Suvall says.
One category of investments the fund is broken into is companies trading below their breakup value. An example of this type of holding, Suvall says, is Transocean Inc (RIG), which provides offshore drilling services for oil and gas wells.
Suvall expects the company to get a lift from the sale last February of part of its interest in its TODCO`A` (THE) oil and gas drilling subsidiary. In addition, she sees Transocean benefitting as the rebounding U.S. economy spurs big oil companies to spend more on production.
Another section of the portfolio consists of turnarounds. Suvall cites Health Net (HNT), which provides managed health care services, as a typical investment in this group. The stock, which ranked second in the portfolio at the end of June, has been hurt because the company underestimated medical costs and consequently mispriced its services, Suvall says. But “management has the situation under control” now, she says.
Health Net stock has been trading for around $26 lately. But “we think it’s worth in excess of where it’s selling right now,” Suvall says. She declines to elaborate.
Similarly, Novellus Systems (NVLS), a semiconductor equipment maker, is “worth a lot more than the stock is selling at now,” Suvall says. (The shares have been trading for about $26-$31 this month.) She cites Novellus as an example of what she calls “broken growth” stocks, which make up a third part of the portfolio.
Investors have been shying away from semiconductor stocks recently because of concerns about a slowdown in demand. But Novellus and its rivals have said they expect business to pick up, Suvall says. The company also looks good to her because it is the second-largest in its industry, and has “an incredibly clean balance sheet,” she says.
At the end of the second quarter, technology stocks like Novellus accounted for about 25% of the holdings of the fund, whose sector weights, Suvall says, are primarily the result of the managers’ individual stock picks. Still, valuations for these stocks “are really inexpensive,” and “prospects for these companies are better than for any other part of the market that we see,” she says.
Another tech stock, Teradyne Inc (TER), was the fund’s No. 1 holding on June 30. The company is a leading supplier of automatic test equipment used in producing semiconductors. Its attributes include a 20% growth rate and a solid balance sheet, according to Suvall. She also envisions semiconductor-related stocks to gain as companies increase spending on information technology, which they ignored between 200 and 2003. Because capital expenditures in the area appear to be rising, “we continue to believe that the upturn in the semiconductor equipment area is only in the beginning stages,” Suvall says.
A favorite of Suvall’s among the fund’s technology investments is chip maker Cypress Semiconductor (CY). The company features a sound balance sheet and its stock is “very cheap on a valuation basis,” she says. Suvall points out, too, that during the technology slowdown earlier in the decade, Cypress was able to cut expenses and able to diversity its product line through acquisitions it was able to make inexpensively.
TCW Galileo Value Opportunities has been a strong performer in up and down markets versus its peers, but its relatively concentrated portfolio — the fund owns 50 to 60 stocks — means it can also be more volatile that the average mid-cap value fund. However, given that the managers delve into busted growth stocks, turnarounds, and less traditional value sectors such as technology, one could also expect this fund to pack more punch than its mid-cap value fund peers.
Contact Robert F. Keane with questions or comments at: [email protected].