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Legg Mason Fund "Bet the Farm" on Global Crossing
Even bond fund managers cannot resist the temptation of buying stocks. That's bad news for investors, who count on their funds not to stray from their primary objective of investing in bonds.
Funds like AIM High Yield II, Penn Capital Strategic High Yield FUnd and John Hancock High Yield Bond Fund currently average between 8% to 10% ownership in stocks.
But that pales in comparison to the Legg Mason High Yield Prime FUnd, which last year concentrated a full 25% of the funds' assets in a single stock, Global Crossing. That was a dangerous position for its investors.
To be fair, the overconcentration resulted from the fund's owning company warrants, which gained value after the company's IPO. After a one-year lock-up agreement prohibiting sales, the fund sold most of its position. Currently, the fund's ownership interest is 2.4% of its assets.
Investors carefully read a fund's prospectus to see what the fund is allowed to buy, then monitor the fund to see what, in fact, it is buying.
Source: Wall Street Journal, February 14, 2000
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