Waddell & Reed Financial Inc., the mutual-fund manager based in the heart of Kansas that caters to mom and pop investors, is an unlikely company to be blamed for sending Wall Street into a tailspin on May 6.
“They're a long-term, buy-and-hold investor,” Geoff Bobroff, a fund-industry consultant in East Greenwich, Rhode Island, said in a telephone interview. “Their nature is not of an organization that is an active trader.”
During the May 6 crash, heavy sales of Standard & Poor's 500 Index futures by one firm so unnerved investors that U.S. stocks lost $862 billion in value in a 20-minute meltdown, according to a report by the Securities and Exchange Commission and
Commodity Futures Trading Commission. Waddell & Reed, which manages about $48 billion, was the seller, said two people with direct knowledge of the report, which doesn't name the firm.
The company, started 73 years ago by Cameron Reed and Chauncey Waddell, was unloading the futures, known as E-minis, in the course of normal hedging of its holdings, according to the report. The trading may not have prompted a retreat had investors not already been rattled by negative news, including a worsening of the European debt crisis, said the people, who asked not to be identified because the regulators' report hasn't been released.
Roger Hoadley, a spokesman for the Overland Park-based company, said its traders were “merely trying to manage downside risk in our portfolios.”
SEC Chairman Mary Schapiro asked the agency last month to examine whether the loss of traditional market makers has hurt investors. With market making now dominated by hundreds of automated traders with few rules for when they must buy and sell, the SEC will consider ways to keep the biggest from abandoning the market at the first sign of trouble.
After the May crash, U.S. lawmakers asked if the high- frequency firms that have supplanted specialists and market makers with strategies that transact thousands of shares a second destabilized trading by stepping away when they were needed most.
Waddell & Reed, started with less than $125,000 in assets during the Great Depression, is the opposite of a high-speed trader. Like most mutual-fund firms, it holds onto its investments for months or years.
The firm is small compared with the largest fund managers. Vanguard Group Inc., based in Valley Forge, Pennsylvania, is the biggest U.S. mutual-fund manager by assets, with $1.31 trillion.
Waddell & Reed, which went public in 1998, fell 10 percent this year through yesterday, compared with the 4.1 percent decline by the Standard & Poor's index of asset managers and custody banks. Its market value is $2.3 billion, compared with $32.6 billion for New York-based
BlackRock Inc., the biggest publicly traded money manager.
Jeffrey Hopson, an analyst at
Stifel Nicolaus & Co. in St. Louis, said the report is unlikely to damage the company in the long term.
“It's not ideal PR, but the activity didn't represent anything unusual,” Hopson said in a telephone interview.
Bobroff, the consultant, said Waddell's distribution structure will help protect it from any reputational fallout with individual investors. The company sells to individual investors almost exclusively through intermediaries, including its own network of financial advisers, who have a direct relationship with their clients.
Waddell & Reed is run by Henry J. Herrmann, a 39-year veteran of the company who became chief executive officer in 2005 and added the post of chairman in January. Herrmann, 67, joined the firm as an analyst and served as a fund manager and chief investment officer.
The $3.04 billion Asset Strategy Fund, the company's largest, has returned 1.9 percent this year, worse than 84 percent of rival funds, according to data compiled by Bloomberg. The fund, which can invest in stocks, bonds and short-term securities, has outperformed 92 percent of competitors over the past five years, returning an annual average of 11 percent.
In the past five years, the firm's funds that invest in both stocks and bonds beat 90 percent of U.S. fund companies in that category, according to Chicago-based research firm Morningstar Inc. Waddell's taxable bond funds topped 40 percent of competing fund families. Its domestic and international stock funds ranked ahead of 65 percent and 69 percent of rival companies.
Waddell was one of several mutual-fund companies that settled claims by the SEC earlier this decade. The company paid $77 million in 2006 to resolve accusations that it allowed certain clients to make improper trades.
