The discount broker will be forking over $119 million to settle state and federal lawsuits that accused the broker of misrepresenting the risks of its ill-fated YieldPlus
The bond fund had no problem attracting income investors with its compelling objective of seeking "high current income with minimal changes in share price." Unfortunately, the pursuit of chunkier payouts found the fund overloaded in mortgage-backed securities just as that market was collapsing three years ago.
The fund's 1% dip in 2007 -- according to Morningstar -- was unsettling, but the 35% plunge in 2008 was the dagger. Investors bolted as the lawsuits began to pile up, exacerbating matters on the way to a nearly 11% slide in 2009. The fund bounced back with marginally positive results last year, but the depleted asset base means that few of the scorched investors are still around.
As far as scandalous dives, YieldPlus' plight may not compare to when iconic money market fund Reserve Primary broke the buck in 2008. Investors figured that money market investments were glued to a net asset value of $1, but the failure of Reserve Primary -- and the need for Legg Mason
YieldPlus was always marketed as a bond fund with a fluctuating NAV. The rub came when it stretched the meaning of "minimal changes" when its investments fell apart.
The fallout hasn't been fatal to the Schwab brand. The discounter continues to grow. However, as discounters TD AMERITRADE
If there's any surprise here it's that Schwab continues to run the fund. It would have been easier to merge the fund with a more successful alternative as a means to rub out its negative history. Schwab gets points for that, though I wouldn't touch the fund with your money.
In fact, I don't know why investors stuck around when the lawsuits first started mounting in early 2008. The fund had lost less than half of what it eventually gave up in 2008 at the time, and it was a given that a stampede of redemptions would hamper its near-term performance. You don't want to be the last person out of a burning movie theater, even if you hear that the end credits are a hoot.
Schwab appears to be nearing the end of paying the price for the fund's deceptive marketing. Hopefully, investors have learned their own lessons, too.
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