COL Van Wagoner moral: Know what you own
Any time a fund company is the target of a class-action suit, investors can learn something.
It doesn't matter whether the suit is fruitful or frivolous. There's always a lesson buried in these legal conflicts about how funds work and what investors need to know.
Last week, Van Wagoner Capital Management became the target of at least three class actions alleging that it misled investors about the value of shares in its Emerging Growth fund.
No matter how the cases turn out, the entire saga should prompt investors to look more carefully into what they own.
The lawsuits arose after a Wall Street Journal article last month questioned the way the fund valued "private placements," investments in companies that are not public and whose shares are not priced on any stock exchange.
The Journal, relying on documents filed by the fund firm, reported that 23 private placements purchased by the Emerging Growth fund did not change in price from the time of the investment through the end of 2000.
All were purchased prior to the stock market's peak in March 2000. It might be reasonable to assume the private placements -- mostly in small technology companies -- should have lost some of their value before the end of the year, even if their thinly held shares never traded during the market decline.
But Van Wagoner didn't revalue many of the private placements until 2001, according to company filings. By June 2001, nine private stocks that had accounted for $28.6 million on New Year's Eve 2000 were valued at a mere $9 in total.
Truth be told, the overvaluation alleged by the class-action suits helped investors who already were in the fund. If they sold out, they got out at a price that was artificially high. They won't have to give back excess profits, even if it is determined that the fund was mispriced.
And if they didn't sell, riding Van Wagoner Emerging Growth through a horrendous 2001, their shares now reflect the current, lower, fair-market value of those private placements.
The lesson here is to know what is in your fund. Plenty of fund firms buy private placements; few put as much emphasis on them as Van Wagoner, for whom such purchases can often represent more than 10 percent of the assets at any of its five funds.
Charles A. Jaffe can be reached by e-mail at email@example.com or at The Boston Globe, P.O. Box 2378, Boston, MA 02107-2378.