James Kelsoe, once the top-ranked bond manager of seven funds worth $611 million at Morgan Asset Management, is about to get dumped when shareholders meet to vote on his fate on July 11th.
The seven funds managed by Kelsoe lost an average 67 percent in the past year which prompted a slew of investor lawsuits against Kelsoe and Morgan. Regions Morgan Keegan Select High Income, the largest fund in the group, plunged to $104 million from a peak of $1.23 billion in 2006. At his peak, Kelsoe outperformed his peers three years in a row by betting heavily on bonds with below-investment-grade ratings. He chose increased risk of default for yields higher than those on investment-grade debt. In an interview in July 2007, he said he developed an "intoxication'' for securities backed by risky sub-prime mortgages. Kelsoe was hit hard with redemptions when the market seized up last year.
In a bid for some damage control, Morgan announced in April that it would hand over Kelsoe's four closed-end funds (RMK Advantage Income Fund Inc., RMK High Income Fund Inc., RMK Multi-Sector High Income Fund Inc. and RMK Strategic Income Fund Inc.) and three open-end funds (Regions Morgan Keegan Select Short Term Bond, RegionsMorgan Keegan Select Intermediate Bond) to New York-based Hyperion Brookfield Asset Management Inc., pending the shareholder vote in July. Hyperion isn't expected to lose anything in taking over the funds because if they're not recoverable, it's not their fault. And if they're able to work their way out of the mess, they become the hero. Investors shouldn't expect a miracle from Hyperion though.
Kelsoe joined Morgan in 1991 and established the Select High Income fund in 1999. He increased returns on this high-yield fund by stuffing them with mortgage-backed bonds, collateralized debt obligations and aircraft-leasing obligations. From 2004 to 2006, the High Select Income fund averaged a 12 percent return, compared with 7.6 percent for all other high-yield funds tracked by Morningstar.
But the fund was unraveled by record defaults on sub-prime mortgages and investors fleeing from risky investments. The Select High Income fund fell 60 percent in 2007 and fell another 31 percent this year while the average high-yield fund rose 1.5 percent in 2007 and is up 0.4 percent this year. According to Morningstar, Kelsoe is to blame for taking on so much risk and poor communication with shareholders and assets plunged.
A dozen lawsuits against Morgan and Morgan executives including Kelsoe have piled up since last December. The lawsuits are accusing them of mismanagement and misrepresentation and they're seeking class-action status.
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