Morgan Keegan Bond Mutual Funds
Morgan Keegan is a Memphis, Tennessee based broker-dealer that is, according to its website, a "premier regional investment firm offering full-service investment banking, securities brokerage, trust and asset management." Morgan Keegan claims to operate 400 offices in 19 states.
During the second half of 2007, several Regions Morgan Keegan bond funds sustained significant losses. The funds at issue include:
- Regions Morgan Keegan Select High Income — A, Symbol: MKHIX, Year to Date Return as of 11/20/07 – down 54.45 percent
- Regions Morgan Keegan Select High Income — C, Symbol: RHICX, Year to Date Return as of 11/20/07 – down 54.66 percent
- Regions Morgan Keegan Select High Income — I, Symbol: RHIIX, Year to Date Return as of 11/20/07 – down 54.35 percent
- RMK High Income Fund — NYSE: RMH, Year to Date Return as of 11/20/07 – down 60.83 percent
- RMK Strategic Income Fund — NYSE: RSF, Year to Date Return as of 11/20/07 – down 61.86 percent
- Regions Morgan Keegan Select Intermediate Bond Fund — A, Symbol: MKIBX, Year to Date Return as of 11/20/07 – down 42.73 percent
- Regions Morgan Keegan Select Intermediate Bond Fund — C, Symbol: RIBCX, Year to Date Return as of 11/20/07 – down 42.96 percent
- Regions Morgan Keegan Select Intermediate Bond Fund — I, Symbol: RIBIX, Year to Date Return as of 11/20/07 – down 42.50 percent
The investments of these bond funds became concentrated in debt tied to the United States housing market and its mortgages. By early 2007, most Wall Street investment professionals knew and understood the risks associated with the American housing market and mortgages. Why these funds became highly concentrated in mortgage related securities is a question that must be answered.
In a statement made on August 10, 2007, Jim Kelsoe, the manager of these funds attempts to explain why several of the funds that he manages were coming under increasing pressure and sustaining significant losses. Mr. Kelsoe calls the current market conditions "truly unprecedented times." The real issue from an investor's perspective is whether the investment strategy utilized by Mr. Kelloe and Morgan Keegan was appropriate given the investment parameters of each of the bond funds.
At the crux of this issue is the amount of money each of these funds invested in:
Mortgage Backed Securities ("MBS") which are derivative investments that rely on mortgage payments to meet their obligations. The mortgages at issue may include: sub-prime loans, home equity loans, alt A loans, adjustable loans and even manufactured housing loans.
Collateralized Debt Obligations ("CDO") which are a resecuritized derivative investment. Simply stated, a CDO is a security created by Wall Street that is generally made up of MBS. Many CDOs are illiquid and their complex structures make them very difficult to value.
In general, before a broker invests a customer's money, he must make every attempt to familiarize himself with a customer's financial situation, trading experience, and risk tolerance and must perform due diligence to ensure that the investment recommendations are reasonable given the customer's investment needs. It is our opinion that the above-referenced Regions Morgan Keegan bond funds would have been suitable for only high risk, speculative investors.
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