Picking Up The Pieces Morgan Keegan Attempts to Move Forward After RMK Fund Debacle

Representing Investors Nationwide

An August 22, 2008 Memphis Business Journal article chronicles life at Morgan Keegan post Kelsoe and the RMK fund meltdown.

In essence, Morgan Keegan has transferred management of the seven distressed funds from in-house manager Morgan Asset Management (MAM) to outside boutique manager Hyperion Brookfield Asset Management (Hyperion). Hyperion reportedly specializes in turning around distressed mutual funds but most observers hold out little hope these funds will ever return to form. One Morningstar analyst was quoted as saying “It’s good for fresh eyes,..but I still think they inheriting junky portfolios.” Ouch!

For Morgan Keegan’s part, distancing Kelsoe and his team from the firm and the funds was a priority. They allegedly overloaded the three open-end and four closed-end bond/income funds with mortgage backed securities and other structured products that became illiquid and difficult to value during last summer’s credit market implosion. See my August 23, 2008 blog regarding the recipe for disaster that was the investment strategy of the RMK funds.

The RMK Select High Income Fund (MKHIX); the RMK Select Intermediate Bond Fund (MKIBX), the RMK Select Short Term Bond Fund (MSBIX); the RMK High Income, Inc. (RHY), the RMK Strategic Income, Inc. (RSF); the RMK Advantage Income, Inc. (RMA); and the RMK Multi-Sector Income, Inc.(RHY) have lost between 50 and 80% in the past year alone. Fund holders, many of whom were sold these funds as secure investments, are angry and lashing out with lawsuits and arbitration claims to recover their losses.

Morgan Keegan and it’s investors aren’t the only losers here. Another repercussion from the RMK debacle is the reported exodus of financial advisers who were also allegedly mislead by the fund managers and marketing side. With their client books decimated and their reputations tarnished, many MK reps are seeking higher ground on which to rebuild their tattered careers.

The question becomes…can Morgan Keegan survive and prosper post-RMK? The company reportedly has insurance to cover losses related to investor suits but the long-term future remains a subject of speculation. Clearly, the losses related to the RMK Funds was not what Regions Financial Corp. bargained for when they purchased the brokerage firm (the bank wrote off $75 million in the 4th qtr of 2007 related to two of the funds’ losses). However, observers say the brokerage-related gains to Regions operations still outweigh the losses. The firm produced a net income of $165.9 million on revenues of $1.3 billion, “a good return on capital” according to FTN Midwest Securities bank analyst Jeff Davis and new Morgan Keegan CEO, John Carson predicts another good year in 2008. However, as lawsuits and arbitration claims continue to stack up, only time will truly tell.

For further information on the RMK Fund arbitration litigation, please contact Colling, Gilbert, Wright & Carter. Thank you.