Is Pilgrim Making Any Progress?Eric Schine
It has been one tough year for the mutual-fund industry. But you haven't seen real trouble until you look at Pilgrim Group. Last year, it was tarnished by scandal: Pilgrim and CEO Palomba Weingarten were sanctioned by the National Association of Securities Dealers and paid fines for misleading advertising. And its funds performed poorly: Assets dwindled to just $1.7 billion at yearend 1994 from $3 billion in 1992. By late last year, Weingarten decided to sell the fund company.
Now, it's Robert Stallings to the rescue. To be sure, the 45-year-old mortgage banker and his Scottsdale (Ariz.) Express America Mortgage Corp. seem to be unlikely saviors. Express America itself has been bleeding red ink for two years. And Stallings has no experience with mutual funds. Still, he's ponying up $28 million to buy seven of Pilgrim's 17 funds, with some $1.15 billion under management. He's even keeping the Pilgrim name and has moved to Los Angeles to be close to the operation.
Stallings insists he can restore Pilgrim to health. Others aren't so confident. "It's going to be an uphill battle," says Don Phillips, publisher of Morningstar Mutual Funds. "Why in the world would they even want to try?" Weingarten declined comment.
Stallings argues that Pilgrim is a virtual gold mine. He says its two closed-end funds will produce steady cash to help rebuild the company. Like mutual funds, fees for closed-end funds are based on assets under management. But unlike mutual funds, unhappy shareholders can't take their money out. They can only sell the shares for whatever they fetch in the market. Pilgrim Prime Rate Trust, with $720 million in assets, and Pilgrim Regional Bankshares, with $156 million, should produce more than $7 million a year in fees. And Stallings considers Pilgrim MagnaCap Fund, with its market-beating 4.1% total return in 1994, "a great lead horse" for a family of equity funds.
But the closed-end funds may not be the cash cows he's counting on. Both funds, listed on the Big Board, trade at deep discounts to their net asset value (NAV). But shareholders of Pilgrim Regional Bankshares have the right to vote on whether to convert to a mutual fund--and the betting is they'll do it in 1996. That will open the door to redemptions.
Prime Rate Trust, trading at 13% below NAV, has no such provision, but it poses problems for Stallings, too. To boost share prices, he may have to launch a buyback, which would shrink the assets. If that doesn't improve the share price, it could invite a hostile raid that could wrest control from Pilgrim, says Robert Grunburg, former Pilgrim Group president.
WEAK RECORD. Can Stallings improve the lot of Pilgrim fund shareholders? He hasn't done much for his own. Stallings took Express America public in 1992 at $10 a share. The stock soared to $16 in 1993 as the company rode the mortgage-financing boom. Since then, Express America has racked up nothing but losses. Stallings cleared $45 million from the sale of the mortgage-servicing business last summer. The stock now trades at around 4.
Even the sale to Express America--which is subject to the approval of the acquired funds' shareholders--won't end Weingarten's woes. She'll still be saddled with 10 unsaleable adjustable-rate mortgage (ARM) funds. These funds, which are supposed to be little more volatile than a money-market fund, turned in disastrous losses in 1994, ranging from-12.5% to -20.5%.
Most ARMs funds invest in government-backed securities. But Pilgrim sought higher yields by investing in private-issuer ARMs. When the credit quality of some of those issuers slumped, so did the prices for their ARMs--and the NAVs of the funds. That, in turn, triggered shareholder redemptions, which forced Pilgrim to dump these illiquid securities at fire-sale prices. That further shaved NAVs, which, of course, prompted more redemptions. Even if the ARMs funds are totally liquidated, some debts remain. The funds owe millions to banks for borrowings used to advance commissions to brokers.
Even under new management, Pilgrim won't have an easy time selling its wares. Brokerage firms and financial planners who formerly sold Pilgrim funds are slashing the number of fund groups they deal with. To get distribution, Pilgrim will have to compete with titans such as Fidelity, Franklin, and American Funds. It's going to be awfully tough for a small player without any fund-industry track record to pull that off.