* Faced regulatory review following "flash crash"
* Analyst: falling performance will drive away money
By Ross Kerber
BOSTON, July 27 A Waddell & Reed Financial Inc(WDR.N) fund linked to the May "flash crash" which saw the Dow Jones Industrial Average lose some 700 points in 10 minutes, has since seen significant outflows, Lipper data show.
The outflows are striking given the importance of the $21.5 billion Ivy Asset Strategy (WASCX.O) fund to Waddell & Reed, the Overland Park, Kansas, asset manager that is due to release financial results on Wednesday morning before the market opens.
The outflows could point to another problem for Waddell & Reed -- the fund's performance has fallen off since the start of the year, which may be spooking clients. "Deep underperformance may have gotten investors' attention," said Lipper analyst Jeff Tjornehoj.
The firm was caught up in the events of May 6, when stock markets plunged more than 9 percent before mostly recovering, for reasons that are still unclear.
Early in regulators' reviews they noticed that Waddell & Reed was an unusually big seller of futures contracts during the day, though there has been no suggestion the firm was at fault for the crash.
Regulators have since moved on to review the total amount of liquidity in the market, adopting circuit breakers that halt trading when a stock moves 10 percent within five minutes. They already are studying rules that would keep market-making offering quotes within that band.
But the regulators' earlier focus may have affected Waddell & Reed's business. The firm's trading of futures contracts known as "e-minis" was conducted in its so-called "flexible portfolio" funds like Ivy Asset Strategy, known for the wide variety of stocks and securities they may own.
Ivy Asset Strategy is Waddell & Reed's biggest fund and managed by Michael Avery, who also serves as the company's chief investment officer.
Avery was not available to be interviewed, said a company spokesman, who added he could not discuss more details ahead of tomorrow's earnings report.
Data from Lipper, a unit of Thomson Reuters, show the fund had inflows for each of the first four months of the year. But in May it swung to outflows of $308 million, and it posted another month of outflows in June, when investors took out $54.5 million.
Waddell & Reed had $74.2 billion under management at March 31, the end of its first quarter. For the three months ended June 30, the firm's mutual funds had net inflows of $278 million, Lipper estimates, though the figures do not include all the firm's products.
Traditionally, Avery and the fund's co-manager Ryan Caldwell have done well making bold bets and rapid shifts across the world and through various sectors, a reason their fund is known as a "flexible portfolio" vehicle.
For instance, their big bets on cash and gold were good ones during the credit crisis and are the reason the fund has beaten more than 90 percent of peers during the past three- and five-year periods, according to data from Morningstar Inc.
But performance has fallen off more recently, according to Morningstar. Through July 26 the fund was down 2.2 percent for the year to date, according to Morningstar, worse than 88 percent of peers. So far this year, a major holding of the fund has been gold, which has fallen in price in recent weeks. Other favorites also come down, including indexes of foreign securities.
Not every pick has been a miss, however. Among Ivy Asset Strategy's top equity holdings as of June 30 were casino operator Wynn Resorts Ltd (WYNN.O), up 52 percent for the year so far, and financial holding company Standard Chartered Plc (STAN.L), up 17 percent. (Reporting by Ross Kerber. Additional reporting by Jonathan Spicer in New York, editing by Gerald E. McCormick)