* 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
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
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
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
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)