Business as Usual at State Street

When residents of State Street find a pothole, they don't slow down. They evidently just drive around it and keep plowing ahead.

Attorneys general in Alaska and Idaho are considering taking legal action against the asset manager State Street for misleading investors about its bond funds that plummeted during July and August, according to a report in today's Wall Street Journal. And earlier this week, Prudential Retirement Insurance and Annuity Company sued the asset manager for the same reason, saying that State Street marketed the funds as conservative, index-based funds when they actually made aggressive and risky bets with their funds.

So what does State Street do today? Why, it launches a new index-based bond fund, of course. Don't let that pothole keep you from where you need to go.

With $1.9 trillion in assets under management, State Street Global Advisors calls itself the world's largest institutional fund manager.

State Street sells its products to retirement plans, such as those for state employees in Alaska and Idaho, as well as those managed by Prudential. Prudential claims that the bond funds it invested in were called "enhanced index funds," and their objective was to provide "stable, predictable returns" comparable to a bond index. But it claims that one fund lost 25 percent during July and August, while its benchmark index fell just 3 percent. A second fund lost 12 percent, compared to its index that lost 2 percent.

It turns out that the funds had exposure to an index of derivatives that were linked to subprime mortgages, according to a report by Financial News. Prudential says it never received word that State Street was changing its investment policy.

State Street responded to the charges. "The funds in which Prudential's plan clients were invested are actively managed, which entails market risk," a spokeswoman told Financial News. "The recent market conditions and lack of liquidity were unprecedented. An unfortunate result of such market events is that some funds lost value."

The bond fund in question for the Alaskan retirement fund was popular among workers in their 50s, who believed the fund was conservative, according to the Journal.

And what about the new product State Street launched today? It's also index based. It will "track the total return performance of the Lehman Brothers Global Treasury Ex-US Capped Index."

But a footnote in the press release reminds investors to know what they're getting into.

"Before investing, carefully consider the funds' investment objectives, risks, charges and expenses. A prospectus, which contains this and other important information about the fund can be obtained by calling 866.787.2257. Read it carefully before investing."

by Megan Barnett