June 8, 2012 / 5:28 PM / 7 years ago

Morningstar reviewing BlackRock energy fund rating

* Ratings agency cites “potential conflict of interest”

* Report advises shareholders to invest elsewhere

By Jessica Toonkel

NEW YORK, June 8 (Reuters) - Morningstar Inc is reviewing its rating of BlackRock Inc’s Energy & Resources Fund due to “a potential conflict of interest,” regarding one its portfolio managers, according to the investment research company.

Dan Rice, one of the portfolio managers of the $953 million fund, founded a natural gas drilling company, Rice Energy, in 2005. As first reported on Saturday by The Wall Street Journal, a subsidiary of Rice Energy, Rice Drilling, in 2010 entered into a joint venture with Alpha Natural Resources, a holding in the BlackRock Energy Resources Fund. Since that joint venture, the fund has increased its ownership in Alpha Natural Resources.

Alpha currently is a top 10 holding of the fund, making up 4.85 percent of its holding as of April 30, according to Morningstar.

The potential downgrade that Morningstar is considering would affect its analyst rating of the fund, a fairly recent category that is in addition to its star ratings of funds.

In its report announcing that Morningstar is reviewing its Bronze analyst rating for the fund, analyst Rob Wherry states that BlackRock has made it clear that Rice is no longer involved with the day-to-day business of Rice Energy, which is now run by his sons.

The report also said that BlackRock has stated that its increased holdings of Alpha was due to Alpha’s acquisition of Massey Energy in early 2011, a top holding for the fund.

“Clear disclosure would have helped investors make better decisions about owning this fund,” Wherry wrote in his report, entitled “Stewardship issues are overshadowing this fund’s merits.”

While there has not been evidence that shareholders were hurt by the situation, “it does raise enough concerns about stewardship and future conflicts that existing shareholders should consider other category options for their new dollars while demanding information about Rice’s dealings,” Wherry wrote in the report.

Wherry declined to comment outside of his report until he had time to talk to BlackRock.

Rice and a BlackRock spokeswomen did not immediately return calls and emails seeking comment.

The Chicago-based firm in November introduced its analyst ratings, which are designed to complement its star ratings and take into account other factors besides past performance, such as its managers, its parent company, and its stable of analysts.

Even though Morningstar’s analyst ratings are still new and don’t have the same weight with investors yet as its star ratings, a downgrade in an analyst rating is actually more significant, said David Snowball, founder of MutualFundObserver.com, which examines and critiques the mutual fund business.

“The analyst ratings are probably more predictive of the performance of the fund,” he said. “And when the analyst rating is a source of moral judgment, it may start to stick with investors.”

Observers said they were surprised that BlackRock allowed the potential for conflict of interest to occur.

“The potential for conflict of interest is there and I am surprised the BlackRock’s compliance department didn’t have the same conclusion,” said Jeff Tjornehoj, head of research at Lipper.

Lipper, which only takes into account quantitative metrics for its ratings, gives the BlackRock fund a 4 rating on a 5-point scale based on its past three-year performance.

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below