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Home > Cases > Charles Schwab > Schwab YieldPlus: Worst Of The Worst

Schwab YieldPlus: Worst Of The Worst

The back story on the Schwab YieldPlus Funds goes something like this: As part of the ultra-short funds genre, Schwab YieldPlus - which refers to the Schwab YieldPlus Fund Select Shares (SWYSX) and the Schwab YieldPlus Investor Shares (SWYPX) - was supposed to be the safest of all bond funds. Charles Schwab marketed the YieldPlus Funds as a safe alternative to money market investments - a cash substitute designed to preserve capital and generate income with minimal price fluctuation. Instead, managers - hoping to pump up the performance of YieldPlus - gambled big with mortgage and asset-backed securities. When the housing market imploded, so, too, did Schwab YieldPlus. The fund lost more than 35% last year, while the average ultra-short bond fund was down just 1.9%.

The original lead manager of the Schwab YieldPlus portfolio was Kimon Daifotis, who found himself replaced in July 2008 as manager of the funds, as well as four other Schwab fixed income funds. Since then, a slew of lawsuits and arbitration claims have been filed against Daifotis, alleged that he and Schwab misrepresented the safety of the YieldPlus funds.

According to investors' claims, Schwab brokers often advised clients with short-term certificates of deposit to move into the Schwab YieldPlus Fund, since the aim of the fund was to provide generally steady monthly income with limited interest rate and credit risk. When the credit crunch hit, however, YieldPlus began to unravel.

The fund's situation became so dire that Don Phillips, a managing director at fund tracker Morningstar, characterized it as “jaws dropping” among “veteran guys” in the industry.

Interestingly, some of the biggest holders in Schwab YieldPlus were other Schwab funds. But in an apparent show of no-confidence, Charles Schwab declared that as of April 2008, none of its funds held YieldPlus.

As for investors, they've lost millions because of their investments in Schwab YieldPlus. Perhaps an Aug. 28 column by Chuck Jaffe for MarketWatch said it best: “Ultra-short funds - if you believe the sales documents - are supposed to provide the best of both the money-fund and short-term-bond-fund worlds. It's a compelling sales pitch, but the reality is that they have actually provided the worst of those worlds.”

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options concerning the Schwab YieldPlus Funds.


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