Dan Rice wasn’t just the best stock mutual fund manager in Boston over the first decade of this young century. His track record stood above those of every other stock fund manager in the business.
Rice is about to step down as comanager of five energy-related mutual funds operated by giant BlackRock Inc. These developments come just weeks after published stories described his role founding Rice Energy, an energy business he started seven years ago that is now run by his sons.
BlackRock insists this arrangement was perfectly legal, and that may very well be the case. But the perception of a conflict of interest is impossible to explain away. The Rice family business could be a partner or a competitor with many companies in the fund manager’s portfolio — without investors ever knowing. In fact, this has already been the case.
“It exposes him and the fund to all kinds of potential conflicts of interest,” said Rob Wherry, an analyst at the mutual fund tracking firm Morningstar Inc. In a report published Monday, Wherry said Rice’s departure from the funds was “warranted.”
BlackRock provided no explanation for Rice’s move and would not comment on his future at the firm. But Wherry reported Rice would stay on to oversee investment accounts for institutional investors.
Rice never managed huge amounts of money by mutual fund standards. While many of the industry’s best-known managers oversee many billions of dollars in assets, his top fund invests a bit less than $1 billion.
But Rice’s reputation is well established in the fund industry, especially the corner of the business focused on energy investments. His BlackRock Energy & Resources Portfolio fund, outperformed every stock fund from the end of 1999 through the end of 2009 with an average annual return of 23.09 percent. That added up to a total return of 700 percent over a decade when the Standard & Poor’s 500 index lost 9.1 percent.
Along with big gains, Rice funds also came with more volatility. The same fund has lost 28 percent in the past year, a bumpy period for energy investments.
Rice was Boston Capital’s mutual fund manager of the year in 2004 and also appeared here with a small group as the city’s best fund managers of the century’s first decade.
In the midst of that great 10-year run, Rice created Rice Energy to develop natural gas opportunities focused on the Marcellus shale fields in Pennsylvania.
Today, Rice is listed as general partner and founder of the company created in 2005 and his sons serve as top executives. Rice Energy has acquired leaseholds expected to yield 200 to 250 wells, according to the company’s website.
Rice disclosed these activities to executives at BlackRock, but the money management firm never told fund shareholders about them. A BlackRock spokeswoman declined to explain why the company concluded it was not required to tell fund investors about the arrangement. Too bad, because I’m stumped.
“This is an example of where they fell short of doing what’s right for shareholders,” said Wherry.
Many of the details about Rice’s side business spilled out recently in news stories first published by The Wall Street Journal. And the Rice Energy website made no secret about what it was doing and who was involved. Among other things, it offers links to business media stories and interviews featuring Rice’s views on energy issues and investments.
But the website doesn’t tell you much about a 2010 joint venture between a Rice Energy subsidiary and Alpha Natural Resources to develop natural-gas wells. Rice’s fund at BlackRock had invested about 2 percent of its assets in Alpha shares, and that stock became a much larger part of the portfolio later. Alpha’s 2011 acquisition of another Rice investment favorite, Massey Energy, apparently accounted for most the increase.
Meanwhile, Rice Energy competes with several other big companies whose stocks could easily end up in an energy mutual fund portfolio. The Journal cited Chesapeake Energy, Consol Energy, EQT, and Range Resources as actual examples at BlackRock.
The explanation for all this? Rice is not actively involved in day-to-day operations at the energy company and specifically recuses himself from anything connected to the joint venture with Alpha. In fact, Rice now owns very little stock in the family business he started.
These are bad answers and don’t explain away two big mistakes. Dan Rice put his shareholders in a bad position when he launched the family business. BlackRock committed the even greater sin when it decided shareholders had no need to know about it.