RESPONSE OF THE OFFICE OF CHIEF COUNSEL

PUBLIC

RESPONSE OF THE OFFICE OF CHIEF COUNSEL

DIVISION OF INVESTMNT MAAGEMENT

MAY - 7 199

Our Ref. No. 95-633-CC

Blanchard Global

Growth Fund

File No. 811-4579

Your letter of October 17, 1995, requests our assurance that

we would not recommend that the Commission take any enforcement

action if Blanchard Global Growth Fund ("Global Growth"), in

calculating its standardized average annual total return

presented in prospectuses, advertisements, or sales literature,

excludes investment results prior to the date on which a new

subadviser began providing portfolio management services. For

the reasons discussed below, we are unable to provide this

assurance.

Global Growth is a series of the Blanchard Funds, a

registered open-end investment company. Sheffield Management,

Inc. ("Sheffield") served as Global Growth's investment adviser

from the fund's inception in 1986 through July 1995. As adviser,

Sheffield was responsible for providing portfolio management

services to Global Growth. Sheffield entered into agreements

with various subadvisers, and delegated to them the task of

managing Global Growth's portfolio on a day-to-day basis. On

July 12, 1995, Virtus Capital Management ("VCM") acquired the

business and assets of Sheffield and became Global Growth's

adviser. At that time, VCM continued to retain each of Global

Growth's five existing subadvisers.i/

Approximately three months after becoming Global Growth's

investment adviser, VCM decided to replace the five subadvisers

with a single new subadviser, Mellon Capital Management Corp.

("Mellon"). Global Growth now proposes, in calculating its

standardized average annual total return to be presented in

prospectuses, advertisements, and sales literature, to exclude

performance data for the period prior to the date on which Mellon

began serving as subadviser to Global Growth.

In our view, past performance data cannot be excluded from

calculations of a fund's standardized total return simply because

the fund's adviser replaces one subadviser with another. ~/ Thus,

i/ Global Growth's shareholders approved a new advisory

agreement with VCM and new agreements between VCM and each

subadviser, thereby approving the reappointment of each

subadviser to serve in the same capacity as before.

g/ See Colonial International Fund for Growth (pub. avail.

May 7, 1996) (an investment adviser remains ultimately

responsible for the fund's performance whether the adviser

manages the fund's portfolio directly or delegates this task to a

subadviser). Our position that past performance cannot be

(continued. . . )

-2­

Global Growth may not exclude performance data for the period

prior to Mellon's appointment as subadviser. Nor may Global

Growth exclude performnce data prior to the date VCM became the

fund's adviser because, for a significant period of time

thereafter, VCM continued to retain as subadvisers the same

entities that had served in that capacity prior to that date.~/

Accordingly, we cannot assure you that we would not

recommend that the Commission take enforcement action if Global

Growth proceeds in the manner described in your letter .~/

ßCh A~~

Barry~. Mendelson

Senior Counsel

~/ ( . . . continued)

excluded from calculations of standardized total return when the

fund's adviser replaces the subadviser applies equally to

quotations of standardized total return in fund advertisements

(rule 482 (e) (3) of the Securities Act of 1933), fund sales

literature (rule 34b- 1 (b) (1) under the Investment Company Act of

1940), and fund prospectuses (Form N-1A, Instruction 6 to Item

5A) .

~/ Cf. zweig Series Trust (Jan. 10, 1990) (staff declined

to provide no-action assurance to a trust that changed investment

advisers based upon the past affiliation of one of the owners of

the new aãviser to the previous adviser and to the trust). On

the other hand, when a fund's adviser and subadviser (s) are

replaced, at the same time, the fund may omit past performance if

the standards established in our previous letters are met. See.

~, Unified Funds (pub. avail. Apr. 23, 1991) ¡Philadelphia

lund (pub. avail. Oct. 17, 1989) i Investment Trust of Boston

Funds (pub. avail. Apr. 13, 1989). Those letters permit a fund

to omit past performance that includes investment results

attributable to a former adviser unrelated to the current adviser

if, among other things, none of the former adviser's employees or

principals are involved in managing or supervising the funds for

the current adviser.

~/ Our position addresses only the calculation of

standardized total return and does not preclude the Fund from

including in its advertisements or sales literature total return

calculated from the Replacement Date. Rule 482 (e) (4) expressly

permits, and rule 34b- 1 does not preclude, quotation of nonstandardized total return in fund advertisements and sales

literature, as long as it is accompanied by quotations of

standardized total return calculated in accordance with rule

482 (e) (3) for the full periods required by that rule. See also

Zweig Series Trust, supra note 3 (footnote 6).

~~~1\~~~.,~-- ~~

--

FEDE~TED m ADMINISTRATIVE

U SERVICES

FEDERATED I:-"ESTORS TOWER

PITTSBCRGH. PA 15222-3iï9

412-288.1900

SA 0+ /133

AI

Investment Company Act of 1940/

SEON

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PUBLIC f1 7 II.

AVAIILITY . at,' 70

Rule 34b-1

Securities Act of 1933 /Rule 482

October 17, 1995

Office of Chief Counsel

Division of Investment Management

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, DC 20549

Re: Blanchard Funds, File Nos. 33-3165 and 811-4579

Dear Sir or Madam:

Virtus Capital Management, Inc. ("VCM") is an investment adviser

registered with the Securities and Exchange Commission (the "Commission")

and is Manager of the Blanchard Funds (the "Trust"), which consists of ten

portfolios (collectively, the "Funds"), including the Blanchard Global Growth

Fund ("Global Growth"). As Manager, VCM selects, monitors and evaluates

the Funds' sub-advisers, each of which has actual responsibilty for the

purchase and sale of securities for the respective Fund for which it acts as subadviser.

Currently, VCM has contracted with five separate sub-advisers to

manage the six sectors of Global Growth. It is anticipated that, on January 20,

1996, Mellon Capital Management Corp. ("MCMC"), wil succeed Global

Growth's current sub-advisers as sole sub-adviser of Global Growth.

On behalf of the Trust, VCM, and the Trust's Distributor, Federated

Securities Corp. (the "Distributor"), I respectfully request that the staff of the

CommIssion advise that it wil not recommend any enforcement action if the

Trust, VCM, or the Distributor does not include any period prior to the date

MCMC becomes sub-adviser of Global Growth in calculations of average

annual total return presented in prospectuses, advertisements or sales

literature relating to Global Growth.

A subsidiary of FEDEMTED 1:\'\ 'ESTORS

i. Background

The Trust is a registered open-end management investment company

organized in 1986 as a Massachusetts business trust. Until July 12, 1995, the

Manager of the Trust was Sheffield Management, Inc. ("Sheffield"). Sheffield

provided overall management services necessary for the operations of the

advisory

agreements with various sub-advisers, who were in fact responsible for the

selection of each Fund's investments.

Funds, and Sheffield, with respect to each Fund, entered into sub

On July 12, 1995, the business and assets of Sheffield were acquired by

VCM and, as required by the Investment Company Act of 1940 (the" Act"), the

Board of Trustees and the shareholders of each Fund approved a new

Management Agreement between VCM and the Trust, appointing VCM as

Manager of the Funds, and new sub-advisory agreements between VCM and

each sub-adviser, reappointing each sub-adviser to serve in the same capacity

with respect to each respective Fund that it served at the date of the

acquisition of Sheffeld. Sheffeld wil liquidate and dissolve.

VCM, \vhich is a wholly-owned subsidiary of Signet Banking

Corporation ("SBC"), has not employed any .former officer or employee of

Sheffeld, except for Yolanda Reynolds, whose responsibilities both at

Sheffield and VCM, encompass(ed) administrative and compliance, rather

than investment advisory, matters. While certain other former employees of

Sheffield are now employed by Signet Financial Services, Inc. ("SFSI") (a

wholly-owned broker-dealer subsidiary of SBC), to provide marketing

services in connection with the sale of the Blanchard Funds, none of these

persons provide, on behalf of any SBC-affilated company, any investment

advisory services or portfolio management services to the Blanchard Funds.

Michael Freedman, formerly Sheffield's principal stockholder and Chief

Executive Officer, was primarily responsible, on behalf of Sheffield, for

selecting, monitoring and evaluating sub-advisers for the Funds, but was not

actually involved in providing investment advisory or portfolio

management services. Mr. Freedman is currently employed by SFSI as

Executive Vice President, but is not an officer or director of VCM or the Trust

and is not responsible for any investment advisory activities.

On November 15, 1995, VCM wil make a proposal (the "Proposal") to

the Board of Trustees of the Trust to replace the existing sub-advisers of

Global Growth with MCMC and approve a new sub-advisory contract

between VCM and MCMC. VCM wil also recommend that, subject to Board

approval of the Proposal, a special meeting of the shareholders of Global

Growth be held on or about January 20, 1996, to vote on this matter. If

approved by the Board and the shareholders, the sub-advisory contract with

MCMC is expected to become effective on or about January 20, 1996.

2

Under the Proposal, MCMC would replace the following existing subadvisers of Global Growth: Shufro Rose & Ehrman (sub-adviser of the U.s.

Equities Sector); Fiduciary International, Inc. (sub-adviser of Foreign Equities

and Foreign Fixed Income Sectors and Global Allocation Strategist),

Investment Advisers, Inc. (sub-adviser of the American Fixed Income Sector),

Cavelti Capital Management, Ltd. (sub-adviser of the Precious Metals

Securities and Bullon Sector) and Martin Currie, Inc. (sub-adviser of the

Emerging Markets Sector) (collectively, the "Current Sub-Advisers"). MCMC

has no affilation with, and owns no interest in, any of the Current SubAdvisers and has employed no officer or employee of any Current SubAdviser responsible for Global Growth, and no such acquisiton or

employment is contemplated.

Thus, approval of the Proposal and the assumption of sub-advisory

responsibilities by MCMC \vil bring about a total change in the investment

advisory responsibilities for Global Growth, at the levels of both the Manager

and the sub-adviser. The new Manager, VCM, is now responsible for, among

other things, selection and monitoring of Global Growth's sub-adviser(s), and

a new sub-adviser, MCMC (subject to Board and shareholder approval), wil

be directly responsible for Global Growth's investment program. Under these

circumstances, the Applicants believe that inclusion of Global Growth's

performance history prior to the assumption of responsibilties by MCMC

would be inappropriate and would convey an inaccurate impression of the

abilities of both VCM and MCMC.

As discussed below, the staff has on several occasions taken a no-action

position with respect to the omission of past performance following a change

in investment advisers, in what the Applicants believe to be very similar

circumstances. Consistent with those precedents, if no-action relief is granted

to permit the Trust to include only periods after the date MCMC becomes subadviser of Global Growth, in calculations of average annual total return

presented in prospectuses, advertisements, and sales literature relating to

Global Growth, Global Growth would clearly disclose in such material (i) the

date of inception of Global Growth and the fact that prior to January 20, 1996,

Global Growth operated under different management, (ii) that per share

income and capital changes for the last 10 years are disclosed in Global

Growth's statutory prospectus, and (ii) that average annual total return

figures for one, five and ten year periods are available on request.

II. Discussion

In a series of no-action letters, i.e., Philadelphia Fund, Inc. (pub. avaiL.

October 17, 1989) ("Philadelphia Fund"), Investment Trust of Boston Funds

13, 1989) ("Back Bay") and Unified

Funds, Inc. (pub. avaiL. April 23, 1991) ("Unified"), the staff took no-action

/Back Bay Advisors (pub. avaiL. April

3

positions concerning mutual fund advertising of performance figures in

situations where there was a change in investment advisors. In each case, the

staff advised that it would not recommend enforcement action if the

performance data presented in advertisements, sales literature or omitting

prospectuses covered only the period commencing with the engagement of

the new adviser where (i) the new adviser had no interest in the predecessor.

adviser and did not employ any officer or employee of the predecessor firm

who was responsible for managing the fund's portfolio; (ii) since the date of

the engagement of the new adviser, all investment advisory and portfolio

management services required by the funds were provided and supervised

exclusively by offcers and employees of the new adviser, who had no prior

affilation with the predecessor adviser; and (iii) all relevant materials

include the disclosures noted above.

We believe that the facts set forth above with respect to Global

Growth-- specifically, the total change in both Global Growth's Manager and

its sub-adviser -- are similar to those in the Philadelphia Fund and Back Bay

letters. We submit that here, as was argued in those letters, it is in the best

interest of prospective sl;areholders that advertisements and sales literature

reflect performance data commencing on the date that MCMC becomes subadviser for Global Growth, because of the inaccurate impression as to the

abilities of both VCM and MCMC which would otherwise be conveyed.

The fact that, as noted above, VCM is the successor to the business of

Sheffield should not change the analysis where, as here, there is no

continuity in personnel between the former manager and the current

Manager (and, moreover, a new sub-adviser would be in charge of Global

Growth's investment program). This is similar to the situation in Unified,

where the staff granted a no-action letter permitting the Unified Funds to

include performance only from the date on which ownership of the adviser

(Unified Advisers, Inc.) passed from Mutual Life Insurance Company of New

York to Unifed Holdings, Inc. on the basis that, although the actual legal

entity advising the Unified Funds did not change, there was a complete

change in control of that entity, as well as in the personnel responsible for

providing investment advisory and portfolio management services to the

Unified Funds.

We also submit that the present circumstances should be distinguished

from those addressed in Zweig Series Trust (pub. avaiL. January 10, 1990)

("Zweig"). In Zweig, the staff declined to provide no-action assurance where

the Zweig Series Trust proposed to eliminate performance antedating the date

of the installation of a new adviser, because an owner of the new adviser had

also been President and a director of the previous adviser, Chief Executive

Officer and Trustee of the Trust, and Senior Vice President of the former

distributor.

4

Zweig does not apply here because in Zweig, the individual in question

may have had a controllng position with both the predecessor and the

successor advisers, whereas after MCMC becomes the sole sub-adviser to

Global Growth (assuming approval by both the trustees and the

shareholders), no former shareholder or officer of Sheffield or Global Growth

wil have any position with VCM or MCMC, other than Yolanda Reynolds,

who, as stated above, is and had been employed solely in an administrative

and compliance capacity. While it is true that several persons formerly in

responsible positions with Sheffield (including Mr. Freedman, its former

principal shareholder and chief executive officer) are now employed in

responsible positions with SFSI, none of these persons has any position with

the Manager (VCM) or the proposed new sub-adviser (MCMC), nor does any

such person have any responsibilty for providing any investment or

portfolio management services for the Blanchard Funds.

Moreover, unlike in the Zweig situation, where both the predecessor

and successor advisers actively managed the portfolios of the Funds, here

Sheffield had, and VCM has, contracted the actual portfolio management

function to the Current Sub-Advisers and the proposed new sub-adviser. The

fact that there is no ownership or personnel continuity between the subadvisers (coupled with the lack of continuity in management personnel

between Sheffield and VCM) would, in our opinion, compel the conclusion

that no-action relief is appropriate in this case.

III. Conclusion

We believe that based upon the facts presented herein, the staff's

position taken in Back Bay, Philadelphia Fund and Unified would not be

compromised or otherwise contradicted if a similar position was taken in

respect hereto. We respectfully request, therefore, based upon the foregoing

analysis and subject to the proposals set forth above, that the staff advise that

it wil not recommend any action to the Commission if Global Growth, VCM

or the Distributor do not include any period prior to the date on which

MCMC becomes sub-adviser for Global Growth, in calculations of average

annual total return in omitting prospectuses, advertisements and sales

literature relating to the Trust.

If you have any questions concerning this matter, please do not hesitate

to telephone the undersigned at 412-288-8160.

Sincerely,

,-I .Vj A _ 1. J-L. ..'" . /t; . ~ /'

'"

... V4. i.i.,-V /_¿~ \.-i~' l-

C. Grant Anderson

Corporate Counsel

5