What historically has been a rare occurrence - a mutual fund going out of business carrying an unpaid debt from its investment adviser - apparently is becoming more common. In the last year alone, two fledgling funds have sought to close with such bills outstanding.
The problems of these two funds provide a glimpse of the financing challenges funds face in surviving their first few years of life.
One of the funds, the tiny Michigan Heritage Fund, hopes to close imminently. Shareholders are scheduled to vote on the matter March 15. But, it is still owed about $63,000 - an amount equal to about 20 percent of the fund's assets - by the fund's investment adviser. That is the bill which the adviser, Dickinson Asset Management of East Lansing, Mich., ran up for what the fund contends are overdue expense reimbursements.
Dickinson had been paying a portion of expenses since the fund opened for business in July, 1997 but failed to do so in the second half of last year, according to a fund lawyer. The board wrote down the value of the fund's assets in late December to reflect the overdue bill but still is trying to recover the debt.
Dickinson, which stopped managing the fund last month, disputes the fund's debt claim. Lawyers for the parties are trying to resolve the matter without having to go to court.
"I am hopeful that in the end we can work everything out," said David. D. Jones, the lawyer in Phoenixville, Pa. who represents the fund and the independent directors.
Michigan Heritage's experience marks the second time in less than a year that a mutual fund has tried to go out of business with what the funds have claimed were expenses advisers failed to pay. In the first instance, the Life Cycle Funds of Wayne, Pa. announced plans in June to close. The funds said their former adviser, Benson White & Co., had failed to pay overdue reimbursement expenses of more than $300,000. (MFMN, Aug. 3, 1998)
A vote on the Life Cycle funds' liquidation was scheduled for October. SEC filings available on-line do not reflect the outcome of the vote. A representative of the Wilmington Trust Co., the firm identified in SEC filings as Life Cycle's adviser, did not return a call requesting comment.
In both the Michigan Heritage and Life Cycle cases, the funds were less than three years old when they ran into trouble. Both funds were run by a first-time mutual fund advisery firm. And both advisers subsidized fund expenses. Benson & White ultimately became insolvent, according to SEC filings. Jones said he did not know Dickinson's financial status. Dickinson officials did not return calls seeking comment.
The plight of these funds suggests that it may be easier to start a mutual fund than it is to sustain it, said Geoffrey Bobroff, a mutual fund consultant in East Greenwich, R.I. Starting a mutual fund is probably too easy, said Bobroff. It takes only $100,000 in seed money to start a mutual fund and fund advisers, unlike broker/dealers, do not need to keep a minimum amount of capital on hand to satisfy regulators.
Despite the low entry barriers, however, fund advisers need sufficient capital to make a new fund work, Bobroff said. Mutual funds must be in business for three years before they receive a star designation from Morningstar, the fund rating firm. A favorable Morningstar rating helps attract assets which can enable a fund to pay its own way without adviser subsidies.
In order to get a favorable rating, however, funds need good performance. To accomplish this, new funds normally waive fees and reimburse funds for expenses, keeping down the costs which can reduce investment returns.
The waivers and reimbursements go beyond new funds. As of Sept. 30, the last date for which such figures are available, 46 percent of the approximately 12,700 funds Lipper tracks waived at least part of their management fee or paid fund expenses, a Lipper spokesperson said last week.
New fund companies have built assets without having a three-year track record, Bobroff said. Thomas Marsico, for example, used his reputation as an effective stock picker at Janus funds to build Marsico's own fund group in less than one year, Bobroff said. Funds which have a recognized brand name or a reliable means of distribution also have an advantage in gathering assets. For the others, however, a marketable Morningstar performance record is key, Bobroff said.
"It's really a question of staying power," Bobroff said. The fund adviser must "have the financial staying power to wait it out" until the fund builds a marketable track record, he said.
Stephanie Djinis, a lawyer in McLean, Va. who represents smaller mutual fund companies, said she advises money management clients to run private accounts rather than mutual funds if they can not raise $100 million in assets quickly. She estimated minimum fund start-up expenses at $250,000 and warned that additional costs for running and distributing a fund are substantial.
"I usually think of that ($100 million level) as the threshold," Djinis said.
That is a threshold Michigan Heritage did not approach. The fund's audit for 1997, the most recent on file with the SEC, showed approximately $303,000 in assets. Jones said the current total remains in that range.
Despite the modest asset total, Dickinson kept current on reimbursements through roughly the middle of 1998, Jones said. Then expenses began to accumulate.
When Dickinson gave notice on Dec. 15 that it was resigning as fund adviser, it owed the fund approximately $63,000, according to a preliminary proxy statement filed with the SEC on Feb. 18. Dickinson said it had no responsibility for the alleged debt, according to the SEC filing.
After Dickinson gave notice, the fund board looked for a new adviser. The fund's expenses discouraged candidates. Firms the board talked to cited the large balance of expenses which would hurt the fund's performance as one of the reasons for not taking the job, according to the Feb. 18 SEC filing.
mfmnBy Mike Garrity
What historically has been a rare occurrence - a mutual fund going out of business carrying an unpaid debt from its investment adviser - apparently is becoming more common. In the last year alone, two fledgling funds have sought to close with such bills outstanding.
The problems of these two funds provide a glimpse of the financing challenges funds face in surviving their first few years of life.
One of the funds, the tiny Michigan Heritage Fund, hopes to close imminently. Shareholders are scheduled to vote on the matter March 15. But, it is still owed about $63,000 - an amount equal to about 20 percent of the fund's assets - by the fund's investment adviser. That is the bill which the adviser, Dickinson Asset Management of East Lansing, Mich., ran up for what the fund contends are overdue expense reimbursements.
Dickinson had been paying a portion of expenses since the fund opened for business in July, 1997 but failed to do so in the second half of last year, according to a fund lawyer. The board wrote down the value of the fund's assets in late December to reflect the overdue bill but still is trying to recover the debt.
Dickinson, which stopped managing the fund last month, disputes the fund's debt claim. Lawyers for the parties are trying to resolve the matter without having to go to court.
"I am hopeful that in the end we can work everything out," said David. D. Jones, the lawyer in Phoenixville, Pa. who represents the fund and the independent directors.
Michigan Heritage's experience marks the second time in less than a year that a mutual fund has tried to go out of business with what the funds have claimed were expenses advisers failed to pay. In the first instance, the Life Cycle Funds of Wayne, Pa. announced plans in June to close. The funds said their former adviser, Benson White & Co., had failed to pay overdue reimbursement expenses of more than $300,000. (MFMN, Aug. 3, 1998)
A vote on the Life Cycle funds' liquidation was scheduled for October. SEC filings available on-line do not reflect the outcome of the vote. A representative of the Wilmington Trust Co., the firm identified in SEC filings as Life Cycle's adviser, did not return a call requesting comment.
In both the Michigan Heritage and Life Cycle cases, the funds were less than three years old when they ran into trouble. Both funds were run by a first-time mutual fund advisery firm. And both advisers subsidized fund expenses. Benson & White ultimately became insolvent, according to SEC filings. Jones said he did not know Dickinson's financial status. Dickinson officials did not return calls seeking comment.
The plight of these funds suggests that it may be easier to start a mutual fund than it is to sustain it, said Geoffrey Bobroff, a mutual fund consultant in East Greenwich, R.I. Starting a mutual fund is probably too easy, said Bobroff. It takes only $100,000 in seed money to start a mutual fund and fund advisers, unlike broker/dealers, do not need to keep a minimum amount of capital on hand to satisfy regulators.
Despite the low entry barriers, however, fund advisers need sufficient capital to make a new fund work, Bobroff said. Mutual funds must be in business for three years before they receive a star designation from Morningstar, the fund rating firm. A favorable Morningstar rating helps attract assets which can enable a fund to pay its own way without adviser subsidies.
In order to get a favorable rating, however, funds need good performance. To accomplish this, new funds normally waive fees and reimburse funds for expenses, keeping down the costs which can reduce investment returns.
The waivers and reimbursements go beyond new funds. As of Sept. 30, the last date for which such figures are available, 46 percent of the approximately 12,700 funds Lipper tracks waived at least part of their management fee or paid fund expenses, a Lipper spokesperson said last week.
New fund companies have built assets without having a three-year track record, Bobroff said. Thomas Marsico, for example, used his reputation as an effective stock picker at Janus funds to build Marsico's own fund group in less than one year, Bobroff said. Funds which have a recognized brand name or a reliable means of distribution also have an advantage in gathering assets. For the others, however, a marketable Morningstar performance record is key, Bobroff said.
"It's really a question of staying power," Bobroff said. The fund adviser must "have the financial staying power to wait it out" until the fund builds a marketable track record, he said.
Stephanie Djinis, a lawyer in McLean, Va. who represents smaller mutual fund companies, said she advises money management clients to run private accounts rather than mutual funds if they can not raise $100 million in assets quickly. She estimated minimum fund start-up expenses at $250,000 and warned that additional costs for running and distributing a fund are substantial.
"I usually think of that ($100 million level) as the threshold," Djinis said.
That is a threshold Michigan Heritage did not approach. The fund's audit for 1997, the most recent on file with the SEC, showed approximately $303,000 in assets. Jones said the current total remains in that range.
Despite the modest asset total, Dickinson kept current on reimbursements through roughly the middle of 1998, Jones said. Then expenses began to accumulate.
When Dickinson gave notice on Dec. 15 that it was resigning as fund adviser, it owed the fund approximately $63,000, according to a preliminary proxy statement filed with the SEC on Feb. 18. Dickinson said it had no responsibility for the alleged debt, according to the SEC filing.
After Dickinson gave notice, the fund board looked for a new adviser. The fund's expenses discouraged candidates. Firms the board talked to cited the large balance of expenses which would hurt the fund's performance as one of the reasons for not taking the job, according to the Feb. 18 SEC filing.
