But Strategy Hinges on Large Volumes of Investors, Observers Say

In announcing last week that it will lower the minimum initial investments required for its four mutual funds, Forward Management is bucking an industry-wide trend that has been taking shape for years.

The San Francisco-based company, which oversees about $170 million in assets, said last week that it will lower the amount of money investors need to initially sock into its funds from $2,500 to just $100. Minimums for its retirement accounts will be reduced to $250.

The changes will apply to the company's four sub-advised funds, which include the Hoover Small Cap Fund, Garzarelli U.S. Equity Fund, Hansberger International Fund and Uniplan Real Estate Investment Fund.

In dropping the minimums so drastically, Forward says it is trying to attract assets from smaller investors who have been largely left behind by the industry. "Mutual funds were designed to provide more investors with easy access to financial markets and our mission is to help small investors," said Alan Reid, the company's president. "When some mutual fund families turn them away, we will be there for them."

In Search of Improved Margins

Indeed, observers say fund companies have been raising their minimum investments for about five years. The companies are hoping to attract wealthier investors, analysts say, and they are also trying to improve their margins by driving up the size of their accounts. TIAA-CREF, for example, raised the minimum investment on its accounts from $250 to $1,500 in November (See MFMN, 10/13/01).

Janus, INVESCO and American Century have also raised their minimums in the past five years, said Russ Kinnel, a senior analyst at Morningstar. Whereas many fund companies offered minimum investments of between $250 and $500 a few years ago, those minimums now hover around $2,500 to $3,000, he said.

The theory in past years was that companies could lure investors by requiring small minimums and that those accounts would grow over time, Kinnel said. But the theory proved false. Investors "would let that $500 account languish," he said. And so most companies decided it wasn't worth the cost of servicing small accounts. They raised their minimums, or they hit investors with a fee when their accounts dipped below certain dollar amounts.

Filling a Void, Creating a Difference

Forward is now trying to fill the void left by companies who abandoned the idea of servicing small accounts, said Craig Lamson, the company's director of marketing. "We're trying to go against the trend," he said. "We believe it's going to build loyalty among our shareholders and it will pay off for us in the long run."

"There are very few companies out there that [offer] no-load products and have minimums this low," Lamson continued. "It's definitely something that will make us very unique in the marketplace and it's another point of differentiation."

But Lamson said Forward plans no major marketing push to promote the lower minimums. The company's products are distributed through online supermarkets and through intermediaries, he said. The company will rely on word of mouth as well as some updated information on its re-vamped Web site to get the word out.

Turning Up the Volume

For the plan to be successful, analysts say Forward will have to attract an incredible amount of new business. "You have to be betting on volume to make this work," said Matt McGinness, an analyst at Cerulli Associates.

If Forward can't attract large accounts, the firm runs the risk of becoming overwhelmed by an avalanche of tiny accounts, which could drive margins down, analysts say. The industry may have been built on small accounts, but times have changed, said Whitney Dow, an analyst at Financial Research Corp. "Servicing just hoards of people with small accounts, that's a very daunting task," he said.

"At $100, you're not even paying for the shareholder report," Kinnel said. "The moment [a client] calls their 800 number, they've taken a $10 or $20 hit."

Lamson said Forward has not calculated the number of accounts it will need to open to maintain decent margins. "We don't have targets like that," he said. "We're looking for long-term shareholders. In some cases, clients won't add more to their accounts. We're certainly willing to live with that."

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