At first glance, Forward Management LLC of San Francisco looks like a typical investment management boutique, presiding over a current family of 16 niche mutual funds.
But Forward's investment talents are broader than they first appear, spanning not only mutual funds but separately managed accounts. Its technology is also more innovative than others, as the firm is affiliated with ReFlow Management, which burst onto the fund scene in 2002 with new liquidity tools that the Forward Funds quickly embraced.
Not only has the Forward fund group grown through new fund launches, including adding three international funds in 2007, but it has been adding on core competencies for several years through targeted acquisitions, strategic investments and partnerings. It has kept with its core mission of identifying and investing in sub-advisors with long track records that specialize in specific investment disciplines and asset classes.
Several years ago, Forward agreed to become the investment advisor for The Sierra Club, the group focused on protecting both local communities as well as planet Earth, as manager of three of its mutual funds run under the Club's social and environmental mandate. That trio has since been whittled down to one stock fund, but the screens remain. The fund won't invest in companies that are big polluters or those with significant carbon emissions, companies financing projects contributing to "urban sprawl," those with labor relations issues, or those that test their products on animals, in addition to nixing companies with ties to tobacco, military weapons or nuclear power.
In 2003 and 2004, Forward bought three Pictet Funds managed by Pictet International. The following year, Forward acquired three mutual funds from Emerald Asset Management of Lancaster, Pa.: a growth fund, a banking and financial sector fund and a technology fund that later refocused as the Forward Opportunities Fund. The three recently dropped the "Emerald" brand.
Even earlier, in 2004, Forward made an equity investment in what was renamed Forward Uniplan Advisors, an investment firm based in Milwaukee that provides separate account portfolio management to institutional and individual investors. The two firms had struck up an accord in 1999 when Forward agreed to market and distribute the firm's investment portfolios.
In August 2006, Forward announced a strategic partnership with Affinity Investment Advisors of Irvine Calif., under which Forward would market and sell the firm's managed account capability while Affinity agreed to sub-advise a new large-cap equity fund for Forward, which debuted two months later. Morgan Stanley acquired Affinity in 2007, and Piedmont Investment Advisors subsequently signed on to sub-advise the fund.
So, it came as no great surprise when Forward Management announced two new but separate acquisitions within weeks of one another last month. Forward announced it will acquire Accessor Capital Management of Seattle and its 18 predominantly sub-advised mutual funds, including several lifecycle funds, bringing the fund group an additional $3 billion in assets to add to its own $2.1 million.
It will also acquire four separate account portfolios as well as the retail investment team of Berkeley Capital Management of San Francisco. That acquisition doubles the number of in-house investment professionals at Forward that preside over managed accounts and adds new investment styles: U.S. dividend, global dividend, international dividend and a small/mid core portfolio. (Berkeley's institutional asset management unit, Delta Asset Management of Los Angeles, remains intact and was not acquired).
MME Editor-at-Large Lori Pizzani recently talked with Forward Funds President J. Alan Reid, Jr. about the acquisitions and where the firm will go from here. An edited account of their discussion follows.
MME: What benefits do the two recently announced acquisitions bring to Forward?
J. Alan Reid, Jr.: Both of these deals give us additional leverage. The Berkeley Capital acquisition allows us to piggyback on the Forward Uniplan's capabilities. We have a 20% ownership of this Milwaukee company, which offers microcap, REIT, high income and total return separately managed account investments.
It allows us to deepen our bench strength with high-income securities. They have a strong track record, and with these we are building more depth while giving them distribution through wider channels.
The Accessor Funds will be kept separately and not merged into existing Forward Funds. We'll keep the Accessor brand, as well.
Accessor has effectively used a pure style mandate while our managers have been more focused on alpha generation without a strict discipline to the Morningstar style boxes. Accessor has adhered to core asset classes, except for its newest fund, the Accessor Strategic Alternatives Fund, which invests 75% of assets in non-correlated asset classes through exchange-traded funds, exchange-traded notes and structured notes.
Other fund advisors have since launched similar alternative funds. People are realizing there are alternative asset classes that can maximize portfolio returns and minimize risk.
But Accessor's primary distribution has been through banks and bank trust departments where Forward distributes through registered investment advisors, broker/dealers, large banks and retirement plans. We also distribute through Charles Schwab and Fidelity. We have been within the top 30 of new fund assets at Schwab for the last two years.
There is some significant distribution leverage, especially through Forward Uniplan, to build our separate account platform. We want to bring innovation. We have a relationship with Market Street Advisors (of Edison, N.J.) now, and they allow for multi-currency, long-short positions and more within separate accounts.
MME: What do you see as your challenges going forward?
Reid: I see two challenges. The first is getting the economies of scale through one compliance system, one fund accounting system and all of the operational issues involved in putting the back ends together with ours.
The second will be the sales team. We will have a combined 16 internal and external wholesalers now, and we will look to expand on that by a handful of people, especially in the bank channel. We'll be aggressively seeking to get distribution for the Accessor products including the alternative fund and a short duration mortgage-backed securities fund sub-advised by BlackRock.
Accessor was the first to use the fund-of-funds structure in its lifestyle funds. They have six lifestyle funds. Those are a great fit for the average American.
One of the challenges is that people are not great with timing their investments. They end up buying high and selling low. That's due to a lack of investment strategy or policy. We, as an industry, need to find a way to change that.
MME: Didn't you also recently added share classes to some of the funds?
Reid: Yes, to four of our funds. We added an institutional share class this May that makes it easier for all sorts of RIAs, including family offices, to access our funds.
MME: Did you ever have a B-share class?
Reid: No. When we brought over assets from the Emerald Funds, they had A and C shares, but not B, and that stayed.
There may be a place for a quasi B/C share class because people don't mind paying as they go. Those who don't meet the minimum for institutional shares need another option.
MME: Not every initiative has been successful for Forward. We wrote about you launching your long/short credit strategies fund (see MME, 1/10/08) just six or so months before the credit market's bottom fell out. The fund's A shares have lost 21.75% from the fund's inception in December 2006 through May 1.
Reid: Yes, that's one of the funds we added an institutional share class to.
When credit spreads widen, that's where the opportunity is. There's a unique opportunity today. We also dropped the performance fee on this fund as well. We found that it wasn't a structure that works well today.
MME: Where does the Forward Funds complex go from here, especially in a difficult market environment?
Reid: On average, we have been growing 35% to 100% per year. We don't want to see less than 35% growth this year. We'll make lemonade when we can. We need to focus on managing our operations and the back end.
MME: Are there additional acquisitions to be made?
Reid: This is the bulk of it for now. But we are always looking to see where we can bring new value to the market.
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