Nvest of Boston has agreed to acquire a majority stake in Kobrick Funds, a family of three growth funds based in Boston, from Cendant Corp. of Parsippany, N.J. later this summer.
Both Nvest and Kobrick declined to disclose the selling price and the size of the majority position. However, Kobrick president and chief executive officer Frederick Kobrick said the deal gives Nvest full control of the board of directors and that under the agreement, signed June 11, he will continue to manage the funds for seven years.
One of the main reasons Kobrick decided to change strategic partners less than two years after his company formed a joint venture with Cendant Corp. was concerns about marketing and distribution.
Kobrick signed on with Cendant - a holding company whose divisions include Howard Johnson hotels, Avis Rent-a-Car and other travel, real estate brokerage, relocation, mortgage, insurance and tax preparation services - to widen distribution of the funds, said Kobrick.
"I thought they would become one of the big, competitive mutual fund distribution channels of America," Kobrick said. Cendant, in the spring of 1998, was poised to buy two insurance companies but never did, Kobrick said. Then, in December 1998, Cendant sold Essex Corp., a bank distribution business, to John Hancock Mutual Life Insurance Co. of Boston.
"We lost our strategic fit," he said.
Further contributing to the demise of the joint venture, just a few months after Kobrick aligned with the firm, Cendant suffered an accounting scandal in April 1998, when auditors discovered that CUC International, which merged with HFS to form Cendant, had drastically understated costs and overstated revenues for the previous three years. The revelation caused Cendant's stock to plummet, cost shareholders $15 billion and led to 60 lawsuits. Cendant's subsequent lack of capital stalemated its plans to become an insurance/mutual fund powerhouse, said Kobrick.
This turn of events was an indirect reason for Kobrick no longer being a Cendant partner, the fund president said.
Now aligned with Nvest, Kobrick is once again optimistic.
"Nvest's large and experienced organization offers marketing prowess and the benefits of distribution," Kobrick said. "It's a load off my mind and it's bound to help performance because I won't have any more distractions."
Kobrick's funds include Kobrick Capital, an all-capitalization growth fund; Kobrick Emerging Growth Fund, a small capitalization growth fund; and Kobrick Growth Fund, a large capitalization growth fund. For the 12 months ended June 10, Kobrick Capital was up 46.23 percent and Kobrick Emerging Growth was up 33.05, according to Lipper of Summit, N.J. And in the nine months since its inception on Sept. 30, 1998, Kobrick Growth was up 42.73 percent, according to Lipper.
Although Kobrick's funds have performed well, they have attracted only $200 million of assets - far less than the $4 billion Kobrick had managed for 13 years at State Street Research & Management Company of Boston. There, the 55-year-old investment veteran built a reputation as an institutional portfolio manager with a penchant for rigorous quantitative and qualitative analysis of large companies with above-average earnings growth and strong management teams.
Kobrick said he built these $200 million in assets primarily by promoting his funds' performance through print and web banner advertisements. When he opened each of his three funds, they had only $1 million of seed money apiece.
Nvest will be able to grow the Kobrick funds through Nvest's relationships with financial advisors and broker/dealers, its representation on 401(k) menus and affiliation with the insurance agent networks of New England Financial and Metropolitan Life Insurance, said Laurence Dwyer, a senior vice president and spokesperson for Nvest. New England Financial is a unit of Met Life, the largest shareholder in Nvest. State Street is also a division of Met Life.
"The Kobrick funds have had great performance, and to reach the next level, Fred Kobrick felt he needed help with distribution," Dwyer said. Nvest has not yet set sales goals for the funds but has strong faith in them, Dwyer said.
"The funds are well-positioned for growth," he said.
Distribution is an issue for any fund company with assets of $200 million or less, said Dennis Dolego, director of research for Optima Group, a fund distribution consulting company in Fairfield, Conn.
"It's costly and difficult for them to obtain shelf space through registered investment advisors and supermarkets," Dolego said. "Mutual funds with good performance grow to a reasonable size and then see even higher cost for distribution, support and servicing. At that point, they tend to sell out."
It is attractive for small funds to partner with larger fund complexes or holding companies like Nvest "because they have established distribution arrangements that can pull a fund with strong performance through the system," said Andrew Guillette, a consultant with Cerulli Associates, a mutual fund research and consulting company in Boston.
Most importantly, larger companies "can give smaller funds access to full-service brokers and intermediaries, who wield the strongest influence in investment choices," said Guillette. "They wield the bulk of the power at their fingertips."
Nvest plans to continue building its 17 affiliates and divisions through internal growth and acquisition of companies to round out its fund offerings, strengthen its distribution channels and broaden its geographic presence, Dwyer said.
The Kobrick funds appealed to Nvest because they broaden the company's growth sector funds and retail business, Dwyer said.
"While we do have several no-load and growth fund managers, we felt the acquisition of the Kobrick Funds would balance our value and institutional business," Dwyer said. "We have more institutional assets than retail assets and that is also an area we are looking to grow."
Currently, 64 percent of Nvest's $135 billion of assets under management come from the institutional side. Only 36 percent are from the retail side.