Many mutual fund companies are happy just to have survived a brutal bear market that has obliterated more than $1 trillion in industry assets. Some fund complexes, though, have managed not only to survive but to grow assets and capture new market share.
More than two dozen fund complexes have seen assets and market share rise from year-end 1999 through the end of 2002, a period that roughly coincides with the bear market, according to Financial Research Corp. The biggest winners were giants Vanguard Group and American Funds, which leveraged low costs and balanced investing philosophies into significant gains, and PIMCO Funds, which capitalized on its leadership position in bond funds. Vanguard's market share rose 2.4 percentage points to 13.05%. American Funds' market share rose 1.7 percentage points to 8.97%, and PIMCO's market share rose 1.7 percentage points to 3.09%.
But the list is studded with smaller firms that have benefited from investment styles well suited to falling or stagnant stock prices and a rising bond market. In some cases, the sudden growth spurt followed years-long dry spells. The challenge now for these bear market winners is to hang on to their hard-won gains as the budding economic rebound levels the playing field.
For Chicago-based Shay Assets Management, a potential upturn in the economy would only solidify its extraordinary bear market gains. Its flagship AMF Adjustable Rate Mortgage fund has more than tripled its assets to $4.8 billion during a period of falling interest rates, even though it is designed for optimal performance when rates are rising. The fund, which accounts for about 80% of Shay's $5.8 billion in assets, invests in adjustable-rate, mortgage-backed securities. The rate flexibility, along with a target duration of six months to a year, will make the fund a good defensive play for when the economy heats up.
Derek Casteel, Shay's national wholesale manager, attributes the large inflows to "people who have been anticipating for quite some time that we've bottomed out on rates." Still, because of the fund's preference for securities issued by government sponsored enterprises and AA-rated or better corporate bonds, it has served as a safe harbor for jittery investors. Since its 1991 inception, it has never posted a negative quarterly return.
Roger Shay, a retired president of Merrill Lynch Securities, founded the firm in 1981 to provide safe and flexible short-term investments for small banks and savings and loans. Banking institutions still account for 80% to 85% of its assets, though Shay has recently been marketing to new channels, notably insurance companies and retail investors. Last year, the National Association of Insurance Companies approved two of Shay's bond funds for use as insurance company reserves. Shay also has quietly begun to accept retail assets through major brokerage platforms such as TD Waterhouse, Fidelity and Ameritrade.
"We have found for ourselves and also for our clients that the investment needs of financial institutions aren't necessarily at odds with those of other types of investors, and that has brought in money from non-traditional channels," Casteel said.
Shay's lineup of five bond funds always have required minimum investments of $10,000, a level within reach of retail investors. "We've never told retail investors they couldn't invest in our funds," Casteel said. "We just never really marketed to them." Shay's lineup also includes two equity funds, established originally as savings plans for bank employees, though Casteel says promotion of these equity funds "is not something we have on the front burner."
Harris Associates' Oakmark family of funds has seen its assets more than double to $13.2 billion during the economic downturn. But the fund family, which stubbornly clung to its value-oriented investing approach during the long bull market, is unlikely to change its spots if and when growth funds come back in style. "At a time when valuations were completely unreasonable, we tried to communicate to our shareholders that they needed to believe in our process and stick to it throughout market conditions," said Kelly Arnold, Oakmark's assistant director of marketing.
Few did stick with Oakmark during the worst part of the run up. Assets fell almost by half, to $5.5 billion, during 1999 and 2000, as investors piled into funds that loaded up on tech and Internet stocks. The onset of the bear market brought sweet vindication. But the influx of new money has forced Oakmark to close two of its most successful funds, Oakmark Select and Oakmark International Small Cap, to new investors. That leaves just five open funds.
All have plenty of room to grow - up to a point. Oakmark's portfolio managers pick from an approved list of just 125 to 150 stocks. The flagship Oakmark fund, with $3.7 billion in assets, typically holds just 40 to 50 securities. At what point would the influx of new funds prompt an expansion of the product line? All Arnold will say is: "In terms of new products, never say never." Oakmark has introduced only one new fund since 1996, the Oakmark Global fund, which was launched in 1999.
Like Shay Assets, Nuveen Investments found that its strong presence in the bond market was a big plus when stocks went south. While Shay's niche is short-duration and adjustable-rate bonds, Nuveen's is tax-free municipal bonds. Thanks in large part to 25 state-specific and five national tax-free income funds, Nuveen's open-end mutual fund assets grew by more than $600 million during the three-year bear market. While that growth was welcomed, it has paled in comparison to the growth of Nuveen's closed-end exchange-traded funds business. In the last year alone, Nuveen's ETF assets have grown 25% to $41.6 billion.
Chief Marketing Officer Alan Brown said Nuveen's fixed-income funds have long been pitched as all-weather investments. During the bull market, "we joked internally that instead of Got Milk,' it should be Got Bonds.' We were just reminding people how they were underweight," he said.
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