Think back to 1985 and remember the John Fogerty song, "Centerfield": "Put me in, coach. I'm ready to play today. Look at me. I can be centerfield."
Although many Money Management Executive readers are already successfully in the game, some smaller firms are watching it from the bench.
Out of nearly 6,000 mutual fund portfolios, more than 800 funds have assets of only $50 million to $100 million, and more than 1,400 have less than $50 million, according to mutual fund research firm Financial Research Corp. of Boston. Some of these small funds are products from fund giants that have not been aggressively marketed. But others are run by smaller firms with limited budgets, limited brands and limited sales, marketing and distribution strategies.
With reduced margins as a result of bear markets, increased compliance costs and fund scandals, some small funds are finally considering strategies to get in the game so that they are not eaten up by their competition. Dan Sondhelm, vice president and partner with fund marketing and public relations firm SunStar of Alexandria, Va., recently spoke with Timothy J. Wahl, president of GKM Advisers of Los Angeles , about how he expects good performance will attract more assets to his fledgling, four-year-old GKM Growth Fund, which has $35 million under management.
MME: Since GKM Advisers manages private accounts for high-net-worth individuals, why did you launch your mutual fund?
Wahl: GKM Advisers is a registered investment advisor focused on the long-term, after-tax growth of capital. We were spun off of Gerard Klauer Mattison when they were purchased by the Bank of Montreal in July of 2003. We manage approximately $500 million in individual accounts of high-net-worth individuals.
The fund came about as a function of our core business, in that it enables us to provide equity management to family and friends with smaller accounts. For example, we manage third- and fourth-generations of wealth. These accounts can start off small as gifts, or, perhaps, educational or trust accounts, so we started the fund to facilitate the management of these smaller accounts and to provide our clients with the appropriate risk management through diversification.
MME: Did having a public track record come into play?
Wahl: Over the years, we have been asked by referrals, the media and different distribution channels about our record. We've never published a composite, as our accounts have individual investment objectives. We have long-standing relationships, and the portfolios reflect each individual client.
The mutual fund was a way to develop a public track record for a very private investor.
MME: What sort of success did you think you would have when you launched this product four years ago? Did you think you'd have more than $35 million in assets by now?
Wahl: We started the fund with no other purpose than to serve our clients. Looking at the economics of running a mutual fund, we knew it wasn't going to be a huge moneymaker, but we knew it was the right thing to do for our clients. My initial expectations were to raise $10 million the first year and approximately $30 million over the first three years to get us to break-even.
MME: Are you profitable at this point in the game?
Wahl: We are covering the costs. With $35 million dollars in the fund, as you can imagine, we are not hugely profitable.
MME: So what are your asset goals, if any?
Wahl: Strange as it may sound, we have never been focused on goals such as assets under management other than to at least break even after all operational costs are considered. We don't have a plan of when or how to reach, say, $100 million. But, based on past performance, I had a feeling we would rank highly with Morningstar and Lipper, and we have. I believed over time our performance would merit attention, but it's tough to cut through the ephemeral investment clutter of today's investment environment.
MME: How have you found it difficult to compete?
Wahl: We are too small for many in the institutional world, although we are beginning to have conversations with various smaller institutions. As for the retail market, it is difficult simply due to the sheer number of funds competing and marketing dollars spent. An unexpected benefit of our strong performance has been the fact that we're now managing assets for advisers around the country who have found us through the fund, and we're working toward making our services available on the separate account platform.
MME: Are you on such distribution platforms as those at Schwab and Fidelity?
Wahl: The cost to place the fund on large platforms without transaction fees doesn't make a lot of sense. To pay 25 to 35 basis points to broaden the distribution with little or no marketing intentions would not benefit the shareholders at this time. We're long-term-oriented, which is reflected in our extremely low turnover, and we would hope our investors have the same mindset. Transaction fees have come down dramatically over the years to the benefit of the investor and have significantly reduced the benefit of the "no transaction fee" platform. The real benefit is the distribution. We are available on the transaction fee platforms and many other free platforms such as E*Trade and Wells Fargo. We are developing a following in the RIA channel for those looking for a long-term, buy-and-hold growth style of investing.
MME: What else have you tried?
Wahl: We have participated in only three media interviews over the past 45 years. Recently, we interviewed with Tim Middleton, who is affiliated with CNBC, and we gave an interview to Wall Street Transcript. Again, our interest lies in the management of the capital and not marketing. The few interviews we have given have introduced us to other advisers interested in our services, which allows us to focus on what we do best, investing the capital.
MME: What was the impetus for starting the Web site?
Wahl: We started the Web site back when we formed GKM Advisers for clients to access their account information. Moving forward, we intend to use it to educate our clients and share our investment philosophy. We prefer independent analysis of the fund, and if we have the ability to share the work that others have performed and shared with us, we will.
On the educational front, I would like to share what we consider to be important investment, economic, social and political articles. For the fund holders, once or twice a year, we update the shareholder's with a letter and produce annual reports.
MME: Many small funds in your shoes are selling right now. Have you considered that option?
Wahl: Yes, we would consider it but only if we could partner with a firm that we felt would benefit the shareholders' long-term interests. The money management industry is at an inflection point where the actual management of the capital and distribution are becoming separate and distinct lines of business, as witnessed by Citigroup's sale of its asset management business to Legg Mason. We're in the asset management business, and if we can find a partner that would be of value to our clients and shareholders, I guess we would have to consider.
MME: How will you feel if say, three years from now you're still at $35 million?
Wahl: Of course we'd be disappointed if assets under management didn't grow either through referrals or the appreciation of capital.
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