Investment managers - including insurance companies as well as independent firms - are going down market.
Whether they are converting separate accounts and commingled trust funds to mutual funds or launching funds designed to serve smaller institutions, these firms are trying to serve smaller accounts in a more cost-effective manner.
In doing so, they are following the lead of banks. Banks have been converting commingled funds for pension plans into mutual funds as a way to enter the mutual fund marketplace. Bank trusts for taxable clients have been slower to convert because of the tax burden associated with the shift, but Congress is now considering changing the law.
Once they have formed a mutual fund for smaller institutions, firms later lower the investment minimum to a level suitable to attract retail clients.
"They think initially they're doing it not as a business builder but as a facilitator. Then they decide they want to go into the business," and lower the investment minimum, said A. Michael Lipper, president of Lipper Analytical Services, Summit, N.J.
In other cases, a firm might use pooled funds as a middle ground between mutual funds offered to retail investors and pension fund separate accounts.
Among the players:
Warburg Pincus Counsellors, New York, launched an unusual mutual fund designed to provide corporations with higher returns on their corporate cash. The fund's minimum investment is $250,000, a fraction of the $25 million minimum on a separate account with the same objective.
In an effort to compete more effectively in the 401(k) market, an investment subsidiary of Norwest Corp., Minneapolis, converted $2.3 billion in collective trust funds to mutual funds. The conversion created a new class of mutual funds, Norwest Advantage mutual funds, designed especially for the corporate retirement plan market.
PaineWebber Group, which owns Mitchell Hutchins Asset Management Inc., New York, two years ago formed a group catering to high net worth individuals which is just beginning to market itself to small institutions. Although Vista, a specialized small-cap manager, offers separate accounts, the investments are managed in tandem like a mutual fund, said Nicholas Stiassni, senior vice president. Vista's minimum is $250,000. So far, Vista has two tax-exempt fund accounts totaling less than $1 million.
Connecticut Mutual Life Insurance Co. is making its separate accounts available as mutual funds to better meet the needs of potential 401(k) clients. Officials did not return calls by presstime.
Harbor Capital Management, Boston, has established pooled funds with investment minimums of $500,000. By contrast, its separate account minimum is $5 million for private accounts and $10 million for institutions.
"We've always had this problem," said Malcolm Pirnie, president. "We have a lot of clients with family money or inheritances and no way of managing it. We put together a series of trusts and partnerships, taxable and tax-exempt. We've been pleasantly surprised at the interest."
On a monthly basis, clients can put in and withdraw money. Harbor also is a subadviser of mutual funds for retail investors.
The fixed-income group of Loomis, Sayles & Co. L.P., Boston, with $11 billion under management, launched pooled funds in March to serve clients with $2 million to $10 million to invest.
"We view a mutual fund as more of a retail product. Fees are lower on the pooled fund. There are economies of scale and fewer transactions," said Margaret-Ellen Clough, public relations manager. Whereas the firm's corporate bond mutual fund has an expense ratio of 90 basis points, its investment grade pooled fund has an expense ratio of 55 basis points and its medium grade pooled fund, 75 basis points. So far, the funds have attracted $15 million from two clients.
Oppenheimer Capital Corp., New York, formed a trust company late 1993 to offer collective trusts to small pension funds. Larger clients use the funds for specialized areas such as international and small cap.
"We're not actively marketing yet. First, we're trying to move existing smaller clients (out of separate accounts and) into pooled funds," said Virginia Sirusas, managing director. The move has enabled Oppenheimer to increase its separate account minimums. "It makes it possible for portfolio managers to concentrate on fewer larger accounts, not to be distracted by managing a lot of smaller portfolios. And it makes it easier for smaller clients to achieve more diversification - larger clients too, in the case of specialty funds," she said.
Glen Casey, a consultant with Cerulli Associates Inc., Boston, said going down market to small institutions makes sense.
"Institutional money managers probably won't get as much play from retail investors, whereas (smaller) institutional or corporate clients recognize them," Mr. Casey said.
"Banks have been the most aggressive, but we're starting to see it across the competitive landscape. Banks have been doing it for a long time and insurance companies are starting. They are losing 401(k) market share to mutual fund companies because (fund companies) offer mutual funds that enable participants to do daily transactions and check performance daily in the newspapers."
Conversions by banks with tax-exempt trusts have been accelerating in the last few years.
"As long as there is an opportunity to do these conversions tax free, I think they will be done because the constituency they are directing it to is much more knowledgeable about mutual funds in general than they were when common trust funds were used almost exclusively 20 years ago," said Susan O. Cain, partner at KPMG Peat Marwick in San Francisco.
