Institutional money managers eager to break into the mutual fund business got a welcome boost from the Securities and Exchange Commission.
Two landmark no-action letters to Massachusetts Mutual Life Insurance Co., Springfield, Mass., and Haven Capital Management, New York, from the SEC late last year have paved the way for certain mutual funds to include performance numbers from privately managed pooled accounts in their prospectuses, statements of additional information, advertisements and sales literature.
So far, few firms are taking advantage of the guidance. "We are not seeing a great deal of this. It's not making the inroads I thought it would. Maybe the market has turned," said Thomas A. Pappas, associate director-advertising regulation of the National Association of Securities Dealers, Washington.
The Mass Mutual letter reverses - under certain circumstances - a longstanding SEC position that registered investment companies could not use performance of an unregistered predecessor. The policy was intended to prevent firms from selectively including performance of separate accounts to paint a rosier picture for a new mutual fund than it deserved.
"In our case, there clearly was no cherry-picking," said Richard M. Howe, second vice president and associate general counsel of Mass Mutual, noting 80% of the assets covered by the no action letter represent pools with track records exceeding 10 years.
In response to demand from 401(k) plans for mutual funds, in September 1994 Mass Mutual took $2.8 billion in seven pooled funds managed on behalf of pension fund clients and established a mutual fund with seven series substantially identical to each of the pools.
But the firm didn't want to eliminate the pools, its "bread-and-butter pension fund product," said Mr. Howe.
Consequently, as of the end of September 1994, each pooled fund transferred all of its assets to its corresponding mutual fund in exchange for shares in the mutual fund equal to the value of the assets.
The institutional mutual funds currently total $3.2 billion.
An SEC spokeswoman said "anyone can rely on the Mass Mutual letter as long as their facts line up."
Haven Capital Management, New York, which received its SEC letter about the same time as Mass Mutual, converted a limited partnership established in 1984 to a mutual fund in June 1994. The $60 million fund, which buys growth equities at a reasonable price, now can boast an 11-year track record.
In addition to Haven and Mass Mutual, other firms that took advantage of the rule are: Federated Investors, Pittsburgh; Nicholas-Applegate, San Diego; and Schwartz Investment Counsel Inc., Bloomfield Hills, Mich.
The ruling enabled Federated to launch a mutual fund with a 19-year track record. The Federated Capital Appreciation Fund acquired the $100 million in assets of Federated Exchange Fund Ltd. Dec. 29. The predecessor fund was organized as a California limited partnership in 1976 (Pensions & Investments, March 18).
Nicholas-Applegate, which launched its first mutual fund in 1993, applied the ruling to four funds: Income and Growth, Core Growth, International and Emerging Growth. Now two funds have five-year records and two have 10-year records. The longer track record included performance of limited partnership funds that used the same strategies and were set up for clients with a minimum of $250,000. The firm recently got its sales materials using the longer track records approved by the National Association of Securities Dealers.
Schwartz Investment's $53 million Schwartz Value Fund also used the track record from a limited partnership.
The Mass Mutual letter to the SEC, dated Sept. 21, asked that the commission not recommend enforcement action if Mass Mutual used the performance of each of the pools as the performance of the corresponding fund, restated to reflect the fees and charges of each share class of the fund.
In its response, the SEC said Mass Mutual could incorporate the older funds' performance because the mutual funds were being managed virtually identically to the pools and the mutual funds were created for purposes entirely unrelated to the establishment of a performance record. The SEC allowed for the fee adjustments in part because they "would result in total return figures for the funds that are no higher than would result from the use of the actual expenses paid out of the assets of the (pools,)" said the Sept. 28 letter, which was signed by Jana M. Cayne, an attorney in the SEC's division of investment management.