WASHINGTON - Only the largest mutual fund companies - those with more than $20 billion lion under management - stand a viable chance of success in providing bundled fund services, according to a study by Federal Reserve Board economists Phillip Mack and Sean Collins.
The two economists analyzed data from Lipper Analytical Services Inc., New York, on the largest 621 U.S. mutual fund complexes, which managed about $2 trillion in about 5,000 mutual funds at the end of 1994. They were attempting to measure economies of scale to determine the optimal amount of assets under management for a mutual fund company.
Bigger is definitely cheaper for investors, the study found. The largest companies in the survey, which averaged $85 billion under management, had average annual expense ratios of 0.7%. The smallest companies, with an average of about $33 million, had expense ratios of 2.8%.
The mean expense ratio of all 621 companies was about 1.5%, and the average asset pool size was $3 billion.
Based on their empirical data, the researchers concluded that full-service fund complexes (which offer defined contribution plan services, customer service programs and internal record keeping, distribution and fund accounting) achieved economies of scale when they reached $20 billion to $40 billion under management. The larger asset pool and number of shareholders allowed large, full-service providers to spread fund expenses over a much broader base.
Economies of scale can be reached by mutual fund families offering only bond funds at about $4 billion and by money market-only managers at about $10 billion. Equity mutual fund managers have a much lower threshold - $800 million - the study found.
But the study wasn't completely pessimistic for smaller mutual fund managers. With better possibilities for the outsourcing of fund administration and distribution services now, smaller managers may be able to eke out a living on less.
The study found only 21 fund complexes, or about 3%, managed more than $20 billion, about half had less than $400 million, and one third had less than $100 million. The 21 largest firms also manage more than half the total assets of the universe.
Fund for African-Americans
CLEVELAND - Key Asset Management Inc. hired minority manager Lakefront Capital Investors Inc. to manage what it Key says is the country's first mutual fund targeted to African-Americans.
The Victory Lakefront Fund will be a large-capitalization value fund, looking for undervalued companies. Lakefront will take an activist stance and work with corporate management to promote workplace diversity.
Nathaniel Carter, Lakefront president and chief investment officer, is the fund's portfolio manager.
Some of Mr. Carter's first stock picks for the Lakefront Victory Fund were American Express Co., Texas Instruments, Ford Motor Co., Reebok International Ltd., General Electric Co. and Ameritech Corp.
Mr. Carter said the company's effectiveness as an activist shareholder initially will be somewhat blunted, but as the fund's assets blossom, companies will begin to listen to the message that workplace diversity "is good for business."
The fund will be marketed and distributed through normal mutual fund channels to 401(k) plans, broker/dealers, mutual fund supermarkets, financial advisers and banks, as well as directly marketed to members of African-American churches and social and professional associations.
Mr. Carter said African-American brokers in major brokerage houses have shown particular interest in the fund.
The top 21
BODEGA BAY, Calif. - Mutual fund researcher Reg Green, editor of Mutual Fund News Service, pointed out an interesting fact about mutual fund performance in the face of a raging market.
Based on data from Lipper Analytical Services Inc., New York, Mr. Green found only 21 mutual funds managed to outperform the Standard & Poor's 500 Stock Index in the last one, three, five and 10 years.
The Massachusetts Investors Trust and MFS Research funds, both managed by Massachusetts Financial Services Co., are on the list, as are five of Fidelity Investments' sector funds. Both companies were the only ones with more than one fund appearing. The best performing broad market fund was the FPA Capital Fund, followed by Van Kampen American Exchange Fund and the Enterprise Growth Fund.
Mr. Green noted three elements underlie all 21 funds: heavy research, long-term focus and downside risk management.
Other funds on the list were: Davis New York Venture, Elfun Trusts, Hancock Regional Banks, IDS Fund, INVESCO Financial, Mairs & Power Growth, MAS Value, PaineWebber Financial, RSI Emerging Growth, Safeco Equity and SIFE Trust funds.
Partners launch overseas funds
LOS ANGELES - Payden & Rygel introduced two international mutual funds with Scottish Widows Investment Management, Edinburgh.
The International Equity Fund is a large-cap value fund managed exclusively by the Scottish manager. Payden & Rygel will determine asset allocation of the new Global Balanced Fund and manage the fixed-income portion. Scottish Widows manages the global equity component of the fund.
Scudder gets detailed
BOSTON - Scudder, Stevens & Clark Inc. introduced a detailed classification system of the investment style and objectives of its mutual fund family.
Scudder's 40-odd funds now are separated into six investment categories.
The new system further divides the funds into 11 categories, reflecting investment objectives and style. U.S. stock funds will be distinguished from non-U.S. stock funds. Within the domestic fund category, funds will be split into growth or value styles. Non-U.S. stock funds will fall into regional and worldwide categories. Bond funds will be divided into tax-free income, U.S. income and global income.
An asset allocation category will cover its lifestyle funds, the Pathway Series Portfolios.
Scudder also renamed two funds to clarify their investment styles. The Scudder Capital Growth was renamed Scudder Large Company Value Fund, and Scudder Quality Growth Fund is now the Scudder Large Company Growth Fund.
CHICAGO - Harris Associates, subadviser to the Oakmark Family of Funds, lowered the minimum investment to $1,000 and eliminated the 2% redemption fees for the Oakmark Small Cap Fund and the Oakmark International Small Cap Fund.
Harris also voluntarily capped expense ratios at 1.5% for the domestic funds and 2% for the international funds. Harris also agreed to cap IRA fees for multifund IRA investments. Shareholders will pay $20 regardless of the number of Oakmark Funds chosen.
The Oakmark International Emerging Value Fund was renamed the Oakmark International Small Cap Fund.
Trustees of the Oakmark Small Cap Fund also took steps to restrict new contributions when the fund reaches $750 million under management (it had $681 million as of March 19). It is likely the fund will stop accepting contributions from new investors, rather than restrict existing shareholders, Oakmark officials said in a statement.