SAN FRANCISCO - Fremont Investment Advisors Inc. has taken an unprecedented move in providing shelter - and temporary employment - for an outside portfolio manager who has left to start his own firm.
Fremont Investment Advisors, the money management subsidiary of Bechtel Power Corp., San Francisco, is following a favorite money manager, Robert E. Kern, as he makes his third move in the 14 years of their association.
Robert Kern has assumed management of a $30 million Post-Venture Fund option for Bechtel's $2.9 billion Trust & Thrift plan and the $140 million Fremont U.S. Micro-Cap Fund after resigning as a small and micro-cap manager from Morgan Grenfell Capital Management Inc., New York.
Morgan Grenfell was terminated as a subadviser of the two funds.
Robert Kern will be an employee of Fremont until his own firm, Kern Capital Management L.L.C., based in New York, is operational. Michael H. Kosich, president of Fremont's mutual funds, said management of the two funds will be awarded to Kern Capital when the company hangs its shingle. Mr. Kern will be joined by his son, David, who just gave up management of the Discovery Fund, a small-cap offering of Founders Asset Management Inc., Denver, to join his father's endeavor. Two other members of the Morgan Grenfell small-cap team are also joining Kern Capital - trader Mike Murphy and research analyst Greg Weaver.
Fremont Investment will hold a minority interest in the new company, along with another money manager, Holland & Co. L.L.C., New York. Robert Kern declined to specify the terms of the part-ownership agreement.
Mr. Kern was an early pioneer of small-cap investment in the late 1970s. Mr. Kosich said the Bechtel pension plan originally was interested in providing employees with a venture capital option, "but it was too difficult, logistically. Bechtel came around to the idea of small-cap as the next best alternative and it has worked very well for 14 years." The style had an average return of 20% per year since its inception in 1984, said Mr. Kosich. The two-year cumulative return for the Fremont U.S. Micro-cap Fund was approximately 50%, said Mr. Kosich.
Mr. Kern's small- and micro-cap investment style, which he developed at Chase Investors and transported to Morgan Grenfell, is bottom-up and emphasizes intensive research. The style is very team-oriented and reliant on the focus of each individual member on particular economic sectors.
At Morgan Grenfell, he was joined by co-managers Audrey Jones and David Baratta in 1994. As a team, the they managed about $400 million in small- and micro-cap strategies, said James Minnick, president of Morgan Grenfell Capital Management. In addition to the $140 million Fremont U.S. Micro-Cap Fund, which started in 1994 and is virtually a clone of the Bechtel Post-Venture option, the trio managed the $100 SMALLCap Closed-end Fund, which is mostly retail assets and the Morgan Grenfell Investment Trust's U.S. Smaller Cos. fund. The team also managed institutional separate accounts using the strategy.
Morgan Grenfell introduced its own branded, but identical version of the Fremont U.S. Micro-cap Fund for institutional investors in January. It now has $2.5 million.
Mr. Minnick said Ms. Jones and Mr. Baratta are assuming coverage of Mr. Kern's sector, technology, while a replacement is sought. Evie Ramsdell will assume Mr. Murphy's trading duties and Mr. Minnick said more research analysts might be added to cover Mr. Weaver's duties. The company has talked to all of its clients and, Mr. Minnick said, "we have very good small-cap capability. I think we will do very well going forward."
But the hole left by Mr. Kern's departure might not be easy to fill. Mr. Kosich said Fremont and Bechtel officials always felt Mr. Kern was the real strength behind the team and that much of the style's strong performance was due to his technology sector coverage.
"We think Bob is the strength of the team. If we thought any differently, we would certainly have retained the other two-thirds of the team and kept Morgan Grenfell," said Mr. Kosich.
Another reason for the change in manager, said Mr. Kosich, was Morgan Grenfell's introduction of the rival micro-cap fund. Mr. Kosich and Mr. Kern said the Fremont and Morgan Grenfell mutual micro-cap funds are nearly identical.
"We found it a little disconcerting, to say the least, that Morgan Grenfell introduced a direct competitor to the fund they run for us. We think it's rather contrary to the interests of their oldest, longest-standing client to make this kind of a move. We felt it was in the best interests of our shareholders and employees to make this manager change," said Mr. Kosich.
Mr. Kern agreed that to run the two funds side-by-side created many "conflicts of interest for me as a manager. it's one of the reasons I decided to leave."
Mr. Minnick explained the introduction of Morgan Grenfell's mutual fund by saying: "We have a broad range of institutional mutual funds and the micro-cap is one of the products we created specifically for that market place."
Mr. Kern said his approach will change very slightly at his new firm and have a slightly stronger focus on the micro-economic sectors of the economy where the most innovation is taking place - health care, technology, service companies and consumer goods. The new team also will keep a careful eye on companies as they emerge from their venture capital phase, where growth opportunity is great. The small-cap style invests in the bottom 20% of U.S. equities with market capitalizations between $10 million and $1.8 billion; the micro-cap universe includes the bottom 5% of U.S. equities with between $10 million and $300 million.
Kern Capital will rely on Fremont to market and distribute the micro-cap mutual fund and will focus its own efforts on winning separate account business.
"We will be taking a rifle-shot approach, looking for the best fit," Mr. Kern said. "We're not trying to be everything to everyone."
