WAYNE, Pa. -- How do you start an asset management firm with four marketers and no portfolio managers?
You hire investment subadvisers, hook into distribution and record-keeping systems, and orchestrate the marketing.
"Subadvising is a booming business right now, although not so much in institutional as retail and high net worth," said Paul Schaeffer, partner at Investment Counseling Inc., Mill Valley, Calif. IC advises investment management firms on business strategies.
Paul Hondros and several other marketers recently let go from Pilgrim Baxter & Associates want to form their own investment management firm to serve institutional clients.
Mr. Hondros told Pensions & Investments he wasn't ready to discuss details of his plans, such as who would manage the money.
When asked to consider possibilities for such a startup, Mr. Schaeffer said there's no reason the Hondros group couldn't build a subadvisory system to serve institutional investors in the same way as Mark Hurley's Undiscovered Managers LLC in Dallas.
Mr. Hurley, a former vice president at Goldman, Sachs & Co., started the firm in September 1997.
Undiscovered Managers has signed seven investment managers to exclusive seven-year contracts and has 100 clients and about $65 million in assets under management. Each manager offers one product, which Undiscovered's marketing staff sells to 401(k) plan sponsors, financial advisers and bank trust departments. Record keeping is contracted out. Undiscovered does some client servicing.
Undiscovered is, in effect, brokering small managers.
"The managers need us to diversify their business, and move into mutual funds," Mr. Hurley said. "We can do it for less than half of the cost than the managers can do it for themselves and still make a nice living. We are the vehicle for bridging the gap between small ERISA managers and defined contribution plans."
It's definitely an attractive business model, said Randy Michaels, director of growth and competitive strategies at IC's West Conshohocken, Pa., office.
"To start such an operation, you figure out the product, do an asset allocation and choose the market. You go to managers and cut a fee schedule on the assets you expect to acquire. You might even work out custodial relationships with the managers," Mr. Michaels said.
Mr. Schaeffer added, "Just look at SEI Investments. They don't manage money."
There's a connection there. Robert Wagner and Don Pepin, two former Pilgrim employees who might join Hondros, worked at Oaks, Pa.-based SEI before being drawn to Pilgrim Baxter by Mr. Hondros last spring. Pilgrim Baxter let go 50 people and canceled ambitious marketing plans last month because of performance problems and market volatility..
SEI manages more than $36 billion in total assets through a manager of managers program, and does the back-office record keeping as well. The technology and systems sales division was where Messrs. Wagner and Pepin worked at SEI.
If the group doesn't want to hire subadvisers or be a manager of managers, they could hire investment staff from an existing firm, Mr. Schaeffer said.
But one source said that is unlikely. "Managers don't usually follow marketing people. The managers are the ones with the ball," the source said.
