Numerous companies launched operations in 1998 with out-of-the ordinary business plans, seeking that tiny crease of opportunity between the footprints of the dominating players.
But there also were plenty of traditional startups during the year, in which investment professionals left an existing firm to start their own operations.
Undiscovered Managers Inc., Dallas, seeks to take subadvising to a new level. Undiscovered's founder, Mark Hurley, is a former Goldman, Sachs & Co. analyst who participated in the 1995 Goldman Sachs report on the future of the investment management industry.
His firm, Mr. Hurley said, is an example of the small manager niches the report identified as a wave of the future.
"The traditional market is shrinking on a cash flow basis, on a defined benefit basis. Why fight for a lousy piece of a shrinking market? Packaged products is where the new business is," he said.
Undiscovered Managers has exclusive contracts with six small asset managers, often those who can't afford to build and market their own mutual funds. Undiscovered creates the funds and sells them to defined contribution plans, independent financial advisers and banks.
"We are the vehicle for bridging the gap between small ERISA managers participating in DC plans. A lot of DC plans are looking for these kind of guys."
Also aiming for the defined contribution market, but in a different way, are the principals at Strategic Financial Concepts Inc. in Clarendon Hills, Ill. They want to be hired by the participants in defined contribution plans to make their investment selections for them.
"We are not giving advice. We are managing the investments for them," Carl Londe, SFC chief executive officer. "Many participants not only don't know what to choose, they don't want to be investors. And we believe employees want the opportunity to have a professional manage their money rather than do it themselves. It's like having your car worked on. You can do it yourself, but you'd rather have a professional."
SFC is hired by the plan sponsor and becomes an intermediary money manager, performing risk and asset allocation studies for participants and choosing the proper fund allocations in the defined contribution plan.
Because SFC is not giving advice, the company is not performing an act that would fall under Section 404 of the Employee Retirement Income Security Act. SFC's operation will fall under 405(d) of ERISA, which states trustees are not held responsible for the acts of properly appointed investment managers.
Mr. Londe said SFC's fees probably would come from the participant's investment performance.
TRADITIONAL PATH
Osprey Partners is probably the most successful example of a traditional startup operation, having amassed more than $1.5 billion in equity and fixed-income institutional assets in less than six months. Firm executives won't say how many of those accounts came from Fox Asset Management Inc., Little Silver, N.J., the firm from which seven portfolio managers and six support staff departed last summer.
Not all startups have acquired assets as quickly. Sawgrass Asset Management LLC of Jacksonville, Fla., has $240 million in total equity and fixed-income assets under management.
Sawgrass' principals -- Dean McQuiddy, Andy Cantor and Brian Monroe -- left Barnett Capital Advisors shortly after it was acquired by NationsBank Corp. last April. AmSouth Bancorporation bought 50% of Sawgrass and placed $100 million with the firm. Sawgrass also is subadviser for two new AmSouth mutual funds.
The impetus to form Spyglass Asset Management in Cleveland also came on the heels of a bank merger, when First of American Bank Corp. in Kalamazoo, Mich., was absorbed by National City Corp., Cleveland. Spyglass has won $40 million in total assets, all for small-capitalization equity accounts, in the past six months.
Internal problems at Investment Advisers Inc. in Minneapolis led two senior bond portfolio managers to strike out on their own. Scott Bettin and Tim Palmer formed a hedge fund company last May, Atlas Capital Management in Minneapolis.
Seeking to fill a different niche, Money Management Partners LLC is just getting off the ground in Boulder, Colo. The venture capital firm is the creation of Kenneth Phillips, founder and former chief executive officer of Portfolio Management Consultants in Denver. (He sold his 15% holding in PMC following a disagreement with the board of directors.)
While banks have funded a few startup investment management firms in recent years -- Marsico Capital, Denver, was backed by NationsBank -- they won't help everyone.
"Some startups are helped by private individuals, or they use their own capital, or they go to the bank. But in most cases, they are too small for the venture firms. We will take the risk in these small firms,9 Mr. Phillips said.
The endeavor is funded by Mr. Phillips and two private families.
"Acquisitions today spawn startups in the next three to five years. I'd like some of these people to give me a call because they'll need capital, about $1 million to $2 million, to get started," Mr. Phillips said.
"We will have nothing to do with day-to-day management from Day 1, but we will initially be a part of the board. We don't intend to own more than 25% to 40% after the business if profitable and the plan is executed," Mr. Phillips said.
NEW ORGANIZATIONS
Several new organizations were formed in 1998.
Longtime consultant Jerry Grimm of F.J. Grimm Associates of Needham, Mass., launched the Independent Managers' Alliance, an informal alliance of small and midsize investment managers in the northeastern United States, with assets between $100 million and $2.5 billion. The group has 10 members, with a goal of 20 to 25. Members meet to discuss common issues such as asset and profit growth, management succession, compensation, client relations and technology matters.
Also formed was the Third Party Marketers Association, led by Jim Vogelzang of Vogelzang & Associates, Denver. Members promote the use of third-party marketing firms by smaller asset management companies as a lower-cost alternative to in-house marketing or a better alternative to no marketing.
