A number of recent deals show that the relationship between money managers and subadvisers has taken a new twist: They're now linking up for distribution as well as asset management.
Among some of the interesting new subadviser relationships are:
* Oppenheimer Funds Inc., New York, will launch six portfolios in January that will be managed by four broker-dealers that have their own distribution channels.
* John Hancock Funds Inc. introduced a fund this fall that invests equally in three different sectors -- technology, financial services and healthcare. Each third of the portfolio is managed by a different subadviser with its own distribution channels.
* Turner Investment Partners, Pa., struck deals this year to have two of its funds offered through major distributors -- the Vanguard Group, Valley Forge, Pa., and Merrill Lynch & Co. Inc., New York.
Meanwhile, American Express Asset Management, Minneapolis, will hire three subadvisers to manage its new small-cap growth fund, due out in January. The hiring of RS Investment Management Inc., San Francisco; INVESCO Funds Group, Denver; and Neuberger Berman LLC, New York, marks the first time American Express has used outside subadvisers to manage one of its funds.
But the Oppenheimer, Hancock and Turner deals stand out for a different reason. They represent a new trend in subadvisory relationships, said John Benvenuto, consultant at Financial Research Corp., Boston.
"Traditionally, a firm goes into a subadvisory relationship to hire out an asset manager," said Mr. Benvenuto. "Now you see the added twist of using a certain manager, who is also very good at what they do, to gain access into their distribution channel," said Mr. Benvenuto.
Differences still
While the Oppenheimer, Hancock and Turner deals represent a trend, they are each different from each other.
Oppenheimer filed papers with the Securities and Exchange Commission, Washington, in mid-November to launch six Select Managers funds, which will be managed from four wire houses: Merrill Lynch, Prudential Insurance Co. of America; , Citigroup, and Nationwide Life Insurance Co., Columbus, Ohio.
The two Merrill Lynch funds, managed by Merrill subsidiary Mercury Funds, are an S&P 500 fund and a focused growth fund. The two Prudential funds are a balanced fund and a growth fund. Citigroup and Nationwide each will run a growth fund.
Mr. Benvenuto said an added benefit for Oppenheimer of partnering with these broker-dealers is that it allows Oppenheimer to have a "deeper" relationship with each for future partnerships. And because each firm has its own sales staff, it opens up new distribution channels for Oppenheimer.
"The beauty of this is that both Oppenheimer and the subadvisers are expanding distribution of their channels," said Charlie Bevis, a consultant at FRC.
Gregg Stitt, Oppenheimer Funds spokesman, declined to comment on the specifics of the subadvisory relationships because the funds are in registration with the SEC.
But before the Oppenheimer funds were introduced, the John Hancock Growth Trends Fund looked to capitalize on the distribution potential of one of its subadvisers, Merrill Lynch.
Launched in September, the fund invests in three sectors -- financial services, health care and technology - with each sector run by a separate portfolio manager. Hancock runs the financial services portion of the portfolio, Merrill's Mercury Advisors runs the health-care part of the fund, and American Fund Advisors is responsible for the third of the fund that invests in technology.
Turner turns over
Turner Investment Partners made news earlier this year when it struck unique subadvisory deals with Vanguard and Merrill Lynch. Turner agreed to turn its Turner Growth Equity Fund over to Vanguard and sell it under the Vanguard umbrella as the Vanguard Growth Equity Fund. A similar arrangement was made with Merrill as the Turner Select Growth Fund became the Mercury Select Growth Fund.
In both cases, Turner continues to handle the investment duties. On the distribution side, Turner benefits by having the fund sold under the Vanguard and Mercury names and through their broad channels. In turn, Vanguard and Merrill get access to Turner's growth equity management capabilities.
Turner President Stephen Kneeley said the firm will continue to go after subadvisory business. "Our philosophy is to focus on the manufacturing side and partner with people on the distribution side," said Mr. Kneeley. "We want to make sure we're marrying our product with their distribution the best way possible."
He said the firm is looking to expand its strategy into global and international funds and is interested in building that capability through a liftout of an international investment management team.
Mr. Benvenuto expects to see an increasing reliance on subadvisers in the future. In 1999, $425 billion in mutual fund assets were subadvised, which is about three times the $143 billion in 1996, according to FRC.
Because of increased competition in the mutual fund industry, there is a greater urgency for money managers to have top performing "five-star" funds, said Mr. Benvenuto. As opposed to building an internal investment management capability and waiting three years for a track record, more managers are getting that brand recognition right away by using subadvisers. "There is a trend in the industry now of looking at distinctively looking at your business as manufacturing and distribution," he said. "If you are not capable of manufacturing all the products you need, you can turn to a subadvising relationship."
First step
American Express Asset Management did just that when it filed registration papers with the SEC to launch the AXP Small-Cap Growth Fund.
American Express spokesman David Cunihan said while the firm has growth management capabilities, one of the areas where it is light is in the small-cap arena. "We didn't have a lot of bench strength internally on small-cap," said Mr. Cunihan, "and wanting to get this fund available relatively quickly, we decided that going to outside advisers was the way to go."
Mr. Cunihan said the firm wouldn't rule out more relationships in the future. He said the firm wants to be "flexible and creative" in doing what it needs to do to get funds to market.
Besides AMEX, RS Investment Management picked up another subadvisory relationship this fall, this one with a Japanese mutual fund company, Partners Asset Management, Tokyo, to subadvise the Partners U.S. Emerging Growth Fund or Woodside Fund. The fund, managed by James Callinan, is named after a small community in Silicon Valley and invests in primarily small technology-based companies.
David Elliot, principal at RS, said the subadvisory business, along with mutual funds and institutional, is part of the mix of assets that the firm is looking to build. He said RS has added at least one major subadvisory relationship each of the past four years.
Founders Asset Management, Denver, with more than $2 billion in subadvised assets, this month was tabbed by Dreyfus to manage a microcap growth product and in December will receive a $400 million small-cap growth mandate from North American Funds.
