Fund adoption is "like leasing with the option to buy," said Lars Schuster, director of subadvisory services at Financial Research Corp., Boston. "More fund groups are going this route."
Mr. Schuster said he expects between eight and 15 adoption agreements a year, affecting 30 to 40 funds with a combined value of $2 billion to $3 billion.
Executives at New York-based Dreyfus are interested in exploring opportunities in areas such as large-cap growth and large-cap value, as well as "capacity constraint" strategies, including small-cap and emerging markets equities, Mr. Cardona said.
To date, Dreyfus has adopted five funds. Next month, it expects to take on two more: the $32 million Thompson Plumb Select Fund and the $30 million Thompson Plumb Blue Chip Fund from Wisconsin Capital Management Inc., Madison, Wis., pending shareholder approval.
Officials at Charles Schwab, San Francisco, also are considering making more adoptions following a successful agreement with AXA Rosenberg LLC, Orinda, Calif., nearly a year ago, said Jana Thompson. Through the deal, Schwab picked up 11 U.S. mutual funds, putting them into a new group of mutual funds, the Laudus Group; Ms. Thompson is president of Laudus. This was Schwab's first adoption deal.
"We are most interested in rounding out our offerings of domestic equity funds," Ms. Thompson said, noting her chief interest is in large-cap and small-cap aggressive growth.
While not all investment management companies have holes to fill, some do not want to miss out should a worthy fund present itself.
"We believe our fund family is complete," said Steve Graziano, executive vice president, strategic marketing, at Boston-based Pioneer, which completed its first six adoptions in 2004. "But that is not to say we would not be opportunistic if a unique situation showed up."
In 2004, there were seven adoption deals announced involving a total of 19 mutual funds and a combined $1.4 billion in assets, FRC's Mr. Schuster said. A year earlier, there were 10 adoptions totaling 31 mutual funds and $3.9 billion in assets.
Prior to that, the pace of adoptions was much slower. Fund firms announced six adoptions in 2002, four in 2001 and two in both 2000 and 1999, according to FRC.
In the current environment, small mutual fund shops are ripe for the picking. Many come with strong track records but lack the brand recognition to grow assets in a tough market. They also are eager to hand off aspects of their business that are costly or burdensome — including distribution, marketing and growing disclosure and compliance responsibilities.
"Fund adoption gave us the freedom to stay where we are and focus on managing money," said Greg D'Amico, president of IPS Advisory, Inc., Knoxville, Tenn. "We needed to make a change to provide an opportunity for growth."
In a deal expected to close in March, IPS plans to give its Millennium and Frontier funds, with combined assets of roughly $70 million, to Integrity Mutual Funds Inc., Minot, N.D.