Series trusts gain popularity with funds

Assets climbed to $15.9 billion in 2007

Mar 24, 2008 @ 12:01 am

By Sue Asci

Although small mutual funds have been sharing boards under series trusts for a decade, firms offering the service say the demand has accelerated in recent years because of competition and complex compliance laws.

Series trusts grew in assets to $15.9 billion from $1.5 billion between 2002 and 2007, according to U.S. Bancorp Fund Services LLC of Milwaukee. The number of participating funds also grew — to 218 from 65 — over the same time period.

As part of a series trust, a firm shares a board of trustees, chief compliance officer and much of the infrastructure supporting compliance, reporting, shareholder services, transactions and back-office functions.

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A series trust is a single registered group comprising multiple, separate portfolios, each with its own assets and shareholders. Each portfolio has its own prospectus and is branded to the adviser that manages the funds.

Each has its own name, prospectus, and shareholder reports, or its own identity as far as the public is concerned.

At U.S. Bancorp Fund Services, assets in its three series trusts have tripled to $6.6 billion over the past three years. The trusts include 40 different advisers and 74 funds. Last year alone, they added 25 funds.

"Managers today are facing a complex mutual fund environment," said Bob Kern, executive vice president and director of business development at U.S. Bancorp Fund Services. "They need to find qualified board members and they need to meet SEC compliance rules."

Most of the firms involved are startups, although some service firms report an increase in interest from stand-alone firms.

It can be an alternative to consolidation, Mr. Kern said. Cost savings can range from 10% to 15% of operating costs.

"I could spend $150,000 for a startup or spend one-third of that in a series trust," Mr. Kern said.

Series trusts gained popularity after 2003, amid the proliferation of compliance rules, said David Bogaert, senior vice president of Unified Fund Services Inc., an Indianapolis-based subsidiary of Huntington Bancshares of Columbus, Ohio.

The Unified Fund Services Trust has $1.23 billion in assets, up from $672 million just two years ago. The trust has 27 advisers and 46 funds.

The individual fund advisers take care of their own sales and marketing. The funds are branded to the advisers.

Becker Capital Management of Portland, Ore., might not have launched its flagship mutual fund in 2003 without using the series trust at Unified Fund Services. The asset management firm, with about $2.5 billion largely in separate accounts, has been in business for more than 30 years. It looked into starting a mutual fund in 2002 but it was cost-prohibitive, said Patrick Becker Jr., chief investment officer.

"The series trust gave us a lower break-even point," Mr. Becker said.

The firm launched the Becker Value Equity Fund (BVEFX) with just about $3 million in seed money. Now, its two mutual funds total $70 million in assets. "As it scales up, we bring the expense ratio down," Mr. Becker said.

The Value Equity Fund is performing in the top 2% of its category year-to-date, and the top 12% over three years annualized, according to Morningstar Inc. of Chicago. "The series trust allows us to just focus on managing the money and concentrate on our business," Mr. Becker said.

The eight mutual funds of DAL Investment Co. of San Francisco are part of a series trust at U.S. Bancorp Fund Services. The funds, which total $1.5 billion, were launched in 2001 and are separate from DAL's asset management business.

"When we launched the mutual fund, we were not sure how much we would get in terms of assets," said Jason Browne, portfolio manager at DAL. "It was a new business for us.

We were not as familiar with the other elements of becoming a mutual fund company."

The economic benefit can change as the fund grows.

"As we've grown, some of the economic benefits are not as significant as they were before," said Mr. Browne. "The series trust is probably more valuable for keeping up with compliance issues than the cost savings. The only disadvantage is, because we are a funds of funds [firm], we cannot invest in the funds that are part of the multiple series trust."

A series trust fund can lose a few points in the stewardship grade with Morningstar.

"The fund directors don't invest in the mutual funds they are overseeing," said Laura Lutton, a Morningstar fund analyst. "We like to see fund boards invest in the funds. It's an indication that they are really engaged in the oversight of the funds."

On the other hand, the fact that the funds are saving money is important to the rating.

E-mail Sue Asci at sasci@investmentnews.com.

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