$25B institutional money manager takes a leap into retail

Three mutual funds just the start for Pzena Investment Management

Nov 30, 2015 @ 12:23 pm

By Jeff Benjamin

Pzena Investment Management, a relatively obscure $25 billion institutional money manager, is hoping to tap into the potentially lucrative retail investor market by creating a distribution team to promote three fledgling mutual funds.

Even though Pzena, an equity manager, has a 20-year record managing money for institutions, including a solid push over the past four years into the sub-advisory space, the firm's expansion into the branded mutual fund arena won't be without challenges, according to Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ.

“Offering mutual funds will broaden their investor base, but it's more challenging to gather assets in the retail space,” he said. “They don't have a familiar brand like Fidelity or Vanguard, it's not a firm that people readily think of for mid-cap value investing.”

Richard Pzena, founder and co-chief investment officer, said the three mutual funds launched in March 2014 are just the beginning, and that the three specific strategies were launched to both leverage Pzena's asset management expertise and gain traction in the current market environment.

The Pzena Mid Cap Focused Value Investor Fund (PZVMX) highlights the company's institutional track record in the mid-cap value space.

'CAPACITY CONSTRAINED'

“We believe some of the top-rated mid-value funds are capacity constrained,” Mr. Pzena said.

The Pzena mid-cap fund has just $2.8 million, a high expense ratio of 1.35%, and has gained 1.62% over the past 12 months through Nov. 27. The category average, as tracked by Morningstar Inc., is down 1.19% over the same period, and the S&P 500 Index is up 2.97%.

(More: A 60-40 portfolio can no longer deliver growth and inflation protection)

The Pzena Emerging Markets Focused Value Fund (PZVEX) is the largest of the three funds at $12.2 million, but it also has a high expense ratio at 1.75%, and its one-year return is a decline of 21.78%. That compares to a category-average decline of 15.91% over the same period.

“The emerging markets strategy was a no-brainer for us,” Mr. Pzena said. “We've been managing emerging market accounts for non-U.S. institutional investors.”

The Pzena Long/Short Value Investor Fund (PZVLX) has $4.2 million and an above average expense ratio of 2.1%. The fund has declined 3.31% over the past 12 months, which compares to a category-average decline of 0.89%.

Pushing into the mutual fund space
*Returns through 11/27/2015; Source: Source: Morningstar

Mr. Pzena admitted that the long-short strategy is newer to the firm, and not one where the firm already has an institutional client base.

“We launched a long-short strategy in the late 1990s; the last time the value cycle looked as compelling to us as it does today,” he said. “We had some success back then, but 15 years ago the world wasn't ready for one manager going both long and short.”

RETIREMENT INVESTMENT SHIFT

Part of the rationale behind the move into the retail space, Mr. Pzena explained, was the steady shift away from defined benefit pension plans and toward defined contribution plans like 401(k)'s.

“We figured we have enough of a reputation institutionally to capture some of the retail business,” he said.

Even if it doesn't necessarily help build a branded reputation, Pzena does have a growing track record as a sub-advisor to retail products.

At $11.4 billion, nearly half the company's assets are now from sub-advisory accounts, which is up from $3.1 billion in October 2010.

“The whole pitch, really, is that we've been an institutional quality manager with a very well defined disciplined approach to money management,” Mr. Pzena said. “We think that will resonate.”

The man responsible for making sure that message resonates is Scott Napier, the new head of intermediary distribution, who previously worked at OppenheimerFunds.

Mr. Napier said the distribution strategy will focus on both broker-dealer channels and independent financial advisers. There will also be efforts to continue to expand the sub-advisory business, including into the variable annuity space.

(More: Advice for advisers: Always think about inflation)

“In the process of building the team out we'll be adding traditional wholesaling capabilities,” he said. “The strategy is not to try and spend a lot of time branding Pzena.”

GAINING APPEAL

Jeff Tjornehoj, head of Lipper Americas research, said expanding into the retail space has been gaining appeal among other institutional asset managers, particular hedge fund shops.

He cited AQR Capital Management as one example of a firm that moved into retail with its first mutual fund in 2004.

Today, AQR has 33 mutual funds and $22.26 billion in mutual fund assets under management.

“You can bring in billions with a successful mutual fund launch, but it takes a long time for a hedge fund manager to get to billions of dollars,” Mr. Tjornehoj said. “The beauty of an open-end mutual fund structure is that you can bring in money hand over fist once those taps are open, and mutual fund money can be stickier and more profitable.”

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