ADVISERS PILE INTO SECTOR FUNDS: MERIDIAN’S ICON GROUP: ONE YEAR, $700 MILLION

Since it began offering its own sector mutual funds in January of 1997, Meridian Investment Management of Englewood, Colo., has pulled in a tidy $700 million, all of it from financial advisers.

The majority has come from the 150 independent broker-dealers with which the firm has signed selling agreements, including Royal Alliance Associates Inc., SunAmerica Securities Inc., IFG Network Securities, FSC Securities Corp. and Securities America Inc.

Since October, Meridian has offered its Icon Funds to fee-based financial planners through the supermarkets of Charles Schwab & Co. and Jack White & Co., attracting another $75 million. It also runs $35 million through a fledgling institutional business.

Bradley B. Williams, senior vice president, says the firm would love to get the ball rolling with Fidelity’s adviser network. But it may take time for Fidelity to get over the loss of Meridian, which was among the biggest users of its Select Funds. Meridian also was a big buyer of sector funds from Invesco, before it decided to create its own.

Mr. Williams says the advent of the Icon Funds family gives the firm’s chief investment officer, Craig Callahan, control over which industries he wants to own in a broad sector.

Meridian each week assigns a valuation to 115 industry groups, as represented in the Standard & Poor’s Super-composite, but turnover is a moderate 50% to 60%, he says. It holds four to eight stocks per industry. Each sector fund — ranging from financial services to healthcare — covers up to 11 industries.

index funds, too

Many broker-dealers opt for Meridian to manage client accounts, using Icon’s funds representing their favorite industries for a 2% account management fee — which may be split with Meridian. But financial planners prefer using the 11 sector funds and five non-U.S. regional index funds (sub-advised by State Street Global Advisers) to design their own sector portfolios for clients.

The management fee, for accounts with at least $25,000, does not include the expenses
of the underlying funds, which average 1.45% for domestic funds and 1.65% for international funds. The average domestic equity sector fund has expenses of 1.62%, according to Morningstar Inc.

flexibility is in demand

Linda Ferentchak, a spokeswoman for the Society of Asset Allocators and Fund Timers in Denver, says many existing sector “funds have imposed trading restrictions which has opened the door for Icon and others with a more flexible format. There’s a lot of demand in the market.” The society’s 170 registered investment adviser members also use many of the new index-linked securities for sector investing. Icon became one of the group’s 64 associate members, mainly fund companies, in November.

“The majority of returns over long-term cycles is determined by what industries you own, not the stocks within the industry. We just buy the largest cap stocks to capture the essence of an industry. . . . We don’t want the risk of going out and cherry-picking stocks,” notes Mr. Williams.

Meridian’s likely next step: boosting its management of portfolios for annuities. So far, it manages portfolios for two insurance companies.