EVEN SMALL FUNDS BUILD BRAND IMAGES: THEY ALL NEED ONE, AND ALL IT TAKES IS BUCKS

John T. Story still cringes when he recalls the “lengthy and agonizing process” of trying to convince his bosses at Montgomery Asset Management to sign off on a touchy-feely ad campaign to raise the small mutual fund company’s profile.

“It’s difficult for executives at the firm to spend the kind of money it takes to run an effective branding campaign,” says Mr. Story, an executive vice president.

The kind of money he had in mind was $6 million, a figure that pales in comparison to the estimated $60 million San Francisco neighbor Charles Schwab & Co. spent promoting its image in 1997 — but is three times the usual advertising outlay for Montgomery, which has $5.5 billion in fund assets under management

Mr. Story finally succeeded. This past October, Montgomery took its first stab at building a strong brand image. The effort consists mainly of ads bearing the firm’s signature owl and the slogan “invest wisely” in such high-profile lifestyle magazines as Architectural Digest, Gourmet and the New Yorker.

Other fund companies are taking the plunge. With more than 8,980 mutual funds now being sold in the United States — compared to 3,209 five years ago and 1,579 a decade ago — fund companies are quickly realizing that name recognition is absolutely critical to their success in gathering assets.

Spending on general mutual fund advertising — most of which is aimed at brand recognition — climbed a whopping 70% last year to $193 million, according to the New York ad tracking firm Competitrack. While the bulk of that money is being handed out by such fund titans as Fidelity Investments and Putnam Investments, a growing number of smaller firms are scrambling to get the word out, too.

Even firms that do their retail selling strictly through intermediaries, like Massachusetts Financial Services and Alliance Capital Management LP, feel the need for brand identity.

With 80% of the $3.1 trillion in U.S. mutual fund assets invested in just 20 mutual funds, second-tier firms
such as Massachusetts Financial Services Inc., T. Rowe Price Investment Services and State Street Research and Management are being lured into the brand war by the prospect of stealing market share.

But they face an uphill battle. “It takes a tremendous amount of money to create a brand,” says Jeff Lapantine, an executive vice president at Siegel & Gale, the New York firm that is overseeing the branding efforts of Morgan Stanley Dean Witter & Co. (Morgan Stanley declined to comment on what it spends on brand awareness.) “When I’m working with a small company, I don’t have the opportunity to go into major markets and spend the time and money it ordinarily takes to create a brand image.”

For most small companies, the most powerful weapon used in building awareness is beyond reach: television. With a 30-second spot on network TV during prime-time costing upwards of $500,000 these days, few can afford the medium.

money, money, money

“Oh God, TV just eats up money,” says William Hostler, senior vice president of marketing at the Delaware Group, the Philadelphia-based mutual fund subsidiary of Lincoln National Corp. The Indianapolis-based insurer is considering a branding campaign — both for its own investment products and for Delaware Group’s.

Even those who can afford television initially are likely to lack the financial wherewithal to sustain it. MFS, for example, pulled TV ads from its 1998 advertising budget because they didn’t offer enough “bang for the buck,” says John Reilly, director of advertising. The Boston-based mutual fund company, which has nearly $50 billion in mutual fund assets under management, spent $10 million on its branding campaign last year, nearly $6 million of which was on TV.

“We found we could definitely move the bar with TV,” says Mr. Reilly. “But the bar dropped right back to where it started as soon as we stopped advertising.”

Smaller mutual fund companies also face many of the same challenges as big companies,
the most pressing of which is intense competition from the banking industry.

In April, Chase Manhattan Bank and Citibank — the two biggest brands in U.S. banking — will attach their names to their proprietary mutual fund families. Chase’s Vista funds will be renamed Chase Vista, and Citibank’s Landmark funds will be called CitiFunds. Both banks are hoping their brands, in which they have been investing heavily for years, will allow them to gain market share in the mutual fund business.

Despite the obstacles, mutual fund companies see no choice but to launch expensive efforts to bring attention to themselves

“You simply have to do it,” says Edward Bernard, managing director in charge of retail marketing and third-party distribution at T. Rowe Price, which is based in Baltimore. “There are too many choices out there. Consumers are very quickly developing a short list of companies they will do business with.”

T. Rowe Price, which has $81.1 billion in mutual fund assets under management, increased its spending on brand awareness this year to $8 million, from $6 million in 1997. The bulk of the money is spent on both network and cable television advertising.

Those that can’t afford TV, or even print campaigns, are finding other ways to sear their names in the minds of consumers. Because it’s often confused with State Street Bank, Boston-based State Street Research and Management is focusing less on branding its corporate name and more on branding the names of its individual funds. In January, the firm renamed its State Street Research Equity Income Fund “Alpha.”

a doubling of sales

The results? “Sales have doubled,” claims Troy Shaver, executive vice president in charge of mutual fund sales and marketing. “We’ve gone from bringing in $5 million to $6 million a month to $10 million to $15 million.”

State Street, which fortified its branding efforts in July by hiring a former brand manager from Procter & Gamble Co., has also started sponsoring the Carl
sbad 5,000, an annual road race in California — which, not coincidentally, is the nation’s largest mutual fund market.

It remains to be seen whether the firms’ efforts will pay off. Or even whether they are worthwhile. Stephen T. Gorman, a Norwell, Mass., financial adviser with more than $50 million in non-discretionary assets under management, insists glitzy advertising campaigns figure little into his recommendations to a client.

“I don’t pay much attention to ads,” he says. “They might jar my memory and remind me that somebody is still out there, but that’s all.

“No client has ever mentioned seeing an advertisement as a reason for wanting to get into a particular fund,” he adds. “People who go to financial advisers want help making choices. They’re usually not coming in with their own ideas.”