KAUFMANN FUND IN PLAY: STAR MANAGERS HIRE INVESTMENT BANKERS AMID UNSOLICITED OFFERS

The operator of the $6-billion Kaufmann Fund — the highly visible and profitable small-cap mutual fund — has hired an investment banker, presumably to explore its options in a consolidating mutual fund market.

Kaufmann operator Edgemont Asset Management Corp. of New York is working with adviser Putnam Lovell & Thornton Inc. of San Francisco, mulling a possible sale or strategic alliance, according to sources. Though Edgemont’s two principals and co-portfolio managers — Hans Utsch, 61, and Lawrence Auriana, 54 — declined an interview request, a spokeswoman denies the firm is being shopped, saying, “They’re not considering the sale of the Kaufmann Fund.” A senior executive at Putnam Lovell also declined to comment.

Still, industry sources say Mr. Utsch and Mr. Auriana have begun an “exploratory” process after receiving unsolicited inquiries from potential suitors. Though it is impossible to predict the outcome of the discussions, an outright sale of the firm could command more than $500 million. That’s based on the Kaufmann Fund’s unusually steep 1.50% management and administrative fee, which generated about $90 million last year for the tiny 20-employee firm.

And though Kaufmann is the most heavily advertised single mutual fund in the industry — from conventional financial media ads to spots on train station monitors and the backs of Amtrak tickets — those expenses are more than covered by a separate 12(b)1, or marketing, fee of 0.29%, which generated some $17 million last year.

Investment bankers and industry executives estimate that Edgemont could enjoy a profit margin approaching 70% — about double the 35% margin of a diversified fund manager such as Atlanta-based Amvescap PLC. Last year, Financial World magazine estimated Mr. Utsch and Mr. Auriana earned $13 million each in 1996.

employees own it

“It’s the only firm that combines brand strategy with the clout and performance of a single fund and is still entirely owned by its employees,” says Chas Burkh
art, president of Investment Counseling Inc., an investment banking firm in West Conshohocken, Pa.

Though the firm’s profit margin would seem to indicate a high purchase premium, that factor could be offset somewhat by the fact it is basically a two-man shop.

Edgemont’s Kaufmann Fund would be most attractive to a firm focused on bond funds that seeks to beef up its equity offerings. Yet one factor likely to temper Edgemont’s potential value: The firm’s uncertain prospects for holding on to business now that its principals’ stellar investing record is starting to lose some luster.

Such concerns aren’t just hand wringing, given that the fund has grown from several thousand dollars in assets when the Edgemont principals took it over in 1986 to $6 billion today. Kaufmann’s 26.5% annualized 10-year return ranks it as the top performer of the 34 small company growth funds in business during the period, according to Chicago fund researcher Morningstar Inc.

Doubled in three years

That track record, plus Edgemont’s formidable marketing prowess, has helped nearly double assets under management in the last three years, from $3.16 billion.

“They’ve got high revenues,” says H. Tom Griffith, a principal with Chicago-based Convergent Capital Management Inc., a private holding company that is acquiring controlling stakes in money managers. “But anyone looking at them has to be thinking about their ability to retain assets if things turn against them.”

Indeed, the swelling size of the fund now appears to be having an effect on performance.

Last year, the Kaufmann fund’s 12.56% return trailed the Wilshire Small Growth Index by 3.29 percentage points. What’s more, Kaufmann trailed more than half of the 212 similar funds followed by Chicago-based researcher Morningstar Inc.

That raises questions about how long Kaufmann’s investors will stick around while the high-priced fund delivers merely average returns.

After taking in a whopping $1.46 billion in 1996, Kaufmann ended last year with just $
7 million in net new sales, according to Boston-based Financial Research Corp. The fund suffered $43 million in net redemptions during last year’s second half.