It takes about four months and about $50,000 to get a fund to market
Registered investment advisers with good performance and a penchant for marketing should consider launching their own mutual fund as a way to ramp up profits, according to David Wright, managing director at Sierra Investment Management Inc.
Mr. Wright, who spoke Tuesday at the annual gathering of the National Association of Active Investment Managers in Orlando, Fla., launched a mutual fund in December 2007.
“As soon as your fund launches you have a vehicle that can be marketed across three new channels,” he noted.
Those channels, he explained, include other RIAs, self-directed investors using brokerage platforms, and independent-broker-dealer networks.
“If you want to increase your net income fivefold in four years, this is the way to go,” he added.
The Sierra Core Retirement Fund Ticker:(SIRAX), which comes in four different share classes, has taken in half of its $330 million over the past 11 months, according to Mr. Wright, who co-manages the fund with Kenneth Sleeper.
The firm manages a total of $870 million, but the mutual fund was launched as a means of working with clients who could not meet the $1 million investment minimum, as well as helping to expand overall distribution of Sierra's investment management.
Of the 229 NAAIM member firms, nearly two dozen have launched their own mutual funds as a way to highlight the kinds of tactical-investing strategies for which the association is known.
In Sierra's case, the fund launch was assisted by Gemini Fund Services LLC, one of a growing number of firms that help newcomers maneuver through the red tape of registering and launching a fund.
It takes about four months and about $50,000 to get a fund to market, according to Eddie Lund, Gemini's national sales director.
While outsourcing the back-office can help get the fund off the ground, the investment manager should realize going in that running a fledgling mutual fund can come with its share of challenges.
“We tell people to think of $15 million under management in the fund as the break-even point and that they should try to get to $25 million in the first year,” Mr. Lund said. “We're here to provide the back-office support, but at the end of the day, you guys know your story, and it's up to you to handle the sales and marketing.”
As Mr. Wright emphasized, the financial services industry puts tremendous stock in three-year track records and high ratings from companies such as Morningstar Inc.
“The three-year mark is very significant, and a lot of firms want to see at least $500 million in the fund,” said Mr. Wright, whose fund won't reach the three-year mark until the end of this year.
But absent hefty assets and a long track record, Mr. Wright said, there is nothing like strong performance to attract investors.
Of course, performance can be a double-edged sword.
“If performance isn't pretty outstanding, you're going to have a hard time raising assets,” he said.
Additionally, poor performance in a registered fund can hurt efforts to raise assets in non-registered separate accounts, which as typically managed identical to the mutual funds by most of the NAAIM members.
Other realities worth considering include the fact that mutual funds are among the most heavily regulated industries in the country.
And then, of course, there is that pesky marketing challenge.
“If you're not pretty sophisticated and active in marketing, this will be tough for you,” Mr. Wright said. “You can always find somebody to handle marketing and wholesaling for you, but those people all have to be hired, trained and managed.”
