Is it worth the time, energy and expense?
If you ask Steven Rogé why the world needs another
mutual fund, the 24-year old, who co-manages the Rogé Partners Fund,
just chuckles. Now that he's racked up 19.5% annualized returns since
the fund's inception two years ago, not much is going to knock Rogé off
his game. Especially now that his fund broke even and is operating in
"This is a ten-year plus project for us," says Rogé, who manages the fund along with his dad, veteran advisor Ron Rogé, president of the wealth management firm Ron W. Rogé and Co. Inc. "This is nothing we haven't been doing in the past," says Steve. "This is just another platform for us to leverage our research. It's just great to have a public track record. It cuts through all the bull. In the long run, we think this will be the best marketing tool we can possibly have for our firm."
It's expensive, this launching of a mutual fund business. The experience and the costs might intimidate a lessor firm. And just because you build a mutual fund doesn't mean that investors will pay any attention. Still, Rogé is one of a growing cadre of advisors who are confident that packaging their successful private money management in mutual fund form will be one of the smartest things they've ever done.
"It's definitely not for the faint of heart or pocketbook, which is why we do so much up-front counseling to ensure a firm has what it takes," says Mike Miola, whose firm Gemini Fund Services provides registration and back-office administration for all of the advisors-cum-fund managers we spoke with. Costs for launching a fund average about $150,000 in the first year.
Until advisors hit the break-event point in terms of inflows and have collected enough investor dollars to offset their monthly operation costs, they must either subsidize the fund on a monthly basis or charge above-average expenses. This latter strategy can be counterproductive, since it will likely scare away the very investors the fund seeks. "We really don't advocate pricing a fund above 1.25% to 1.5%. The market won't bear it," says Miola. "You'll eliminate the investment advisor market over the 1.5% mark."
But the former strategy-subsidizing fund expenses-doesn't come cheap. Rogé's firm paid $20,000 a month to cover his fund's operating expenses until the fund broke even in February-that's a tab of a quarter million in expenses annually until and if you break even.
These types of hard numbers are the starting point for the rigorous screening Miola and his firm put would-be fund managers through. "If they only have $1 or $2 million raised, we'll typically tell them to do a private equity format. Usually if you don't have $15 to $20 million raised to start a fund, it isn't worth it. Even that can be tight," says Miola, who notes that the Rogés are an exception because of their operating capital and excellent performance and marketing capabilities.
Still, it's not enough to just to build a good fund, says Miola, who founded his Scottsdale, Ariz.-based firm some 20 years and has launched more than 100 fund families in that time. "You can have a great investment discipline. You can be the best large-cap manager in the world. But unless you have a great distribution plan, don't waste your time. This will end up being a frustrating and expensive experience."
Distribution strategies can run the gamut from using insurance companies and their variable annuity subaccounts to getting placement on fund supermarkets, wirehouses and regional broker-dealer platforms. Getting on the shelves with any of these distribution channels isn't cheap. Placement can cost as much as what the advisor charges to manage the fund. A less-expensive route? What Miola calls "four-wall distribution," which essentially amounts to the advisor using the same marketing they use within the four walls of their wealth management firm. (The fact that many advisors are not stealth marketers should be noted here.)
What can go wrong? "You don't raise the assets you need. That's really what can go wrong," Miola says. The fact that funds don't qualify for Morningstar or Value Line ratings until they have three years of performance under their belt can also make garnering investor assets a long-term proposition.
Which brings us back to that important, burning question that drives to the heart of why advisors want to start new mutual funds in a universe that already includes some 8,000 registered investment companies: Does the world really need another mutual fund?
"That's a great question and the answer is no one knows," says Miola. "There are always advisors out there who feel that they have come up with the most consistent strategy to successfully manage money. In reality, some strategies will do better than others."
Which brings us to our advisor-turned-fund managers and what makes them tick. For Steve Rogé, working at his dad Ron Rogé's firm summers during high school had him reading Warren Buffett like some kids read the Incredible Hulk. By the time he started college he was already boning up on the finer points of starting a mutual fund, as he spent time interviewing fund managers for his dad's firm, which manages $220 million in private equity and fund portfolios for 200 clients who have average assets of $1 million each.
In actuality, Rogé didn't have long to wait. He launched his core mid-cap fund, which today has 80 investors and $9 million in assets, at age 22. He and his co-manager/father have produced annualized returns of 19.84% since the fund's inception in October 2004.
How does the fund complement the firm's wealth management business, when Rogé admits few clients will ever be shareholders? "Our regular minimums for money management are $1 million, but we kept having clients come in saying, 'My grandson just came into some money. Can you manage his money like you manage mine?' We really can't," says Rogé who invests in both equities and mutual funds in the fund he manages. "With a $1 million portfolio, we invest in 15 mutual funds which have $5,000 order minimums each. So we can't invest a $50,000 portfolio the way we'd manage $1 million."
The firm gets referrals of prospective investors who have $50,000 to $100,000 to invest all the time, Rogé says. This fund gives these clients access to the same investment manager their neighbor may get, but without the full planning relationship, he adds.
The mutual fund, Rogé continues, allows the firm to leverage copious amounts of investment research for both fund and wealth management clients. "If anything, this doesn't take away from our work with wealth management clients, it enhances it. We're doing more research and finding more good investments. They benefit from that. Also, as the fund gets bigger, we'll make more money and be able to add more wealth management staff," he says.
While many advisors have considered starting their own mutual fund, not everyone takes the leap. "We considered starting a small-cap mutual fund at our firm, from the perspective of, could we aggregate assets, reduce costs and have a better investment choice," says Chris Cordaro, chief investment officer at RegentAtlantic Capital in Chatham, N.J. "We never made it to the part where we could reduce costs in order for it to make sense. It would have been an even trade, and the fund would have been no less expensive than using institutional mutual funds. Frankly, we didn't see that we'd add that much value."
Instead, RegentAtlantic decided to launch a hedge fund of funds that invests in six different hedge funds specializing in long-short equity, equity arbitrage and fixed-income arbitrage. It's a way to sidestep the high $1 million minimums most hedge funds carry. So far, RegentAtlantic has invested $35 million in client funds in its hedge fund. But Cordaro says that if small-cap funds keep closing, the firm may have to revisit the possibility of opening their own small-cap mutual fund.
Rogé says he looked into the prospect of launching a hedge fund, but decided it was a bad fit, not least because it would have been designed to cater to wealthy or at least accredited investors with at least $250,000 to invest, rather than the type of referrals and investors he wants his fund to serve. "We typically don't like the idea of short-selling on the magnitude of hedge funds. We don't think it adds value. It just takes a lot of time away from the manager. We also didn't want to keep opening another fund every time our partners grew past the 100-partner limit. And a lot of people would have been worried with the typical lockup period of a limited partnership. Worse, we wouldn't have had an audited track record. Now, our clients can go on our site and see how we're doing. For all these reasons, our mutual fund is a much better fit for us," he says.
The next hurdle? Turn the corner with fund inflows so expenses can be reduced. "Right now, the fund's expenses are 1.99%. But as investors take notice, costs will come down significantly," Rogé says. At the $50 million mark, expenses will fall to 1.5%. At the $100 million mark, 1.4%, he adds. Since the Rogés decided from the onset to cap the fund's expensive ratio at 1.99% and reimburse anything over that, it was costing them approximately $20,000 per month until recently, when the fund broke even.
While the costs until then may keep away many advisors, not all have been deterred. Craig Marcott, an advisor in Smithtown, N.Y., who is building a firm that specializes in special needs and eldercare planning, says he plans to make the fund a core equity holding in his clients' portfolios. "I can get Steve Rogé on the phone, which I'm never going to do at Fidelity or T. Rowe Price. I can't get this kind of on-the-ground, hands-on management elsewhere. It provides added-value to my clients to be able to bring them a best-of-breed manager," Marcott says.
For his part, Rogé says he created the mid-cap core fund, which has 45 fund and stock holdings, with very few restraints. "This is a terrific vehicle for building a basket of assets from around the world. We own everything from large to micro-cap, both foreign and domestic. We'll go anywhere and do anything."
Rogé's holdings include Leucadia National Corp., Berkshire Hathaway and Investor AB. One of his biggest winners has been Legg Mason, which he started buying at $55. In early April, the stock was trading at $126.
To market the fund, Rogé says he prefers to let his performance speak for itself, but he has registered the fund on TD Waterhouse and his wealth management clients can buy it on the Schwab platform. To reach a broader audience of investors, he's also hired a public relations firm, JC Public Relations, in Hackettstown, N.J., which specializes in getting the word out about mutual funds and other financial services firms.
As the fund applies for its ticker symbol (ROGEX) this month, Rogé says he is ready for growth. While all new funds desire nothing more than a strong and steady influx of new money, one new fund-The Ralph Parks Cyclical Equity Fund-has already announced that it will close at each incremental $50 million mark so it can fully digest all inflows before reopening. "We won't allow a lot of money to ruin our track record," says the fund's namesake, investment advisor Ralph Parks.
The 133-stock, all-cap fund, which launches in May, will feature weekly technical analysis of 10,000 stocks performed by Park and his co-manager Gina Griffo, using Park's proprietary software. His one-year rate of return was 24.45% through last September (compared to 12.79% for his benchmark, the Wilshire), when he left his wirehouse employer of more than a decade.
"Six out of very ten of our stocks are winners and four are losers, but through diversification we keep our losses to a minimum," says Griffo.
The fund's cost will be high-an eye-popping 4%. "I know some advisors will have a hard time with the expenses, but how many know how to analyze stocks? And how many folks will analyze 10,000 stocks a week? How many have the technology to do this?" asks Parks. He estimates the fund will attract between $20 million and $25 millions in its first three months and begin to break even at that point. "We have quite a few investors lined up," says Parks, who calls himself more performer than planner.
He says a fund makes perfect sense for his firm, The Ralph Parks Investment Group, in Pittsford, N.Y., because he caters to investors with an average account size of $400,000. "My brokerage firm tried to get me to launch a hedge fund, but really, I wanted to work with middle America. It's where I've always been comfortable," Parks says.
The fund will be offered on a select group of platforms ("Pershing is a strong candidate right now, as is National Financial," Parks says), but at the end of the day he hopes it will be performance that sells investors and advisors on his fund. Winners in his stock portfolio into 2006 include Range Resources (up 407%), Nutrasystems (up 347%) and American Retirement (up 212%).
The main reason that the Biondo Group decided to launch a mutual fund after running separate account portfolios since 1991 tracks Rogé's reasons: Strong performance and a boatload of referrals that were no match for separate account management. "We just have tons of account referrals, and while we're happy to do separate account management for our $3 million clients, it's cost-prohibitive to do it for their $50,000 nephews," says Joseph P. Biondo, manager of The Biondo Growth Fund, in Milford, Pa.
Biondo just got Securities and Exchange Commission approval for the fund and was preparing to launch April 21 with $25 million. He expects to be at the break-even point very quickly, although the fund's costs have been capped at 1.50% and the firm has vowed to subsidize expenses above that mark if necessary.
"This will be a clone of our most successful portfolio, an all-cap growth strategy," the advisor says. The portfolio's performance, though unaudited, has beat the S&P's performance by almost 5% in the past 15 years, more than 5% in the past five years and nearly 8% in 2005.
The fund, says Biondo, will be concentrated to between 40 or fewer stocks with a long-term perspective, evidenced by turnover as low as 0% on the private side in some years. Biondo's homeruns in the past year for his private money clients have included Intuitive Surgical (up 300%) and Idexx Lab, which has stellar average annual 20% growth over the past eight years and was up 50% in 2005.
"I don't know anyone who does investment research the way we do," says Biondo, who will meet with the top three to four executives at any company before investing. "You really get a sense of what they do well and where they'll fail, which gives you a clear perspective of when to buy and when to sell. That's made and saved us a lot over the years."