Some financial advisors outsource the investment management part of their practice, while others prefer to do it themselves. Keith Goddard is among the latter group. As president and chief executive at Capital Advisors Inc., Goddard oversees a firm with roughly 800 client relationships and $1.1 billion in assets for families and small foundations. "We're asset managers first in that we do our own asset management in-house rather than buying other people's mutual funds," he says.
But one mutual fund Goddard does buy, so to speak, is his own. In 2000, his Tulsa, Okla.-based firm launched the Capital Advisors Growth Fund (CIAOX), a large-cap growth strategy that has been consistently rated a four- or five-star fund by Morningstar Inc. (it was four-star rated as of mid-May).
The fund grew out of the large-cap growth strategy the firm offered as a separately managed account. "We figured we had enough client relationships and demand from within our own industry that we could create this," Goddard says. "And we thought 'Wouldn't it be great if we caught lightning in a bottle and got national recognition?'"
Today, the fund is on the no-transaction fee platforms at Charles Schwab and Fidelity, and recently had assets of $27.5 million. Goddard says he's pleased with the fund and the degree of national recognition it has, but notes that his firm neither invested in the marketing force nor took the time to talk it up at industry conferences that could've made it bigger.
"We haven't needed to because that's not the reason why our business succeeds or fails," Goddard says. "It's a tool for our existing clients that fits some portfolios, and that's good enough."
Capital Advisors is just one of a number of financial advisors who have launched their own mutual funds. Although exact numbers aren't readily available, companies that provide turnkey solutions to help advisors turn their investment strategies into mutual funds, ETFs, annuity funds or hedge funds say they're seeing growing interest by advisors who want to launch their own funds.
"We get eight to 10 inquiries a week from financial advisors and money managers, as well as from existing fund providers who want to launch additional funds," says Garrett Stevens, CEO of Exchange Traded Concepts (ETC).
Based in Oklahoma City, ETC opened for business last year with an ETF-in-a-box platform that does all of the heavy lifting for advisors and others who want to create an ETF. Its services run the gamut from filing the required paperwork and providing exemptive relief with the SEC (a necessary step related to certain '40 Act fund requirements) to writing the prospectus and designing a Web site and logo for the fund.
It takes 75 days of SEC review and costs about $100,000 in start-up costs to launch an ETF through ETC, which Stevens says is much less time and money than doing it yourself (typically 12 to 18 months of review and approximately $1 million). As of May, ETC had launched the Yorkville High Income MLP ETF (YMLP), and had 16 funds in registration.
Stevens says he's had talks with one advisory firm that's contemplating creating four ETFs based on its proprietary indexes.
Advisors can have different motivations for establishing a fund. In some cases, it's mainly an in-house vehicle aimed at handling existing client money more efficiently. "If an advisor has several hundred clients with similar-type portfolios and they have discretion over those assets, it would be much simpler to trade one ETF portfolio than hundreds of individual client accounts," Stevens says.
In other cases, advisors who think they have a unique investment strategy run it up the flagpole in hopes of attracting additional assets, supplementing their existing business and maybe getting national recognition.
One company that joined the fund fray is Sarasota Capital Strategies Inc., which launched its Currency Strategies Fund (FOREX) mutual fund in early 2009. The fund is based on an absolute return strategy using currencies that the firm used for its RIA separate accounts and which, according to the firm, performed well during the 2008 downturn.
Anthony Welch, a certified financial planner and portfolio manager at the Osprey, Fla.-based firm, and his co-portfolio manager, Ian Naismith, noticed there weren't many currency mutual funds on the market at the time. "They were pretty much bets against the dollar," Welch says. "But we wanted to go long or short the dollar versus other currencies. If there was a similar mutual fund out there already, we wouldn't have started our own."
Their fund currently has about $14 million in assets. Most of the firm's clients are in it, and the fund has also attracted outside money. But it hasn't been easy.