Three Years
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.
Sarasota Capital created its fund with help from Gemini Fund Services LLC, a turnkey company that helps advisors and others create mutual funds, variable annuity funds and hedge funds. Welch says it cost about $70,000 to create the Currency Strategies Fund, and that it reached the break-even point at $12 million in assets.
Mutual funds--and all funds--have several fixed costs and will have higher expense ratios as a percentage of overall assets when they start out. Ideally, as fund assets grow, expense ratios can shrink. The Currency Strategies Fund's stated net expense ratio is 2.61%. To entice investors to buy the fund, Welch says they waive their management fee to cap the expense ratio at 1.95%. "We renew the cap every year," he notes.
Creating a fund is one thing. Getting people to notice is another. "What I'd caution advisors who are interested in doing this is that it's a lot harder than it looks," Welch says. "A lot of advisors screen out funds that don't have a three-year track record."
The Currency Strategies Fund recently had its three-year anniversary, which Welch considers a significant milestone. "We've been told by Gemini and others that once you get to three years it gets a little easier," he says.
It Ain't Cheap
Kip Meadows, CEO of Nottingham Investment Administration, a turnkey fund accounting and portfolio record-keeping company in Rocky Mount, N.C., that works with roughly 125 funds and about $50 billion in assets, states it can cost as much as $150,000 a year to operate a fund through Nottingham, an amount he says is significantly less than a do-it-yourself fund. That entails custody, audit, legal and filing fee expenses, along with accounting, administration and transfer agency chores.