Meadows says a mutual fund needs at least $15 million just to cover expenses so it can charge a reasonable fee of 125 basis points while enabling the portfolio manager to collect an investment advisory fee of 35 basis points. "If you can't see within the first year to one and a half years that you'll have more than $30 million in the fund and heading toward $50 million, then you probably shouldn't do it [create a mutual fund]," he says. "You need to get to those asset levels in order to take the full investment advisory fee and keep expenses reasonable."
That's a tall order. Nonetheless, advisors are knocking on the doors at Nottingham or Gemini or other similar outfits with the intent to enter the fund business. Andrew Rogers, president of Hauppauge, N.Y.-based Gemini, notes that his company has brought about 100 advisor-sponsored funds to market during the past five years. "About half of our clients are the traditional, what I call, wealth advisors, who have clients of their own and manage assets for them, and they come to us to either create a mutual fund or an annuity fund," he says.
Gemini's soup-to-nuts mutual fund service is its Northern Lights Fund Trust, a shared mutual fund trust comprised of independent funds that are all managed by separate investment advisors. These pooled trusts streamline regulatory compliance and hold down costs.
In March, Gemini launched its third shared mutual fund trust under the Northern Lights Fund Trust umbrella to meet growing demand to create small- and midsize funds. Combined, those three trusts have about 110 mutual funds and about $8 billion in assets.
Rogers notes that development costs for a mutual fund can vary based on its complexity. A general asset allocation fund might cost about $35,000, while funds involving commodities or more involved strategies can run as much as $75,000. Most of those expenses relate to legal and registration fees.
In addition to its mutual fund trust, Gemini also created the Northern Lights Variable Trust to service variable insurance trust funds. "We're seeing a lot of interest right now in insurance products," Rogers says, "so we think this is a very exciting time to be launching variable insurance funds."
These funds are offered through insurance company platforms, which Gemini says can boost the distribution of the fund and expand an advisor's business. As of May, there were 18 funds in Gemini's variable annuity trust.
Elsewhere, Gemini has been helping advisors create hedge funds. "A lot of times it's with advisors who see potential opportunities in real estate," Rogers says. "And they're actually directly buying properties and managing them and things like that, which obviously you can't do in a registered vehicle."
More Business Opportunities
W.E. Donoghue & Co. Inc., an RIA firm in Norwood, Mass., has launched both a mutual fund and a variable insurance fund via Gemini. Jeff Thompson, the firm's senior vice president, says the impetus for creating its funds came from interest shown by other advisors who heard about the risk-adjusted performance of some of its investment strategies. "We've been approached by other firms, primarily independent brokers, who've said, 'Hey, we like your story and we like your results. How do I get access to you guys?'"
Donoghue started producing separate account solutions for the independent broker-dealer channel, but they found that some brokers prefer a wrap-type solution like a mutual fund, while others like putting a portion of their clients' money in tax-deferred vehicles such as variable annuities.
"We found it necessary to roll out a mutual fund for a couple of reasons," Thompson explains. "One is that it creates efficiencies within the separate account portfolio that we're managing. Plus, we're looking to grow out our business and be as ubiquitous as possible by offering our solutions to the independent broker-dealer channel."
According to the prospectus, the primary objective of the firm's Power Income Fund is total return from income and capital appreciation, with capital appreciation as a secondary objective. It invests mainly in junk bonds and uses a fund-of-funds approach that trades underlying mutual funds and ETFs within it. The fund started trading in September 2010, and had $272 million in assets as of the end of April.
Thompson says the majority of the fund's investors are utilizing the institutional share class (PWRIX). The fund's A-share class trades under the ticker symbol PWRAX.
Donoghue later rolled out its variable insurance trust, called the Power Income VIT Fund, which became available on the Jefferson National Monument Advisor platform last month. It was scheduled to be available on the Nationwide MarketFlex platform (load and no-load) in June.
Together, these funds "have definitely been a huge win for us because we're seeing more depth and breadth in terms of the business that's coming to us as a boutique firm," Thompson says.
Blow Your Horn
Rogers notes that about one-quarter of the 100 advisor-sponsored funds Gemini helped bring to market during the past five years have failed.
"Sometimes it's just really bad performance," he says. "You know, some people have great ideas and they don't always work out." Or, he adds, it could be a case of bad timing or the inability to raise sufficient assets.
It takes about 30 days to close a fund. "The advisor and Gemini put a lot of effort into it, so it's sad for everybody involved, including the [fund's] board," Rogers says. "But usually when a fund closes, everybody knows it was the right time to do it."
For advisors, it helps to have ideas that are really focused and, hopefully, different from the pack. "Advisors often come to us with big plans," says Garrett Stevens from Exchange Traded Concepts. "They may want to launch 10 funds, but we tell them to start with the best two and we'll go from there. We tell people to make sure it's a product they know, not just an idea they have."
Kip Meadows from Nottingham Investment Administration believes mutual funds that will gain the most traction will be those employing hedging strategies, writing options to generate income or employing moderate leverage. "They should try to generate alpha rather than beta, because it's hard to beat an ETF using a passive index strategy," he says.
And a big key to success is marketing and distribution. That means getting in front of advisors at industry conferences and getting a fund on broker-dealer and RIA custodial platforms. "There's a saying in mutual funds that reps will buy the last fund they saw," Rogers says. "So you want to make sure that you are constantly putting your fund in front of those representatives and those various brokers and custodial platforms so they're always seeing your story."
Anthony Welch says he and his partner at Sarasota Capital Strategies have spread the word about their Currency Strategies Fund by attending lots of industry conferences each year. "No matter how good your idea is, people won't flock to your fund just because you put it out there," he says. "People need to be told the fund exists because they won't find it on their own."