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WALL STREET, CALIFORNIA | MUTUAL FUNDS / CHARLES A.
JAFFE

Retail Spin

Money managers who choose stocks for institutions and the wealthy are pitching retail offerings, and they're hoping you'll be impressed by their track records. Before deciding to buy, make sure those figures are relevant to what's being sold.

March 18, 1997|CHARLES A. JAFFE

After years of making their services available only to "institutional investors," a number of exclusive funds and private money managers now want you as their next client.

And their offers are going to sound appealing.

In investing, many opportunities are worth a sniff, but how you size up the institutional funds' and money managers' retail offerings may depend on where you stick your nose. They're going to put some fragrant-smelling figures in your face, and you should make sure you know exactly what it is you're smelling.

More on that in a second. First, let's look at two related trends.

Several fund companies known for their consistently high performance have opened their institutional funds--offerings that previously accepted only large chunks of money from pension funds and private investment firms--in some fashion to retail customers, often with low investment minimums for new accounts. Among them are Pimco Advisors, Nicholas-Applegate and, soon, Teachers Insurance and Annuity Assn.-College Retirement Equities Fund, the company that manages retirement plan funds covering millions of workers in nonprofit organizations.

Second, several other firms that had been running "common trusts" (that is, private pools of money) or "separate accounts" (big investments from corporations and pension groups) have also gone retail recently. Witness Milwaukee-based Marshall Funds and California-based Provident Investment Counsel, which essentially have created new funds that promise to follow the strategies that made them successful at managing private money.

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It's no secret why these firms are jumping on the retail bandwagon: That's where the money is--both in terms of profit and in the number of potential customers. And if the firm has a great track record, it can leverage that to sell the new products.

Investors, whether buying through brokers or directly from the fund, are usually going to be impressed by a track record, says Robert Powell, editor of Mutual Fund Market News, which tracks fund industry activity. "Here come these funds with a long history; you put a retail sticker on it, and you have the potential for a very popular product."

Too, there's an aura about private or institutional funds that makes them appeal to the general public. After all, who doesn't like the idea of investing the way the wealthy elite do?

Many of these funds invest in a tightly defined area of the market and strive to avoid "style drift"--the phenomenon of a fund's winding up with investments not true to its stated objective. In addition, many institutional investors aren't looking to hit home runs: They want predictable (and, preferably, above-average) performance. The result tends to be that these funds stick to their knitting.

Institutional clients also tend to scrutinize their funds carefully, demanding and getting more access to managers and information than the rest of us could ever hope for.

"That kind of oversight can't be bad for the rest of the investors in the fund. It keeps management honest," says David Schultz, managing director of the Marshall Funds.

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Sounds good, so far.

The downside is that it will in some cases be tough for the retail investor presented with a track record to judge how well it applies to the product being offered.

In the case of Pimco, an investor gets an apples-to-apples comparison; the institutional track record was achieved as a mutual fund, and that's what's being offered to retail customers now.

But with a new, retail fund offering from a private money manager, the situation is dicier.

The Securities and Exchange Commission is allowing these new funds to cite performance from before they actually functioned as public mutual funds, so long as the experience is "relevant." In other words, if private managers "sorta, kinda" ran their pools the way they intend to manage the new retail fund, it is probably allowable for them to tout that track record in a prospectus. (To date, the National Assn. of Securities Dealers will not allow managers to use this data in ads; expect that to change.)

This, in effect, permits a "creation bias," whereby a fund can enter the market claiming a better track record than the best mutual funds, even though it was not functioning as a true mutual fund during the time in which it compiled the record. (Institutional funds with poor track records won't go retail, so you won't hear much about them.)

"The question the industry must ask in evaluating these funds is whether their track record is meaningful and achieved in the same way they intend to go forward," says Don Phillips of fund rating firm Morningstar Inc. "That same challenge faces individual investors. You could see some terrific performance numbers that may not actually reflect what the fund is doing."

Adds Michael Lipper of fund tracker Lipper Analytical Services: "What some of these funds want you to do is look at their record and say, 'I knew your father, I know your brother and, therefore, I know what you are going to do.' Certainly there will be similarities between private management and what they do as a fund, but there will be differences too."

The thing to keep in mind, then, is this: Institutional funds and money managers are offering intriguing new options, nothing more. These are not the sure things some people will make them out to be. Before you commit to investing, make sure you base your decision on a rational weighing of the facts.

Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe.com or at the Boston Globe, Box 2378, Boston, MA 02107-2378.

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