Best Practices from the Fastest Growing Fund Managers

by Dan Sondhelm

SunStar Strategic and Strategic Insight, a mutual fund research and consulting firm, co-sponsored a study to identify the fastest growing small medium/small sized mutual fund firms in 2010 and first quarter 2011. In fact, 22 of the top 25 fastest growing firms overall were those who began the 2010 with under $5 billion in assets. Since firms of this size were not likely to have large marketing departments, we delved further into how they were able to achieve such spectacular growth in a year when many large equity funds experienced net outflows.

In the course of our research, three major themes developed: stellar performance, product innovation and creative communication. Let’s examine each one.

Stellar performance is often the first thing advisors and investors seek.
Much as “location, location, location” drives real estate, it should be no surprise that “performance, performance, performance” is a key factor in mutual fund success.

A prime example of performance-driven growth on our list is Jensen Investment Management, with $937 million of net inflows during 2010. Utilizing a selective screening process to focus its holdings on 25-30 companies, its flagship fund, the Jensen Portfolio, has ranked within the top decile of its Lipper Large-Cap Core classification over both the three- and five-year periods ending December 2010.

“Money finds good performers,” said Mark Travis, CEO of Intrepid Capital Management. Its largest offering, the Intrepid Small Cap Fund, has been the top-performing domestic small-cap fund across all three of Lipper’s US Small-Cap classifications (Value, Growth and Core) over the same three- and five-year periods (ending December 2010). Intrepid achieved 105% in total net new inflows in 2010.

In the fixed income area, two fund managers, Thompson Investment Management and Iron Financial, cited outstanding performance as well as specific expertise within their niche as important factors in their growth. They posted 83% and 75% in net new flows respectively.

Citing a slightly different tilt on the assets selected for the fund, the Thompson Plumb Bond Fund is a short-term fund that posted outstanding returns resulting in part from their use of BBB-rated securities, which Nedra Pierce said, “not a lot of fund managers use.”

Similarly, Iron Financial points to its expertise in the area of credit default swaps and other alternatives as a major factor in the Iron Strategic Income Fund’s five-star rating from Morningstar (overall and three years) in the High Yield Bond fund category.

Innovation enables fund managers to broaden their product line.
In addition to specializing within their asset classes, some of these fast-growing fund managers have leveraged their existing capabilities to create new opportunities.

Stone Harbor provides an excellent example of such innovation as they capitalized on their expertise within a specific sector (emerging markets debt) by launching the open-end Stone Harbor Local Markets Fund and the closed-end Stone Harbor Emerging Markets Income Fund. Together these two new funds accounted for 70% of their net new assets.

Similarly, Osterweis Capital Management launched the Osterweis Strategic Investment Fund. Leveraging the investment capabilities of the firm’s other two funds – the Osterweis Fund (equities) and the Osterweis Strategic Income Fund (fixed income), the Strategic Investment fund also capitalizes on increased investor interest in flexibly managed portfolios.

Two other managers cited increased demand from advisors and investors for funds which rely on the expertise of asset managers to diversify across a mix of asset classes. They are Intrepid, whose flexibly managed Intrepid Capital Fund’s net inflows increased sharply to $164 million in 2010, and Corbyn Investment Management, where Bill White describes their sole offering, the Greenspring Fund, as a “go anywhere, non-style box, alternative, low beta” fund.

Creative communication enables these managers to make their story known.
Getting the word out is especially important for small fund managers, and here we found a broad range of strategies.

Increased media outreach was cited by Jenson, which augmented its quarterly media tours in New York with additional media meetings in several major markets. Intrepid’s portfolio manager Mark Travis has been promoting his fund aggressively and told us, “I have spoken to anyone who wants to hear our story, kissing many frogs if you will, in person in New York, Washington DC, Boston, by phone or remote.”

Several mentioned regular participation at conferences such as Schwab and Morningstar to deepen relationships with advisors who already recommend their funds as well as introduce themselves to others.

Maximum platform exposure is the goal of several of our fast-growing companies. While they do little in the way of advertising and have no wholesalers, Thompson is one of several that make certain all their funds are on all broker-dealer and custodian platforms. When advisors see their unique niche in the fixed income space as well as their excellent performance numbers, availability is not a problem.

Not surprisingly, email campaigns, updated websites and other technology tools such CRM systems and databases are important resources employed by many of these fund managers to maximize their communications with advisors and investors.

But we also heard from fund managers including Corbyn who prefer what Bill White describes as a “rifle shoot,” catering to independent RIAs, even those with smaller assets under management. They build relationships by offering a personal attention and unique resources such as study groups to that sector of the advisor universe. Positioning themselves as a boutique asset manager, “not a brand name,” Bill says they believe that independent RIAs appreciate being able to offer a fund that isn’t available at the firm across the street.

In conclusion, small fund managers who want to accelerate their growth would be well advised to follow the examples of these fast-growing fund managers of 2010 and focus their efforts on achieving great performance results, developing innovative new products and employing creative communications strategies.