FUNDS, BROKERS FINALLY INTO THE BLACK: AFRO-AMERICAN INVESTORS, THAT IS, AS MARKET HEATS UP

As a broker at Legg Mason Inc., Eugene Profit never found enough time to do what he really wanted: cultivate new black investors.

So, three years ago, he left to found the Profit Value Fund aimed at African-Americans. The large-cap fund now boasts $3.5 million — most of which Mr. Profit personally drummed up, in between trading stocks — networking in the community. It is, he says, a slow process, heavy on face time, education and patience. Just the sort of investment that big companies haven’t made when it comes to black investors.

Now that’s starting to change. After years of being ignored, African-American investors have become the growth market du jour, and some of the nation’s biggest money managers want a piece of the action.

Indeed, as Mr. Profit works his way from church supper to seminar, from investment club to dentists’ conventions, he is bumping into the big boys from American Express Financial Advisors and Charles Schwab Corp.

“They’re starting to come running now,” says Mr. Profit, whose firm, Profit Funds Investment Trust in Silver Spring, Md., oversees $12.5 million. “Mainly, I think, because everyone’s looking for new markets and it’s like, hey, here’s this big pile of untapped money, right under your nose. So now everyone’s doing the diversity thing.”

The number of mutual funds managed by and marketed to black Americans has doubled in three years to 16. The Coalition of Black Investors, formed in 1997, reports more than 5,000 members.

“No doubt, this is a community that’s been tremendously overlooked,” says Thomas Boatswain 3rd, part of American Express New York area Diversity Learning Lab, a group of advisers targeting minority communities. “But we intend to change that. Today’s minorities are tomorrow’s majority.”

Michael DiFlorimonte, head of Schwab’s year-old African-American Marketing Initiative, puts it this way: “For Schwab, it’s a natural evolution of identifying client needs. We have segments for women, seniors, Asian communities, Latin Americans and so on.” The African-American investment market, he says, is just taking longer to figure out than most.

Schwab, with black-owned Ariel Mutual Funds, last year took a giant step in that direction with the publication of the Ariel/Schwab Black Investor Survey, the first systematic look at black Americans’ investment patterns.

The key finding backs Mr. Profit’s view about the untapped pile of money: Of the 2.5 million black households with annual incomes of more than $50,000, only half have brokerage or mutual fund accounts, compared with 71% of whites.

It also found that the biggest barrier to investment is trust. Three-quarters of African-Americans surveyed said they didn’t know if they could trust an investment adviser, and nearly as many said lack of knowledge about investing is a key reason they don’t invest more.

(This year’s survey, due this month, addresses why black Americans hold such views, according to Mr. DiFlorimonte.)

That may be why, as the survey confirmed, black investors prefer conservative investments like insurance and real estate; 41% of them have most of their money in banks, to 35% for whites, while 51% of whites have most of their assets in brokerage accounts or mutual funds, and blacks have just 26%.

It’s not surprising, then, that Schwab’s African-American marketing efforts focus heavily on education and the painstaking trust-building process that black firms like Mr. Profit’s practice.

Schwab and Chicago-based Ariel set up shop at every Coalition of Black Investors event, and last year more than 1,400 African-Americans attended seminars the two companies underwrote with the organization. Every advertisement or event is done in partnership with a black firm, usually Ariel, but recent partners have varied from Black Enterprise Magazine to African-American Women on Tour.

“There is no shortcut here. The education and the trust have to come first,” says Mr. DiFlorimonte, adding that he has no idea how many clients the initiative has garnered for Schwab. “That’s really premature,” he explains. “We’re more concerned with branding right now.”

So is American Express, which gives extensive support to groups like Mr. Boatswain’s – beginning with splashing Tiger Woods across its ads. But the grunt work is done by teams of advisers who speak to church groups, work with neighborhood banks and credit unions and attend convention after convention.

It’s worth it, says Mr. Boatswain, who believes that African-American clients provide more referrals and are more loyal, once they’ve been won . “There is a real hunger out there for long-term financial relationships.”

Steven Sanders, president of Philadelphia-based MDL Capital Management, agrees, saying: “The African-American dollar is a very loyal dollar.” But performance always comes first, he cautions.

“I believe black investors prefer black money managers as a matter of pride, but only if your performance justifies it,” says Mr. Sanders. Like Mr. Profit, he markets his mutual funds to investors of all races based on performance. “The fact that we’re African-American is icing on the cake.”

sign of maturity

Mr. Sanders believes that the flurry of investment offerings from black money managers is not so much an overnight sensation as evidence of the maturing of the African-American investment industry.

For example, he waited until MDL’s separate account and institutional businesses were well-established — over the $750 million mark — before launching its two mutual funds a year and a half ago. The funds now manage $43 million and MDL oversees $1.2 billion.

MDL also works with Allison Street Advisors, a recently formed wrap account program from black-owned broker-dealer GRW Capital Inc. of Washington, which hooks smaller African-American companies and retirement plans up with top black money managers.

Mr. Sanders, for one, thinks it’s great that mainstream outfits like American Express are paying attention to black investors: “The way I see it, we’re the product, they’re the distribution. We can’t do it without them, and they can’t do it without us.”

But Mr. Profit isn’t so sure.

“Do I feel like I’m in competition with the American Expresses and Merrill Lynches of the world? You bet. And even though we are the ‘black’ firm, we’re still an unfamiliar name so we have more to prove.”