Mutual fund cooperative helps firm win new clients

An Alabama asset manager that once sheltered client funds by investing in oil wells and thoroughbred horses is luring new investors with a stable of low-cost mutual funds.

The popular proprietary funds, whose costs are low thanks to a business arrangement with three Virginia advisory firms, boast fewer fees and lower minimum investments.

During the past 25 months, T. Leavell & Associates Inc., an 11-adviser firm in Mobile, has added 95 clients with a combined $100 million in assets. The group’s three proprietary funds account for 60 of the new clients.

The assets of those clients are below the group’s separate-accounts minimum of $1 million but meet the $250,000 needed to invest in the mutual funds, says Richard Mitchell, executive vice president at T. Leavell, which manages $570 million.

The beauty of investing in these funds from a client’s perspective is they get the same asset managers working on their account and the same access to those managers, which makes investors feel more comfortable with the people who oversee their money.

“In Alabama, that’s a very important selling point,” says Mr. Mitchell. “Our clients come looking for that kind of relationship.”

down-home feel

Nestled in a majestic antebellum office building, T. Leavell acquired a sterling reputation during the early 1980s by catering to the Deep South’s wealthy and elite.

But when new tax laws closed the chapter on hoity-toity investments such as horses and oil, the firm created its proprietary funds.

The three funds are the Government Street Equity Fund, with $87.2 million in assets as of Jan. 30, the Government Street Bond Fund, with $58 million, and the Alabama Tax-Free Bond Fund, with $34.2 million.

The down-home mutual funds recently helped the firm land the account of a wealthy attorney. His assets included a $400,000 personal portfolio and a 401(k) balance of $650,000.

The client wanted each account invested 60% in equities and 40% in fixed income.

T. Leavell was able to accommodate the client by investing his money in its proprietary funds. The investor also saved more than 50% on the wrap fee his stockbroker was previously charging him.

Clients who invest in T. Leavell’s mutual funds pay no wrap fee. In addition, there are no 12(b)-1 fees because the funds aren’t advertised.

Instead, investors pay a flat fee of $250 a quarter in addition to the imbedded annual management fee. This would work out to annual expenses of about 0.75%, or $3,750, for a client with $500,000.

By comparison, the intermediate and Alabama bond funds carry advisory fees of 0.70% and 0.65%, respectively. The equity fund has a fee of 0.81%.

The funds came about after desire crossed with serendipity.

Years ago, T. Leavell managers had wanted to add the funds to boost the group’s prestige but initially nixed the idea after being told by lawyers that it could cost $250,000 to set up.

But in 1991, fate intervened when one of the firm’s principals attended a presentation by a competing advisory firm, Flippin Bruce & Porter Inc. of Lynchburg, Va.

Flippin, which manages $2.5 billion, was offering proprietary mutual funds. Mr. Mitchell says he began wooing Flippin on the spot – a courtship that culminated in a partnership shortly thereafter.

Flippin allowed T. Leavell to participate in something it had formed called a Massachusetts business trust. With this entity already established, it cost T. Leavell $15,000 to form each mutual fund.

Charles “Chip” Roame, principal of Tiburon (Calif.) Strategic Advisors, says he’s been on the boards of mutual funds run by financial advisers and has seen plenty that don’t do quite as well.

“Creating mutual funds may or may not be an economically smart model,” says Mr. Roame. “Doing it with other advisers, though, does keep costs down.”

“It’s a good strategy, and I don’t think many have done it,” says Kurt Brouwer, president of Brouwer & Janachowski Inc., also in Tiburon. Mr. Brouwer, whose firm manages $400 million, is co-author of “Mutual Fund Mastery: Wealth-Building Secrets from America’s Investment Pros” (Random House, 1997).

“It’s unusual for it to be a family of funds [under the control of financial advisers], adds Mr. Brouwer.

cross-referral system

The advisers call the shared business trust the Williamsburg Investment Trust, and it now comprises 10 mutual funds with combined assets of $513 million.

The firms say the trust was a far better vehicle for cutting costs and sharing expenses than a corporation because of its flexible format.

“Instead of a $50,000 auditing fee, we have an $8,000 auditing fee,” says Mr. Mitchell. “It’s really one trip [for the accountant], plus you’re splitting it between 10 funds.”

The firms also allow one another’s customers to invest in their funds, though in reality most of the firms stick to their own.

T. Leavell draws on the Jamestown International Equity Fund to help fulfill certain asset-allocation needs. The fund is offered by Lowe Brockenbrough & Co. Inc. of Richmond, Va.

This cross-referral system works well because it helps all the firms – the fourth is Richmond-based Davenport & Co. LLC – get their mutual funds to a critical mass. Reaching this critical mass not only keeps costs down, but it also attracts new cash, because if the fund does well, the results are published by fund trackers such as Lipper Inc. in New York.

T. Leavell’s Government Street Equity Fund now has 438 shareholders.

The fund lost 13.01% over the three years through Dec. 31, edging out the Standard & Poor’s 500 stock index, which lost 14.58% over that span.

Over the one-, three- and five-year periods through last Monday, it ranked in the 26th, 35th and 36th percentiles, respectively, of large-cap-blend funds tracked by Morningstar Inc. of Chicago. The two bond funds have more middling results.

Shareholders brought in once the fund has reached the break-even point are a cash cow.

“Out of the 438 shareholders in the Government Street Equity Fund,” Mr. Mitchell says, “25 `belong’ to the other firms in the Williamsburg Investment Trust, 194 are clients of our firm, and the rest are `outside’ investors.”

“Once you get over the fixed costs of a mutual fund, it becomes a pretty nice business for our company,” says John Bruce, a principal with Flippin Bruce & Porter.

“The Fidelitys and Putnams have to be large to support their marketing costs. Our break-even is much, much lower,” Mr. Bruce says.