EX-HONCHO: FUNDS BUOYED BY A LOT OF BULL: MONTGOMERY VETERAN SETS UP AS CONSULTANT

If the bull market tide weren’t raising all boats, many mutual funds would sink.

That’s the view of John Story, former executive vice president in charge of mutual fund development at San Francisco-based Montgomery Asset Management.

“The bull market has created an industry that is overpopulated with companies and funds and strategies that if it weren’t for the bull market would be doomed to failure or mediocrity,” he says. “Don’t mistake a bull market for brains.”

ALL IN THE FAMILY

Companies should, for instance, have a critical mass in their funds. Having two funds with $50 million in assets each is more effective than having 10 at $10 million apiece.

To help fund companies determine which of their strategies may fail in a bear market, Mr. Story left Montgomery last month to form his own mutual fund consultancy. Besides strategic planning, it will offer product development and executive placement consulting. His wife, Pamela, is the firm’s secretary/treasurer.

Geoff Bobroff of East Greenwich, R.I.-based Bobroff Consulting Inc., says there’s plenty of room for competitors in the mutual fund consulting business.

“The more the merrier,” says Mr. Bobroff. “John is a good addition to the world of consulting.”

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Mr. Bobroff does offer one warning: It’s easy to tell clients what to do. Convincing them to put the ideas into action is more difficult. “The biggest challenge for many of these companies lately has been opening the mailbox,” he says.

Mr. Story, who worked at Montgomery for about four years after spending 15 years with Alliance Capital Management in New York, says many fund companies are faced with a “margin squeeze.” Mutual funds that depend on intermediaries, such as financial advisers and brokers, are the prime victims of the squeeze, he says.

“The hidden cost is (investor) turnover, which is much higher in these channels,” Mr. Story says.

And, Mr. Story says, fund switching is twice as prevalent among clients of advisers as it is among those buying directly. Why? Access to mutual fund supermarkets has eroded the allegiance financial advisers feel toward a fund family, he says. It’s easy to switch funds at no cost.

“There’s less patience if (a fund) is out of favor,” Mr. Story says.

Making matters worse, some advisers also think that if they’re charging an annual fee, they should show active management of client accounts.

But intermediaries are here to stay, Mr. Story says, so fund companies must adapt the way they market their products. Fund companies should, for instance, work with the supermarkets to make sure which advisers are aggressively switching mutual funds.

Mr. Story has been planning his entry into the consulting world for a year. Before he left Montgomery, however, Mr. Story helped the firm launch its first load funds, the Montgomery Partner Series, this past winter. While at Montgomery, Mr. Story also developed a multichannel distribution strategy.

When Mr. Story arrived at Montgomery in 1994, the firm had “an institutional mindset,” says Chip Ridley, a Story hire who is vice president of institutional advisory services.

“We had no strategy as to what we were going to do,” he says. “We were just going to offer mutual funds (to the retail market) to see if people would buy them.”

But Mr. Story urged the company to seek other distribution channels, such as advisers, Mr. Ridley says.

And the Partners load funds, which opened on Dec. 31, are performing well, Mr. Ridley says. The Partners Emerging Market Focus Fund is up 22% year-to-date, while the Partners Global Long-Short Fund has jumped 40%.

Such experience figures to make Mr. Story a successful consultant, Mr. Ridley says. “John isn’t a dogmatic person,” he adds. “He’s flexible and open-minded. He’s not going to think one size fits all.”