Ameristock would switch value fund as assets grow

… And with a wave of a magic wand, the mutual fund became a holding company.

That may sound like the end to a fund manager’s weird daydream, but it’s exactly what the Ameristock Funds group aims to do. Unfortunately, the Moraga, Calif., firm doesn’t have a magic wand.

Ameristock wants to turn its $5 million Ameristock Focused Value Fund into a holding company stock to generate higher returns, says Nicholas Gerber, co-manager of the fund.

Mr. Gerber says higher returns are possible because funds sell on a daily basis at net asset value – normally below book value – while stocks usually trade above book value.

careful planning

But fund lawyers say Ameristock will have to contend with tricky securities rules and tax issues if it wants to be successful in turning the seven-month-old fund – which has returned nearly 70% year-to-date -into a holding company.

“This would have to be very carefully planned so that they could do the transition without violating the [Investment Company Act of 1940] or the tax code, while at the same time getting to where they’re going,” says Pamela Wilson, a lawyer at Hale & Dorr LLP in Boston. “It’s a very difficult transaction.”

But it’s not impossible, according to an official with the Securities and Exchange Commission.

Robert Plaze, an associate director in the SEC’s division of investment management, says he doesn’t think there’s anything to prevent a fund from becoming a holding company.

“There are some parts of the [Investment Company Act] that suggest it did happen regularly in the old days,” Mr. Plaze says. “There are tax issues, but I don’t know if there are any securities law issues.”

That’s good news for Mr. Gerber, who acknowledges that he hasn’t really started to look into the legal ramifications.

Despite uncertainty over how to do it, however, he says he is certain his fund won’t exist in its current form after it reaches a certain size, probably when it gets to between $30 million and $60 million in assets.

“It may take one to 10 years,” Mr. Gerber says. “We’re not in a hurry.”

Bump-up in value

Mr. Gerber is adamant about changing the fund into a holding company for several reasons. In addition to the bump-up in value it could get as a holding company stock, the new company would also get a boost from being able to own outright the companies in its portfolio.

“If we find a good, undervalued company that we think is great business for the long term … what we’d really like to do is own the whole thing,” Mr. Gerber says.

Mr. Gerber says the holding company he’d like to model off is Warren Buffett’s enormously successful Berkshire Hathaway Inc. in Omaha, Neb. That company, however, never started life as a mutual fund.

Indeed, it’s hard to find holding companies that started as funds. Some fund lawyers can think of only one example. Unfortunately, that fund, the closed-end Madison Fund, never came to resemble anything close to Berkshire Hathaway.

It became Madison Resources Inc. in 1984, and a year later merged with Adobe Oil and Gas Corp., which later changed its name to Adobe Resources Corp. After a long series of mergers, it is now part of Devon Energy Corp. in Oklahoma City.

The initial change from investment company to energy conglomerate, however, was not a good one for investors, says Joseph Bartlett, a partner with the law firm Morrison & Foster in New York who worked with the Madison Fund.

“It was a disaster,” Mr. Bartlett says of the transformation. “Who knew oil prices were going to go to $12 a barrel? Everybody thought that it was going to go to $35 to $50 a barrel. At the time, it was one of the shrewdest moves around.

“Nobody anticipated that Opec would collapse and that oil prices would just head straight south, which they did for a bunch of years.”

The change from mutual fund to energy conglomerate, however, came fairly easily to the Madison Fund, thanks to circumstances that will probably differ from those Ameristock will face. After the fund deregistered itself, it became a conglomerate by merging with Adobe. It didn’t have to bring any motions to become a holding company, Mr. Bartlett says.

Whether Ameristock will be successful in changing its Focused Value Fund into a holding company is yet to be seen. Mr. Gerber says that the company makes sure every shareholder is aware of the fund’s goal. But until enough assets come in, Ameristock Focused Value will be run as a traditional mutual fund, he says. As such, it had gained 69.9% year-to-date through July, compared with a loss of 7.70% for the Standard & Poor’s 500 stock index.