HOW TO BUILD A FUND FAMILY: BUY FUNDS — 4,200 POTENTIAL TARGETS WITH LESS THAN $50 MILLION

Unified Financial Services Inc. has come up with a way to build a mutual fund family without spending a bundle on start-up or acquisition costs.

The fast-growing Indianapolis company, founded in 1990 as a provider of back-office services to fund shops, has rolled out a program designed to consolidate small mutual funds — namely, those struggling to manage operations and hold down expenses — under its roof. The break-even point is considered to be $50 million of assets, and Unified is targeting the estimated 4,200 funds below that level, giving their advisers an exit strategy.

Still, its asset-gathering strategy is not entirely unique. A number of bigger companies which acquire full or partial stakes in funds — ranging from United Asset Management to New England Investment Cos. — have met with mixed success. And even if Unified were to bring all 4,200 small funds in-house, it would have only about a 4% share of the market.

So far, Unified has gathered $63 million in fund assets through its program, a tiny fraction of the $60 billion it plans to bring in-house during the next three years.

Meanwhile, it has been aggressively acquiring privately held registered investment advisers — some of which managed mutual funds — through stock transactions and plans to go public later this year. In all, the firm has $750 million under management — up from $115 million last year — a sixfold increase due largely to the recent acquisitions.

Here’s how the reorganization program works: After receiving approval from a company’s shareholders, the fund is liquidated and reorganized under the Unified umbrella. There are no tax consequences for shareholders, the firm says, because no holdings are sold and investors are put into a portfolio with similar investment objectives.

The fund’s former adviser either becomes a subadviser or consultant, although the management may go to one of Unified’s subsidiaries. While some funds survive, others are merged into similar funds.

what they do best

After the reorganization, Unified provides transfer agent services, accounting, administration, compliance, distribution and other costly and time-consuming services. The result, the company says, is a reduction in fund expenses and a likely elimination of any sales charges.

“We are finding that there are a lot of fund complexes under $250 million that are losing money,” says Timothy L. Ashburn, Unified’s chairman. “Now, all they have to do is do what they do best, but they don’t have to do any of the grunt work.”

Its first reorganization took place in December 1996 when New York-based Laidlaw Holdings Asset Management’s $3 million Laidlaw Covenant Fund — a “socially conscious” stock fund — was made part of the Vintage Funds, a no-load family serviced by Unified. (Mr. Ashburn had served as a portfolio manager to some of the Vintage Funds.)

The fund has been renamed the Unified Laidlaw Fund, its expense ceiling reduced to 1.5% from more than 2%, and redemption fees and a 5% front-end load eliminated. Laidlaw continues to serve as a consultant to the fund, now managed by Fiduciary Counsel Inc. of New York.

In February, Unified reorganized the Vintage funds, adding $60 million in assets, and bought the funds’ adviser, Indianapolis-based Vintage Advisers Inc. All of the subadvisers to the funds have remained the same, and one was acquired by Unified in June.

the distribution challenge

Still, the plan may have some shortcomings. The biggest challenge faced by independent funds is distribution, and many fund operators may be reluctant to give up their independence in exchange for services that can be outsourced relatively cheaply, observers say.

“There are so many people who provide a total soup-to-nuts turnkey service. To get that you don’t need to sell the advisory contract,” says Mariko O. Gordon, manager of the $2.7 million-asset Daruma Fund.

Unified has a broker-dealer unit and also hopes to sell through external broker-dealers by offering stock in exchange for shelf space. It also plans to sell through fund supermarkets, but may be hard pressed to compete with the fund giants.

Distribution is “the reason (a lot of) small funds haven’t grown,” says Philadelphia-based mutual fund consultant Burton J. Greenwald.