Wealth manager eyes specialty fund niche

A Chicago holding company with stakes in a dozen money managers is getting into specialty mutual funds and will target independent advisers to sell them.

“We expect to be a niche distributor of fund offerings. We don’t have the resources to compete in the broad consumer market against giant fund companies,” says Richard Adler, CEO of Convergent Capital Management Inc., whose affiliates manage more than $12 billion in assets for wealthy individuals, endowments and institutions.

Convergent agreed in December to buy AHA Investment Funds Inc., a group of four small institutional funds with $200 million in assets, from Hewitt Associates LLC, a Lincolnshire, Ill., benefits consultancy.

The sale is subject to a vote by fund shareholders scheduled for Feb. 22. Sale terms have not been disclosed.

Doubtful prospects

Hewitt and the American Hospital Association of Chicago launched the funds 12 years ago. Hewitt has marketed the funds to the group’s smaller non-profit member hospitals and affiliates.

Though Convergent will continue to sell AHA funds to health-care institutions, it plans to create separate “feeder” funds for retail investors.

Those funds will be sold directly, and through independent financial advisers and fund supermarkets.

Convergent also plans to add a money market fund and an international stock fund, both of which will likely be managed by one of its affiliates.

Attracting investors’ attention amid an already crowded fund market will be a tough challenge.

Convergent already faces that problem with its Star Series Advisors Ltd., a Bermuda-based fund group the company purchased in April 1999. That unit manages just $1 million in assets.

Some observers are also doubtful about the new venture’s prospects.

“Third-party marketers are an unproven commodity in the fund industry,” says Geoff Bobroff, an industry consultant in East Greenwich, R.I.

“There is no profit from distribution. The profit is owning the management fee.”

CCM Advisors LLC, the new investment management unit created to oversee the funds, plans to augment its fees by offering asset-allocation advice to fund investors.

It will also offer separate-account management – likely using its own affiliates.

CCM would collect 0.2% to 0.3% on assets for allocation advice and 20% of the affiliates’ fees for separate-account management.

Timothy Solberg, 47, a marketing and client services executive who managed the funds for Hewitt, is joining CCM as a managing director and part owner in the advisory unit.

Douglas Peabody, 37, a managing director with Convergent’s holding company, is slated to serve as president of AHA funds.

Limited interest

The current portfolio managers will continue to run the four acquired stock and bond funds.

They include Patterson Capital Corp. in Los Angeles; Baird Advisors, a unit of Northwestern Mutual Life Insurance Co. in Milwaukee; and two affiliates of United Asset Management Corp. – Cambiar Investors Inc. in Denver and Western Asset Management Co. in Pasadena, Calif.

Despite the funds’ top quartile investment performance over the past three years, only 55 of the association’s 5,000 member hospitals invest in them.

To encourage sales to the AHA member hospitals, Convergent plans to cut the funds’ minimum initial investment to $100,000, from the current $1 million, and add the money market and international stock fund offerings.

In addition, Convergent will pay the hospital association an annual fee of 0.05% of the assets invested by its members. That would amount to $100,000, based on the funds’ current assets.

Convergent’s primary backers include Amway Corp. co-founder Richard DeVos and troubled Indiana insurer Conseco Inc.