Small Fund Watches Game from the Dug Out

Think back to 1985 and remember the John Fogerty song, Centerfield. It goes like this:

“Put me in, Coach – I’m ready to play today;”

“Look at me, I can be Centerfield.”

Although many money managers are already in the game, many smaller firms are watching it from the bench.

Out of nearly 6,000 mutual fund portfolios, over 800 funds have assets between $50-100 million while over 1,400 have less than $50 million, according to mutual fund research firm Financial Research Corporation in Boston. Some of these small funds are products from fund giants that have not been aggressively marketed. But others are run by smaller firms with limited budgets, limited brands, and limited sales, marketing and distribution strategies.

With reduced margins as a result of bear markets, increased compliance costs and fund scandals, some small funds are finally considering strategies to get in the game or they may be eaten by their competition.

I had the chance to talk to Timothy J. Wahl, CPA and president of GKM Advisers about his fledgling GKM Growth Fund.

How did GKM come about? Why did you launch your mutual fund?

GKM Advisers is a registered investment adviser focused on the long term after tax growth of capital.We were spun off of Gerard Klauer Mattison when they were purchased by the Bank of Montreal in July of 2003.We manage approximately $500 million in individual accounts of high net-worth individuals. The fund came about as a function of our core business, in that it enabled us to provide equity management to family and friends with smaller accounts.For example, we manage third and fourth generations of wealth.These accounts can start off small as gifts, educational, and trust accounts.We are long term growth managers who believe in growing capital in the best performing, major asset class available-common stocks.Risk management is extremely important to us as managers and our clients so we started the fund to facilitate the management of these smaller accounts and to provide the appropriate risk management through diversification.

Did having a public track record come in to play?

Over the years, we have been asked by referrals, the media and different distribution channels about our record. We’ve never published a composite as our accounts have individual investment objectives.We have long standing relationships and the portfolios reflect each individual client.The mutual fund was a way to develop a public track record for a very private investor.It allows us to provide our clients, family, friends and the investing public our low turnover, long term growth style.

What sort of success did you think you would have when you launched this product four years ago? Did you think you’d have more than $35 million in assets by now?

We started the fund with no other purpose than to serve our clients. We believed we could provide the same high quality money management over time with proper diversification through the fund. . Looking at the economics of running a mutual fund, we knew it wasn’t going to be a huge moneymaker but we knew it was the right thing to do for our clients. My initial expectations were to raise $10 million the first year and approximately $30 million over the first three years to get us to a break even operationally.

So what are your asset goals, if any?

Strange as it may sound, we have never been focused on goals such as assets under management other than to at least break even after all operational costs are considered. We don’t have a plan of when or how to reach, say, $100 million. But, based on past performance, I had a feeling we would rank highly with Morningstar and Lipper, and we have. I believed over time our performance would merit attention but it’s tough to cut through the ephemeral investment clutter of today’s investment environment.

Why did you say “it’s tough to cut through the clutter?”

We are too small for many in the institutional world, although we are beginning to have conversations with various smaller institutions and the retail market is difficult simply due to the sheer number of funds competing and marketing dollars spent. An unexpected benefit of our strong performance has been the fact that we’re now managing assets for advisors around the country who have found us through the fund and we’re working towards making our services available on the separate account platform.

Are you on the distribution platforms like Schwab, Fidelity, etc.?

The cost to place the fund on the large no-transaction fee platforms doesn’t make a lot of sense.To pay 25 to 35 basis points to broaden the distribution with little or no marketing intentions would not benefit the shareholders at this time.We’re long term oriented which is reflected in our extremely low turnover and we would hope our investors have the same mindset.Transaction fees have come down dramatically over the years to the benefit of the investor and significantly reduced the benefit of the “no transaction fee” platform.The real benefit is the distribution.We are available on the transaction fee platforms and many other free platforms such as E*Trade and Wells Fargo.We are developing a following in the RIA channel for those looking for a long term, buy and hold growth style of investing.

What else have you tried?

We have participated in only three media interviews over the past forty-five years. Recently, we interviewed with Tim Middleton, who is affiliated with CNBC and we gave an interview to the Wall Street Transcript.Again, our interest lies in the management of the capital and not marketing.The few interviews we have given have introduced other advisors interested in our services which allows us to focus on what we do best, investing the capital.We are a firm that, perhaps to the detriment of our growth, will always put the clients’ needs first. As such, we focus on the management of the client’s capital, the relationship and historically haven’t put much energy into marketing. We have begun to develop a Web site.

And a good one I may add.

We developed our website back when we formed GKM Advisers for clients to access their account information.Moving forward, we intend to use our website to educate our clients and share our investment philosophy.We prefer independent analysis of the fund and if we have the ability to share the work that others have performed and shared with us, we will. On the educational front, I would like to share what we consider to be important investment, economic, social and political articles. For the fund holders, once or twice a year, we update the shareholder’s with a letter and produce annual reports.

Are you profitable at this point in the game?

We are covering the costs. With $35 million dollars in the fund, as you can imagine, we are not hugely profitable.

Many small funds in your shoes are selling right now. Is that an option for you?

So long as we could partner with a firm that we felt would benefit the shareholders long-term interests.The money management industry is at an inflexion point where content (the actual management of the capital) and distribution are becoming separate and distinct lines of business as witnessed by Citigroup’s sale of it’s asset management business to Legg Mason.We’re in the content business and if we can find a partner that would be of value to our client’s and shareholders, I guess we would have to consider.

How will you feel if say, three years from now you’re still at $35 million?

Our mission is to take care of our clients. Not many managers last a decade, let alone over four.We expect to continue to manage and grow our clients’ capital.Of course we’d be disappointed if assets under management didn’t grow either through referrals or the appreciation of capital.We have every expectation that the fund will continue to do well over time and the assets will grow.The investment world becomes more ephemeral every year.Investors are bombarded with information, which, I believe, makes it even harder as there is more information to process.Over time, the market goes up and over time our clients have done well and I would be disappointed if over time our client base through individual accounts and the fund did not grow.
by: Dan Sondhelm