L.A. Managers Stock Up Funds

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L.A. Managers Stock Up Funds
Buying In: Sean Thorpe

L.A. money managers have been generating new mutual fund offerings at a faster pace than their colleagues across the country, taking advantage of a hot stock market to open up opportunities for investors in global markets or as a hedge against interest rate fluctuations.

These funds have come both in response to demand from investors seeking new opportunities as well as the firms’ investment advisers seeking a way to introduce their strategies to a wider audience.

“There was an entire market we didn’t have access to,” said Matt Humiston, president of Westwood’s AMI Asset Management, which launched L.A.’s newest mutual fund April 30. “About two years ago we crossed the billion-dollar mark in terms of management, so we started to get some interest from larger institutions.”

AMI, No. 70 on the Business Journal’s list of largest money managers in Los Angeles County, joins Aristotle Capital Management and DoubleLine Capital among the larger L.A. managers pushing out new product. (See page 14.) They lifted the region to the forefront for the generation of new funds. That other regions are not setting up new vehicles at the same pace might reflect the fact that Los Angeles has more equity than debt managers, and stocks have performed much better than bonds in recent months.

Through May 29, U.S. money managers have started only 164 funds, according to data from financial analysis company Morningstar Inc. in Chicago. Around 10 of those were originated in Los Angeles.

The overall number is well off last year’s pace, when 543 funds opened, and that of 2012, which saw 525 funds launch. There are currently more than 7,500 mutual funds in the United States.

Mutual funds are actively managed, publicly traded pooled investments in stocks and bonds that take smaller investments, allowing more participants to access a fund’s strategies.

Demand from potential investors was also what inspired Aristotle in West Los Angeles (No. 32 on the list) to launch the Aristotle International Equity Fund, which opened March 31.

“We met with financial advisers who said, ‘We’d love to be investors, but your minimums are too high,’” said Sean Thorpe, a principal at Aristotle who manages the fund alongside fellow principal Geoffrey Stewart. For actively managed investments, the company’s minimums were in the millions.

With a minimum investment of $25,000 for its new fund, Aristotle’s international strategy has been opened to a broader range of investors. Its global focus is particularly appealing to those who want exposure to foreign companies but are prevented from buying their shares directly by securities regulations.

“It can be difficult for even people who are able to meet some of the minimums to be able to invest in ordinary shares overseas,” Stewart said. “A pooled strategy like a mutual fund allows someone with much smaller investable assets to be able to get access to a fuller range of equity investments.”

AMI’s latest offering, the AMI Large Cap Growth Fund, has a minimum investment of $50,000, well below the traditional six- to seven-figure commitments they required previously from individual clients. The firm was interested in reaching out to bigger players, such as other money managers and family offices, but found many wanted to invest in AMI’s large-cap growth strategy but wanted to do it through a mutual fund.

Interest risk

While AMI and Aristotle started their latest funds to bring their stock picking strategies to a new group of investors, downtown L.A.’s DoubleLine opened up two bond-based mutual funds to give its existing clients more choices in the fixed-income category.

DoubleLine (No. 8 on the list) has about $48 billion under management and already operated several large mutual funds. It launched two funds April 7. One was the DoubleLine Flexible Income Fund, managed by bond rock star Jeffrey Gundlach. The other is the Low Duration Emerging Markets Fixed Income Fund, launched to attract investors worried about a potential rise in interest rates.

Luz Padilla, a director at DoubleLine who manages the Low Duration fund, decided to look into launching it when one of DoubleLine’s investors asked a research analyst about the possibility of putting together a short-duration fund that focused on emerging market bonds, which had been some of the firm’s best performers over the last year. Duration refers to how long it takes for a bond’s returns to cover the initial investment, rather than its maturity.

Gundlach, DoubleLine’s founder and chief executive, quickly got behind the idea, Padilla said.

“Jeffrey was very receptive because he wanted to offer a suite of products here at DoubleLine to our investors that were particularly concerned with interest-rate risk,” she said.

The fund invests in short-duration bonds that offer higher interest rates, repaying their investment faster and are therefore less sensitive to interest-rate swings. When interest rates go up, bond prices go down.

Padilla said the goal is to deliver returns of about 4 percent or 5 percent. Investing in short-duration bonds and choosing only dollar-denominated debt, which mitigates foreign exchange risk, keeps volatility low.

The Low Duration fund sells shares to both institutions, with a minimum investment of $100,000, and individuals for a minimum of $2,000.

Padilla and her team are particularly bullish on Latin American bonds and have significant exposure to Peru, Colombia and Guatemala. They are focusing on industries such as banking, natural resources, utilities and telecom because those are likely to receive support from the government in times of stress.

Offering costs

While a successful mutual fund can cause an investment company’s profile and fortunes to skyrocket, launching one isn’t something to take lightly. For one, startup costs are significant and the regulatory process can be tedious.

Each offering must be registered in all 50 states, which requires the help of securities lawyers. Its managers also have to find a sponsor, usually a financial intermediary such as Fidelity Investments, to help raise money for the fund, and a custodian, often a bank or trust company, to hold its assets. None of these third parties come cheap.

“It takes a while to break even,” AMI’s Humiston said.

Also, launching an equity-based mutual fund at a time when markets are soaring can be dangerous if things turn the other way. Mutual funds are rated against their peers and a few bad quarters can do lasting damage.

Humiston is not overly concerned with that. He said AMI’s strategy actually distinguishes itself most when markets are at their worst, as he’s confident he’ll pick the right stocks in a downturn.

“If we launched this in 2008, we’d look great,” he said.

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