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Start a Fund and Hit the Jackpot--or Not

The highs and lows of the fund business can lie just pages apart.

Gregg Wolper, 09/08/2010

Government filings don't often appear on recommended reading lists. That's understandable. The phrase itself can put people to sleep. But as investigative reporters can tell you, one can find stories aplenty buried in the seemingly mundane pages of documents that typically end up filed and forgotten.

In the fund world, the filing with the tamest title often yields the most interesting stories. The Statement of Additional Information, an addendum to the prospectus, contains a wealth of data on funds, advisors, and directors. A look at a recent SAI filed by one fund firm, for example, reveals both how lucrative and how challenging the fund industry can be.

Nice Work If You Can Get It
Artio Global Management is best known in the industry as the advisor of Artio International Equity BJBIX. That fund has racked up an excellent record over the 15 years its current managers have run the portfolio. The SAI recently filed with the SEC covering that fund and the rest of Artio's lineup, while typical in many respects of those from others in the field, makes for particularly compelling viewing. That's because it's from a rather small firm--Artio Global Management has just six portfolio managers, along with analysts and other staff--and its filing illustrates both the promise and the peril of the business in stark terms.

Among many other tidbits, in an SAI an advisor states how much money it earned in management fees for each fund. (Note: This figure does not include other components of a fund's overall expense ratio, such as payments to directors or printing and legal costs.) These numbers can be exceedingly large for big funds, even for those offerings whose fees sound reasonable when stated in percentage terms.

The Artio filing confirms that fact. It shows that the firm's two biggest funds, Artio International Equity and Artio International Equity II JETAX, brought in substantial sums, even if they didn't approach the take from PIMCO Total Return or several American Funds highlighted in the column cited above. Over the three years from 2007 through 2009, the combined management fees for the two Artio International Equity funds totaled more than $680 million. 

Not So Fast
Before you dash from your chair to start your own management firm in the hopes of hitting the jackpot, though, consider the story of the less fortunate funds created and managed by that very same firm. Yes, the same filing that displays the riches available to successful funds offers a cautionary tale for anyone hoping to make a fortune in the fund world.PAGEBREAK

In the mid-2000s, Artio (which then carried the Julius Baer name) decided to expand its lineup. At the time it only offered international-stock funds and bond funds--nothing focused on the U.S. stock market. This was unusual for a U.S.-based fund firm. So, it brought in a manager from outside and opened four funds that targeted various market-cap levels of the U.S. stock market. The funds launched in 2006 and now have more than four years of history under their belts.

These funds have performed decently well in relative terms during a volatile era. One of them, Artio U.S. Smallcap JSCAX, ranks in the top decile of the small-growth category over the trailing three-year period through Sept. 2, and through July 31 all were topping their category averages since their inceptions. But investors have paid little attention. Three of these funds are minuscule, with less than $12 million in assets apiece. (One of them, Artio U.S. Microcap JMCAX, has roughly $10 million in assets, and more than $1 million of that amount comes from Richard Pell, Artio Global's CEO and chief information officer.) Only the Smallcap fund has more, and even that one has just $76 million in its coffers.

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