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Fund Spy

Start a Fund and Hit the Jackpot--or Not

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

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.) As revealed last December in a Fund Spy by Karen Dolan, Morningstar's director of fund analysis, 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.

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.

Because management fees are calculated as a percentage of a fund's asset base, it wouldn't be surprising if Artio's take from the U.S. stock funds was meager. But what's noteworthy is that Artio is actually in the red on each of them. How is that possible? The funds have capped the expense ratios they'll charge to shareholders, so when the management fee--when added to other costs--pushes the overall expense ratio above that level, Artio must reimburse the funds to bring the charge to shareholders down to the mandated limit. As a result, the advisor took a loss on each of these funds every year from 2007 through 2009.

Granted, the amount of the losses was minimal, ranging from $28,000 to $67,000 per fund per year. Their struggles aren't hurting Artio Global Management much; obviously, the massive sums pouring in from the international funds more than compensate. Shareholders of the U.S. stock funds, in particular, need not shed a tear for the advisor. After all, investors who've owned any of Artio's U.S. stock funds for the past three years are themselves in the red.

Rather, the key point here is the fact that funds with decent to strong records that come from a shop with name recognition among financial professionals are consistently costing their advisor money. That should give pause to those thinking of trying their hand at this game.

This example is unusual in one respect. Advisors typically don't lose money on their funds. (For an even more unusual case, see last week's Fund Times.) But while fee income usually lands in positive territory, the advisors to numerous small funds can testify that these fees often add up to rather unimpressive amounts. In short, although the giants rake in jackpots that put Lotto to shame and a handful of new offerings make headlines by attracting huge amounts of money right off the bat, anyone who expects to simply open the doors and watch the assets and fees pour in could be in for a nasty surprise. 

Gregg Wolper does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.