How Mutual Fund Adoptions Help Asset Managers Focus and Grow, But Ask Questions First

This article has been updated from a story that originally appeared in the August 5, 2019 edition of Money Management Executive.

Many boutique asset managers start mutual funds with the “Field of Dreams” mentality: If we offer them, investors will come. What they quickly discover is, without a long-term track record, an extensive distribution network and a well-planned marketing strategy, efforts to get in front of clients and draw in assets under management largely fall flat.

With flows to passively managed funds outpacing actively managed funds, and the fee stampede squeezing profit margins for all but the most popular fund families, asset managers that don’t have household names in their lineups may be looking for ways to exit the fund business. For many, executing fund adoption agreements with larger firms may offer the best way to focus on their core strength: managing investments for institutional or high-net-worth clients.

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Shed The Products, Keep the Expertise

What is a fund adoption? Also called a fund reorganization, it’s a euphemism asset managers use when they sell their funds to a larger asset management company and stick around to manage them as subadvisors. In many cases, this can be a win-win situation for both sides.

Adopters get to own funds that may be outside their area of expertise. The sudden influx of new AUM helps move them up the ranking of largest asset manager. The enhanced combination of depth and size gives them a better story to pitch to the gatekeepers and research teams. And since adopters generally have greater bench strength in their sales and marketing departments and a broader network of advisors and consultants to reach out to, they have a better chance of generating inflows for the newly added funds.

Greater Seller-Side Risk

While fund adoption carries risks for both sides of a sale or merger, adoptees have more to lose if a deal goes south. Once the adoptee exchanges ownership and control of its funds for a sub advisory relationship, it’s essentially shedding its independence and autonomy. Adoptees have to play by the rules of their new parents. And since they’re sharing management fees, they depend on the goodwill of the adopter’s business development team to increase AUM to make up revenue shortfalls.

This can be a problem if the adopter’s network of investors and intermediaries are not interested in the newly acquired funds. Or if support for the adoptee’s new sub advisory role among senior executives doesn’t percolate down to the distribution personnel who are now tasked with the job of marketing and selling their former funds.

Evaluating Adoption Partners

You’ve worked hard to develop your funds and establish your reputation. That’s why, if you’re considering a fund adoption, it’s critical to conduct due diligence on any potential adopter. In addition to looking at the numbers, you need to get the answers to qualitative questions that could indicate whether the transaction is your lifeline to future profitability or points to a rocky road ahead.

Consider the following questions:

  • Is the adopter committed to growing assets in your funds, or are they buying them purely to gain assets and to create the impression of being a more diversified?
  • Does the company have the sales and marketing resources to grow AUM in the funds you’re sub-advising?
  • Are there opportunities beyond the funds such as institutional accounts or annuities to manage?
  • Does your firm and the adopter company share the same corporate culture and values?
  • Is there potential for clashes that could drive away your investment experts?
  • Have they added AUM for an adopted manager before?
  • Does the manager already have competing funds?
  • How do you make sure the funds you’re selling are valued properly?
  • What characteristics can raise or lower your valuation?
  • How will you be paid?
  • How much time will your managers need to devote to sales and marketing?
  • Will conference appearances be required?
  • Will you need to produce thought leadership articles?

But does it really work?

One manager had his $60 million fund adopted by a large global asset management firm. Between the growth of the fund and other accounts he was given, he managed close to $1 billion AUM. Sure, he had to do more marketing than he was used to. But as he said, “It was worth it. Half the fee of a billion is much better than the whole fee of $60 million.” And managing $1 billion made it easier for him to qualify for institutional accounts that came to him directly.

A very large institutional asset manager had good performing niche mutual funds totaling $300m AUM. Because the firm focused on institutional sales, these funds were the unloved stepchildren at the firm. They were expensive and didn’t get the attention they deserved. After many first dates with different potential partners, they found a strategic partner that were willing to take on and commit resources to the mutual funds. This firm was a fast-growing firm with a dozen wholesalers and good marketing capabilities. Once the deal closed, within months, the CIO and portfolio had meetings with research teams they never thought they’d have. For them, the biggest benefits include retaining the assets, eliminating costs, and “getting rid of the headaches” associated with mutual funds. After one year, they say they are on the verge of seeing new money.

Most asset managers would choose to grow their mutual funds if they could over an adoption. But for some, they are money managers and not marketers. Partnering with one of the many mutual fund managers with excess sales and marketing capabilities makes sense so they can focus on what they do best – managing money. But you don’t want to make a mistake and partner with the wrong firm. Go on plenty of first dates. Do your homework and research. Ask plenty of questions and talk to the managers that were previously organized within the firm.

Dan Sondhelm is CEO of Sondhelm Partners, a firm that helps asset managers, mutual funds, ETFs, wealth managers and fintech companies grow through marketingpublic relations and sales programs. Click to read Dan’s latest Insight articles and to schedule a complimentary consultation.