How to Create
and Manage
a Mutual Fund or
Exchange-Traded
Fund
A Professional’s Guide
MELINDA GERBER
John Wiley & Sons, Inc.
How to Create
and Manage
a Mutual Fund or
Exchange-Traded
Fund
A Professional’s Guide
MELINDA GERBER
John Wiley & Sons, Inc.
c 2008 by Melinda Gerber. All rights reserved.
Copyright Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data:
Gerber, Melinda.
How to create and manage a mutual fund or exchange-traded fund : a
professional’s guide / Melinda Gerber.
p. cm. — (Wiley finance series)
Includes bibliographical references and index.
ISBN-13: 978-0-470-12055-2 (cloth)
1. Mutual funds—United States—Management. 2. Exchange traded
funds—United States—Management. 3. Portfolio management—United States.
I. Title.
HG4930.G465 2008
332.63 27068—dc22
2007050862
Printed in the United States of America.
10
9 8
7
6 5
4
3
2 1
To my parents, Michael Edward and Debra Deitch, who
always expected me to do my best and to learn something
while doing it.
To my husband, Nicholas Gerber, whose support (and
contacts) made the process of creating this book a whole lot
easier.
To the master of truthiness, illuminator of the enlightened
path, and cultural icon, Dr. Stephen T. Colbert, DFA, whose
standard for excellence inspires a nation.
Contents
Preface
vii
Acknowledgments
xi
About the Author
xv
PART ONE
Create and Manage a Mutual Fund
CHAPTER 1
Why the World Needs Another Mutual Fund
3
CHAPTER 2
Money, Product Differentiation, and Distribution
13
CHAPTER 3
Price and Customer Service
48
CHAPTER 4
Spreading the Word with Promotion and Publicity
89
CHAPTER 5
Building Your Mutual Fund Team
117
CHAPTER 6
The Steps to Start a Mutual Fund
156
PART TWO
Create and Manage an Exchange-Traded Fund
CHAPTER 7
ETFs: The Mutual Fund’s Next Evolution
221
v
vi
CONTENTS
CHAPTER 8
Building Your Exchange-Traded Fund Team
236
CHAPTER 9
The Steps to Start an Exchange-Traded Fund
251
APPENDIX A
What to Expect in Your First Year
310
APPENDIX B
Selling Your Business
315
APPENDIX C
Useful Web Sites, Phone Numbers, and Additional Readings
322
APPENDIX D
List of Service Provider Questions
330
Afterword
340
Notes
341
Index
343
Preface
utual Funds are a gigantic business. At the end of 2006, there were
8,726 open-end funds with $10.4 trillion in assets under management.
These assets represent 96 million individual investors1 who purchase mutual
funds through their IRAs, company’s 401(k), investment intermediaries, and
directly from the fund company.
While mutual funds are the dominant investment vehicle, exchangetraded funds (ETFs) are the new and rapidly growing kid on the block. As
of the end of 2006, there were 343 ETFs (over 400 new funds were expected
out for 2007) with $406.81 billion in assets under management. About 20
years ago, money markets were this size ($428 billion in 1989) and that’s
now a $2.4 trillion business. But growth in this industry has happened faster
(37.3 percent each year for the past five years versus money market’s 13.2
percent for the comparable years 1984– 1989).
Managing either is a great business. There are no accounts receivable,
write-offs, bad debt, inventory, or heavy lifting. Your fee is built into your
fund’s NAV, so you do not have to bill anyone to get paid. Also, through
asset appreciation, revenues may increase even without any new sales. But
how to get either one started has been knowledge that only a few in the
industry possessed—until now.
How to Create and Manage a Mutual Fund or Exchange-Traded
Fund harnesses the knowledge of 100-plus industry professionals in an
easy-to-follow step-by-step reference guide format. This book combines
What to Expect when starting with the How to Start.
I imagine the most popular chapters will be Chapters 6 and 9. These
two chapters walk the reader through the 29 steps to start a mutual fund
and the 36 steps for an ETF. Each step consists of four parts:
M
1. You Will Need lists items required for the step.
2. Time to Complete states the days, weeks, months, or in some cases,
years, generally needed to complete the step.
3. Purpose describes why the step is a necessary part of starting a fund.
4. Process depicts the actions you must take to complete the step.
Costs are covered in detail for mutual funds and spoken of globally for
ETFs.
vii
viii
PREFACE
The largest variable cost for either is service providers, those who
support the operations of the fund, as well as a 40 Act attorney and an
independent auditor. Given this group’s importance, I dedicate Chapters 5
and 8 to selecting the right ones for your fund.
Please do not overlook the common factors of a fund’s success. Learn
how to attract assets and retain shareholders by reading Chapters 2, 3, 4,
7, and 9.
And that’s not all. The appendixes offer additional information, such
as What to Expect in Your First Year in Appendix A; Selling Your Business
in Appendix B; and Useful Web Sites, Phone Numbers, and Additional
Readings in Appendix C.
Even with all this information, there are some things this book is not.
It is not a book about how to pick securities for your fund. It also does not
explain how to perform the various service provider functions. This book
is not a substitute for a 40 Act lawyer’s expertise. Lastly, it is not a book
about how to start closed-end funds, unit investment trusts, hedge funds, or
exchange-traded funds registered under the Securities Act of 1933. On this
last point let me explain.
The financial industry has lumped many exchange-traded products
under the moniker of ETF. This book covers ETFs registered under
the Investment Company Act of 1940. These funds have an underlying
index. There currently exist passively and quasi-active managed funds
with active management looming on the horizon. Other products, such as
commodities-based products that don’t track a securities index, Exchange
Traded Notes, and HOLDRs are not covered in this book.
I wrote How to Create and Manage A Mutual Fund or Exchange-Traded
Fund as a reference tool for the fund sponsor, who orchestrates a fund’s
launch. While anyone can be a fund sponsor, this book assumes the fund
sponsor is the investment adviser and portfolio manager. I wanted the fund
sponsor to have a complete picture of what it takes to start a successful
open-end mutual fund or exchange-traded fund and give him insights to
create a better product for the fund’s shareholders.
Some likely fund sponsors include:
■
■
Investment advisers who offer individual advice and who execute advice.
By starting their own fund, they can improve asset allocation for
existing clients and grow their business by accepting smaller-dollar
investors.
Separate account managers. By having a fund, NASDAQ, Yahoo!, and
Morningstar would follow these managers’ performance, giving them
free daily public exposure and greater visibility. They could expand
the number of products offered to existing clients and entice new
clients.
Preface
■
■
■
■
■
ix
Alternative investment advisers, including hedge funds. Starting a fund
would give them greater visibility, bring them a greater audience, and a
larger pool of money.
Broker-dealers who have an interest in expanding their product offering.
Banks that want to use mutual funds and ETFs for their institutional and
trust clients instead of commingled funds. Even though a commingled
fund may be less expensive, it does not get the visibility a mutual fund
gets.
Banks that are moving from a traditional banking model to a financial
services model. These institutions want to provide all financial products
to their clients. By offering all financial products, clients would have a
one-stop shop at their local branch.
Insurance companies or industrial firms providing defined benefit plans
in house. Both do money management for themselves but could turn
these cost centers into profit centers by offering a mutual fund or ETF
to outside investors.
Other groups would benefit from this book as well. Established service
providers could use this book to train staff as to how all the pieces to
start a fund pull together. Also universities, offering courses in finance and
entrepreneurial programs, could find this reference guide useful.
To receive the greatest benefit from How to Create and Manage A
Mutual Fund or Exchange-Traded Fund, I suggest reading the entire book
once before starting to apply any of it. After that, go back through the book,
step by step, by using the model timetables in Chapters 6 and 9.
For clarity, I use these words interchangeably throughout Part I of
the book: mutual fund, open-end mutual fund, the fund, your fund, and
investment company. All refer to an SEC-registered open-end mutual fund.
Similarly, for Part II, I use exchange-traded fund, ETF, the fund, and your
fund. All refer to a 40 Act registered exchange-traded fund.
The other naming convention involves the fund’s board. Typically a
mutual or exchange-traded fund is organized as a corporation or a trust. If
organized as a corporation, the board members are called directors, and as
a trust, the board members are called trustees. Throughout the book, I use
board, board of directors, and directors. The places where I use these terms
are valid for both a board of directors and board of trustees.
Managing an open-end mutual fund or ETF has awesome responsibilities and rewards associated with it. You get paid for doing something you
love and have a positive impact on those who invest with you. As things
change, new opportunities evolve. Change brings about new ideas, new
products, and new players. You can lead the change. If you can do it a little
differently or a little better, then do it. Those who have come before you
have been passionate and committed. Join them. To your success!
Acknowledgments
his book compiles the insights and wisdom of more than 100 industry
professionals. Eleven of these individuals went above and beyond, giving
me additional guidance, enduring tight deadlines and proofreading my poor
English to help make this the best book possible.
For both the mutual fund and ETF sections, a special thanks to my
husband, Nicholas Gerber, who was my first case study for both financial
products and opened the door to the first wave of interviews. To W. Thomas
Conner, a partner at the law firm of Sutherland, Asbill & Brennan, for his
time and never-ending patience explaining legal nuances (in some cases, the
same ones multiple times).
For the ETF section, many thanks to Clifford Weber, EVP of the AMEX;
Joseph Keenan, Managing Director of Exchange-Traded Funds for the Bank
of New York; and Peg McCaffrey, CPA and Audit Partner at Cohen Fund
Audit Services.
For the mutual fund section, many thanks to Jim Atkinson, CEO of
Guinness Atkinson Asset Management and principal at Orbis Marketing;
Richard P. Cancelmo Jr., portfolio manager of the Bridgeway Balanced Fund
and leader of the equity trading team for Bridgeway Capital Management,
Inc.; John E. Deysher, founder and portfolio manager of the Pinnacle Value
Fund; Malcolm R. Fobes, founder and chairman of the Berkshire Funds
and the fund’s investment adviser, Berkshire Capital Holdings, Inc.; Hugh
Herndon, Sr. VP, USBancorp Fund Services LLC; and James T. McCurdy,
CPA, a partner in McCurdy & Associates, CPAs, Inc.
Below is a partial list of the remaining contributors. I send my gratitude
to all of them for their time, their valuable information, and their patience
in answering my questions.
T
xi
xii
Mitchell Bell, Pershing, LLC
Cindi Boudreau, Alamo Direct
Mail Services, Inc.
Ned Burke, ALPS Mutual Funds
Services, Inc.
James Cain, Sutherland, Asbill, &
Brennan, LLP
Tom Carter, ALPS Mutual Funds
Services, Inc.
Kelly Clark, formerly of Bright
Wire, Inc.
Katie Rooney, Ameristock Funds
Laura Ann Corsell, Corsell Law
Group, Ltd.
Marne Desantis, Bennings &
Scattergood
Nina Doktorovich, Transfer
Solutions
Jerome L. Dodson, Parnassus
Funds
Amy Domini, Domini Social
Investments
Jane Drake, Women’s Equity Fund
Diane Easter, Fiserv ISS
Scott Ebner, AMEX
Andy Fotopulos, Theodore
Liftman Insurance, Inc.
Dave Ganley, Matrix Fund
Services
Gregory Getts, Mutual
Shareholder Services, LLC
Elaine Hahn, Hahn Capital
Management, LLC
Paul Hakim, Pioneer Management
Roger Hartley, Putnam Lovell
NBF Securities
Mike Hecklinger, Asset
Communications, Inc.
ACKNOWLEDGMENTS
Peter Heldman, formerly of
Bowne & Co.
Neil Hennessy, Hennessy Funds
John Hussman, Hussman
Econometrics Advisors
Kendrick Kam, Marketocracy
Funds
Erick Kanter, Kanter & Associates
Howard Kaplan, Stifel Nicolaus
Jeffry H. King Sr., Quaker Funds
Bernie Klawans, Valley Forge
Fund
Mark Liftman, Theodore Liftman
Insurance, Inc.
Lipper, Inc.
Peter Mangan, Shareholders
Service Group, Inc.
Jeff McCarthy, Brown Brothers
Harriman
Don Mendelsohn, Thompson
Hine LLP
Morningstar, Inc.
Mark Mulholland, Matthew 25
Fund
NYSEArca
John Odell, SBG Capital
Management
Linda Pei, Women’s Equity Fund
Julia Poston, GCMFA
John Prestbo, Dow Jones Indexes
Jeff Provence, Premier Fund
Solutions
Ashley Rabun, Investor Reach
Scott Rehr, Emerald Funds
Chip Roame, Tiburon Strategic
Advisors
Tom Rzepski, Amex
Evan Scharf, Vintage Filings, LLC
Acknowledgments
Terence P. Smith, CPA
Dan Sondhelm, SunStar
Stuart Strauss, Clifford
Chance
xiii
Tom Thurlow, Thurlow Capital
Management, Inc.
Jeanie Wilson, Ulicny, Inc.
Donald A. Yacktman, The Yacktman Funds
And finally, I want to express my gratitude to the entire Wiley team
(Bill Falloon, Laura Walsh, Emilie Herman, and Michael Lisk) for taking a
manuscript and making it into a book.
About the Author
elinda Gerber served as the secretary on the board of directors for the
Ameristock Corporation and the Ameristock Mutual Fund. Concurrently, she worked as a project manager and consultant at GAP, Inc., where
she was recognized as one of the five most innovative individuals in the
entire company. Her previous book, Start a Successful Mutual Fund: The
Step-by-Step Reference Guide to Make It Happen (JV Books, November
2004), was the first book ever to compile the steps necessary to launch
a mutual fund. Ms. Gerber earned an MBA concentrating in Operations,
Information Systems, and Organizational Behavior from the University of
Southern California (1994) and a BS in Biopsychology from the University
of California, Santa Barbara (1990). Ms. Gerber resides with her family in
Moraga, California.
M
xv
PART
One
Create and Manage
a Mutual Fund
CHAPTER
1
Why the World Needs Another
Mutual Fund
rom its birth in the United States in 1924 to today, the mutual fund
industry has witnessed its share of scandals, changing regulations, new
products, and emerging players. Each change that the fund world has
experienced over the years has created opportunities and bred innovation.
Seize the opportunity and bring creativity to the marketplace. Start your
own successful mutual fund.
F
WHAT IS A MUTUAL FUND?
This professionally managed, pooled investment vehicle allows individuals
and institutions to combine smaller amounts of money into a larger sum for
investment. This pooling of assets allows for these individuals and groups
to attain economies of scale (that is, smaller brokerage commissions than an
individual investing alone) and a reduction of risk through diversification.
The term mutual fund reflects the mutual relationship between the
shareholder and the fund. The fund sells shares to investors or redeems
shares from those wanting their money back, at a price that depends on the
net asset value (NAV) of the fund. NAV is the price of one fund share at the
end of the trading day.
SCANDALS
When Edward Leffler, a former securities salesman, created the first U.S.
open-end mutual fund in 1924, it was shadowed by a more popular
investment vehicle, the closed-end investment trust. These trusts issue
fixed amounts of nonredeemable securities that are traded inside secondary
3
4
CREATE AND MANAGE A MUTUAL FUND
THOSE INVOLVED IN THE DAY-TO-DAY FUNCTIONS
A mutual fund generally does not have employees, although a recent
SEC rule requires funds to have a ‘‘chief compliance officer’’ that
reports directly to the fund’s independent members of the board
of directors. The fund has contracts with firms that provide services it needs. These contracts are with the investment adviser, fund
administrator, principal underwriter or distributor, fund accountant,
custodian, transfer agent, shareholder servicing agent, attorney, and
independent auditor. The fund’s board of directors or trustees oversees the contracts of these and other firms that provide services to the
mutual fund.
Investment Adviser —the firm that manages the fund. The portfolio manager, the person who decides which securities to buy
and sell to attain the fund’s investment objectives, is typically
an employee of the investment adviser.
Fund Administrator —interacts with each service provider. It
ensures that all the fund’s checks and balances are in place
and that the fund complies with certain federal requirements.
Principal Underwriter or Distributor —is responsible for reporting commissions paid and received, state registration of shares
sold, advertising and sales-literature compliance, and selling agreements between the brokerage firms and the mutual
fund.
Fund Accountant —calculates the Net Asset Value (NAV).
Custodian—pays cash for securities (securities settlement) and
makes sure all trades match (trade confirmation).
Transfer Agent —keeps shareholder account records, calculates
and disburses dividends, and prepares and mails confirmation
statements and federal income tax information, as well as a
host of other services. The transfer agent is responsible for
anything to do with account-owner shares.
Shareholder Servicing Agent —responds to inquiries from potential and existing investors, gathers information from them,
and provides another means to deliver the fund’s message.
This agent is typically an extension of the transfer agent.
Attorney—specializes in the Investment Company Act of 1940
(40 Act), the primary law governing mutual funds, and is
commonly referred to as a 40 Act lawyer. The attorney assists
Why the World Needs Another Mutual Fund
5
the fund in understanding how to integrate the various federal
and state regulations with the fund’s business parameters.
Independent Auditor —certifies the fund’s financial statements.
The independent auditor is required under the 33 Act.
Board of Directors—in addition to overseeing the fund’s contracts, the directors serve to protect the interests of the
shareholders.
Shareholders—the fund’s only owners and its only customers.
They are critical to a mutual fund’s success. Without them,
the fund’s assets stagnate or dwindle. They enjoy certain rights
affecting the fund. Under the 40 Act, all shares issued by a
mutual fund must be voting stock and have equal voting
rights. The shareholders use these voting rights to elect the
board of directors to vacant positions, approve or reject any
changes deemed fundamental, and in some cases approve or
reject any changes in the fund’s investment advisory contract.
markets. By 1929, open-end mutual funds numbered 19, with $140 million
in assets. In contrast, 89 closed-end investment trusts held $3 billion in
assets. The dominance of the closed-end investment trusts, however, was
about to change.
The impetus for change was the stock market Crash of 1929, which
shed light on the investment trusts’ inherent problems. Many closed-end
funds did not disclose their underlying portfolio holdings. This allowed
those funds to value their own shares at whatever price their fund managers
wanted. It was also common for fund managers to borrow money to inflate
the size of their fund. The leverage enhanced the investor’s return, but
exposed them to the potential loss of their stake to senior debt-holders.
Also, many closed-end funds purchased securities as favors to help insiders
unload undesirable stocks.
Speculation before the Crash drove prices of closed-end funds higher
than the prices of the securities they owned. When the Crash hit, closed-end
trust holders were hurt more than common-stock investors.
Open-end funds also lost value during the Crash, but their policy of
redemption upon demand at NAV safeguarded them against many of the
problems that devastated closed-end funds. Because open-end funds might
have to sell portfolio securities at any time to meet investors’ redemptions,
they could not borrow heavily or hold any large proportion of their
6
CREATE AND MANAGE A MUTUAL FUND
portfolios in unmarketable securities. Also, pricing fund shares at NAV
avoided speculation, since a fund could not be priced beyond the prices of
its underlying securities.
Although growth in the investment market was slow after the Crash,
by 1943 open-end funds’ share of the market exceeded that of closed-end
funds for the first time. At the end of 2006, open-end funds continued to be
a more popular investment choice; there were 8,726 open-end funds with
$10.4 trillion in assets under management versus 646 closed-end funds with
cumulative assets at $298 billion.1
It took 74 years for another major scandal to strike. Regulators are
currently investigating such abuses as excessive trading, late trading, and
time-zone trading. Excessive trading is the rapid buying and selling of
fund shares. While not illegal, excessive trading may increase expenses for
long-term fund shareholders. Most fund companies prohibit it.
Late trading, which is illegal, takes advantage of price movements
in securities held by a fund after the stock exchange is officially closed.
Customers who place a trade after the 4 p.m. ET cutoff get the pre-4 p.m.
price.
Time-zone trading takes advantage of price movements in foreign
securities held by mutual funds after the foreign markets have closed, but
before the NYSE has. If mutual fund companies do not use a fair-value price
for the foreign securities, an investor may take advantage of a disparity in
price by buying or selling fund shares.
REGULATIONS
With scandal comes regulation. Following the Crash of 1929, Congress
passed four significant laws: the Securities Act of 1933, the Securities
Exchange Act of 1934, the Investment Advisers Act of 1940, and the
Investment Company Act of 1940.
The Securities Act of 1933 (33 Act) established rules for any public
offering of securities. Anyone who wants to offer securities to the public
must register those securities. In addition, prospective investors must receive
a prospectus that adequately discloses a description of the offering.
The Securities Exchange Act of 1934 (34 Act) created the Securities and Exchange Commission (SEC), whose role is to enforce federal
securities laws. The 34 Act also established rules and registration requirements for the securities exchanges, broker-dealers, transfer agents, and
distributors.
While the 33 and 34 Acts affected all public companies, the Investment
Advisers Act of 1940 and the Investment Company Act of 1940 specifically
Why the World Needs Another Mutual Fund
7
addressed the mutual fund industry. The Investment Advisers Act targets
the investment adviser, the firm that manages the fund. The rules require,
among other things, registration with the SEC, keeping certain records, and
prohibit acting in a manner that would deceive or mislead somebody to
whom the investment adviser owes a fiduciary duty.
The Investment Company Act of 1940 aimed its regulations at investment companies (for example, closed-end and open-end funds and unit
investment trusts). It formed the foundation upon which all regulation
specific to the mutual fund industry is based. Unlike the 33 Act, which is
predominantly disclosure-oriented, the 40 Act prohibits a broad range of
conduct and mandates various types of fund behavior.
Some of the provisions aim to:
■
■
■
■
■
Counter inadequate disclosure to shareholders by requiring investment
companies to register with the SEC, maintain specified accounts and
records, and file annual reports with the SEC. Independent auditors
must audit the financial statements in the annual reports.
Circumvent management from pursuing their interests above the shareholder’s by requiring the investment company’s board of directors be
composed of at least 40 percent independent members who are not
affiliated with the management company. (Recent rules increased this
number to 75 percent.) In addition, the shareholders must initially
approve a written contract between the fund and its investment adviser
and principal underwriter. Thereafter, the board must approve this
contract annually.
Further protect shareholders by requiring that investment companies’
shares have equal voting rights and that shareholders vote on changes
to fundamental policies.
Avoid mismanagement by requiring that investment companies’ officers
and employees, who have access to cash or securities, be bonded with
what is called a fidelity bond. A qualified custodian must hold the
securities.
Ensure an investment company has adequate assets or reserves by
requiring that it begin with at least a net worth of $100,000, which is
known as seed money.
As you can see, the 40 Act addresses many of the abuses by closed-end
investment trusts that came to light with the Crash of 1929.
The SEC has also proposed a series of new regulations to address the
instances of market timing, late trading, and other recent developments
in the mutual fund industry. The scope and impact of this new body of
regulations may be significant.
8
CREATE AND MANAGE A MUTUAL FUND
Not all regulation occurs to circumvent future scandal. Some create
benefits. For example, Congress passed the Revenue Act of 1936, which
established the tax pass-through treatment. It states that investment companies, such as open-end mutual funds, can avoid paying federal income
tax on their income if they meet a number of requirements, including
distributing all taxable income to their shareholders and redeeming their
shares upon demand. This benefits shareholders. Instead of being taxed
twice on their investments like a regular corporation, they are only taxed
once.
PRODUCTS
Regulation can also create new products. For example, in 1974, the
Employee Retirement Income Security Act (ERISA) passed and created
the Individual Retirement Account (IRA). This pension reform act mandated that employees be vested in their pensions within 10 years and retain
their pension rights as they move from one employer to another. Four years
later, the Revenue Act of 1978 passed. This act permitted the creation of
401(k) retirement plans. Many other retirement vehicles were spawned over
the years and with them we have seen a shift from employer-sponsored
defined benefit plans to employer-sponsored defined contribution plans. As
of the end of 2006, 32 years after the passage of ERISA, IRAs and defined
contribution plans accounted for $4.1 trillion (or 39 percent) of mutual
fund assets.2
The adoption of Rule 12b-1 in 1980 also created new products. Rule
12b-1 allows for funds to pay for distributions out of fund assets. This gave
sponsors of load funds new ways to design commission arrangements. In
addition to the traditional front load, the contingent-deferred sales charge
(CDSC) and level-load arrangements were created.
The industry also benefits when regulations are dropped. In 1974, the
SEC ended fixed stock commissions. This paved the way for the emergence
of discount brokerages. Discount brokerages allow investors who do not
need advice to execute their own trades. Customers pay a transaction fee to
buy or sell a particular mutual fund.
Discount brokerages spawned fund supermarket platforms. In 1992,
Charles Schwab created OneSource, the first mutual fund supermarket.
With OneSource, the customer trades mutual funds on a no-transaction fee
(NTF) platform. The mutual fund pays an ongoing fee, which is tied to
the size of investor assets brought in through the platform. Both discount
brokerages and fund supermarkets created new distribution opportunities
for mutual funds.
Why the World Needs Another Mutual Fund
9
PLAYERS
Charles Schwab was not the only player to shape today’s mutual fund
industry. Jack Dreyfus, Ned Johnson, Gerald Tsai, Peter Lynch, and John
Bogle were also important innovators.
In 1957, Jack Dreyfus did something no one had done before: He
introduced advertising to the mutual fund industry. The launch of this new
era began with a TV ad featuring a lion that strolled out of a subway, past a
newsstand on Wall Street, and into the Dreyfus office where it transformed
into the Dreyfus company logo. Dreyfus again made mutual fund history in
1958 by publishing the Dreyfus Fund’s entire prospectus as a supplement in
the New York Times. Brand advertising came later and Ned Johnson was
the one to do it.
In 1972, Ned Johnson took over the reigns of Fidelity Management and
Research from his father, Ed Johnson. During his tenure, the younger Johnson helped transform the mutual fund from a service into a product. One
way he did this was through brand advertising. Much as consumer-products
companies sell detergent or cola, Johnson initiated an advertising campaign
that emphasized the Fidelity name. Also supporting the transition from service to product, he and his management team initiated or popularized new
features and services such as check writing against money market funds and
expanded their product offering to include an exhaustive list of funds such
as sector, international, and tax-exempt. By the late 1990s, every fourth or
fifth dollar flowing into U.S. stock funds was invested in a Fidelity fund.
Gerald Tsai, another giant in the industry, came from Fidelity. After
leaving Fidelity, Tsai started the Manhattan Fund (1965). Over its first
year, the Manhattan Fund grew faster than any mutual fund up until that
time. It attracted $100 million in one year, largely due to Tsai’s portfolio
management style that emphasized performance. This style rocked the world
of mutual funds in two ways. People previously invested in mutual funds for
diversification, professional management, and economies of scale. In this
go-go era, people invested for performance.
Also, portfolio managers, previously considered fiduciaries of their
client’s assets, were now becoming stars. People in the investment industry
knew where Tsai ate and what he was buying and selling. Tsai, along with
other gunslingers of the time, created the mutual fund world we live in
today. People chase performance and adulate the most successful portfolio
managers like they do rock stars.
Peter Lynch, another Fidelity player, took star status up a notch to
celebrity. In 1990, Peter Lynch ended his thirteen-year reign of the Fidelity
Magellan Fund. His ‘‘Invest in what you know’’ strategy helped the Magellan
Fund skyrocket from $26 million to $14 billion. Someone investing $1,000
10
CREATE AND MANAGE A MUTUAL FUND
in Magellan at the beginning of his reign and leaving it in there for the
remainder of his tenure would have had $28,000, a 29.2 percent return each
year for 13 years! His amazing track record combined with his personality
elevated him to celebrity. He even starred in a series of Fidelity ads.
Portfolio managers are not the only shapers of the industry. John
Bogle, founder of the Vanguard Funds, is a great example of this. In
1975, John Bogle started the Vanguard Group. What’s unusual about the
Vanguard Group is its structure. The funds themselves own the investment
adviser. Bogle believes this not-for-profit structure is the way to minimize
the cost to the funds, which in turn minimizes the cost to investors.
Throughout his career, Bogle has been and continues to be an advocate
of index funds because he believes that actively managed funds create
more cost than returns for a shareholder over the long term. In the past
thirty years we have seen the emergence of discount brokerages, fund
supermarkets, defined contribution plans, IRAs, new fee structures, and
the status elevation of the portfolio manager. Change continues today.
Exchange-traded funds, the mutual fund’s next evolution, are fully explored
in Part II.
GOING FOR THE BRASS RING
Whether you want to be a star, take your current business to the next level,
look to prove a theory, change your career, or make a social statement on
a broader level, this is a great business. There are no accounts receivable,
write-offs, bad debt, inventory, or heavy lifting. Your fee is built into your
fund’s NAV so you do not have to bill anyone to get paid. Also, through
asset appreciation, revenues may increase even without any new sales.
In addition, compared with other financial products, people are comfortable with it. Even with the scandals that periodically arise, people are
familiar with and trust mutual funds. If you ask someone to invest in a
commodity fund, hedge fund, or to place her cash overseas, her natural
inclination would be to run away. Even these scary products, however,
wrapped within a nice veneer of a mutual fund would be more palatable to
the average investor.
It is also a very profitable business. Studying the 1998 financial reports
of eighteen publicly held management companies, Strategic Insight, an
industry research firm, found an average 36 percent operating margin. The
companies in the study were large firms totaling over $1 trillion in assets
under management. I want to point out that bigger in this case is not always
better. Some of the small funds I spoke with averaged even higher net
margins!
Why the World Needs Another Mutual Fund
WHAT’S YOUR MOTIVATION?
While managing a mutual fund is exciting and profitable, I wanted to
know the personal reasons why individuals decided to take the plunge
and start a mutual fund. To answer this, I picked up the phone and
called an assortment of money managers who chose to throw their hat
in to the ring. The funds they manage or managed were very different from one another. These money managers represented a variety of
investment objectives, strategies, distribution methods, and fees. Where
they also differed was on why they started their fund(s). Some of them:
■
Wanted to add value for clients. While managing separate accounts,
one registered investment adviser (RIA) got frustrated when he
found a great value stock and was not able to allocate it effectively
across his clients’ accounts. By starting a mutual fund, he was able
to take positions in the stocks within the mutual fund and have his
clients own a portion of the fund.
■
Hoped to grow the business. One RIA felt limited growth by managing separate accounts. He had increased the minimum investment
for clients but did not like turning away smaller investors. By starting a fund, he was able to maintain the separate-account business
and grow his total business by adding new clients to his mutual
fund.
■
Desired daily public exposure and greater visibility. One money
manager had a great track record, but wanted the world to know.
He started a mutual fund so people could see his investing skills
daily in the newspaper.
■
Wanted to create a profit center. One business was already managing money internally as a cost center. By starting a mutual fund
and offering it to outside investors, they turned the cost center into
a profit center.
■
Aimed to enter the subadvisory business. Another RIA wanted to
become a subadviser, but she could not find an entry point. By
starting a mutual fund, she was able to get visibility and attract
offers to subadvise for other mutual funds.
■
Sought to prove a theory. Another RIA wanted real money invested
so that no one could say her investment approach was just a theory
in a computer and that it could not be done in real life.
(Continued)
11
12
CREATE AND MANAGE A MUTUAL FUND
WHAT’S YOUR MOTIVATION
(Continued)
■
Meet a client challenge. One RIA heard this challenge from clients
thousand of times: ‘‘If your model is so good, then why not run
your own fund?’’
■
Wanted to make an impact. One money manager who had a social
agenda wanted to make an impact on a broader scale.
■
Others launched funds to make a change in their lives. Some simply
enjoyed investing and wanted to get paid for it. Some wanted to
prove something about themselves or switch careers. One individual got tired of being fired and another wanted to keep busy when
he retired.
Not all these money managers’ funds survived. Some closed within
a few months of becoming effective, some years, and a few never
happened. Regardless of their survival rates, it’s important to learn
from these managers. Their stories, words of wisdom, and warnings
are sprinkled throughout this book. So too are the insights of more
than 40 industry professionals who work with mutual funds.
In addition to being a great business, managing a mutual fund is
an amazing career. A portfolio manager is like a detective. You examine
individual companies, dig into the details, put together pieces of information,
and create an informed decision to either buy or sell. Something new and
exciting is always happening.
On top of this excitement is the awesome responsibility of managing
people’s money. People trust you with their money and that feels great. You
are making a positive impact on the lives of your shareholders.
Managing an open-end mutual fund has awesome responsibilities and
rewards associated with it. You get paid for doing something you love and
have a positive impact on those who invest with you. As things change,
new opportunities evolve. Change brings about new ideas, new products,
and new players. You can lead the change. If you can do it a little different
or a little better, then do it. Those who have come before you have been
passionate and committed. Join them. To your success!
CHAPTER
2
Money, Product Differentiation,
and Distribution
Success Factors
hat do successful funds have in common? I posed this question to
current and former fund sponsors, as well as more than 40 other
industry professionals. Two consistent themes emerged: working capital
and marketing. I call these the success factors. These two success factors
need to be in place and integrated to support your fund.
Generally, small funds do not have enough assets on Day 1 (or 2 or 3)
to cover their fund’s expenses. That is why working capital is needed.
Working capital pays for start-up and ongoing expenses until your fund
reaches a point where income equals expenses.
While you may feel that assets under management will grow quickly
and therefore cover your fund’s expenses, realize there are factors working
against a new fund. Many investors shun funds that are new, small, and
have no track record. Remember you are dealing with other people’s money.
Money is a very personal subject. The cash may be earmarked for a house,
college education, wedding, retirement, or another financial goal. Investors
may not want to take what they perceive as a risk on your fund. To ensure
that your fund survives past its new fund status, you need plenty of working
capital. What’s enough working capital? The general consensus is enough
cash to cover your start-up expenses, as well as expenses for your fund’s
first three years.
During your first few years, put your fund’s marketing plan in motion.
The hardest part of starting a mutual fund is reaching $10 million in
assets, then $50 million and $100 million. As you attain each milestone, it
becomes easier to reach the next one, but getting started is like pulling teeth.
W
13
14
CREATE AND MANAGE A MUTUAL FUND
While there are limited barriers to entry into this industry, there are definite
barriers to recognition. This is where marketing helps.
Let’s clear up a potential point of confusion from the very start:
Marketing is not advertising. With advertising, the firm pays to endorse
itself. As one fund manager phrased it, ‘‘Advertising is about as effective
as spitting in the wind.’’ And let’s face it, the big guys spend more on
advertising by 9 a.m. than you will all year. This is an area where it’s tough
to compete.
Where you can successfully compete is with marketing. Marketing is
about getting the name of your fund out to its target market repeatedly
without paying an exorbitant fee for it. It is free most of the time. Here is
one example of a low-cost marketing method. When offering your fund to
your existing clients, put information about your fund into a pre-existing
mailing such as a newsletter. This may attract customers to your fund. There
are endless smart and low or no-cost strategies that get your fund’s name
and message known.
Be consistent with marketing. People walk down a predictable path
before investing. At the beginning of the path, they are completely unaware
that your fund exists. Make them aware. They may not understand what
your fund is trying to achieve and how it fits into their goal. Make them
understand. Once they understand, they need to believe it is the right step
for them. Make them believe. When they believe, make it easy for them
to act on their decision to invest. Once they have invested, they will leave
your fund if their conviction falters. Remind them why they invested. One
news release or one story or one TV appearance will not attract a crush of
customers. It is a blip on the radar screen. You must continuously market
to attract and retain investors.
You must integrate working capital and marketing to be successful.
You will have to spend some money to support your marketing efforts to
grow your business. Increasing assets under management means your fund
no longer relies on outside working capital to pay for everything. At the
point of profitability, your fund sustains itself.
Superior performance will also boost your chances of success. Unfortunately, performance is, to a large extent, uncontrollable. There is no
guarantee that under all market conditions your fund will be number one
in its Lipper category or in the top 10 percent of its Morningstar category.
Figure 2.1 shows the performance of ten major asset classes from 1996
through 2006. How has your asset class done? How often has your style of
investing been in favor? As you can see from the table, no category or style
of investing can enjoy top returns every year. You can’t depend solely on
your fund’s future performance to attract assets. The smart money manager
also implements a marketing strategy. Successful firms do.
15
Money, Product Differentiation, and Distribution
Annual Total Returns of Key Asset Classes 1996 – 2006
Best
1996
1997
Large
Large
Growth Value
Stocks Stocks
23.12% 35.18%
Large
Mid
Stocks Value
Stocks
22.96% 34.37%
Large
Large
Value Stocks
Stocks
21.64% 33.36%
Small
Small
Value
Value
Stocks Stocks
21.37% 31.79%
Mid
Large
Value Growth
Stocks Stocks
20.26% 30.49%
Mid
Mid
Growth Growth
Stocks Stocks
17.48% 2.54%
Small
Small
Stocks Stocks
Worst
16.49% 22.36%
Small
Small
Growth Growth
Stocks Stocks
11.26% 12.95%
Foreign Bonds
Stocks
6.36%
Bonds
9.682%
Foreign
Stocks
3.61%
2.06%
1998
1999
2000
2001
2002
2003
2004
2005
2006
Mid
Small Bonds Small
Mid
Foreign Foreign
Small
Large
Value
Growth Value Stocks Stocks
Growth Growth Value
Stocks Stocks
Stocks Stocks Stocks Stocks
35.71% 51.29% 22.83% 14.02% 10.27% 48.54% 23.71% 14.02% 26.86%
Mid
Small
Mid
Large
Mid
Bonds
Small
Small
Small
Value Stocks Value
Value
Value
Stocks Growth Value
Stocks
Stocks Stocks
Stocks Stocks Stocks
28.58% 43.09% 19.18% 8.42% −9.64% 47.25% 22.25% 12.65% 23.48%
Small
Small Foreign
Large
Mid
Foreign Large Bonds Small
Value Stocks Growth Value
Stocks Growth
Stocks Value
Stocks Stocks
Stocks
Stocks Stocks
20.33% 33.16% 11.63% 2.49% −11.42% 46.03% 20.70% 12.10% 22.25%
Large
Foreign Large
Mid
Mid
Small
Large
Mid
Mid
Value Growth Stocks Value
Value
Growth Stocks Value
Value
Stocks Stocks Stocks Stocks
Stocks Stocks
Stocks
17.86% 27.30% 7.02% 2.33% −15.52% 42.71% 18.33% 7.05% 20.22%
Large Foreign Foreign Large
Large
Small
Small
Small
Large
Value Stocks Stocks Value Stocks Stocks Value Growth Stocks
Stocks
Stocks Stocks
Stocks
15.63% 21.26% −3.02% −5.59% −15.66% 39.17% 16.49% 5.26% 18.37%
Small
Large
Large
Large
Small
Mid
Mid
Bonds Large
Stocks Stocks Growth Stocks Value Growth Stocks Stocks
Stocks
Stocks Stocks
8.67% 21.04% −9.11% −9.23% −20.48% 38.07% 15.48% 4.91% 15.79%
Small
Mid
Large
Large
Large
Small
Large
Mid
Small
Value Growth Stocks Stocks Value Growth Value Growth
Value
Stocks Stocks Stocks Stocks
Stocks Stocks Stocks
5.08% 7.35% −11.75% −11.88% −22.10% 30.03% 14.31% 4.71% 13.35%
Mid
Mid
Small
Mid
Large
Foreign
Mid
Small
Large
Growth Value Stocks Growth Growth Growth Stocks Stocks Growth
Stocks Stocks Stocks
Stocks Stocks
Stocks
1.23% −0.11% −13.96% −20.15% −27.41% 29.75% 10.88% 4.55% 10.66%
Large
Large
Small Bonds Large
Large
Small
Large
Large
Stocks
Growth Growth Growth Stocks Growth Growth Growth
Stocks Stocks Stocks
Stocks Stocks Stocks
−2.55% −0.83% −22.43% −20.42% −27.88% 28.68% 6.30% 4.15% 9.07%
Small Foreign Small Bonds Bonds Bonds Bonds
Small
Small
Value
Value Growth Stocks Growth
Stocks
Stocks Stocks Stocks
−6.45% −1.49% −22.43% −21.21% −30.26% 4.11% 4.34% 2.43% 4.33%
LARGE STOCKS are represented by the S&P 500 Index, comprising 500 widely held stocks and generally considered representative of the U.S. stock market
LARGE GROWTH STOCKS are represented by the Russell 1000 Growth Index, which measures the performance of those Russell 1000 Index companies with
higher price-to-book ratios and higher forecasted growth values.
LARGE VALUE STOCKS are represented by the Russell 1000 Value Index, which measures
the performance of those Russell 1000 Index companies with lower price-to-book ratios and lower forecasted growth values.
MID GROWTH STOCKS are
represented by the Russell Midcap Growth Index, which measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher
forecasted growth values.
MID VALUE STOCKS are represented by the Russell Midcap Value Index, which measures the performance of those Russell Midcap
companies with lower price-to-book ratios and lower forecasted growth values.
SMALL STOCKS are represented by the Russell 2000 Index, comprised of small
cap securities, which generally involve greater risk.
SMALL GROWTH STOCKS are represented by the Russell 2000 Growth Index, which measurers the
performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values.
SMALL VALUE STOCKS are represented by
the Russell 2000 Value Index, which measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values;
FOREIGN STOCKS are represented by the MSCI EAFE Index, generally considered representative of the international stock marker; and
BONDS are
represented by the Lehman Brothers Aggregate Bond Index, generally representative of intermediate-term government bonds, investment grade corporate debt
securities, and mortgage-backed securities. Indices are unmanaged, and one cannot invest directly in an index. Past performance is no guarantee of further results.
Source: Stifel, Nicolaus & Company, Incorporated using date from Zephyr StyleADVISOR.
FIGURE 2.1 Annual total returns of key asset classes, 1996–2006
Source: Stifel, Nicolaus & Company, Incorporated, using data from Zephyr
StyleADVISOR.
16
CREATE AND MANAGE A MUTUAL FUND
DETERMINE WORKING CAPITAL
Let’s focus on working capital. To determine how much you require, you
need to know how much it costs to start and run a mutual fund.
For my start-up example, I’m imagining a Florida-based Registered
Investment Adviser firm that wishes to grow its total business. Managing
separate accounts has limited its growth, and although it has increased
the minimum investment for clients, they do not like turning away smaller
investors. Starting a mutual fund enables them to maintain the separate
account business and grow its total business through the addition of new
mutual fund clients.
The proposed mutual fund is a no-load, plain vanilla, domestic equity
product with a 1 percent expense ratio. Owing to their established clientele,
assets under management on Day 1 will be $10 million. Other details:
■
■
■
■
■
■
Offered through direct sales and on four no-transaction fee (NTF)
platforms
Registered for unlimited sales in all states and provinces of the United
States
Uses outside service providers, but investment management is done in
house
Has Directors & Officers and fidelity bond insurance
$3,000 for prepromotion
$10,000 buffer
Given these parameters, it costs approximately $150,000 to start a
mutual fund. The details, however, don’t necessarily match the situation.
For example, if the focus is existing clientele in Florida, why have the fund
available in all states? Also, why the need for the NTF platforms? Good
questions.
When fund sponsors research other mutual funds, they see those products sell in all states and trade on all platforms. This makes them feel they
should too. By making this choice, however, it costs an additional $80,000
in start-up fees. Ouch! If unnecessary on Day 1, then start-up costs drop
to $70,000. Additional states and platforms (also broker-dealers, defined
contribution plans and so forth) can be added at any time. Do it when it
makes sense for your business.
If you start two or more funds, your start-up costs will not double.
Many expenses are one-time costs, such as establishing the fund family’s
legal structure. Each additional fund should increase costs by approximately
50 percent.
What if you don’t have $10 million to invest on Day 1? No problem. At
an absolute minimum, you need $100,000. This $100,000, known as seed
17
Money, Product Differentiation, and Distribution
money, must be in the fund for an indefinite time. The Investment Company
Act of 1940 (40 Act) requires this minimum amount. There is an exception
to this rule. To understand this, let’s take a step back and look at a mutual
fund’s business structure.
Because a mutual fund needs to be able to legally issue shares, it is
generally set up as a business trust or corporation. This legal structure
forms an umbrella for the fund. Under an umbrella, a series may be started.
A series is the ability to offer different portfolios, or series, within the
same legal organization. A small cap growth fund and large cap growth
fund would be two series under your umbrella. If you wanted a small cap
growth fund with classes A, B, C, and R, then that represents one series
with four classes within the series.
Establishing a series can be done in two ways: The fund sponsor creates
the umbrella and series or the sponsor uses another’s legal umbrella. For
the latter, this separate entity creates another series, or class, for your fund
under their umbrella. From an investor’s standpoint, it looks and functions
like any other fund. The only hint of the arrangement is a small note on
the cover of the prospectus (the Widget Fund, a series of Share Umbrella,
Inc., for example). Two possible structures of a series within the same legal
organization are presented in Figures 2.2 and 2.3.
By joining a pre-existing series, you remove the need for the $100,000
seed money. The 40 Act requires these monies only for the first fund in a
fund family. (Note: this would be true for additional funds you start under
Two Series
Business Trust or Corporation
Small Cap Growth Fund
Large Cap Growth Fund
FIGURE 2.2 Two Series
One Series, Four Classes
Business Trust or Corporation
Small Cap Growth Fund
Class A
Class B
Class C
Class D
FIGURE 2.3 One Series, Four Classes
18
CREATE AND MANAGE A MUTUAL FUND
your own umbrella as well.) While this seems like a deal, have some money
to invest on Day 1. One fund sponsor discovered this the hard way.
The fund firm focused so intently on the start-up process that they
neglected to raise capital to invest once the fund became operational. This
lack of multitasking resulted in an NAV of $0 on their inception date.
Returning to the imaginary Floridian fund example’s details, I mention
a $10,000 buffer. This buffer is what I call the four flat tires phenomenon.
Four flat tires is emergency money for the unforeseen. The name comes
from an experience I had with my first car. The car, a ten-year-old Datsun
510 was a continuous money pit. Every month, there was something that
needed to be done, but luckily, they were small repairs. Then one day, when
my Datsun was getting a new timing belt, the mechanic discovered that each
of my tires had holes in them. They could not patch the tires because they
were so worn down. Despite working two jobs, I did not have the money
for the tires and had to go to my parents for it—so much for proving my
independence.
You should always maintain a cash reserve for the unexpected for both
the start-up and running of your fund. If you are not completely financing
this yourself, imagine having to ask your backers for additional funds for
something you did not foresee.
Now, the $70,000– $150,000 start-up costs previously mentioned were
for a plain vanilla, domestic equity fund. If you have something unique,
bump up the numbers to account for additional costs. A unique concept I
encountered was the Loyalty Fund.
The Loyalty Fund was intended as a consumer loyalty solution. Paul
Hakim and Pat Palcic developed this idea when they studied the cost of
acquiring a new customer for various businesses. What they discovered was
that many businesses had low customer-retention rates. For example, if you
participated in a frequent-flier program, there was no incentive to remain
loyal to the airline if a competitor offered a better frequent-flier program.
Upon further research, they found a high correlation between stock
ownership and consumer-loyalty behavior. So if a customer owned shares
of Home Depot and they were confronted with a choice to turn left to shop
at Home Depot or right to shop at Lowe’s, they would turn left.
Using their findings, Hakim and Palcic created a loyalty solution. Their
premise was to offer consumers shares of stock for their patronage of
merchants as well as reward them with points that could be redeemed for
shares of the mutual fund. The fund would be weighted 60 percent based
upon consumer participation and 40 percent chosen by the investment
adviser.
Three major things needed to be in place to make this happen: secure
agreements with participating companies, a relationship with a company
Money, Product Differentiation, and Distribution
19
with experience facilitating direct stock-purchase programs at the point of
sale, and subaccounting to track and report the points to consumers. All
this was accomplished. These additional costs were above and beyond those
of a regular fund.
On top of this were even more costs. Because they were a unique product
with four patents, their registration process was a bit more involved. After
writing their prospectus, they had numerous rounds of negotiations with
the SEC and corresponding rewrites.
Being unique is a good thing in the mutual fund industry. You want to
be unique. If additional time and resources are needed to achieve it, factor
them into your costs.
Now, as you are about to see, the Loyalty Fund example also stresses a
general rule of working capital. Sponsors Paul and Pat took steps to become
a fund of an existing fund family. They did a lot of legwork and made
multiple presentations to large fund families in hopes of achieving this.
They eventually succeeded in forming a strategic partnership. Having this
strategic partnership gave them leverage in acquiring the necessary venture
capital to start and run the fund.
With monies secured and the pieces of the puzzle in place, the registration process began. During the last round of rewrites in the registration
process, Paul learned that he wouldn’t get the venture capital money.
Because these investors had gotten burned during the early 2000s on other
investments, they froze their assets and stopped cutting checks. Without the
money, the Loyalty Fund never became effective.
Without money, you will not have a mutual fund. If outside sources are
necessary to build working capital, know the general rule: Expect only one
third or less of all promised money to actually come through.
So how much money do you need? Up until now we’ve only discussed
start-up costs. Let’s turn to the costs for running the fund and your breakeven
point.
It is important to determine your fund’s breakeven point. Knowing
the amount of assets you need under management to reach your point of
profitability enables you to determine whether that number is doable. You
must also plot out a time line to achieve it. Determine how many clients or
customers you have, what percent are going to buy your fund, and what the
average investment is going to be. This is a down-and-dirty way to reach
an asset level and revenue line. Deduct expenses and know how profitable
your fund will initially be and discover your working capital needs.
Breakevens are not static. This is an important concept, because as your
fund grows, expenses increase and you will have a new breakeven. For
example, you may eventually want to offer your fund in more than one
state. This increases costs and shifts your fund’s point of profitability.