J.P. Morgan & Co. has completed a massive reorganization of its Pierpont Funds and is now poised to expand its proprietary mutual fund sales efforts.
The bank recently restructured its 11-year-old family of Pierpont Funds, originally aimed at private banking clients, adopting the innovative hub-and-spoke structure developed by Signature Financial Group.
The change should enable Morgan to tailor investment products to specific market segments, such as retirement plans, without incurring the expense of starting up new funds.
The New York bank is also eyeing opportunities to develop "private label" mutual funds for other banks. The funds would be managed by Morgan, but the banks selling them could put their own stamp on the products.
A Matter of Leverage
|You can sum up the term hub-and-spoke with the word |leverage.' said Evelyn E. Guernsey, managing director of Morgan's U.S. funds management division.
Under the structure, mutual fund assets are managed as a single pool, or hub. Shares in funds, or spokes, that invest in the central pool can then be offered to different investors at different prices.
The spoke funds share the investment objectives of the hub, but each has its own board of directors.
Fund companies can shave their expenses by managing assets in a single pool rather than setting up separate funds for institutional, trust, and retail investors.
Signature's Largest Convert
With $4.8 billion in hub assets, Morgan becomes the largest bank fund using Signature's structure.
More and more banks and mutual fund companies are switching to Signature's trademarked structure or similar "master/feeder" setups.
Signature's structure now has $25 billion in more than 100 hubs, according to James Hoolahan, a senior vice president.
The Pierpont funds were rolled out in 1982.
Another Alternative Rejected
With the old "plain vanilla" mutual fund structure, setting up new portfolios also required an individual investment engine and fund administration.
Some mutual fund companies have opted for another alternative, known as the classes-of-shares structure.
But Morgan rejected that approach, because it would have had to present information on all share classes in a single prospectus.
"We wanted to be able to separate information out and tailor the prospectuses for different purposes," Ms. Guernsey said.
20 Spokes in All
Morgan, still waiting for some prospectuses from the printer, will have nine Pierpont funds and 11 new JPM Institutional funds feeding 10 hubs. Four more Pierpont funds and two new JPM funds are planned, Ms. Guernsey said.
The bank is looking at developing more international funds through the new structure. Under the old system that would not have been viable, Ms. Guernsey added.
The cost to convert funds to hub and spoke varies according to the attributes of a fund family, according to Signature's Mr. Hoolahan.
IRS Opinion Awaited
For Morgan, the majority of conversion work came from preparing proxy materials for a shareholder vote on the issue, Ms. Guernsey said.
Shareholders agreed to the change in March.
Now Morgan is waiting for an opinion letter from the Internal Revenue Service before converting one last fund to the structure.
The conversion has been seamless, Ms. Guernsey said.
When the mutual fund company Eaton Vance Corp. began converting its funds to the structure last year, it ran into numerous regulation issues surrounding tax laws for assets moving between hubs and spokes, Mr. Hoolahan said.
With rulings on those issues now on the books, those adopting hub and spoke have an easier time, he explained.
Another advantage to the structure is the ease with which outside companies can offer their own portfolios spoked into Morgan's hubs, Ms. Guernsey said.
With conversion almost complete, Morgan executives are beginning to talk with smaller banks and trust companies that may want to create private-label spoke funds using a Pierpont hub.
|Significant' Increase Seen
Though Ms. Guernsey wouldn't project how much new business that could generate for Morgan, she said, "I've got to believe it will be significant,"
Ms. Guernsey said she is developing basis guidelines that Morgan will follow as it forms private-label relationships with other banks.
"I think we want to make sure that we're dealing with responsible people and that they're going to market our funds in a responsible manner," she said.
