In the race to be master of the mutual fund universe, Eaton Vance is converting its entire fund family to the hub-and-spoke structure.
The mutual fund company's move will allow banks to put their own names on the funds.
As the first mutual fund company to adopt the hub-and-spoke, which was developed by Signature Financial Group, Eaton Vance is hoping that banks will latch onto these funds in place of establishing proprietary products.
Trimming Expenses
Under the hub-and-spoke 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 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.
|More Attractive'
By October, the Boston-based mutual fund company, which has more than $12; billion of assets under management, plans to restructure all of its 57 funds, said William J. Kearns Jr., director of Eaton Vance's hub-and-spoke effort. Already nearly 40 have been converted.
"We've found a niche in the bank marketplace," Mr. Kearns said. "We can bring private labeling to banks, do it at a low cost, provide revenue, and make it more attractive from a distribution point of view," he said.
Although the break-even point varies from bank to bank, "it is significantly lower having a hub-and-spoke fund than a proprietary fund," Mr. Kearns said.
Also, spoke funds can have smaller asset-sizes to be profitable because banks save in management and legal fees, he said.
Keeping Control
Since spokes take on the appearance of private label funds, banks can substitute them for proprietary funds while retaining ultimate control of the assets.
"It's a way for banks to enter a market they might not be able to gear up for on their own," said David Nadig, senior consultant at Cerulli Associates in Boston.
Instead of creating their own funds, banks can latch onto one of the 36 tax-free funds Eaton Vance offers. Banks get a higher yield and are able to launch the fund sooner in today's market environment, Mr. Kearns said.
Typically, it takes six to nine months to register a new fund, whereas Securities and Exchange Commission turnaround time for new spokes is between 90 and 120 days.
A Downside
Private labeling has drawbacks. "The major thing banks are giving up is the investment management fee," Mr. Nadig said. "In the long run, that's where the money is."
"Most banks have the critical mass needed," which can be developed by converting trust assets into the funds, Mr. Kearns said. However, he added, they may run into trouble maintaining a high level of sales the second year.
Although no customers have signed on yet, they are close to closing two or three deals with banks, Mr. Kearns said. "Banks are our hottest market," he said. "They are jumping into the market and we would like to be there to help them."
Generally the best-suited banks for hub-and-spoke are banks of $5 billion or smaller, said Mr. Nadig. However big banks, with about $20 billion, can use spoke funds to fill in gaps, he said. "It's the rent-versus-build argument."
While the small and medium-sized banks need the most help, the funds are attracting attention from large players such as Citibank, Mr. Kearns said.
Banks need about $15 million to break even and an additional $10 million to $15 million a year afterward to succeed with private labeling, Mr. Kearns said.
