Robert bowes believes that mutual funds are "great financial products," which is undoubtedly why the CEO of Bowes Funds, LLC, a New York-based fund advisor, decided to launch the Bowes Bank and Insurance Fund, which began trading in March 1998 at $10 per share.
The Bowes Bank and Insurance Fund invests in the equity securities of U.S. banks and insurance companies (at least 65 percent of the fund's total assets).
Bowes' affinity for greatness landed him, albeit in good company, in a crowded field rife with challenges for a start-up fund. Among them: how to differentiate the product, win acceptance among the gatekeepers-rating services, brokers and investment advisers-and, of course, lure investors (minimum investment required to open a regular fund account is $2,000).
Conviction, many players argue, is often the first rule of success. For Bowes, a former vp in The Chase Manhattan Bank's financial institutions group, an education in how financial products are developed, marketed and sold played favorably with industry trends, such as increasing use of the capital markets by insurance companies and thrift conversions and consolidations in banking. "We wanted to be able to participate in (insurance company) demutualization opportunities," Bowes says.
With these industry trends as a backdrop, the Bowes Bank and Insurance Fund will spread its assets around, investing in, among other things, banks, thrifts and insurance companies converting from mutual to public ownership.
While Bowes officials aren't lacking conviction-they claim that no other fund digs out and targets insurance company demutualization possibilities- some sources are skeptical of the premise behind the mutual fund's creation, despite Prudential's plans to demutualize within two years. "Everyone wants a piece of the rock. That rock got chipped already," says Lewis J. Altfest, a financial planner based in New York City. Investing in thrift conversions and insurance company demutualizations "is not as good a story as it once was. Joe Six-Pack knows that one." When everybody knows about it, he says, "the price is not as much of a pop."
To find value in the market, Bowes has to do good screening. Altfest concedes that the concept will hold as long as the market is up and banks are offering their shares at a discount. If both reverse direction, people panic; investors who take a risk in new issues panic even more. "You can get a haircut of phenomenal magnitude," Altfest says.
In addition, start-ups carry significant risk, which other factors can influence. And executives had to make a series of decisions about whether the fund should be load or no-load, broker sold or direct marketed.
Though selling exclusively through full-service brokers might get the fund greater assets more quickly, for example, Bowes was wary of the churning he had observed: A broker would sell a client on a fund and then, a few years later, churn the client out and into another one, for which he would collect a commission.
Then there was the load/no-load decision. An upfront fee was "probably a quicker way to build our assets," Bowes says, "but it's not as good a value for shareholders." Upfront costs translate into total return. "Short term, we would not have as many assets under management. In the long run, overall performance relative to our peers, (we'd) outperform them," he says. Increases to reputation, then, would be followed by more sales.
Further, Bowes contends, the Information Age is really taking off, which means more educated investors. Information can now be rapidly disseminated to customers who are increasingly on-line for either research or trading or both. Tapping into this self-directed, expense-conscious market seemed the way to go.
What Bowes did instead was compromise. He created a no-load fund that's "a skinned-down version" of a 12b-1, which compensates brokerage firms 0.25 percent of the assets they bring in per annum, deducted not directly from investors' accounts, but from fund assets, as are management fees.
getting shelf space
While this move fueled debate among some financial planners, Bowes says the fact is that "it's a difficult process getting shelf space for a mutual fund."
With so many mutual funds competing for customers, it's a real contest just to get noticed. To attract attention, Bowes is concentrating on opening up distribution channels like E-Trade and Ameritrade, according to Bowes marketing vp Mike Henry. They are also paying greater fees-0.35 percent plus a $10,000 start-up-for Fidelity and Schwab. "The big challenge is working with large on-line brokerage houses," Henry says. "You're dealing with huge bureaucracies." He says that there's a lot of paper pushing and dealing with legal departments that, after examining a contract, sometimes reject it because they don't like one word it contains.
Bowes Funds must also score big with rating services, since it is their clout that carries among investors and advisors. There's no rating, of course, without a track record, so the only answer to this problem is the passage of time. "Now that we have first-quarter results, we'll get exposure on some of them," Bowes says, though a three-year history is required by top-gun Morningstar.
To generate greater interest, Bowes Funds is using traditional and electronic marketing initiatives to reach the direct retail market, including a banner ad campaign to investors visiting Quote.com, which produced 300 hits on the fund's Web site, and a mailing to 90,000 high-net- worth individuals (doctors, lawyers, insurance executives) that was also coordinated with an ad campaign in The Wall Street Journal and Investors Business Daily. The goal is "500 good, long-term investors," says Henry. So far, 80 have signed on.
-J.Trotsky
