There is a definite imprint on Signature Financial Group, the Boston-based mutual fund administrator, and it is that of its founder and chairman, a securities lawyer named Philip Coolidge.
What distinguishes Signature from the rest of the bank mutual fund servicing industry is that it offers an innovative legal structure for fund administration. And it was Mr. Coolidge who designed the structure, known as hub-and-spoke.
The invention now has many banks rethinking how they've set up their fund businesses.
A 1977 graduate of Georgetown University's law school, Mr. Coolidge practiced law for five years and then worked at Massachusetts Financial Services, heading up the mutual fund administrator's bank division.
Left with Landmark
In 1988, he left to form Signature and pulled along a big MFS client, Citibank's Landmark funds, which were about $1 billion at the time.
Since then Eaton-Vance, Morgan. Guaranty Trust, Brown Brothers Harriman & Co. and others have signed on to make Signature the 11th-largest administrator of bank-related funds. With a new three-person sales office in London that covers Europe, the Middle East and Asia, Signature sees itself as a worldwide company.
Signature was founded as a plain-vanilla administrator, but today banks that team with Signature are probably embracing the hub-and-spoke approach. In fact, all but two of Signature's 14 clients use the structure. Together the funds have $14 billion in assets.
Hub-and-Spoke
Just what is hub-and-spoke?
Usually, a mutual fund has an investment advisor, distributor, administrator and transfer agent.
With Mr. Coolidge's design, a "hub" handles investment management for an assortment of funds, while each fund -- or "spoke" -- tends to its own marketing, distribution, distribution, transfer agency and shareholder servicing.
In effect, the structure allows the investment advisor to clone itself under other fund names. The approach has been likened as one generic product that uses different labels and prices. Each spoke can appoint its own board, charge its own sales loads, or not charge a load at all
Meanwhile, the funds save money on such management functions as daily asset value accounting, audit and custody services.
Partnership Structure
The concept couldn't have worked, Mr. Coolidge says, if the hubs couldn't be structured as partnerships. By doing so. the money from bank trust departments wouldn't pay a capital gains tax when reinvested in the new fund. Nor are they taxed when removed from the hub.
In essence, all taxes and income flow through the hub to the funds themselves. The result: a new kind of flexibility that allows banks to pull trust or other assets into funds without paying capital gains taxes.
Mr. Coolidge received the crucial Securities and Exchange Commission approval in 1989. And Signature received a private letter ruling in early 1990 from the Internal Revenue Service saying the agency wouldn't contest the structure.
"We were first and foremost an administrator and distributor. As part of that business, we had developed hub-and-spoke." Mr. Coolidge said in a recent interview.
"In the first quarter of 1991, Jim [Hoolahan, Signature's senior vice president for marketing] and I came to realize that the product had a huge amount of value to people who did not need an administrator or distributor, i.e. a mutual fund company and insurance company. We decided we had another line of business."
Software Sales
As part of that new line of business. Signature sells its expertise and proprietary accounting software system to clients. Signature has a trademark on the hub-and-spoke term, a copyright and patent for its accounting system and software. In addition to the 14 administrative clients. another 10 have hired Signature to install hub-and-spoke.
The main attraction to the counting package is that it allows the hubs and the spokes to value their portfolios. Because of the different asset values, the system needed to account for two sets of valuations.
Mr. Coolidge is aware that others are interested in setting up similar structures, somtimes called "master feeder" arrangements. For example, BankAmerica Corp. has filed a plan with regulators for several of its Pacific Horizon funds. But Mr. Coolidge said plenty of people are seeking Signature's guidance.
"We spent a huge amount of time and money to develop hub-and-spoke and the accounting system. The cost a mutual fund company would have to reverse engineer it would be enormous "
Signature is famous in its industry for its innovation, but competitors aren't ready to proclaim hub-and-spoke the best way to run a mutual fund.
"Signature is promoting a structure and Concord is promoting distribution," said Richard Stierwalt, chairman of the the bank mutual fund industry's No. 1 administrator and distributor, Concord Financial Group Inc.
When asked about the comment, Mr. Coolidge replied, "An idea is an idea. Nobody makes money from it. We're a company that makes it work. We're a service provider."
Indeed, even Mr. Stierwalt acknowledges that hub-and-spoke is a concept to be reckoned with.
"I think the concept will grow in the industry and Signature will grow as a competitive threat," Mr. Stierwalt said.
Signature, however, has not been without its setbacks.
Hurt by Mergers
Mergers have clearly hurt the company. When the Bank of New England failed in 1991, Fleet Financial Group took over the bank's proprietary Yankee funds. Signature had been the administrator and distributor, but lost the contract when Fleet got rid of the Yankee board and melded the funds into Fleet's own Galaxy funds.
A year later, after Security Pacific merged with BankAmerica Corp., Signature lost its distributorship of the First of America funds when BankAmerica chose not to renew the contract. Going forward, one of the company's big goals is to increase its foreign business. That started last year when Swiss Bancorp-New York wanted to offer international mutual funds to overseas and U.S. clients. The Swiss Key funds debuted in July of 1992. There were two hub funds -- a global fixed income and global equity -- and each of those hubs had domestic and international spokes.
In order to operate such a setup, the hub, which is considered a partnership, has to meet the so-called "10 commandments" of not engaging in a trader business in the U.S. The effect of gaining that classification is to free foreign shareholders from paying U.S. capital gains taxes. They do pay a 35% dividend tax, however.
With an international fund, enough functions -- namely daily net asset valuation -- must be done offshore, To that end, Signature has offices in the Grand Cayman Islands and Toronto, which fax their data to the office of the U.S. hub, or fund administrator.
Mr. Coolidge said regulatory approval has been obtained to use the structure everywhere in the world except for Europe. The company continues to seek approval there.
How big does Signature want to be?
"We're trying to offer all services other than investment management and distribution to to financial institutional managers around the world," Mr. Coolidge concluded. "We want to be good first. We'll be as big as necessary."
