The chief operating officer of a small Arkansas investment manager says he knows his decision to launch his first equity fund this fall defies the trend for small firms to quit proprietary fund management in the face of rising regulatory costs.
But Curt Bradbury said Stephens Investment Management Group LLC enjoys ignoring industry trends. “I like the idea of being a contrarian,” he said. “It is amazing how often it works.”
Stephens Investment Management, a unit of the Little Rock, Ark., investment bank Stephens Inc., introduced its Stephens Small Cap Growth Fund on Monday. The portfolio is an open-end mutual fund benchmarked by the Russell 2000 Growth Index; it will invest at least 80% of its assets in companies with less than $2.5 billion of market capitalization.
Mr. Bradbury said Stephens Inc. has spent the past four to five years developing its private-client group. His unit will begin by offering its new fund to individual and institutional private clients, he said, and then move to wider distribution through wire houses and banks.
In 2004, Stephens hired Ryan Crane and his small-cap asset management team from AIM Investments in Houston. Mr. Crane said Stephens Investment Management, which has $88 million under management, plans to develop a family of equity funds.
“Frankly, to be a little critical, we should have done this a long time ago,” Mr. Bradbury said. “… I wish it happened 20 years ago. … We should have a more fleshed out money management platform. But we wanted to find a strong individual to lead this initiative. We might be a little late, or we might be early as value turns to growth.”
He said he expects to launch a mid-cap growth fund in February and perhaps eventually a micro-cap fund.
“The interesting thing about this business is that once you do one you might as well do two and then you might as well do more,” Mr. Bradbury said. “The regulations and the back-office requirements lend themselves to expansion. We don’t consider ourselves to be scale players, and this doesn’t have to be huge, but we will look to expand.”
Many small asset managers, including some banks, have sold their proprietary fund units in the past two years as the regulatory costs associated with running the funds have risen.
Goldman Sachs Group Inc. and Federated Investors Inc. are among the big asset managers that have been snapping up small fund families from banks.
Federated has added $774 million of assets under management through purchases of fund units in the past two years from FirstMerit Corp. in Akron, Riggs National Corp. in Washington, and the former Banknorth Group in Portland, Maine.
Goldman Sachs’ asset management unit last year announced it would add $1.5 billion with the purchase of most of a fund family from Citizens Bank in Flint, Mich., and through a definitive agreement to buy the Expedition Funds of Compass Bank in Birmingham, Ala.
Last week, another community banking company, Intrust Financial Corp. of Wichita, sold its $600 million fund family, the American Independence Funds, to Arrivato Advisors LLC, a New York company specializing in target-date funds.
Mr. Bradbury said he is confident this trend will turn.
“We actually are hopeful that there will be a rethinking, a rationalization, and a pendulum swing from the excessive reregulation of mutual funds that has occurred in recent years,” he said. “It has gone beyond the point of protecting investors to being punitive. We are hopeful in time, cooler heads will prevail and certain attorneys general will become governor and there will be a rethinking.”
Analysts said if regulations were to ease small money managers might not be as quick to get out of proprietary fund management but that those who have already left would be unlikely to return. Two analysts said it is “highly unlikely” that regulations would be eased anytime soon.
“Most small fund companies have cast their lot with open architecture and nonproprietary funds,” said Burton Greenwald, a Philadelphia analyst at BJ Greenwald Associates. “They are just getting accustomed to this strategy.”
Mr. Crane said he knows that the Stephens approach goes a bit against the grain, but he said the firm is confident it can accumulate $1 billion to $1.5 billion of assets in the small-cap growth fund by the end of next year. It started a small-cap growth managed account last year after Mr. Crane and his team were hired.
Fresh small-cap funds are in demand, Mr. Crane said, because the successful ones quickly exhaust the supply of shares for sale in the companies they have picked and must stop accepting new money from investors in the fund.
“Small-cap managers with a good track record draw a lot of assets and then close down,” he said.
Though most managers are launching small-cap value funds because “small-cap value has dramatically outperformed recently,” Mr. Crane said, he is confident that the growth investing strategy will return to favor.
The Arkansas firm will look to expand nationally, he said. Stephens has offices in Atlanta; Austin, Tex.; Baton Rouge, La.; Boston; Charlotte; Chicago; Dallas; Houston; Memphis; Nashville; New York; Oklahoma City; Richmond, Va.; St. Petersburg, Fla.; Washington; and London.
“We do not want to be a sales force that has to go from broker office to broker office,” he said. “We want to get on wire house platforms and third-party platforms. That will enable us to go after the retirement market.”
Mr. Bradbury said he would hope to have more than $10 billion of assets under management within five years. William Blair & Co. in Chicago, which has more than $20 billion under management, is a good model for what Stephens is trying to accomplish, he said.
“We do not want to be a factory operation,” he said. “We would like to have a focus in certain areas where we are very good. … If we had started when the ‘fundization’ of America started, we’d have $20 billion or more by now. We missed the early rush, but there is still a lot of opportunity.”
