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Fremont Funds Targets RIA Channel


Fremont Mutual Funds, a San Francisco-based fund group with $2.1 billion under management, has set its sights on marketing its funds to the burgeoning intermediary channel of high-end registered investment advisers. And it plans to shortly begin offering an investment arrangement called a Limited Liability Company or LLC. The LLC will provide another tool for wealth managers to use with clients who want exclusive access to professional money managers.

While Fremont offers its 13 no-load funds through several fund channels, including both the retail and institutional fund supermarkets of Charles Schwab, its origins as a pension manager makes it best positioned for the quasi-institutional side of the business.

In 1977, Fremont began as the internal investment management unit for the retirement plan of Bechtel Group, a 100-year-old engineering firm and one of the largest privately-held companies in the U.S. with 28,000 employees worldwide. Bechtel was the company behind the building of the Hoover Dam and the Hong Kong Airport.

In 1986, Fremont Investment Advisors, which now manages a total of $5.8 billion, was spun off as a separate company to manage money for wealthy investors and other institutions. Two years later, Fremont Mutual Funds were launched, originally as a vehicle for the retirement roll-over assets of retiring Bechtel employees.

The fund group began with two flagship funds, the Fremont Global Fund and the Fremont Money Market Fund. Then it launched a complementary group of mutual funds between 1992 and 1997. These funds employed management strategies that had been successfully used to manage Bechtel's retirement plan assets.

The Fremont Funds are managed by a combination of inside portfolio managers and high profile sub-advisers. Four funds are managed internally, nine are sub-advised. The Fremont Bond Fund, for example, is sub-advised by Pacific Investment Management Company (PIMCO), whose chairman, Bill Gross, is a well-known fixed-income manager. The Fremont International Small Cap Fund is managed by Bruce Bee, president and director of Bee & Associates of Denver. And Kern Capital Management of New York is the sub-adviser to both the U.S. Small Cap and U.S. Micro Cap funds.

In 1991, Fremont Mutual Funds brought in Richard Thomas, now senior vice president, business development, to build the business of the fledgling funds.

"We started the business to add value for Bechtel employees and that serves as an excellent base for serving long-term investors," said Thomas. Thomas spent 11 years at Charles Schwab where he worked in a variety of institutional retail sales and marketing positions. In 1984, he helped develop Schwab's Mutual Fund Marketplace.

Fremont has recently decided to focus on those investment advisors, a subset of the larger RIA community, who view themselves as "wealth managers." They value access to superior money managers, low fees, a tax managed vehicle for clients and a more institutional relationship, said Thomas. In insitutional relationships, advisors forego sales pitches and do not deluge customers with marketing literature.

Moreover, wealth managers want exclusivity in getting access to institutional managers because this is the special benefit they can provide their clients, said Thomas. And they do not want to have their clients lumped together with short-term investors. They want their clients investing alongside similarly-minded investors.

Fremont is content to build relationships with financial planners and to persuade them to try Fremont funds. But it also hopes to cement ties by offering them the expertise of their professional investment managers through the use of Limited Liability Companies (LLC.)

LLCs manage assets separately from pooled mutual fund assets. They are managed by professional money managers and are offered as an alternative to separate accounts. Often the minimum investment required to obtain the expertise of a particular manager for a separate account is prohibitive. Minimums are high for LLCs but not as high as for separate accounts.

LLCs can take different forms. An individual RIA can pool his best clients under its own LLC structure, then contract with an investment manager to manage the combined assets. Or a group of RIAs can combine several of their clients under a common LLC, then seek out a manager with strength in a particular market segment or asset class. Fremont has now developed its own prototype LLC which wealth managers can adopt for use with clients. Individually-designed LLCs can spell out very specific parameters for investing geared especially to the needs of those clients.

Unlike mutual funds, LLCs are not designed to offer daily liquidity or accept daily cash inflows. Quarterly redemption windows are more the norm. That means LLC managers do not need a large cash cushion and management fees are, for the most part, below those at funds. And unlike mutual funds, which must be diversified according to SEC regulations, LLCs have a lot more leeway.

"LLCs are not mythical and are not the magic pill," said Thomas. Still there is a place for them, he said. "You can't be so locked into being a fund company. You have to do something that will help advisers evolve."