July 24, 2000
Pilgrim Investments of Phoenix, Ariz. is asking shareholders to approve large increases in the advisory fees for two of its best performing funds. The increased fees will help the firm retain investment talent and expand its capabilities, according to a July 13 proxy.
If approved by shareholders, the annual investment management fee on the Pilgrim Growth Opportunities Fund would increase from 0.75 percent to 0.95 percent and the advisory fee for the Pilgrim SmallCap Opportunities Fund would rise from 0.75 percent to one percent. Based on current fund assets, annual fees on these funds would increase $497,455 and $638,618, respectively.
The request is part of a wider proxy effort the group is undertaking in connection with its acquisition. On April 30, ING Group of Amsterdam, the Netherlands agreed to purchase Reliastar Financial Corp. of Minneapolis which purchased the Pilgrim fund group in late October. Because of ING's pending acquisition of Reliastar, Pilgrim has been seeking approval of the shareholders of all 33 of its mutual funds for new investment management contracts between each of the funds and Pilgrim. ING's purchase of Reliastar is expected to close in September.
The proxy proposals concerning the SmallCap Opportunities and Growth Opportunities funds are presented as two separate items, said industry lawyers. Pilgrim is asking investors to first approve the proposed fee increases. Then, investors are asked to approve investment advisory arrangements with Pilgrim.
"They are trying to show that the change of control is not the reason for the increase," said one fund lawyer.
These two funds, which are new, appear to be the only two for which Pilgrim is seeking to raise the management fees. In October, when Reliastar purchased Pilgrim, it folded its own proprietary asset management unit, Northstar Investment Management, into the Pilgrim subsidiary. At the end of February, Pilgrim Investments managed $16.6 billion, according to the proxy.
The Lexington Funds of Saddle Brook, N.J., which Reliastar announced earlier this year it would also be purchasing, will also become part of the Pilgrim fund group later this year.
On Nov. 1, 1999, in connection with the Northstar mutual fund unit merging with the Pilgrim group, each of the Northstar mutual funds was renamed with the Pilgrim name. The former Northstar Growth Fund became the Pilgrim Growth Opportunities Fund. The Northstar Special Fund became the Pilgrim SmallCap Opportunities Fund. The fund's management team, led by Mary Lisanti, moved to Pilgrim along with the mutual funds Lisanti had managed. Lisanti, now executive vice president and chief investment officer of equities, joined Northstar in May 1998 after briefly working for Strong Capital Management in Menomonee Falls, Wisc.
Pilgrim claims the higher fees are necessary to attract and retain qualified investment management personnel, according to the July 13 proxy. To bolster its claim, the proxy takes the unusual step of listing the names and positions of nine individuals in addition to Lisanti who help manage the fund.
Pilgrim also expects to use the higher fund fees to expand, the proxy said. Pilgrim wants to increase its research staff to broaden its coverage of the small cap equity universe. The group also disclosed its plans to build an office in New York City that will include a new trading facility and an extensive administrative staff.
In the proxy, Pilgrim justifies its requested fee increase by pointing to the two funds' stellar performance. In 1999 the growth fund returned over 90 percent and the small-cap fund returned 145 percent, according to Morningstar, the fund data provider in Chicago. The small-cap fund closed to new investors at the end of February. Those strong performances will probably make the proposed increase in the funds' management fee more palatable to investors, said one industry lawyer.
This is not the first fee increases for these two funds. In October, when the funds assumed the Pilgrim name, the front-end sales charges on the funds' A share class were increased a full percentage point, from 4.75 percent to 5.75 percent.