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Sectoral Snares First American Sub-advisory Deal

Sectoral Asset Management of Montreal has inked its first deal to sub-advise a biotechnology and healthcare fund in the U.S. The institutional money management firm will sub-advise the newly launched Quaker Biotech Pharma-Healthcare Fund, one of the Quaker Funds of Valley Forge, Pa.

The Quaker deal is a big win for Sectoral, which this past fall began trawling for sub-advisory partners in the U.S. The Canadian-based firm, which has raised $1 billion in its two years of existence, has carved out a niche for itself managing worldwide healthcare and biotech stocks, but had no presence in the United States until now.

Sectoral, which was founded by two former executives at Geneva-headquartered private bank Pictet & Cie, was seeking to align with a few U.S. fund companies looking to make a long-term commitment to the healthcare sector, but that didn't want to manage the funds themselves [see MFMN 11/19/02].

The Quaker fund, which went live July 1, was originally registered under a different name with the Securities and Exchange Commission in late May. But after some haggling with the SEC over how the fund should be named to best reflect its broad focus on global healthcare, biotech and pharmaceutical companies, the current name was assigned.

Of the 1.25% management fee Quaker charges on the fund, Sectoral is siphoning off 95 basis points as its sub-advisory fee.

Sectoral was attracted to Quaker's flexible approach, said Jerome Pfund, CEO of Sectoral and co-portfolio manager of the new Quaker fund. Unlike other fund advisors who detail strict investment parameters of the fund to the sub-advisor, Quaker was very open-minded.

"They didn't say we want the fund to look like this or that with lots of constraints. Instead, they [asked us], What kind of fund do you want to manage?'" Pfund said. "Quaker's belief is that if we manage the kind of fund we want to manage, we'll do a better job."

For its part, Quaker wasn't necessarily looking to leap into the biotech sector, a sector that has proven to be the third worst-performing specialty sector for the first half of 2002, according to Lipper of New York. Through the first half of this year, healthcare/biotech funds lost 24.9%, placing them ahead of science and technology funds' 33.8% trouncing, and telecommunications funds' 39.7% thrashing.

Rather, Quaker was impressed by the quality of Sectoral's management as well as its independent entrepreneurial model, said Kevin Mailey, president of Quaker Funds. "The great managers want to be just that: great managers. They dont want to be great politicians or the head of their investment committee." Mailey said. "We believe you don't buy a fund, you buy a manager."

With $213 million under fund management, Quaker focuses on providing retail investors with access to otherwise unobtainable institutional managers. The majority of the group's 11 mutual funds are managed externally by institutional managers whose names are virtually unknown to retail investors. The exception is the group's largest fund, the $160 million Quaker Aggressive Growth Fund, which is managed by a Boston hedge fund manager who Quaker currently employs.

One requirement is that each of Quaker's investment sub-advisors be an entrepreneur, Mailey said. The manager who owns his own firm isn't likely to disappear and be scooped up into a mega fund firm, nor is that manager likely to succumb to style drift because he's chasing a bonus tied to a bogey, he said.

Quaker is a bit of a switch-hitter. In 2000, it won approval from shareholders to convert the formerly no-load funds to multiple share class load funds and sell to the broker/dealer channel. "The funds did well, but the asset gathering didn't," said Mailey, who instigated the cultural change when he signed on as the group's president in March 2000.

Quaker's new sub-advisory distribution arrangement appears to be a better approach. It wants to secure additional U.S. fund sub-advisory arrangements, but with fund advisors who distribute through other distribution channels. Sectoral is being careful not to hatch competing deals. "We don't want to manage competing funds in the same channel," Pfund said.

Hands Across the Water

While the Quaker deal is Sectoral's first U.S. sub-advisory assignment, the firm has been steadily building relationships and branching out worldwide. Last month, Sectoral began its new assignment as the sub-advisor to a debuting Taiwanese pharmaceutical healthcare fund sponsored by Prudential Investments of Taiwan, Pfund said. The fund is sold to Taiwan nationals but invests in companies worldwide. It raised $50 million in its subscription period.

One year ago, Sectoral launched a long/short biotech hedge fund. Under its master/feeder arrangement, Sectoral can sell the hedge fund to both U.S. and offshore clients.

Sectoral also has a deal in the works to manage a private investment fund that will invest in pre-IPO biotech companies for three European investors who will each invest a few million dollars, Pfund said.