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Ohio National Life Pulls Plug on Retail Funds

Ten years after launching its first retail mutual fund, Ohio National Investments, the asset management division of Ohio National Life Insurance Co. of Cincinnati has chosen to close all eight of its floundering retail funds. The cause of death? Lack of fund sales, dismal performance coupled with a prolonged bear market, and the inability to achieve economies of scale across the fund group, according to a recent proxy filing with the Securities and Exchange Commission.

Ohio National will officially pull the plug on the retail funds later this fall. The board of directors approved the liquidation Aug. 28 and ordered the funds to stop selling shares two days later. Shareholders blessed the funds' liquidation at a meeting earlier this month. Shareholders must now bless the funds' liquidation at a meeting scheduled for Oct. 31.

As of early September, assets in Ohio National's fund group had dwindled to a mere $43 million, which still includes the advisor's seed money. Its $13 million money market fund accounts for 30% of the group's total assets. The group, named the ONE Fund, includes eight series funds, six of which are managed internally. The international fund is currently sub-advised by Federated Global Investment Management, the New York-based global investment management office of Federated Investors of Pittsburgh. Ohio National's core growth fund is sub-advised by Pilgrim Baxter & Associates of Wayne, Pa.

"We weren't having the success we thought we should have," said John Palmer, executive vice president of Ohio National Financial Services, and president of ONE Fund. There was no special triggering and or external event that prompted the decision to terminate the funds now, he said, but a confluence of factors caused the advisor to see the handwriting on the wall.

Three Strikes, You're Out

Sporting predominantly internally managed retail funds while investors were clamoring for access to multiple top-name investment managers as fund sub-advisors, worked against Ohio National over the past several years, Palmer said. Furthermore, distribution of the funds was lacking, despite a move in 1997 and 1998 to expand distribution of the funds through banks, broker/dealers and other intermediaries. Up until then, the retail funds had only been available through Ohio National's life insurance agents, a force of about 15,000, according to the company. "We never contemplated a wide-scale marketing push," Palmer said.

In addition, the fund group's dismal performance record, coupled with the continuing bear market, hasn't fueled any windfalls, Palmer said. Ohio National's $5 million growth fund, for example, sports a current 10-year annualized return of a mere 4.67%, placing it in the 84th percentile within its peer fund group, according to Morningstar of Chicago. The younger and smaller $2 million small-cap sibling fund, with a five-year annualized return of negative 11.61% is in the 96th percentile of its peer group.

Back Door

Four of Ohio National's eight funds were launched in August 1992 as "reverse clones," that is, replicas of Ohio National's successful variable annuity separate accounts. Ohio National first entered the variable annuity marketplace in 1970, then backed into the retail fund industry two decades later.

Although most investment advisors generally clone successful retail mutual funds into new portfolios that are then made available within variable annuities, some firms, such as American Skandia of Shelton, Conn., have had success doing exactly the reverse.

Other fund advisors, including Federated Investors, have carefully cherry-picked one or two popular variable annuity sub-accounts, and built a new retail mutual fund in its image in an attempt to seize on the annuity account's success.

Nine months after debuting its first four retail funds, Ohio National launched its cloned sub-advised international portfolio, and 18 months later, rolled out a lookalike small -cap fund. In late 1996, it debuted a mirror-image core growth fund, and in late 1999 it added an S&P 500 index fund clone.

Of course, retail mutual funds were never at the core of Ohio National's business. The firm has had more success selling both individual fixed and variable annuities. In fact, Ohio National's annuity sales increased 80% in 2001. The firm now has $15 billion in assets, $1.1 billion of which is split among 18 variable annuity sub-accounts, according to Lipper of New York

While some critics speculate that insurance companies aren't as adept at creating or nurturing a retail mutual fund group largely because it isn't their core business, many of today's largest and best-known fund groups are insurance company owned. These include Putnam Investments, owned by Marsh & McClennan; OppenheimerFunds, owned by MassMutual; and MFS, owned by Sun Life Financial Services of Canada.

State Farm Insurance of Bloomington, Ill., raised some eyebrows in late 2000 when it launched its own proprietary family of retail mutual funds. Critics wondered if the insurer was simply too late an industry entrant to ever succeed. But with $500 million in assets, including seed money, in the diversified 10-fund State Farm Mutual Fund group, the fund complex has found its footing and is content with its strategy.

State Farm got into this business in December of 2000 because it recognized that customers had needs beyond just insurance, said Jeff Scott, assistant vice president of State Farm Mutual Funds. "We were perfectly positioned with 27 million trusted relationships, and with the quality and recognition of our brand, we had a competitive advantage."

The secret to State Farm's retail fund success lies in sticking to the basics, limiting the number of fund offerings, encouraging asset allocation and not pushing individual funds or sector funds. Scott said. Moreover, of its 16,000-plus independent State Farm agents, 10,000 have now voluntarily registered to sell mutual funds, he said. The lineup includes six equity funds, three of which are actively managed and three of which are index funds, two fixed-income funds, one balanced fund and a money fund.