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M&A's Still Strong Among Smaller Players


Despite the scandalous black cloud that has settled over the fund industry, several investment management companies are still happily shopping for appealing mutual fund complexes, or even a single fund or two.

At the same time, a smattering of fund advisors are deciding to throw in the towel, eager to hand over the day-to-day fund management responsibilities to those better able to compete. In some cases, it has been the third-party administrator that has ended up playing unofficial matchmaker, referring client funds looking to sell out over to clients bent on making acquisitions.

Within the last 12 months, more than a dozen fund company mergers or acquisitions have taken place, many by smaller firms maneuvering for market share and seizing opportunities to achieve scale.

Earlier this month, Hennessy Advisors of Novato, Calif., advisor to six proprietary mutual funds including a money fund, announced it would buy the five-fund Lindner Funds group, managed by Lindner Asset Management of Deerfield, Ill. Hennessy will be picking up an additional $322 million to add to its existing $900 million in assets and folding the Lindner Funds into its own. The fate of Lindner's government money market fund has yet to be determined.

The deal simply made sense for Lindner investors, for Hennessy fund investors and for Hennessy as a management company, said Neil J. Hennessy, president and CEO of the firm. U.S. Bancorp Fund Services of Milwaukee provides services to both firms.

Lindner had been struggling to find its footing. SEC filings reveal that the firm had seen assets erode from $626 million at June 30, 2001 to its current $322 million as of Aug. 31, and four of its funds have been plagued by significant performance losses since 2000. The Lindner Communications Fund has lost 88% of its value since 2000.

In 1999, Lindner, originally known as Ryback Management Corp., adopted the Lindner moniker, restructured and liquidated two of its ailing funds. In 2000, it abandoned its team-managed approach in favor of individual managers, and later added co-managers. To further bolster performance, in 2001 the fund group again pruned its lineup, and adopted a manager-of-managers approach, with all of its funds being sub-advised. That same year, it unified its investor and institutional share classes across the complex, and also added a 0.25% 12b-1 fee. Executives at Lindner were unavailable for comment.

Acquisition Recidivist

This isn't the first acquisition for Hennessy. This past April, Hennessy launched a new fund, the Hennessy Focus 30 Fund, with $35 million of seed money from the acquisition of the Sym Select Growth Fund. Hennessy admits that he is on the acquisition trail and looking for funds or fund groups with less than $300 million whose managers have realized the difficulties in managing funds in light of new compliance requirements, increasing expenses and anticipated new regulatory hurdles. "We will continue to search out funds we can merge into our own," Hennessy said.

Although he said that he would like to round out his fund offerings with a fixed-income fund, the fund advisor's highly formulaic investment process wouldn't be a natural fit for a bond fund, he said.

Hennessy has been shopping before. In June 2000, Hennessy acquired a value and a growth fund from O'Shaughnessy Capital Management of Greenwich, Conn., when O'Shaughnessy bailed out of the mutual fund industry in favor of offering more personalized investment products.

Bulking up on assets now also serves to allow Hennessy to peddle its funds in the 401(k) marketplace, as three of its funds will now exceed the $100 million mark, Hennessy added.

Hennessy isn't the only opportunist.

Last week, Forward Management of San Francisco, also a manager-of-managers, announced that it would "adopt" the two remaining retail international mutual funds managed by Pictet and Cie of Geneva, Switzerland, and merge them into two new funds it had created. Both will continue to be sub-advised by Pictet.

The acquisition allows Forward to broaden its niche product offering to both retail and institutional investors, said J. Alan Reid, president and CEO of Forward. Although international markets have lagged the U.S. market over the past few years, that cycle seems to be reversing, Reid said. The acquisition allows Pictet to focus all of its efforts on global investment management, while Forward takes over the distribution function, he added.

For Pictet, the sale of its seven-year-old international small-cap fund and eight-year-old global emerging markets fund, with a collective $45 million under management, to Forward marks the end of the line and its initiative to proprietarily crack the retail mutual fund nut in the U.S. Both Forward and Pictet utilize the fund administration services of PFPC of Wilmington, Del.