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Pioneer Jump-Starts its SMA Business

Pioneer Investments of Boston is tiptoeing into the separately managed account business through a brand-new phase of its year-old existing partnership with growth manager Oak Ridge Investments of Chicago.

Last Wednesday, Pioneer announced that it had acquired a minority ownership investment in Oak Ridge, essentially buying out the equity portion of the firm owned by one of the two founders, who is retiring. Under the arrangement, Pioneer acquired a 49% equity stake in the company for an undisclosed amount, with a further agreement for Pioneer to acquire another 11% stake two years from now, said Steven Graziano, executive vice president of strategic marketing at Pioneer. Oak Ridge employees own the 51% majority interest.

Oak Ridge's large-cap and small-cap investment know-how and its experience managing, servicing and distributing separately managed accounts, allows Pioneer to make its foray into the burgeoning marketplace. Separately managed accounts have nearly $529 billion in assets under management and are growing rapidly.

Specifically, Oak Ridge has been successful in leveraging its SMA capabilities in the competitive broker/dealer wrap channel, the precise channel that Pioneer was hoping to someday enter, said David Klaskin, co-founder, chairman and chief investment officer of Oak Ridge. "We already have exposure in those channels," he noted.

Moreover, Oak Ridge offered the depth of knowledge about their managed account products, six marketing people and four on-the-road reps, Klaskin said. Pioneer will be training its current 45 wholesalers on the finer points of separate accounts. Right now, the two firms have developed an online managed account crash course for Pioneer's wholesalers to help them obtain the appropriate sales licenses, he said.

Pioneer's wholesalers will be the "hunters and gatherers" who will initially test the waters and identify those brokers who sell managed accounts, Graziano said. After identifying these producers, they will then hand them off to Oak Ridge's team of product specialists, he added.

Laying the Foundation

Pioneer expects to build on its newfound separate account capabilities by acquiring stakes in other managers and using Oak Ridge's separate account platform as its central portal to the industry, explained Graziano. "We are actively in search of acquisitions," he noted. The ideal candidate will offer both retail funds and managed account capabilities that can be pushed through the Oak Ridge platform, he added. A distressed securities manager is next up on Pioneer's wish list, Graziano said.

The two firms are also considering adding additional Oak Ridge managed account products down the road, Klaskin said. Right now, Oak Ridge manages $55 million for clients under an all-cap strategy, and has been incubating a mid-cap product for potential roll out.

Pioneer first partnered with Oak Ridge last year when it adopted both a $8.6 million large-cap fund and a $16.5 million small-cap fund that the firm managed. In February of this year, those two funds were merged into new but similar funds now co-branded under the Pioneer Oak Ridge moniker. In this original agreement, Pioneer serves as the advisor to the funds while Oak Ridge continues to manage the funds through sub-advisory agreements.

While the small-cap fund is nearing its 10-year anniversary, the Oak Ridge large-cap fund began life in the throes of the Internet frenzy in March of 1999. Amassing a mere $2.7 million in assets, in January of 2002, Oak Ridge acquired the $8.2 million Universal Capital Growth Fund and merged those assets into its large-cap fund.

Best Foot Forward

Graziano admitted that Pioneer had thought long and hard about entering the separate account industry. "We are a retail fund shop. We didn't want to go in [to the separate account industry] and trip," he said. "We decided on entering the space through an acquisition, and found a manager with retail funds and a separately managed account business."

The deal is happy partnering for Oak Ridge, as well, Klaskin said, as last year his firm had been looking for a way to build mutual fund assets. A full acquisition was not in the plans, he said. "We are too young and entrepreneurial a firm," he said.

Pioneer, which was originally interested in just acquiring the firm's two mutual funds but retaining the manager, approached Oak Ridge with a Vanguard Group/Wellington Management-type of fund sub-advisory scenario, Klaskin said. But when the two firms were discussing the deal, it became clear that there were also synergies for separately managed accounts, both for retail and institutional investors.

According to Graziano, Pioneer realized it was time to gear up for a managed account initiative when he heard brokers repeatedly make note of its funds' strong performance but note that they only sold separate accounts. "To the extent that you are not a part of that growth [market] you find yourself with an ever-shrinking business," he said.

Its maiden voyage into the managed account industry does not by any means indicate that Pioneer will sacrifice its retail mutual fund business, Graziano said. Pioneer's fund family includes 41 open-end and five closed-end funds. In the future, Graziano expects that Pioneer's product mix will be closer to 60% mutual funds, 25% separately managed accounts and 15% institutional assets.

Although a number of firms have begun entering the separate account industry in the past few years, industry consultants expect the playing field to become even more crowded. "Firms are going to be forced to offer these products in order to target the advisers servicing the more affluent investor," said Dave Haywood, director of managed account research at Financial Research Corp. of Boston. "It is a necessary product offering. Moving forward, groups are going to need to offer an array of services."

As for Pioneer entering the separate account business, the firm is definitely not too late to the party, Haywood commented. "You need to get to market quickly. This is a good way to enter, with a company that has the support, technology and experience," he said.