Fastest growing firms? Not your father's fund company

The fastest growing mutual fund companies have one thing in common: They are anything but just plain-vanilla stock and bond asset management firms. That fact speaks volumes about both the evolving investment appetite of financial advisers and the benefits of providing investors with exposure to less traditional strategies. While there are some established brand names among the 50 firms that saw the biggest percentage gains in assets in 2010, the top of the list uses alternative and quantitative strategies, and has all manner of big-brain academics on staff. “We figure the world doesn't need another large-cap-growth fund, and that's why our funds are all different flavors,” said David Kabiller, founding partner of AQR Capital Management LLC. AQR, which saw its mutual fund assets grow by 380% last year to $3.3 billion, is a typical example of the fastest-growing fund complexes. The firm, which was started in 1998 by a group of Ph.D.s from the University of Chicago, expanded into the mutual fund business less than three years ago. It has a total of $36 billion in assets under management. “We have a fair amount of new ideas and capacity, and we also have a very rigorous vision,” Mr. Kabiller said. “If we have comparative expertise in something and there's a need that's not being met, we feel that's a very good business opportunity.” The company now has seven mutual funds, including the flagship $1 billion AQR Managed Futures Strategy (AQMNX), which invests in futures contracts to provide exposure to more than 100 financial markets around the world. The fund was up 5.8% in 2010, compared with 12.7% for the S&P 500. In an analysis of firms that had at least $100 million in mutual fund assets at the end of 2009, AQR ranked second behind Alps Advisors Inc., which grew by 391% to $1.7 billion. The data were compiled for InvestmentNews by Lipper Inc.

"A STARK CHANGE'

There's nothing plain-vanilla about Alps, either. In addition to master limited partnerships, private equity and commodities, the firm also offers 17 open-end mutual funds, closed-end mutual funds and exchange-traded funds. “Clearly, these are not garden-variety fund firms that are taking in all the assets,” said Tom Roseen, senior research analyst at Lipper. From his perspective, the trend of asset flows represents a stark change from before the market correction of 2008, when investors were more interested in “set it and forget it.” “If you look at the fund companies at the top of the list, they are all using hedge fund strategies, quant strategies, providing exposure to commodities and futures,” Mr. Roseen said. “People are becoming more focused on the niche funds.” While the asset growth percentages are impressive — with assets at the top 21 firms growing by at least 100% last year — the actual numbers still pale in comparison with the behemoth fund companies. The Vanguard Group Inc., the largest mutual fund company, manages $1.7 trillion and grew by $254.9 billion last year. That is about $700 million more than the combined total assets of the 50 fastest-growing fund companies.

POWERFUL INFLOWS

But what remains most impressive to Mr. Roseen is that the boutique fund complexes enjoyed such powerful inflows while domestic equity mutual funds finished 2010 with $68 billion worth of net outflows. For many of the fund companies on the list, the story is less about marketing savvy and distribution than it is about bringing an alternative strategy to a hungry market. That was the case with Stadion Money Management Inc., which saw its mutual fund assets grow by 216% to $1.1 billion. The firm, which was formed in 1991 and has $6 billion in total assets under management, launched the first of its two mutual funds in 2006 to mimic a “fully unconstrained” separate-account strategy. The $900 million Stadion Managed Portfolio (ETFFX) uses ETFs to move between stocks and bonds in a model-driven strategy that can be up to 100% in stocks or 100% in bonds. The fund was up 12.2% last year. “We run a low-volatility, low-beta, low-standard-deviation strategy, and we pivot the portfolio based on moving averages,” said Stadion senior vice president Steve Beard. “A lot of financial advisers felt the same pain that their clients felt in 2008, and this kind of fund is for advisers who are looking for unconstrained strategies,” he said. As for its recent asset growth spurt, Mr. Beard said more advisers are starting to make in-quiries and that marketing is be-coming a bigger priority. “People are calling us an overnight success, but that's just because they [have] never heard of us,” he said. The strong appeal of such boutique investment shops illustrates the fact that the anxieties of mutual fund managers who fled in droves to run hedge funds were overblown, according to Don Phillips, director of research at Morningstar Inc. “This proves that all the asset management talent was not lost to the hedge fund industry, as everyone was predicting a few years ago,” he said. Advisers don't want to live through another 2008, Mr. Phillips said. “They're looking for anything to help smooth out performance,” he said. Ultimately, the popularity of niche players illustrates that “the asset management world is changing,” Mr. Phillips said. “It's not surprising to see smaller players take the lead, because we're starting to see some very talented people come into this industry,” he said. “For financial advisers, the tool kit is getting deeper.” Building products with financial advisers in mind is another of the common denominators among the fastest-growing fund companies.

WORKING WITH ADVISERS

Most of the firms seem to recognize that to succeed in offering more-sophisticated strategies, they will need to work with advisers to deliver the message to investors. “We thought the mutual fund market would be a great opportunity to bring the benefits of hedge funds to a broader market, and so far, it's gratifying because we've seen some traction from financial advisers looking for absolute return,” said Jerry Chafkin, president and chief executive of AlphaSimplex Group LLC. The firm, which started managing money in 1999 and has $1.7 billion under management, launched the first of three mutual funds in 2008. Last year, fund assets grew by 291% to $919 million, most of which is in the $730 million Natixis ASG Global Alternatives Fund (GAFAX). The fund, which gained 9.3% last year, invests in liquid-futures contracts to replicate the performance of the broader hedge fund universe. “We're looking to bridge the gap be-tween hedge funds and mutual funds,” Mr. Chafkin said. “We think it's the right product at the right time.” E-mail Jeff Benjamin at -jbenjamin@investmentnews.com.