SNW Asset Management
learned the hard way that managing a successful portfolio is one thing, but running a mutual fund is another game entirely.
In June, the Seattle-based firm closed
its first and only mutual fund: the SNW Oregon Short Term Tax Exempt Bond Fund
The fund, launched in May 2011, invested in Oregon public purpose debt, such as education, health care and government, to generate returns exempt from federal and state personal income tax for Oregon residents.
SNW managing director Eddie Bernhardt
said the fund was launched after a number of Portland-based advisors reached out to his firm, asking for a product that helped high income clients deal with Oregon's high state income tax.
"They told us, 'Why don't you start a mutual fund for this?'" said Bernhardt. "They were surprised at the push back they got from clients on our lack of a mutual fund."
Bernhardt said that SNW executives based the fund on portfolios that worked well in the separately managed accounts of high worth clients. SNW manages over $1.4 billion in assets within more than 700 separate accounts. It saw over 35 percent asset growth this year.
The fund was distributed by BNY Mellon Distributors, Inc., and during its lifetime the fund attracted roughly $7 million of inflows. As of April 30, 2012, it had generated 4.22 percent in returns since its inception.
The problem: managing a fund wasn't profitable for SNW.
"Although the investment performance was good and it made investors happy, we did not reach profitability," Bernhardt said.
Running a mutual created a slew of headaches for SNW: they needed to find wholesalers, resources and time that they didn't have. Also, the fund's youth created a challenges.
"We reached out to people who were in distribution, but a lot of people want to see three-to-five year track records," he said.
SNW executives did the math and realized that it was going to take a long time before they'd earn profit on the fund, and so, the firm decided to close the fund in June.
"We realized this this was not going to grow fast enough to justify the cost of keeping it open," Bernhardt said. "We reached out to clients and told them, 'If you want to open up a separate account to move these funds, we'll reduce our minimums and some fees to help you.'"
Bernhardt says he has encountered growing frustration amongst other small asset managers about their funds.
"Most of the new mutual funds, successful in terms of assets, are from established houses," he said. "They are backed by established marketing. This is the way of the world. You need wholesalers, and contacts in the marketplace to launch a new fund."
Bernhardt said his firm is still open to participating in the mutual fund business, but it would stick to serving as the sub advisor for the fund's owner. They'd treat the fund as a high touch separately managed account.
"We would partner with another firm, successfully invest in the ways we know how, and let it rip," he said.
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