Why overpopulate the world when you can give a loving home to a ward in need? That seems to be the thinking in the mutual fund industry, where small and midsize companies will often seek the support of larger fund companies for their funds, reports the Wall Street Journal.

So how do fund adoptions work? Typically, a large mutual-fund company will take over management of one or more funds from the smaller firm, adding it to their roster of products marketed and distributed. In return, the original firm tends to remain as the day-to-day PM, and usually receive a cash payment based on the size and track record of the fund.

Adopted funds typically hold between $500 million and $2 billion in assets, and tend to be highly rated for their investment performance.

"To have scale, access to the market, access to investors, more investment managers are finding that they need help," says Avi Nachmany, research director and executive VP at Strategic Insight.

COO Jeff Ringdahl of American Beacon Advisors, which has adopted four funds this year, calls adoptions a "very prudent way" of expanding a fund lineup with proven managers. This makes sense, says Nachmany, who points out that among people who start small investment companies, "their skills and passion are in managing money" than in managing business.

Transactions aren't always announced, so it can be difficult to gauge just how many funds have been adopted in recent years. But partner Ben Phillips at management-consulting firm Casey, Quirk & Associates says you can expect to see more in the coming future.  

Edited by: Irene Park


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