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Wednesday, December 22, 2004

Primecap Continues Odyssey

Reported by Theresa Sim

When Primecap filed to launch its own family of funds in July, many in the industry balked that the move was disingenuous. Because Vanguard, the source of most of the institutional money manager's assets, had just shut off the tap to more assets by closing its two Primecap-subadvised funds, it appeared that the move was designed to gain leverage in negotiations with Vanguard.

Whatever the rationale, it looks like Primecap is getting its cake and eating it, too.

The firm has not only been enlisted to subadvise yet another Vanguard fund and is getting a raise for its management of existing Vanguard funds, but it also seems to be going ahead with plans for its own Odyssey-branded fund line.

Earlier this month, Vanguard announced the opening of the Vanguard Primecap Core Fund, the third Primecap-subadvised fund in its stable. Primecap already manages approximately $26.3 billion in assets for the Vanguard Primecap Fund and $8.3 billion in assets for the Vanguard Capital Opportunity fund.

The SoCal money manager will also be getting more for managing Vanguard funds. Vanguard upped the fees on its Primecap-subadvised funds by four basis points, reportedly in order to "attract and retain top investment talent, and thereby enhance the organizational stability and depth of the firm." The funds will go to hiring more investment professionals who will be needed to manage future diversified streams of assets, according to Morningstar analysts who recently visited Primecap.

The reason that diversified assets are critical to Primecap, according to Morningstar, is because the firm is focusing on succession planning, weaning itself off of the Vanguard tap, and developing the firm beyond its star trio of Howard Schow, Mitch Milias and Theo Kolokotrones.

Whether Primecap actually uses this money to build out its investment staff for the purposes of succession-planning, as Morningstar analysts argue, is debatable, but the recent developments indicate that Vanguard needs Primecap just as much, if not more, than Primecap needs Vanguard.

But more importantly, if Primecap managers are trying to wean themselves off of Vanguard assets, why are they subadvising another Vanguard fund, why is the institutional manager plunging into the retail market, and why aren't the managers trying to sign more institutional clients?

Actually, Primecap has increased the number of institutional clients from 20 to 25, adding five in October alone, according to Morningstar. And perhaps Vanguard was wrong in thinking Primecap management was maxed out.

As for the Primecap Odyssey funds, the firm has filled in a few details since it first filed for the funds in July. U.S. Bancorp Fund Services administer and TA the funds and Quasar will distribute the funds. Mellon Bank will custody the funds' assets.

But according to the Morningstar analysts, "[Primecap] reportedly haven't hired any new marketing personnel, have no plans to spend a penny on distribution or advertising, and pledge to keep the same low profile as before."

In actuality, Primecap will pay a little more than a penny for distribution of the funds -- Quasar will get $21,000 annually, plus 0.05 percent of assets (with a cap of $75,000) to distribute each fund, according to a filing. Although it's not clear if Primecap will pay the fixed $21,000 for each fund, the maximum amount it will pay to distribute three funds would be $288,000 -- hardly a fortune.

The firm's latest filing was on December 1, when it updated the management for the Odyssey funds dated December 1. Since Primecap has already gotten a new fund from Vanguard and higher fees, it seems doubtful that the company would continue the "charade" for no reason, unless the "charade" is real. 

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