Mutual Funds: The Hubbub Over `Hubs'Jeffrey M. Laderman
The Van Eck World Income Fund used to invest its $244 million in foreign bonds--and did a good job of it. But by mid-August, the fund will no longer own any bonds. Instead, it will transfer all its assets to a new fund called the World Income Portfolio and simply take back shares in that.
The 11,000 shareholders will barely notice the paper shuffle. What's happening is that Van Eck World Income is becoming the first "spoke" of a "hub" fund--one of the hottest ideas sweeping through the fast-growing mutual-fund industry. Mutual-fund companies are, in effect, copying what manufacturers of clothing, food, and appliances have done for decades: putting out the same product with different labels targeted to different buyers. Van Eck eventually hopes to spin out spoke funds for banks to sell to their customers, for insurance companies to use in variable annuities, for pension-plan sponsors of 401(k) plans, or for offshore investors. These spokes will act only as conduits for investors' cash, funneling all the money to the hub to invest.
BELLS AND WHISTLES. The hub-and-spoke idea promises to increase the market for mutual funds vastly. It's especially attractive to banks that want to jump on the fund bandwagon but don't have an organization in place. A hub and spoke allows fund companies to start up new funds faster and at less cost.
Each spoke in the hub can have its own sales charges--an up-front load, a back-end load, an annual fee, or any combination. A spoke can be offered as a no-load fund, too, and each spoke can have its own name. That means different investors may end up paying different charges--or even none at all--for the same investment. The seller of a spoke fund doesn't have to tell an investor that he could buy the same investment under a different label for a lower price. "There's no specific rule about that," says Robert Plaze, assistant director of the Securities & Exchange Commission's Investment Management Div.
The first hub-and-spoke fund won SEC approval in 1990, and there are now an estimated 40 hubs, 60 spokes, and some $12 billion in assets, says James E. Hoolahan of Signature Financial Group, which holds a service mark on the "hub and spoke" name and licenses the technology and software to operate such funds. And, adds Hoolahan, the number of funds and assets could double by yearend. Other companies are developing hub-and-spoke structures for their funds but can't use the term. They refer to "master" and "feeder" funds.
SHARED WEALTH? Some big names are getting into the game. The $4.5 billion Franklin Adjustable U.S. Government Fund--the largest fund investing in adjustable-rate mortgages--is the hub of two spokes: a $3.5 billion spoke for individual investors and a $1 billion institutional spoke. Janus Fund, with shareholder approval, recently reorganized each of its funds into hubs and spokes, even though no hub has more than one spoke--nor are any planned soon. "This improves our flexibility," says a spokesman. Others using hubs and spokes are Citibank, Bankers Trust, Flex-Funds, and Liberty Financial Services. Pacific Horizon Funds, for instance, plans a master fund with one feeder for the U.S. investors, one for Canadians, and a third for Mexicans.
The hub-and-spoke idea will undoubtedly produce economies of scale by gathering more and more assets into one portfolio. And proponents say such economies will be passed along to investors as lower expenses. Maybe. For now, investors need neither embrace nor shun spoke funds. Says Plaze: "Make your decision based on the investment portfolio. "
Hub and spoke is a brilliant marketing concept that could make fund companies even richer. But some think the industry might better put its brains to work on enhancing the returns to fund shareholders. Take care of investors, and the fund managers' riches will follow.