How New Funds Reach the Marketplace

03/15/2012 6:45 am EST

Focus: FUNDS

Stuart Bilton, CFA

Chairman and Chief Executive Officer, Aston Asset Management

Advisors Stu Bilton and Ken Anderson explain how they partner with sub-advisors to launch new funds. They also tell MoneyShow.com about three of their fund offerings, and what each brings to the retail investor.

Kate Stalter: Today I’m on the phone with Stu Bilton and Ken Anderson of Aston Asset Management.

You have an interesting sub-advisor model. I’d like to start out today talking just a little bit about what that model is.

Stu Bilton: What Aston does is: We retain, or our fund board retains, independent money managers to sub-advise funds for Aston. Aston is the investment advisor, and then we hire a sub-advisor.

Why do we do that? I think that’s the question. There are really two strands to our business model. The first is that we’re better off with a sub-advised model, because we go out and try to find the best money managers we can, rather than look internally and try and find someone who might be able to run a fund, or perhaps wouldn’t be very good at doing that.

So what it means is, we go out and try to find the best. We don’t get into internal politics and somebody says, “Why don’t you let Jane run a mutual fund?” And then Jane gets to run it. So we go outside and we find the external manager that’s good.

The second strand to it is there are a lot of institutional money managers. That’s money managers who do business and who work for big pension funds, endowments, who don’t want to be in the mutual-fund business directly, because of cost, complexity, compliance work. They will sub-advise a fund for us, because we will do all of that work and so what we actually do is we bring institutional managers, as we like to say, to the retail marketplace.

Kate Stalter: Most of our listeners today are going to be individual investors, perhaps saving for retirement or other goals. How do you make the decision to launch a fund and in which particular space?

Ken Anderson: What we do is, we’re often listening to our clients, and our clients are intermediaries, where their client is the end investor or the retail investor. And listening to their needs and what their clients are saying is one of the big focuses for us, in terms of: Where should we launch some products?

So as an example, today people are trying to seek yield in a very low fixed-income-yield environment, so recently we’ve been discussing our current dividend yield product. So those are the types of things we’ll have discussions with the intermediaries, and listen to the marketplace in terms of adding new funds.

And sometimes an addition of a new fund can come from a current sub-advisor, or oftentimes we will seek a new sub-advisor to specifically focus on that type of area.

The folks that we are talking to are registered investment advisors or financial consultants through the various platforms. It could be a Schwab platform, a Fidelity platform, a Merrill Lynch—in those sorts of places.

Stu Bilton: I was looking at our records the other day. Over the last three years, we’ve had 210 separate meetings with money managers. These are people who’ve come into Chicago and want to talk to us, to see if we will open a fund with.

I believe we’ve opened seven funds during that time period. So what we do is a lot of due diligence. A lot of people come in here and say, “We’re an institutional manager and we want to open a mutual fund.”

We tend to be very careful who we’ll work with in the end, and so we spend a lot of time on the due diligence end of this business, trying to find the right institutional managers who we can take to the retail marketplace. That’s what we do.

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Kate Stalter: I want to talk a little bit about some of these specific funds. I do notice that you span various asset classes and market caps and even strategies. Can you say a little bit about how you choose these various areas, and how individual investors should balance their portfolio across the different models you offer?

Stu Bilton: The simplest way of looking at asset allocation is obviously to use the style boxes. Value, growth, small to large. We try to have one or two funds in each of those categories. So you’ll find a midcap value, a midcap growth, small-cap growth, small-cap value, large-cap growth, and large-cap value.

So we try to put each fund in each style box, and the reason for that is: We don’t believe that most people, probably including ourselves, can really ahead of time tell which style is going to do the best.

Therefore, we recommend that you diversify. That in fact you do not put all of your eggs in one basket, but rather you put a portion of your assets in each of those style boxes, rather than try and choose one that you think for the next 12 to 24 months is going to be the best place to put money.

The other thing we have done recently is: There has been a lot of talk about alternative investments and hedge-fund-like vehicles. We’ve actually put together a fund of hedge funds. A fund of alternative mutual funds into one fund called the LASSO Fund (ALSOX), where we do the work for the retail investor, find the managers, and put them all in one fund, and then make that available to the public.

Kate Stalter: Any other of your funds that may have unusual or particularly timely strategies that you’d like to tell people about?

Ken Anderson: Well, sure, I was just alluding to one in particular. Recently, it’s the Aston/River Road Dividend All Cap Fund (ARDEX), which is seeking yield in a low-yield environment. So that’s one that’s been particularly popular in the past 18 months or so.

And and I’ll go ahead and echo what Stu just mentioned with regards to the Aston/Lake Partners LASSO Fund, which is our alternative fund of funds. And again, that has also been popular, because it dampens volatility. So your portfolio, as a retail investor, you don’t see it having those great spikes both up and down, but it smooths out the returns over time, and it is a great diversifier within a portfolio.

Stu Bilton: The other fund that I particularly like at present is the Aston DoubleLine Core Plus Fixed Income Fund (ADBLX).

Jeffrey Gundlach, who I believe is probably the best fixed-income manager in the country, maybe the world. And Jeffrey and his team at DoubleLine do what we call a Core Plus Fixed Income Fund, which lets the DoubleLine team range all over the fixed-income marketplace to build a fixed-income portfolio for retail clients.

That should over time achieve good returns. So I am particularly strong on the DoubleLine fund right now.

Kate Stalter: Looking ahead, any areas that you see as perhaps ripe for some new funds, or any new types of investing products to offer customers?

Ken Anderson: The focus that we’ve had more recently has certainly been on the alternative space, as we’ve been discussing briefly, and the international space as well.

So on the alternative space, there is a variety of different buckets that retail investors can add diversification to their portfolio, and on the international side, the same thing. Getting exposure in the emerging-markets area, as well as the developed international space.

Stu Bilton: The tough problem for us, Kate, is we know where there are gaps, but we won’t open a fund until we’re confident we’ve found the right manager.

So, for example, managed futures. We’ve looked at that and we’ve looked at lots of people, and I’ve said there’s certainly no shortage of people who want to open a fund with us. But we haven’t quite found what we want in that category to cause us to want to open a fund and put our name on it.

Ken mentioned emerging markets...the same issue there. When we find what we want, we may do it. We’re not just going to do it to get something out there.

And the third area would probably be global tactical asset allocation, where I have some interest. We’re looking at people, but we haven’t yet found one...a group that I think we’d want to be associated with.

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