Monday, February 17, 2014

Getting into the Mutual Fund Business isn’t So Easy: KKR Withdraws

Getting into the Mutual Fund Business isn’t So Easy:  KKR Withdraws

Over the years, I have seen many an institutional money manager look longingly at retail mutual funds as new source of business.   From afar it looks like an easy way to take existing expertise and deliver it to a wide audience.  KKR has learned that it’s not so easy.  They’ve just announced that they are closing their two mutual funds -- Alternative Corporate Opportunities Fund and Alternative High Yield Fund.  Despite having plenty of capital to seed these products, KKR hasn’t been able to attract many outside investors to the products over the past two years.  While a mutual fund can be extremely profitable if it achieves scale, it is extremely expensive to maintain if it remains small.  Until a fund can cover its operating expenses, the manager will probably have to subsidize the fund.
Sketchbook #11 (2001)
The issue is distribution.  Even though a formidable firm like KKR can probably get its mutual funds on one or more full-service or discount brokerage platforms, being on the shelf doesn’t guarantee sales.  If you’re not a big-time firm like KKR, you won’t even get that far.  Stockbrokers and financial planners have established relationships and are bombarded with information from mutual fund wholesalers.  Does an established financial advisor really need another product, even one manufactured by KKR?  Hardly.  In order to gain traction, KKR needed products that were compelling to both investors (returns) and financial advisors (fees) in order to disrupt existing relationships.  Perhaps KKR will decide to make the acquisitions necessary to break into the mutual fund business.  Meanwhile they join thousands of mutual funds that failed to gain traction.

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