Lipper Research Analyst Don Cassidy on "Business for Breakfast" 1060 KRCN - Two New Funds Launch Here in Colorado

A. That's true. And that lack has been a general trend throughout the funds industry for the past couple of years. Overall, in the first five months of 2006 we have seen only about three dozen new funds, against over 90 in the same period of 2005 and over 330 for all last year (numbers exclude ETFs).

Q. Why so?

A. Well, I think there are several factors: First, fund company managements have been pretty busy focusing on new regulations like the chief investment officer, finding independent board chairs, and tightening up controls after the frequent-trading scandal in 2003.

Also, while money coming into the industry has been fairly decent, it has been highly concentrated in a very short list of firms, so not many shops have a lot of extra discretionary money to risk spending on new-fund creation.

Third, there were a lot of new funds created a few years back, and not all of them have gotten the hoped-for assets, so some shops are now cautious.

And fourth, ETFs are chipping away at market share a little bit all the time.

Q. Okay, so we hear there are two fairly new funds based here in Colorado...

A. Right. One, QCM Absolute Return Fund, started in December and focuses on merger arbitrage strategies--a bit of a flavor like one of the many hedge fund strategies. Jerry Paul, a former star manager at INVESCO, is the portfolio manager.

Q. It's interesting that the new funds are by managers that left their old company and started their own firm.

A. Right--true for both funds of local interest. This also is not uncommon for successful and very entrepreneurial managers. Tom Marsico was an earlier local example in the 1990s, and he now has the third most assets of all Colorado-based fund companies.

Q. How has that QCM Total Return fund done so far?

A. It has a total return of 2.4% since its inception in late December. The ticker is QARFX.

Q. And the other newcomer?

A. Quite new, just announced yesterday in fact. It is Aquila Three Peaks High Income Fund (ATPAX), which invests in high-yield bonds. The portfolio manager is Sandy Rufenacht, who ran Janus High Yield Fund very successfully for about nine years before leaving in 2003 to start his own firm.

Q. "Aquila Three Peaks"-two names, right?

A. Yes. Aquila is a small group headquartered here in Colorado, mainly running several fairly conservative bond funds. It has teamed up with Three Peaks being the subadvisor (to actually run the money) for a product in the high-yield arena.

Q. Why is that?

A. Aquila has an established network for distribution, and it is pretty difficult for new firms to break into the funds world and get "shelf space" and mind space right away. We are seeing a growing number of partnering arrangements here and there in the business these days, especially if one party has the established expertise.

Q. What do you think of high-yield funds at this point in the economic and market cycle?

A. Well, if you assume the economy will keep cooking along decently (and certainly the Fed is seeing those sorts of indications), then I would not be too worried about owning a well-managed HY fund at this point.

Q. That does not sound like the most ringing possible endorsement...

A. Well (and of course I must remind people that Lipper does not recommend funds!), HY is an asset class that has its good and bad seasons. I would not want to own a typical HY fund in a recession when defaults rise. And the interest-rate spread over government bonds now is narrower than average, at about plus 3.3%, so the yields are not screaming buys right now.

Q. You mentioned the portfolio manager of this new Aquila Three Peaks portfolio was very successful at Janus...

A. Right. He and his staff take a nearly unique approach, which I think is very important in this asset class. This is an arena where about 5% of bonds default in an average year. And the temptation from a marketing viewpoint is to reach for the highest yielding (lowest quality) bonds, which raises risk to capital. Sandy takes the opposite approach: he wants the safest looking low-rated bonds that yield somewhat less than maximum but have lower default risk.

Q. How has that worked out?

A. Very nicely. During the nine years at Janus, which included the technology meltdown in 2000-2002, not a single bond they were holding went into default.

Q. So, they worked to protect principal first and get what yield they could as a result.

A. Exactly. And I think that is an important strategy for all income investors, no matter what they are investing in. That's why people move to shorter-term bonds and funds when interest rates are rising: to guard against declining bond prices. Basically, if you are living off income from investments, you don't want the principal to erode. So, you need to preserve the base from which you generate your income.

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Don Cassidy is a Senior Research Analyst at Lipper specializing in fund flows, exchange-traded funds, (ETFs), closed-end funds, equity fund performance, and author of Trading on Volume (McGraw-HIll).