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Wednesday, Apr 24, 2024

Miniature Mutual Fund Has Big Growth Plans

Los Angeles is home to one of the largest mutual fund companies in the nation, Capital Group Cos., which runs American Funds. It’s also now home to one of the smallest. Tom Kerr, a veteran portfolio manager with 18 years of experience, has started his own firm in Calabasas offering what he believes is the first mutual fund based in the San Fernando Valley. Rocky Peak Capital Management is diminutive by most any measure. So far, it only offers one small-cap fund of domestic equities, and it’s operated out of Kerr’s home, with the assistance of two interns and his wife, Heidi, who handles administrative and marketing duties. Kerr would like to move into regular office space and create one or two mutual funds a year, but his goal is just a medium-sized firm – one that minimizes water cooler distractions and extended meetings on investment strategy. “I can focus on good companies, let them do their thing and get the value over two to three years,” said Kerr, 48. “They have room to grow and expand.” Kerr started Rocky Peak after leaving, in the summer of 2011, the West Los Angeles firm he had worked for since the 1990s. Reed, Connor & Birdwell had been bought out and the new owner eliminated the small cap fund Kerr managed. But after all those years in the business, he was known about town. Matt Heller, an investment advisor with Willner Heller LLC in Encino has steered clients to Kerr’s mutual fund. Not only does Kerr know what he’s doing, he said, but small-cap fund managers are scarce. “It is hard to find a good manager who does well in that area,” Heller said. Still, Rocky Peak is not exactly starting at a propitious time for the mutual fund industry. While the stock market had a good year despite the economic weak recovery – the S&P 500 was up 11 percent as of Dec. 27 – U.S. investors are getting jittery about equities. The outflow of money in stock mutual funds was $23.2 billion in November, an increase of 41 percent from the outflow of $16.4 billion in October, according to figures compiled by the Investment Company Institute, the national association of U.S. investment companies. And the year to date outflow through November was $123 billion compared to the $98.7 billion for the same period in 2011, according to ICI. Those kind of outflows will pose a challenge to Kerr, who needs to attract investors to his fund. Charles Schwab & Co. Inc. and TD Ameritrade came on board right away, which will allow their individual client investors to put money in his funds. But only after a year of activity will Merrill Lynch & Co. Inc. and Morgan Stanley, for example, take a look because they require the mutual funds they offer have a track record, Kerr said. Striking out After leaving Reed, Connor & Birdwell, Kerr made the decision early this year to be an independent fund manager and started the process of gaining Securities and Exchange Commission approval. “They have to be committed to the process because it not easy,” Heller said. The federal agency reviewed Kerr’s track record and did a background check. The approval process carried a cost of about $20,000. Rocky Peak was up and running in April. The single small-cap fund he offers has 40 hand-chosen companies with market capitalizations of $3 billion or less, and so far it has drawn $1 million in investments. With 6,000 domestic stocks from which to choose, Kerr bases his investment strategy on a number of factors including avoiding speculative securities; researching if a company is sustainable and has a competitive edge; checking for a solid cash flow and low price/earnings ratio; and reviewing the track record of the management and directors. Kerr projects a 10 percent to 15 percent return on the fund, which is higher than usual for a startup but in line with smaller cap funds, which tend to grow faster than large caps. It has a total expense ratio of 1.48 percent. “It is safer than the hedge funds or alternative (investment) products that people are investing in these days,” said Kerr, who has not yet released the fund’s performance to date. The metrics Kerr uses are similar to what the New England Investment and Retirement Group Inc. uses in determining where to invest the money of its clients, which include wealthy individuals and employers investing on behalf of employees For that reason, the North Andover, Mass. firm put some of its clients’ money in Kerr’s fund. “He’s good at risk management,” said Mark Weiderman, the Los Angeles area investment officer for New England Investment. “He does not load up on one stock; it is diverse and spreads out the risk. That is what we look for.” Thinking ahead There are Valley area companies in the Rocky Peak fund, including DreamWorks Animation SKG Inc. in Glendale and aluminum wheel manufacturer Superior Industries International Inc. in Van Nuys. Kerr has followed Superior’s stock since his days at Reed Connor. Superior has long been cost conscious, never carried debt and has a lot of available cash. On a visit there in the 1990s, Kerr recalled being served coffee in a Styrofoam cup and seeing tape holding the carpeting together. “They are not spending money on fancy artwork in the lobby or expensive carpeting,” he said. As his fund attracts more investors, Kerr is already developing the new funds he wants to offer. One will be an international fund that will focus on large-cap and mid-cap companies operating outside of North America. An all-cap fund will have all domestic stocks without consideration of company size. The plan is to roll out a new fund every nine to 12 months. “The firm is well capitalized enough where I can roll out additional funds while the first fund is still in the growth phase,” he said.

Mark Madler
Mark Madler
Mark R. Madler covers aviation & aerospace, manufacturing, technology, automotive & transportation, media & entertainment and the Antelope Valley. He joined the company in February 2006. Madler previously worked as a reporter for the Burbank Leader. Before that, he was a reporter for the City News Bureau of Chicago and several daily newspapers in the suburban Chicago area. He has a bachelor’s of science degree in journalism from the University of Illinois, Urbana-Champaign.

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