Institutional Mutual Funds – Invest With The Millionaires

Suppose a posh country club in your neighborhood offered to let you join for a fraction of the super-high initiation fee it charges its rich and famous members. You’d be tempted, wouldn’t you, even if you never planned to set foot on its Masters-level golf course?

That may be fantasy, but similar seductions are being presented by the Pine Valleys of the investment world: institutional mutual funds. These generally set their minimum investments so high, at $100,000 to $35 million, that none but Fortune 500 pension funds, insurance companies, endowments, and the occasional multimillionaire need apply. But many institutional funds–eager to tap into the flood of money that has been swelling their retail brethren’s assets–have lowered their minimums within reach of the average individual. You can get into some of the best for free (or almost for free)–paying no load and, perhaps, a modest transaction fee.

Invest with the Millionaires

The benefits of membership in an institutional fund are high performance and low expenses–more valuable than an early tee-off time.

Why do institutional funds outpace retail ones? “The biggest difference is expenses,” says Susan Dziubinski, editor of Morningstar Investor. Institutional funds generally spend little on marketing, she explains, because big institutional investors pretty much know what they want. Administrative costs are also much lower, since these funds have substantially fewer clients than retail funds do.

Modest expenses and good performance are only part of institutional funds’ attraction. Just as important, the fund managers, unlike their retail colleagues, tend to focus sharply and steadily on their objectives. They generally invest as their names imply–a growth fund doesn’t morph suddenly into one engaged in emerging markets–and they shy away from gimmicks, such as option-income products.

If you want to join the institutional club, you have two paths to membership: through a financial planner or through a discount broker. Institutional funds rely heavily on pension consultants to pitch their wares to big plans like General Electric’s. So it’s not surprising that to reach individuals, many of the funds turn to the consultants’ small-investor counterparts: financial planners. “We feel that this is the wave of the future,” says Tom McFarlan, a managing partner of Brinson Partners and president of Brinson Funds, which is making its no-load funds accessible to planners’ clients.

Of course, you have to pay financial planners for their services. But you can do an end run around them. Institutional firms sell their shares to the small-investor market through discount brokers, who take a cut of sales in return for mailing prospectuses, distributing shares, and otherwise leaving money managers free to manage money (and keep their administrative expenses low). You can buy through these brokers yourself, without the aid of a planner, if you feel comfortable making your own investment choices. You just have to find out which brokerages offer which funds.