In theory, Steven Adler's ASM Fund ought to be a slam dunk.
The stock market is trading at near-record heights and the Dow Jones Industrial Average is in the news most every night. The Tampa-based ASM Fund, the only mutual fund that tracks the Dow, is up more than 50 percent over the past two years.
Unfortunately for Adler, most investors don't know it exists. The fund has attracted only $28-million from investors, but Adler says it needs $175-million just to break even.
As Adler and his partners in Vector Index Advisors Inc. can tell you, it's tough to start a mutual fund. Vector has lost $4-million over six years, and now it's trying to borrow $5-million in a make-or-break effort to get ASM off the ground.
The odds are stacked against any new fund if it doesn't have a big group behind it. Last year, 828 new stock mutual funds entered a market that already has enough funds to make an investor's head spin.
U.S. investors have their choice of nearly 5,000 stock funds, most sponsored by companies with far more money and marketing clout than Vector. Denver-based Janus Capital Corp. spent $1.2-million this year for 30 seconds of advertising _ a spot on the Super Bowl broadcast.
And though ASM is the only Dow fund, dozens of funds track the Standard & Poor's 500 Index. The biggest is the Vanguard Index 500 Portfolio, which has $35-billion in assets and is a favorite of companies' retirement plans.
Vanguard and ASM aren't in the same league.
Vanguard has 5,000 employees and a college campus-like headquarters near Valley Forge, Pa.
ASM operates out of a modest office in north Tampa with four paid employees, not counting Adler and his wife, Mary, who don't draw salaries. Mrs. Adler gives callers an assumed name (Mary Parker) so she won't get stuck taking long messages for her husband.
Lots of people think starting a fund is easier than it really is, says Gerald Perritt of Largo. He runs the $9-million Perritt Capital Growth Fund, which is even smaller than ASM.
Perritt says: "I get calls about once a month from people who say, "I'm a broker thinking of opening my own fund. You're a mutual fund expert. What do you think I should do?' I say, "I think you should go home and think about something else.' "
But Adler, 59, doesn't give up easily. Adler, who played junior college basketball in New Jersey 40 years and 60 pounds ago, can be found on the court several nights a week, competing against men half his age.
And he wants to give the ASM Fund his best shot, even if it means acting like a big player before he has the resources to be one.
Sponsors of small funds like ASM must pay many fund expenses out of their own pockets, because passing them along to shareholders would make the fund less attractive to investors and would hurt performance.
Adler has decided to give ASM's shareholders nearly a free ride, capping fund expenses at 0.18 percent, which could cost Vector up to $700,000 a year. And if Adler can find a lender, Vector will be launching a high-stakes ad campaign.
In a test last fall, ASM commercials ran on CNBC television and several radio talk shows, including Rush Limbaugh's. Since then, assets have more than tripled, from $8-million to $28-million.
Still, if Adler and his partners don't post more dramatic growth, they may have to throw in the towel. Ironically, that probably would mean selling out to one of the giants.
Adler isn't ready to do that just yet.
"You have to take the bet in life that you're going to be successful and price yourself with the big boys," he said. "There is a big cost of entry to do it right."
Trouble with target market
Doing it right has been much more difficult than Adler ever anticipated.
A pension consultant, actuary and former stockbroker, he thought a Dow fund would make an ideal investment for retirement plans. Six years ago, he convinced a group of business associates to join him, most of them putting up $100,000 to $200,000.
"When we started, it sounded to me like it was a very fine idea," said insurance executive and former Tampa Mayor Bill Poe, a Vector investor who dropped out as losses mounted. "Steve has always been very optimistic about the fund and the ability to market it, but time did not prove that he was correct."
Adler admits he misjudged how hard it would be to make ASM successful.
"We had a difficult time deciding who the market for this fund really is," Adler said. At first, the only professionals he could get to take him seriously were market timers. That backfired when stocks slumped in 1994.
"We went from almost $90-million to $3-million ... whoosh," Adler said. Now ASM tries to keep timers out.
Adler decided to pursue individual investors, but they were turned off by ASM's expense ratio.
"Our expenses are actually low, but in relationship to the size of the ($28-million) fund, they're high," Adler said. "There's almost an insinuation that we're gouging people."
To achieve efficiencies of scale, a specialized mutual fund company needs to have at least $800-million under management, says Phillip Mack, an economist who studied the issue for the Federal Reserve Board. If a company offers a variety of stock and bond funds, the minimum is about $20-billion.
"You need a certain asset size to spread out the cost," he said.
Funds must pay for everything from postage and phone systems to legal and accounting fees. One plus for ASM is that there's no high-priced money manager; assets are automatically invested in the 30 Dow stocks.
Vector has always picked up many of ASM's expenses, but expenses paid from shareholder funds hit 3.01 percent of assets in 1995 and 1.86 percent last year. By comparison, Vanguard's 500 fund keeps its ratio at 0.2 percent.
"It's tough to limit your expenses when you're an eensy-weensy fund," said Burton Berry, a San Francisco money manager and publisher of ++NoLoad Fund+X, a newsletter for mutual fund investors. "If Steve could have figured it out five years ago and limited expenses from the beginning, he'd be a billion-dollar fund by now."
Berry recommended ASM as his top mutual fund pick in the book Wall Street's Picks for 1997 because the Dow's record is better than the S&P's. Still, "we can't buy too much of it because we don't want to own the whole fund," he said.
Many companies that launch new funds pay a lot of fund expenses. The practice is perfectly legal.
However, the way Vector handled a reimbursement for fund expenses three years ago led to a Securities and Exchange Commission investigation. Vector was fined $10,000 because it waited until the end of fiscal 1994 to reimburse the fund for a promised $420,000 subsidy. The SEC ruled that reimbursements should be made monthly rather than accrued.
Complying with the SEC's regulations without having a big legal staff is just one example of how things can be tougher for little funds.
Small companies like ASM also find themselves bucking the trend toward one-stop fund shopping. Many investors buy all their mutual funds from one big company, like Fidelity or Vanguard, or from a fund supermarket like the one run by Charles Schwab & Co.
Adler says Schwab dropped ASM, citing lack of demand.
As if all that weren't enough, ASM can't use the Dow name, which belongs to Dow Jones & Co. ASM is working on a name change to "ASM Index 30 Fund" that Adler hopes will make its investment objective more obvious.
Adler says he isn't deterred by ASM's struggles.
"You just have to be able to suck it up to get there," he said. "This is $4-million tough and I don't know if it's going to work. But this is a wonderful business if you can make it successful ...
"The mutual fund business is such a big market, you only need a little bit of it. If I can make my product legitimate and the press likes it, I've got a shot."
He dreams of launching more index funds and taking Vector public. And he believes in the Dow companies _ most of which he has visited _ as the best way to invest in America's future.
Still, Adler may be ready to give up if assets don't grow substantially by year end.
"If we do everything we can and we still can't grow it, we will start entertaining offers" from other fund companies, Adler said. "We get constant overtures from people to buy it.
"If the fund doesn't make it, I will be a very sad entrepreneur. I've put my whole soul into it. I won't be broke, but it will have taken a huge chunk out of my life."
Still, Adler is encouraged by the calls he gets on radio talk shows. He is a Friday night regular on Steve Crowley's American Scene, broadcast in Tampa Bay from 6 to 7 p.m. on WHNZ-AM 570.
"It cheers you up," he said. "You just have to say, "I've got to get this out to more people.' "
AT A GLANCE
How its funds are invested: Owns an equal number of shares of each of the 30 stocks in the Dow Jones Industrial Average. Attempts to track the performance of the Dow as closely as possible.
Performance: 1996: +24.76%
1994: + 1.07%
Sales charge: None
Expense ratio: Capped at 0.18%
Manager: Vector Index Advisors Inc., Tampa
For fund literature: Call (888) 276-3863 (ASM-FUND)
For other information: Call (813) 963-3150