One nicely performing fund is seeking to turn into a stock

Your Funds

Dollars & Sense

April 28, 2002|By CHARLES JAFFE

NORMALLY, mutual funds buy stocks. Ameristock Focused Value is about to turn into one.

It's a metamorphosis that will turn heads throughout the financial services world, as this tiny hot-ticket fund tries to become an individual stock.

Ameristock's story doesn't yet have broad implications for investors.

But as fund firms try to make their offerings look more like stocks - and as entrepreneurs consider ways to raise money in a tight market - Ameristock's novel approach is worth a closer look.

From the beginning, company founder Nicholas Gerber's plan was to turn Focused Value from a small-cap fund to stock, a fact he mentioned in reports to shareholders, always noting that the move would occur when the fund hit the $30 million to $50 million range.

Performance brought the money in. Focused Value is up 35.5 percent over the last year, according to Morningstar, and up more than 14 percent this year.

With approval from the firm's board of directors to explore the legalities of such a deal - and it applies only to Focused Value, not to the firm's other two funds - Gerber has started moving forward with his plan.

The first step occurred April 15, when the fund was closed to new investors. Assets totaled $54 million.

Now the fund is preparing an initial filing for shares and a proxy vote, with the intention of becoming a closed-end fund.

Most funds are open-end, meaning they can issue an unlimited number of shares, which are priced based on the value of the assets held by the fund.

A closed-end fund has a limited number of shares, which trade like stock; not only can they be bought or sold minute-by-minute (most open-end funds trade only at the closing price on the day of the transaction), but the price is driven by market sentiment and represents a premium or discount to net asset value.

Gerber expects the board to approve conversion to a closed-end fund in mid-May, at which point the matter would go to the Securities and Exchange Commission for review.

If the deal passes regulatory muster, it would go to shareholders for a vote before the end of July.

If shareholders approve the deal, Ameristock Focused Value will be a closed-end fund before the end of the third quarter. (If not, the fund remains an open-end fund.) But closed-end funds still aren't stocks. There are two steps left.

"As soon as we're a closed-end fund, I will go out and try to buy a company, probably an insurance company," says Gerber.

"Then we'll apply to the SEC to have our status changed. We'll declare ourselves a publicly traded company - rather than an investment company - because, by then, we will be."

The conversion would allow Gerber to create a public company through the back door. Instead of going the traditional route, finding financing, taking a sales pitch on the road and selling shares in an initial public offering (IPO), he has been gathering assets in the fund for several years.

"It's as if we found a new way to go public," says Gerber, noting that once he opens the door, others may follow.

Gerber is hoping to build his company in the mold of Berkshire Hathaway, the investment vehicle-turned-public company of multibillionaire Warren Buffett.

Berkshire Hathaway invests in other companies and owns some outright, which is precisely what Gerber envisions.

"When you find a company you really like, you may as well take as big a position as possible, something like 100 percent," says Gerber.

"That's not allowed in a mutual fund."

No one in the fund industry can remember any similar fund-to-stock conversion in the past 20 years, though several experts - and Gerber - vaguely recall this move tried by a now-defunct company around 1980.

The conversion is far from risk-free to shareholders.

Focused Value carries a 1 percent redemption fee, so anyone bailing out immediately faces that cost.

Gerber expects the fee to be dropped once the transition plan is approved by the board, allowing upset investors to leave at no cost.

The bigger risk is when the fund goes closed-end. Most closed-end funds trade at a discount to the value of their assets, meaning that shares could decline when the status is changed.

Good stocks, by comparison, often trade at several times book value, which is why Gerber says he hopes investors will come out ahead "if they stay with us the whole way."

The entire fund world will be watching to see if Ameristock can deliver on that potential, if only because managers of other small funds someday might want to make a similar leap.

"The only way to do this is with a fund that has money and has attracted investors who wanted risk," says Gerber.

"I don't know if we're starting a trend, but I expect that, if we're successful, we won't be the last fund to do this."

Charles Jaffe is mutual funds columnist at The Boston Globe. He can be reached by e-mail at jaffe@globe.com or at The Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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