Clark at Large: Timing Is Everything

Their bond and money market funds are managed in house, with over 20 years of fixed income expertise. But what makes American Beacon different–and particularly attractive to independent advisors these days–is that their equity funds are "funds of funds," each managed by a diversified group of two to five top institutional management companies that very few independent advisors or their clients could approach on their own: Brandywine, Goldman Sachs, The Boston Company, Dreman Value Management, and Hotchkis and Wiley, to name drop a few.

But unlike most funds of funds that have a tendency to overshadow whatever their attraction might be with layers of high fees, these subadvisors and American Beacon itself are players in the highly competitive institutional world. Consequently, the fees they offer to their institutional clients and to advisors' clients are extremely reasonable for mutual funds of any kind: most funds charge from 57 bps (balanced) to 80 bps (small-cap value). On the high end with 140 bps is emerging markets, and on the low side, their S&P 500 Index is at 18 bps.

No Wirehouses Need Apply

I was also impressed that, according to Bill Quinn, American Beacon has no plans to seek wirehouse money: "We're interested in attracting institutional and independent advisory assets managed with an eye toward long-term investing and management of risk" he told me.

For advisors interested in maintaining a broad equity exposure in their client portfolios at what appear to be near-rock-bottom prices, American Beacon offers institutional level oversight of top management firms at a price that's certainly no higher (and often lower) than most traditional mutual funds. "We select top management firms with a range of approaches within each asset class," says Quinn. "Then we closely monitor both their performance and their strict adherence to that asset class and their investment style."

For its part, American Beacon Advisors has substantial motivation to offer its institutional funds to independent advisors. Kneeland Youngblood and his partners in the Pharos Capital Group paid some $480 million for 90% of AB last April. Although they paid a conservative 11 times AB's $43.6 million in pretax earnings, it's hard to conceive of worse timing. When I tactlessly asked him how he is feeling about the acquisition now, he said: "Sure, the timing could have been better, but we got what we think is a great investment company at a very reasonable price. We're long-term investors, and we think the long-term prospects of American Beacon are still very, very good."

As far as I can see, the surest way for Youngblood and Pharos to boost the value of their recent purchase would be to increase its revenues, which at the time of the buyout averaged a very institutional 15.5 bps ($101 million on $65 billion in AUM in 2007). And the surest way to do that is to expand their market beyond large pension funds that can negotiate hard on fees and into the somewhat smaller scales of the independent advisory world, whose clients would pay quite a bit more than that and still get a great deal compared to their alternatives. The proverbial "win/win."

With manager selection and monitoring provided for free (or at least for no additional cost) by American Beacon, advisory firms need only direct portfolio holdings into the appropriate asset classes. That should translate into less professional staff, more client and marketing time for firm principals, or most likely, both. That strikes me as a good solution at exactly the right time: Help reducing firm overhead, while providing clients with low-cost, institutional quality management and diversification to put them in the very best position to recoup their losses as the economy and world markets recover.

Of course, American Beacon Funds, or any similar solution, won't help advisors wrestle with the big questions about whether buy and hold is still the soundest investment strategy or just which asset classes clients should buy and hold in this new investment environment. "We leave the portfolio allocations up to the advisors," says Quinn. "Our job is to give them the best tools to work with; the highest-quality portfolios in each asset class." For advisors who still believe–at least in part–in traditional diversification, it's hard to imagine a more sound solution for today's challenges.