Rise of the name-brand fund

A few affinity groups help investors put their money where their hearts are

In the mid-1990s, when the Sierra Club began looking to invest in socially responsible mutual funds, it drew a blank.

All the funds invested in some company the group couldn't support.

So the club's investment advisory committee decided to hire outside financial advisors and screen their recommendations according to its own strict criteria.

Now, the group is considering starting its own mutual fund so that environmentally minded investors can invest using the same screen.

It's a phenomenon that's popping up with increasing frequency these days. Membership and activist groups are thinking about getting into the investment business.

Last year, the Humane Society of the United States launched the Humane Equity Fund, a no-load, long-term growth fund interested in promoting animal welfare.

Now other groups, including the Sierra Club and the AFL-CIO, are considering opening their own investment vehicles.

Such funds give investors new ways to put their money where their hearts are. And though these funds rarely get big, they do give groups new ways to serve their members - and others interested in their cause.

"Wherever there is an association of people ... there is an opportunity for that association to provide benefits to them that in turn makes membership more valuable," says Michelle Smith, managing director of the Mutual Fund Education Alliance, a trade association based in Kansas City, Mo., that represents funds that sell directly to the public.

"If you look at it strictly from a marketing standpoint, it's a new business avenue, a new way to make money," she adds.

Of the 35 mutual fund companies the alliance represents, three focus their marketing on specific memberships: AARP (for people 50 years and older), TIAA-CREF (for educators), and USAA (for the military community). All three have large membership groups and have proved successful using various strategies.

Take USAA. Starting out in 1922 as an auto-insurance firm, the San Antonio, Texas, company has gradually branched out into other forms of insurance and banking. In 1971, it offered its first mutual fund. It now boasts 41 funds, with some $28 billion in shareholder assets.

"In our case, its an expansion of our product line that helps us in our approach to life-cycle marketing," says Tom Honeycutt, a spokesman for USAA. By providing military personnel and their dependents with financial products for each stage of their lives - from auto insurance to retirement planning - the company tries to establish a long-term relationship with its 4.6 million members.

While USAA manages all but four of its funds in-house, AARP relies on Zurich Scudder Investments, a division of Zurich Financial Services Group, to handle the investing and outreach work.

With the AARP stamp of approval and a bevy of materials aimed at older investors, Scudder has attracted some $14 billion into its AARP program. In turn, AARP's for-profit arm earns a percentage from the program and can offer funds as an additional perk to its nearly 35 million members.

"It's very much an interactive relationship," says Laura Trumble, public relations coordinator for Zurich Scudder Investments. The firm has even given bereavement training to some of its sales representatives so they can better handle calls from AARP members who have recently lost a spouse.

Neither USAA nor AARP funds tout a particular cause. They're strictly performance-based, and they have flourished. That's a rarity in affinity-based mutual funds.

"It's extremely difficult for affinity groups to extend their brand into financial services," says Gavin Quill, senior vice president for Financial Research Corporation, a financial services research and consulting group based in Boston.

Members of such groups usually don't make a connection between their causes and their investments, he adds. "You find most of these funds languishing at extremely low asset levels."

AARP has succeeded because it did manage to make a connection between aging and the need for specialized investments, Mr. Quill says. USAA built its mutual-fund business over decades with low-cost, high-quality service.

Whether anyone can match its success remains to be seen. Some groups, however, seem more eager to bolster their cause than attract piles of investment dollars.

"It would be as a service to our members and the environmental community," says Louis Barnes, director of finance for the Sierra Club, based in San Francisco. He expects to complete his feasibility study of a special mutual fund by the end of the year.

The same sentiment holds true at the Humane Society.

"The idea of the fund is to a.) give our constituents somewhere they can invest and b.) to make a little noise out there on Wall Street, to say: 'Hey! People care about how animals are treated,' " says Thomas Waite, the group's chief financial officer. The group has been investing its own money in a selective, animal-friendly portfolio.

Salomon Brothers Asset Management recommends promising companies, and the Humane Society ensures that the firms aren't involved in such areas as meatpacking, hunting equipment, or goods (such as cosmetics) that use animals to test products.

In February 2000, the group started marketing a similar fund to its members. So far, the Humane Equity Fund has only attracted some $10 million in assets. Only if the assets reach $50 million does the Humane Society collect a percentage fee, which starts at $35,000 - hardly a windfall.

But the fund does fill a void in the socially responsible investing world, Mr. Waite says. It remains the only fund geared specifically to stocks that don't harm animals.

A general timeline of affinity-based investing

1918 - Teachers Insurance and Annuity Association (TIAA) begins offering guaranteed-return pension plans.

1952 - College Retirement Equities Fund starts offering teachers variable-annuity funds. It now sponsors eight funds, including the $108 billion CREF Stock Account, the largest single-managed equity fund in the world.

1971 - Insurance company USAA launches its first mutual fund for military officers. The company now has 41 funds and $28 billion in assets.

1980 - AARP offers its first mutual fund, a money-market account, to mature adults.

1984 - AARP switchesto Scudder to provide mutual funds. Its members now invest some $15 billion among39 Scudder funds.

2000 - Humane Society of the United States launches the Humane Equity Fund in partnership with Salomon Brothers Asset Management.

2001 - Sierra Club explores launching a mutual fund.

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