The feeling is mutual: a bevy of Black-managed mutual funds is bringing new investors into the market. B.E. checks out what they have to offer.

A bevy of black-managed mutual funds is bringing new investors into the market. B.E. checks out what they have to offer.

No, this is one revolution that didn't get televised or much in the way of advertisement, either. At a time when everyone's fixating on the gyrations of a sky-high Dow, no one has seemed to notice how African Americans have burst into the mutual fund business en masse. With the grand total of black funds now at 16 and counting, days when John Rogers Ariel Growth was the only black fund around--a mere 10 years ago--seem like ancient history.

African Americans didn't tiptoe into the business. The bumper crop of new funds marks the latest milestone that blacks have made in money management. It all began nearly 20 years ago when municipal governments in places like Atlanta or Prince George's Country, Maryland, handed over some of their pool of pension money to minority firms, thereby giving many black money managers their first breaks. Two decades later, that kind of financial affirmative action has culminated in a roster of African American portfolio managers now ready to take on the burgeoning market for individual retirement plans and savings. "Currency, you have several of us like Maceo Sloan and Eddie Brown managing over a billion dollars in assets," says Nathan A. Chapman Jr., who started the first of his two funds in 1988. "It was only a matter of time before we made our presence felt."

Now, African American funds virtually span the investment spectrum. Veterans like Ariel rub elbows with newcomers like the Victory Lakefront Fund. You can choose Highland Growth if you're looking for companies with zesty earnings numbers or invest with the Profit Value Fund, which stocks up on blue chips.

More important than variety, though, the new funds mark the beginning of an effort to reach out to a long-neglected market, one with staggering potential. According to the Commerce Department, African American households earning $50,000 or more in annual income now number 1.1 million. By some estimates, the black investor market is a veritable gold mine, with some $36 billion in assets to put to work. However, look at just how the community harnesses that wealth, and a different picture comes to the fore. Recent studies show blacks are less likely than other groups to sink their savings into mutual funds or stocks (see "Profiling the Black Investor," Moneywise, June 1997.) Although part of the reason might be chalked up to African Americans' tradition of financial convervatism, there's a feeling that bigger issues are at play. Many in the investment community say the financial industry's behemoths have overlooked the African American market for far too long.

It doesn't hurt that the pool of black talent issuing orders to buy and sell stock ranks among the best in the financial world. Barbara Bowles of the Kenwood Growth and Income Fund or a John Rogers, who guides Ariel, boasts 10 years or more of experience overseeing pension fund money for corporations and local governments. Randall Eley, the money manager at the helm of the Profit Value Fund, has averaged a total return of 22% the last three years, leading Wall Street Week host Louis Rukeyser to call him "perhaps the best money manager you've never heard of." Eddie Brown, who runs the Brown Balanced, Equity and Small Company funds, is no also-ran either, having routinely outdone the S&P 500, she industry's most quoted benchmark.

A HOME-SPUN APPROACH

High-flying fund managers they may be, but that doesn't mean they're spending days jetting about or checking stock quotes in a limousine. It's not uncommon to spot Bowles canvassing a church convention like a Baptist preacher combing through a revival. "You get to know your first investors very well because many of them are friends and family," she says. "Those people are depending on you." Eugene Profit, meanwhile, put thousands of miles on his odometer last year driving about every weekend drumming up new business. "There are lots of car trips to social organizations and churches," he points out. "When it's you signing the check, you realize you just don't have the money for direct mailings and the various types of literature you might get from a Fidelity or Vanguard."

The benefits of that kind of homespun, personalized approach are twofold. First, it's this kind of face-to-face interaction that's winning new accounts. Beyond that, it's especially important for African Americans who haven't gotten one-on-one time with the investment world. Having a Profit or a Bowles as a personal usher into the market is reassuring.

For the upstart funds, though, it seems like the colossal Vanguard and Putnam funds have it made. To establish a new fund, a parent like Fidelity simply plops a few million of its 55 billion or so in assets and then throws part of a $300 million ad budget to work to get the word out. For an institutional money manager who gets tens of millions of dollars in a single account, however, running a new fund and drumming up a couple of thousand of dollars at a time amounts to an exercise in patience. Annual expenses add up to about $150,000, and include filing paperwork in all 50 stares and with the Securities and Exchange Commission (SEC), as well as outsourcing a company to pick up investor calls and answer inquiries. Experts say to run at its most profitable level, a mutual fund needs to gather $10 million or more in assets. Before that, money managers are basically subsidizing the fund's start.

Fund managers have e a couple avenues m round up new investors. One option is to pay brokers a commission--called a load--to hawk the fund. More and more, though, consumers balk at giving up anywhere from 2%-4% of their gains. That's a trend Lou Holland picked up on when he decided his growth fund would charge no-load. The problem is, running a no-load fund puts a money manager on a tightrope to keep expenses in check--under 2% of assets--as the fund bulks up. That rules out any major advertising since getting the message out in a nationwide ad campaign is just too costly.

GETTING THE WORD OUT

That hasn't stopped the number of new funds from rising. By industry counts, 237 new mutual funds opening shop since January 1 have boosted the total to 6,540, up from 2,900 in 1990. Still, once up and running getting recognition as simple as a daily listing in the newspaper is a struggle. "I'd say the toughest thing for us was getting the $30 million in assets or 1,000 shareholders we needed to break into the financial section," says John Rogers, the unofficial dean of African American mutual fund executives. Another source of free publicity is shut off to fledgling funds as well. Morningstar, the Chicago company that tabulates tomes of statistics and investor-friendly reviews that many financial planners and individual investors swear by, doesn't review a fund until it's been around for three years.

There are ways to get free spotlight, however. For Holland, Brown or Eley, an appearance on TV's Wall Street Week or the Nightly Business Report, prompts curiosity and a few phone calls, leading maybe a month later to a few thousand in new investments. Bowles saw a May story in Essence magazine prod a few dozen callers to ask for a fund prospectus. Then again, there are other ways other fund managers are getting their financial skills to the masses. As a subadvisor for the Calvert Managed Growth and Dreyfus Third Century funds, Maceo Sloan's NCM Management lends its management prowess to bigger firms. Rob Lamb, head of the Highland Growth fund, meanwhile, plans to meet with financial planners often and regularly, using a little one-on-one time to keep them abreast of his fund and to help disseminate news to investors.

WHAT'S THE CATCH?

So just how does a small investor like you actually safeguard your savings with some of the newer funds out there? Rest assured: the SEC and state regulatory agencies have your back, teaming to monitor funds on a federal and state level. Funds are required to file paperwork regularly, and must follow guidelines on everything from prospectuses to reporting results.

A little homework on your part doesn't hurt. We suggest you call to get a fund prospectus and go over the fund manager's record closely; you'll want to know that he or she has a solid track record. Further, it's good to know that the fund manager you're betting on has a solid institutional investing business--at least $100 million under management--that will generate enough money to keep the fund going in those first years.

Don't cry for the little guys. Retirement money keeps pouring into mutual funds by the truckload. Morningstar's head, Don Phillips, estimates that most funds, whether long-established or new-minted, stand about a 90% chance of surviving, a sentiment that a recent study by the Federal Reserve seems to underscore. There are also signs that interest is starting to stir on Wall Street. In one recent deal, American Express took a 40% stake in Maceo Sloan's money management firm. But perhaps most assuring is the tenacity African American managers bring to their funds. "We had to stand out to make it this far," says Chapman, "so you know not one of us is taking a passing fancy to the business."

PLEASED TO MAKE YOUR ACQUAINTANCE

We've put together a brief description of the funds, along with contact numbers you'll need to invest.

Ariel Appreciation Ariel Growth Ariel Premier Bond 800-292-7435

You can say this much about John Rogers: he sticks to what he believes. Rogers' Growth fund buys small company stocks but sidesteps tech shares, opting instead for low-risk consumer goods companies. The strategy helped Rogers bypass his peers the fund's first three years, but later came under question when Ariel missed out on the gains many software shares logged in the early 1990s. Fast forward to 1997, and Ariel's equity funds have rebounded quite nicely. Last year, Ariel Growth posted a total return of 23.51%, and so far this year has gained 18.53%. Ariel Growth's biggest holdings include Interface, the world's leading manufacturer of carpet tiles, and Ecolab, which makes cleaning products for hospitality markets.

Although Ariel Appreciation is a variation on Rogers' old theme, it also buys into large-cap stocks. Manager Eric McKissack keeps to the same Ariel formula, and posted a total return of 23.72% last year and 18.9% during the first half of 1997. McKissack likes stocks trading at a 80% discount to the market's price-to-earnings ratio (P/E) and, like Rogers, favors companies with a strong consumer franchise when possible. The fund's largest holdings include Rouse, a shopping mall developer and Specialty Equipment, which makes restaurant equipment, including grills and ice cream machines for McDonald's.

Just like its fixed-income peers, Ariel Premier Bond fund has found its first year to be rough so far. Mid-year, it had a total return of a little over 4%. The fund, however, has found mortgage securities a good bet and has honed in on Fannie Mae. Questions still remain as to how or when the Federal Reserve will handle interest rates, uncertainty that the fund's subadvisors Lincoln Capital Management, see as reason to stay in short maturities.

Brown Equity Brown Balanced Brown Small Company 800-525-3863

Not long ago, you needed at least $5 million to tap into Eddie Brown's knack for stock picking, a price of admission that reserved his expertise for pension funds. These days, Brown's turning more of his attention toward individual investors. He's lowered the minimum initial investment required for his funds to $10,000, and the talk around the Baltimore money manager's office is that the company might soon launch a new fund with an even lower entry price. Brown's forte has been mid- to large-cap stocks, as well as small companies. He looks for companies with good earnings increases carrying a P/E ratio not too far from the market's average. His balanced fund adds a dash of bonds to the mix. Brown's large company favorites currency include Cisco Systems and Chase Manhattan, as well as Home Depot. The small company fund, meanwhile, has stocked up on companies such as BMC Software and fellow Baltimore mutual fund manager T. Rowe Price. As of this writing, Brown's Balanced Fund had a 17.58% total return, while Equity and Small Company had posted 21.4% and 17.58%, respectively.

Chapman U.S. Treasury Money Fund DEM Inc. (Nasdaq: DEMI) 800-752-1013

You'll probably not see much about Nathan Chapman's U.S. Treasury Fund in personal finance magazines, since their minimum initial investment of $1 million narrows the market to institutions and high net worth clientele. Chapman, who arguably has bragging rights to being the first African American to establish a fund from the ground up, has won over business from corporations like Texaco and the City of Baltimore by running a lean shop to keep expenses to a minimum.

Chapman's DEM Inc. is a closed-end fund--it trades as a stock would on the Nasdaq small company exchange and is available to investors via a stock broker. The portfolio is like that of a mutual fund. Chapman invests DEM, which came to market in August of last year, in companies run by African Americans, women, Hispanics and Asians, with BET, Carver Federal and Granite Broadcasting among his largest holdings. Year to date, the fund's net asset value is up 20.6%.

Highland Growth Fund Highland Aggressive Growth 888-557-3200

Rob Lamb couldn't have picked a better launching date. Highland bought into a lot of its favorite technology shares--stocks like Newbridge Networks and Cisco Systems--before they rallied. The result: Lamb's growth fund got a 7.4% jump his first months out the gate. Lamb says he's angling for stocks that are in line for solid earnings growth as well as positive earnings surprises. That's guided his fund not only toward tech stocks but to big names like Merck and Citicorp as well. Lamb says his aggressive growth fund should be up and running late in 1997.

Lou Holland Growth Fund 800-295-9779

You might remember Lou Holland from an appearance in the Moneywise Private Screening column this May. Holland favors stocks with the promise of good earnings growth, but only if the price is right. That keeps his picks pretty dose to the S&P 500 P/E of 20. Holland's criteria zeroed in on health care companies like Eli Lilly, Merck, Pfizer and Johnson & Johnson earlier this year, and he's invested technology shares like Intel, Microsoft and Oracle as well. As of June 30, Holland's fund was up 20.83% year to date and 44.1% since its inception at the end of April last year.

Kenwood Growth & Income 888-536-3863

Fund manager Barbara Bowles says things are getting a bit pricey. And while the biggest 30 or so companies have out-paced the market, she thinks that's about to end. Bowles' portfolio concentrates on the medium-sized companies in the S&P mid-cap 400, a range she thinks still holds some good values. Kenwood posted a total return of 13.52%, compared to 10.13% for the S&P mid caps, during its first full year. Right now Bowles' largest positions include Mylan Laboratories, a generic drug producer; LCI International, a telecommunications firm; and Occidental Petroleum, an oil producer.

Profit Value Fund 888-335-6629

As a large-cap value manager, Randall Eley approaches the stock market's biggest companies looking for bargains. The proof is in his portfolio: currently he's invested in stocks with an average P/E of 16 compared to 20 for the S&P 500. And at a time when the market has rewarded large caps handsomely, Eley's done quite well; at the end of June, Profit Value was up 24.41%, and 16.5% from the fund's start mid-November of last year. Eley's also a stickler for dividends. "Rising dividends are a sign that management is confident in the state of business," he says. Eley's penchant for high-yield stocks is reflected in Profit Value's 3% average yield, compared to under 2% for the S&P 500. Looking for a combination of high yield and low price, Eley has gravitated this year to oil stocks like Chevron and Exxon, in addition to 3M and International Paper.

Victory Lakefront 800-539-3863

Big stocks made big gains early this year, helping Nathaniel Carter's Victory Lakefront fund reap a 14.97% total return since its launch in March. Carter s penchant is for cheap, large-cap stocks whose P/E trails the overall market's. That's brought capital goods stocks like Deere and Caterpillar into the portfolio. And despite the value label, Carter shops the technology sector whenever a bargain's around. An example: Computer Associates, which Carter rode from a share price of 545 to $68.

The following two funds are managed by Maceo Sloan and NCM Management.

SUBADVISED FUNDS

NCM Capital Management Calvert New Africa Fund 800-368-2748

If you read our story on investing in Africa in May ("Returns from the Motherland"), New Africa's no stranger. During its first few years, the fund ran into a rough parch, losing 11.55% last y ear when its heavy stake in South Africa got clobbered by a currency devaluation. This year, the rabies have turned, and New Africa is up 18.22%, thanks to a rebound in the Johannesburg exchange and a solid rally in countries like Zimbabwe. The fund has had an average annualized total return of 3.13% since its inception in April 1995.

Dreyfus Third Century Fund 800-373-9387

As a large-cap growth fund, Third Century shops for big names with a little spice--earnings momentum. The fund, up 29.82% year to date, following a 24.33% total return last year, searches the market for companies with 20% or greater earnings growth, but also looks for momentum plays or companies where the increases in profits are actually accelerating. Currently, big holdings include money center banks like Bank America and Citicorp. as well as pharmaceutical giants Johnson & Johnson and Merck.

The Feeling Is Mutual

FUNDAMENTALLY SPEAKING:
Here's quick rundown on African American Mutual Funds:

                                 Equity Funds

NAME                          MANAGER              TELEPHONE

Ariel Appreciation         Eric McKissack         800-292-7435
Ariel Growth               John W. Rogers Jr.     800-292-7435
Ariel Premier Bond         Team Managed           800-292-7435
Brown Balanced             Eddie C. Brown         800-809-3863
Brown Equity               Eddie C. Brown         800-809-3863
Brown Small Co.            Eddie C. Brown         800-809-3863
Highland Growht Fund       Catherine C. Lawson    888-557-3200
Lou Holland Growth         Lou Holland            800-295-9779
Kenwood Growth & Income    Barbara Bowles         888-536-3863
Profit Value Fund          Team Managed           888-335-6629
Victory Lakefront          Nathaniel Carter       800-539-3863

                               Subadvised Funds

Calvert New Africa         Clifford Mpare         800-368-2748
Dreyfus Third Century      Maceo Sloan            800-373-9387

                               Money Market Funds

NAME
Chapman U..S. Treasury     MANAGER                TELEPHONE
 Money Fund                Nathan Chapman         800-752-1013

                               Closed-End Funds

NAME                       MANAGER                TELEPHONE
Dem Inc. (Nasdaq: DEMI)    Nathan Chapman         410-625-9656

                                 Equity Funds

                                   TOTAL RETURN
NAME                       YEAR TO DATE    1996     1994-96

Ariel Appreciation            18.90%       23.72    19.23%
Ariel Growth                  18.53        23.51    19.34
Ariel Premier Bond             4.05         n/a      n/a
Brown Balanced                17.58        13.84    30.96
Brown Equity                  21.40        19.04    39.16
Brown Small Co.               17.58        17.08    28.83
Highland Growht Fund          14.44         n/a      n/a
Lou Holland Growth            20.83         n/a      n/a
Kenwood Growth & Income       13.40         n/a      n/a
Profit Value Fund             24.41         n/a      n/a
Victory Lakefront             19.59         n/a      n/a

                               Subadvised Funds

Calvert New Africa            18.22        -11.55    n/a
Dreyfus Third Century         29.82         24.33   29.53

                               Money Market Funds
NAME
Chapman U..S. Treasury         YIELD        AVG. MATURITY
 Money Fund                    4.77%          14.5 days

                               Closed-End Funds

NAME                           PRICE
Dem Inc. (Nasdaq: DEMI)         $15

                                 Equity Funds

                           MIN. INITIAL
NAME                          INV.

Ariel Appreciation            $ 1,000
Ariel Growth                    1,000
Ariel Premier Bond              1,000
Brown Balanced                 10,000
Brown Equity                   10,000
Brown Small Co.                10,000
Highland Growht Fund            1,000
Lou Holland Growth              2,000
Kenwood Growth & Income         2,000
Profit Value Fund               2,500
Victory Lakefront                 500

                           Subadvised Funds

Calvert New Africa              2,000
Dreyfus Third Century           2,500

                           Money Market Funds

NAME                       MIN. INITIAL INV.
Chapman U..S. Treasury     $1,000,000
 Money Fund

                           Closed-End Funds

NAME
Dem Inc. (Nasdaq: DEMI)