Niche Guys

You have to hand it to mutual fund managements when it comes to creativity: Even with more than 6,500 funds available, covering what seems to be every conceivable investment niche, they continue to come up with new ways to try to attract shareholders.

Death, workplace ethnic diversity and animal rights are among the themes to have taken root with this year’s crop of upstarts.

Many nascent funds are the offspring of specialized investment firms with no mutual fund experience. That’s not necessarily a bad thing, but it does cast doubt on a firm’s ability to build assets to the point that economies of scale will kick in.

Here’s a look at three unusual new funds, each of which is still too small to have its net asset value listed in newspapers.

* Pauze Tombstone Index Fund. The managers of this portfolio have found an industry that’s hard to beat from a supply-and-demand perspective: death care. More than 2 million Americans die each year, and the figure is likely to rise when baby boomers begin reaching retirement age.

“The demographics of this industry are compelling,” says David Jones, executive vice president of Pauze Swanson Capital Management in Houston, an investment firm that specializes in managing so-called pre-needs money on behalf of funeral homes. “This is the last consumer industry that will cater to baby boomers,” he adds, repeating an oft-heard bit of black humor about the business.

Funeral home operators, casket manufacturers and tombstone makers dominate the fund’s holdings. But you can also find unusual picks such as American Annuity Group, which sells annuities and life insurance policies to funeral home operators. State regulators allow funeral home operators to invest pre-needs cash, or money received from people who want to prepay their death costs, in insurance products.

One problem with Tombstone Index is that Pauze Swanson has identified only nine public companies that derive at least 15% of their revenue from death-care services. That makes for a concentrated mutual fund.

In fact, a single holding, Service Corp. International, accounts for nearly 60% of the portfolio’s investment assets. The fund’s managers are holding all nine stocks for the long haul, weighting these selections according to a proprietary index that reflects each company’s capitalization, or stock market value.

The fund ([888] 647-5436) made its debut May 1 and now counts about $1 million in assets. It carries a maximum 3.75% front-end sales charge and a minimum investment of $1,000.

* Cruelty Free Value Fund. Most so-called socially responsible mutual funds have left animal rights off their criteria lists.

“No other fund precludes investments in companies that are harmful to animals,” says John Groth, managing director of Beacon Global Advisors of McLean, Va., the fund’s sponsor.

The fund’s intent is to avoid investing in companies that conduct tests on animals or that exploit animals in any other way. Drug companies, food processors and cosmetic companies dominate the fund’s investment-boycott list, but you will also find America West Airlines and Adolph Coors Co. because they recently sponsored rodeos.

Unlike some upstarts, this fund has a veteran manager at the helm. David Dreman, who runs several funds for Kemper, is calling the investment shots. One of his funds currently sports a five-star risk-performance rating from fund rater Morningstar Inc. of Chicago.

The Cruelty Free Value fund, which has attracted roughly $1 million since its May debut, is just now making its first stock investments. Minimum initial investment for the no-load fund ([800] 892-9626) is $1,000.

Beacon Global Advisors pledges to donate a portion of its management fee to establish a foundation that will support animal-welfare causes.

* Victory Lakefront Fund. The African American managers of this fund believe in workplace diversity not just on ethical grounds, but for economic reasons.

For starters, most new entrants into the work force are minorities, women or immigrants, says Nate Carter, president and chief investment officer of Lakefront Capital Investors in Cleveland, the fund’s management firm. And he notes that many U.S. companies are marketing their products to women and minorities or are exporting to developing nations.

Carter says the fund first will buy stocks based on companies’ investment merits, then try to raise the diversity issue with corporate management if the fund feels that the company could be doing more to promote ethnic diversity. That’s a twist for a “socially responsible” fund--most simply avoid buying stock in companies they consider objectionable.

The fund’s concerns about diversity extend not just to employees but also to directors, Carter says.

Victory Lakefront ([800] 539-3863) is available to any investor, but marketing efforts are primarily being directed at minorities and women, through such avenues as black church groups and black stockbrokers. The fund carries a 4.75% sales charge and a minimum investment of $500, or $250 for an individual retirement account.

The problem with highly specialized mutual funds is that they often have trouble attracting investors. Here’s an update on four unusual portfolios that made their debuts last year:

* Meyers Sheppard Pride fund ([800] 410-3337; minimum investment, $1,000) invests in companies with progressive policies toward homosexuals. It has attracted just $1.5 million since its debut last June.

* Munder NetNet invests in companies that provide Internet services or that provide products used in connection with the Internet. Since its introduction in August, the fund ([800] 239-3334; minimum investment, $500) has attracted $1.4 million.

* Principal Preservation Pacific Stock Exchange Technology 100 Index. This fund ([800] 826-4600; minimum investment, $1,000), which bills itself as the first technology index fund, has attracted $11 million since its launch last June.

* SportsFund opened in September to invest in sports-related and sporting goods companies. Despite considerable publicity surrounding its debut, it failed to attract many investors and was recently closed down.

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Russ Wiles is a mutual funds columnist for The Times. He can be reached at [email protected]