Delivery Company

You might call Robert Wadsworth a baby doctor for mutual funds.

He heads the Wadsworth Group, a company that helps bring new funds into the world and makes sure they’re ready to draw their first breaths. He and his staff assist with the legal and accounting work and verify that the many regulatory requirements have been met. They also do a lot of prenatal counseling, making sure an investment firm really wants to start a fund family, because the long-term commitment in time, money and energy can be enormous.

Wadsworth and his staff have been busy lately, as can be inferred from the explosion in mutual funds. Among his deliveries in recent years have been funds in the Nicholas Applegate, Hotchkis & Wiley, Jurika & Voyles, Rainier, O’Shaughnessy and Masters Select families.

“We were in the same boat as a lot of other investment management firms--not knowing how to go about” launching a fund, says Ken Gregory of Litman/Gregory Fund Advisors, a San Francisco firm that introduced the Masters Select Equity portfolio late last year. “If we had tried this on our own, it probably would have cost more and taken longer, and we might have screwed something up.”

Particularly helpful, says Gregory, was Wadsworth’s assistance in registering the Masters Select fund in various states and drafting the firm’s prospectus for shareholders.

Wadsworth says his firm specializes in smaller money managers for which mutual funds would represent a second line of business.

The Wadsworth Group is one of several fund-launching firms. It has a strong focus in California and other Western states--one reason the company moved its headquarters to Phoenix from New York five years ago. Its largest office is in Los Angeles.

“Today, with firms like the Wadsworth Group, investment advisors can concentrate on what they do best, which is manage money,” says Geoff Bobroff, an industry consultant in East Greenwich, R.I.

*

The mutual fund business has grown rapidly in recent years in part because it faces few of the barriers other kinds of businesses do when they want to expand. Costly factories aren’t required, nor are patents. Environmental impact studies and zoning permission don’t figure into the picture. You don’t need much of a staff or even a very good idea.

Wadsworth occasionally receives calls from amateur investors who want to start a mutual fund despite having no more experience than picking a few stocks for their own accounts. For such people--and even for most professional money managers--he recommends against fund parenthood. The field has become incredibly competitive, and the start-up costs usually are just the beginning of what would follow.

Not that those initial costs are insignificant. Wadsworth, for example, charges about $75,000 to launch a fund. That covers the preliminary accounting, legal and planning work, plus a printing of prospectuses. That’s in addition to the $100,000 sponsors generally must commit to start buying a portfolio--money they won’t have access to for five years.

But the really hefty outlays come later, for marketing and continuing operations, including portfolio management.

“Of every 10 parties with whom we discuss starting a mutual fund, we eventually talk nine out of it,” Wadsworth says. “The mutual fund market has become so crowded that it’s a tough business to break into and stay in.”

That’s hard to believe considering the public’s ravenous appetite for mutual funds. Fund assets now exceed $4.2 trillion, nearly six times the level of a decade ago. Over that stretch, the number of funds has expanded to about 7,000, from roughly 2,300.

But many of those funds aren’t profitable and can be expected to disappear sooner or later--either through a realignment of the fund family itself or through that family’s being acquired by another fund family.

As a general rule, a stock fund will need at least $50 million in assets before it turns profitable, Bobroff says. Bond funds charge lower expenses and thus have higher break-even points.

*

Although he is a strong believer in mutual funds--most of his own money is invested in them--Wadsworth worries that many investors have become greedy and impatient, and he questions whether a lot of people will have the fortitude to stick through a prolonged bear market. That thought is something anyone thinking of starting a mutual fund might want to keep in mind.

“People say they are long-term-oriented, but most haven’t been tested,” Wadsworth says.

The answer, in his view, is for investors to diversify among funds that hold different types of investments--bonds, money market instruments and various mixes of stocks. Wadsworth has staked roughly half his own portfolio into foreign-stock funds, reasoning that U.S. share prices are too expensive and that better growth opportunities lie abroad, especially in developing economies such as Russia and China.

“Personally, I’m overweighted in international funds, but I think everyone should have about 25% in them,” he says.

Wadsworth’s main bit of advice for investors is simply to get started.

“The most important thing for people to do is to put money aside as early as possible,” he says. “Somehow make the sacrifice.”

*

Russ Wiles is a mutual fund columnist for The Times. He can be reached at russ.wiles@pni.com