Pioneer Should Stick to Its Knitting

Investing in sideline businesses has proven unsuccessful for the money manager. Eaton Vance, meanwhile, focuses on what it knows.
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There's nothing quite like the sight of the managers who have to stand before a room of shareholders and explain why they've been losing so darn much money lately.

This is doubly true for investment management firms because, come on now, how is it possible to get hosed while managing mutual funds and private accounts in this market?

You might get a hint if you are on hand for today's annual meeting of

Pioneer Group

(PIOG)

. Presumably, chief executive John Cogan Jr. will review Pioneer's $35 million loss for 1998 and talk up the prospects for 1999, which started with a dud in the form of a $20 million first-quarter loss.

For those of you who can't make the meeting, the short answer to our question is that it's virtually impossible to lose running money in a straightforward style these days. But companies that stray into other business sidelines can get burned.

Pioneer is still doing all right running money. But its gold mine has turned into a money pit, losing nearly $20 million by itself last year, and timber interests lost another $18.7 million. Other far-flung interests in places like Poland and India aren't having a major impact one way or the other.

Our point isn't to kick Pioneer when it's down. But we are intrigued by the strikingly different news at another small investment firm that operates just blocks away from Pioneer in Boston.

Once they were seen as two of a kind, Pioneer and

Eaton Vance

(EV) - Get Report

. Both were profitable smaller shops in the downtown shadows of

Fidelity Investments

and

Putnam Investments

. Eaton Vance had a taste for dabbling in side businesses, just like Pioneer.

For years, Pioneer seemed to get the better of the pairing. Its sidelines were more interesting and, for a time, much more profitable. Eaton Vance seemed to be sleepy to the point of comatose. Its bread and butter was municipal bond funds and the diversions were more limited and mundane.

A lot has changed, besides Pioneer's stumble. Eaton Vance found a way to do what few second- and third-tier mutual fund companies can accomplish today: actually grow sales instead of boosting assets under management though sheer market appreciation.

It wasn't sexy, but Eaton Vance's strategy has turned out to be effective and very profitable. It built itself into a name in a relatively new corner of the mutual fund world: tax-managed funds. It also grew a fund business that invests in bank loans from the ground up.

Eaton Vance's tax-managed funds business has bloomed from practically nothing in 1996 to $46.5 million in fee and commission revenues. The

(EMTGX) - Get Report

Eaton Vance Tax Managed Growth fund alone has pulled in net sales of nearly $2 billion in the last year.

Eaton Vance's revenue from running its bank loan funds, another unglamorous but profitable part of the business, more than doubled to $57 million in the same period.

A hint of what would have happened if Eaton Vance stood still and stuck to its muni fund business: Management revenue declined by $1 million to $25.5 million between 1996 and 1998. Instead, pound for pound it's generating one of the industry's best growth stories.

Eaton's own shareholders have seen results. The company's stock was up 191% over the last three years, as of the end of April. (Eaton shares are up from 23 1/8 to 28 5/8 in the last two weeks, thanks to a reversal of an accounting principle that allows the company to again amortize some sales commission expenses over time.)

While Eaton Vance shares have climbed over the last three years, Pioneer stock has slumped by nearly 31%. In the last five years, while the raging bull market has made fortunes for investment firms, Pioneer stock declined by 1.7%.

Most of the blame can be laid on Pioneer's outside interests. It lost big in Russia and has shut down most of its businesses there. Pioneer's U.S. venture capital business has been sold, but for less than the value at which it was carried on Pioneer's balance sheet.

The company's gold mine in Ghana accounted for 60% of last year's red ink. The mine is being shopped by

Salomon Smith Barney

, but a deal was expected months ago.

Pioneer's core money management business has been the lone bright spot for several years now, generating record sales and earnings of $30 million in 1998. But the company suffered its worst sales quarter ever during the first three months of this year, according to

Financial Research

, by recording net redemptions of $259 million.

On the surface, Pioneer's 1998 performance seems stunning. The value-oriented shop was pulling in record sales in a growth-stock market amid lots of management turnover. Departures over that period included equity managers Frank Boggan (

(PIOTX) - Get Report

Pioneer II), Robert Benson (

(PWREX) - Get Report

Real Estate) Norman Kurland (

(PIIFX) - Get Report

International Growth), Todd Grady and Ron Saba (

(PSCFX)

Small Company) and William Taussig (

(PIMCX)

Microcap). Two other fixed-income managers also exited.

The bad news: One fund was really propping up the entire company's sales performance. Pioneer

(MOMGX)

Growth, a large-cap growth fund that has averaged better than 33% annual returns over the last four years, is the entire show. It's hard to imagine just how bad things would have been at Pioneer during the first quarter without the Growth fund pulling in sales of $436 million.

Pioneer Growth has pulled in $1.3 billion over the last year.

(PIODX) - Get Report

Pioneer fund ($574 million) and Pioneer

(PEQIX) - Get Report

Equity Income ($101 million) are the only other funds in the complex to exceed $100 million in net sales during the same period.

The lesson behind the divergence of Pioneer and Eaton Vance? Money management is an incredibly lucrative business. Once you're in it, why gamble on anything else?

Steven Syre & Steve Bailey write for the Boston Globe. This column is exclusive to TheStreet.com. At time of publication, they held no positions in the stocks or funds discussed in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy stocks or funds.