Lacy B. Herrmann, left, of the Narragansett Insured Tax-Free Income Fund, sits with Alfred B. Van Liew of the Ocean State Tax-Exempt Fund.

The Providence Journal / Kathy Borchers

There were no special celebrations yesterday, no popping of champagne corks, no colorful balloons.

It was just another shareholders meeting for the Narragansett Insured Tax-Free Income Fund, up in a fifth-floor conference room at the Rhode Island Convention Center in Providence.

But it marked a key turning point in the world of Rhode Island municipal bond mutual funds.

And it had to be special for the Narragansett fund’s founder, Lacy B. Herrmann.

To understand why, think back to 1992.

Rhode Island was just beginning to emerge from the state’s bank and credit-union crisis.

And the nation was only starting to recover from a savings-and-loan crisis.

Investors were anxious, and things looked bleak.

But not to Herrmann. He saw opportunity.

A Brown University graduate, with an impish smile and a twinkle in his eye, Herrmann decided the time was right to try something new in the field of Rhode Island municipal bond mutual funds.

There was already one such fund in the field at the time — the Ocean State Tax-Exempt Fund. It was the domain of the well-known local investment adviser, Fred Van Liew.

Ocean State essentially bought municipal bonds issued by the State of Rhode Island as well as cities, towns and other local government entities.

Instead of buying individual Rhode Island municipal bonds through a broker, an investor could buy them, in smaller chunks, through a mutual fund.

And a Rhode Island investor who bought shares in the fund received interest in the form of dividends, interest that was free of both federal and Rhode Island income tax.

Herrmann decided to launch a nearly identical fund — the Narragansett Insured Tax-Free Income Fund — but with a twist: it would specialize in buying insured Rhode Island municipal bonds.

So, for a while, Lacy Herrmann and Fred Van Liew were rivals, courting a limited group of prospective investors and advisers in a fairly small market.

It didn’t stay that way for long. Herrmann’s Narragansett fund grew larger that Van Liew’s Ocean State Fund, amassing a bigger pile of assets and a greater number of shareholders.

In time, other funds joined the race. But Herrmann’s fund sailed ahead. Today, it leads the pack.

Here’s the breakdown, according to data compiled by Morningstar, the Chicago-based publisher of investment data:

•Narragansett Insured Tax-Free Income Fund, $163.7 million in assets.

•Columbia Rhode Island Intermediate Municipal Bond fund, $114.5 million in assets.

•Eaton Vance Rhode Island Municipals fund, $50.6 million in assets

•Ocean State Tax-Exempt Fund, $22 million in assets.

While Herrmann’s fund moved to the top of the list, Van Liew’s fund trailed well behind.

Now, the race for them is over. Ocean State will officially merge with the Narragansett fund later this month. As a result, the Narragansett fund will remain standing; the Ocean State fund will disappear.

Why? It’s mainly because expenses are higher nowadays, said Fred Van Liew, who runs Van Liew Capital of Providence and Newport, whose holdings include Van Liew Trust and Van Liew Securities.

Because of changes in regulations, mutual-fund accounting, auditing and other expenses have all gone up, Van Liew said.

Such costs can be a drag on a fund, “and we just didn’t think it was fair to our shareholders,” he said.

So the Ocean State Fund essentially chose to join forces with the Narragansett fund.

Burt Greenwald, a mutual-fund consultant based in Philadelphia, said the transaction makes sense.

“The economics of the business are such that a small muni fund … cannot make money, is not profitable to run,” and can result in lower returns to shareholders because of high expenses, Greenwald said in a telephone interview yesterday.

When the Narragansett fund essentially absorbs the Ocean State fund, it will be able to spread out such costs, he said.

There’ll be no reduction in Van Liew Capital’s work force; the company will continue to have 13 full-time employees and 2 part-time workers, Van Liew said.

Except that now, the company will be able to focus on its core business — providing investment management and corporate trust services, he said.

And, for the first time since the mid-1980s, there’ll be no more Ocean State fund. Its shareholders will soon become shareholders in the Narragansett fund.

A Narragansett fund adviser said at yesterday’s meeting that Ocean State’s shareholders will see no major changes. The portfolio in which Ocean State shareholders will soon have a stake will be fully insured, he said.

In addition, “There’s nothing that we’re concerned with” in the portfolio of municipal bonds that the Narragansett fund will inherit from Ocean State, he said.

After the meeting, two investors expressed support for the planned merger:

Barbara Thornton, of Providence, said, “As long as what he says is accurate, I don’t have any problem with it.”

Harold Gadon, of Cranston, said he favors the merger because costs will essentially be spread across a larger base of assets, leading to efficiencies.

The Narragansett fund has about 1,900 shareholder accounts, the Ocean State fund about 450, said Diana B. Herrmann, president of the Narragansett fund.

So it’s business as usual.

But for two long-time players in the marketplace, things will be different.

The race between those two old sailors — Fred Van Liew and Lacy Herrmann — is now over, and Lacy Herrmann wins the cup.

You couldn’t tell that at yesterday’s meeting. There was Lacy Herrmann, sitting at a table at rear of the conference room at the Narragansett fund’s annual shareholders’ meeting. And sitting nearby, at the very same table, all smiles, was his longtime rival, Fred Van Liew.

Lacy Herrmann wasn’t gloating. “It’s good for them, it’s good for us,” he said of the planned transaction.

It’s also good for a guy who looked into the economic abyss 16 years ago, took a chance, and came out a winner.

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