The KeyChoice lifestyle asset allocation funds, which used to invest only in KeyCorp's proprietary funds, now also invest in three third-party funds.
KeyCorp's asset management division was the first investment company to be granted regulatory permission to sell funds of funds that buy shares from outside its own family, said Christopher Dyer, director of Key Asset Management, Cleveland.
The third-party funds in the mix are Loomis Sayles Bond Fund, Neuberger & Berman Genesis Fund, and the PBHG Growth Fund. The KeyCorp funds in the portfolios are the Key and Victory Funds.
"Customers don't want proprietary funds only" when there are thousands of mutual funds to choose from, Mr. Dyer said.
Federal securities legislation last year allowed mutual funds to invest in others, thus creating so-called funds of funds. But the law limited the investments to a firm's own mutual fund family.
KeyCorp asked the Securities and Exchange Commission for an exemption from the restriction in January. One month later, the exemption was granted, allowing KeyCorp to keep its third-party investments between 15% and 20% of the KeyChoice funds' assets.
That has allowed Mr. Dyer to fill in holes in KeyCorp's product offerings, he said. The three KeyChoice funds invest in different combinations of mutual funds according to an investors' time horizon, risk tolerance, and financial objectives.
While some companies might be wary of sending customers' assets to investment firms, KeyCorp executives realized that investors want a variety of choices, Mr. Dyer said. If the bank's customers don't get all the options they want from KeyCorp, they will go elsewhere, he said.
Indeed, many bank mutual fund programs do not have all the in-house investment capabilities to meet the needs of every investor, said Richard Ross, a consultant at Fifty-plus Communications, Glencoe, Ill. He lauded KeyCorp for recognizing its shortcomings.
"If a customer wants to invest in an emerging market fund, and you don't have it, you're not doing him any great service by telling him to invest with you or don't invest," Mr. Ross said. "What KeyCorp has done is made the intellectual jump to realize it's the customer's money."
The KeyChoice funds are available through KeyCorp's brokerage division as well as through its 401(k) programs.
The total expense ratio for the KeyChoice funds is 45 basis points, Mr. Dyer said. For the first few months the funds were available, 25 basis points were waived. But now that outside funds, which carry their own expenses, are included, the expense for the KeyChoice funds will change, Mr. Dyer said.
