S&T Bancorp, a Pennsylvania community banking company, has started an investment advice subsidiary and says it plans to buck conventional wisdom by launching a proprietary mutual fund next year.
Several community and regional banking companies in recent years have concluded that their proprietary fund families were too small to be adequately profitable and have sold them to much larger fund managers. Even Citigroup Inc. got out of proprietary fund management this summer - swapping its fund family for the brokerage operation of Legg Mason in Baltimore - albeit for reasons other than size.
Some of these companies left the business because they offered run-of-the-mill funds whose performance and underlying investments were too similar to those offered by competitors, according to Malcolm Polley, the president of Stewart Capital Advisors, S&T's new investment adviser subsidiary.
S&T hopes its hands-on portfolio management approach and willingness to manage smaller accounts will give it an edge in wealth management, he said. The $3.1 billion-asset Indiana, Pa., company operates 51 branches in 10 western Pennsylvania counties, some of them in Pittsburgh's orbit.
Regarding banking companies that have not done well at fund management, Mr. Polley said, "They've just taken an existing common fund complex, and they've tried to create a fund business from that. They market six mutual funds with so-so performance, and none of them ends up building any scale. After five or six years they say, 'These funds aren't growing. Why did we do that?' "
An expansion of the wealth management business makes sense for S&T, which has been enhancing its investment management capabilities for several years, said Collyn Gilbert, an analyst who follows S&T's stock for the regional investment bank Ryan Beck & Co. in Florham Park, N.J.
"The trust and investment management business is one of their bigger strengths," Ms. Gilbert said. "It seems like a natural fit for them."
Many banks are looking to expand their fee-based asset management services in light of lackluster stock market returns, which have put a dent in revenues for transaction-based brokers, she added.
S&T may have an advantage in the wealth management business as a local bank with ties to the surrounding community, said Geoffrey Bobroff, the president of Bobroff Consulting in East Greenwich, R.I.
"They are in a unique position in that they do get the foot traffic, and customers arguably identify with them more versus a large institution," Mr. Bobroff said. "A small bank in a bedroom community may have a leg up over a larger bank in that town."
But banks overall have struggled to gain market share in the wealth management business because their investment strategies tend to be more conservative, and therefore generate lower returns, than those of other financial services providers, he said.
S&T plans to differentiate itself by offering proprietary, in-house investment management and research, according to Mr. Polley. At large banks, he said, money management decisions are made at the home-office level rather than in the local branches.
"The larger banks are doing push-button portfolio management," he said. Many large banks also do not do their own research, he added.
"When the customers want to know why we own certain holdings, we should be able to give them a concise answer," Mr. Polley said.
S&T also hopes to distinguish itself by its willingness to manage accounts with less than $10 million of assets. The average account size at Stewart Capital Advisors will probably be about $500,000, Mr. Polley said.
"The big banks are not willing to look at you unless you have $10 million," he said.
S&T's first mutual fund offering will be a mid-cap value fund. If it proves successful, the bank will consider launching a second portfolio, Mr. Polley said.
The fund will need to gather $40 million to $50 million of assets under management for S&T to break even, he said. The company plans to market the fund to its existing client base and through relationships with brokers.
S&T already offers a separately managed account service through Raymond James Financial, an asset manager in St. Petersburg, Fla.
Creating an investment advisory business was a natural extension of the wealth management capability S&T has developed in recent years, Mr. Polley said.
S&T has been building a wealth management business since 2000 when it hired Gregor Young, then a senior vice president at the former Fleet Bank in Springfield, Mass., to lead the effort. Mr. Young is an executive vice president at S&T and the managing director of its wealth management unit.
Before rolling out its own investment management services, S&T had simply allocated customers' investments to underlying Frank Russell Co. mutual funds. But it was not satisfied with the funds' performance and felt their fees were too high, according to Mr. Polley. A Frank Russell spokesman did not return calls seeking comment.
In five years, S&T has doubled the wealth management group's assets, from $600 million in trust accounts in 2000 to $1.2 billion currently, Mr. Polley said.
The company has four portfolio managers, each of whom oversees an investment strategy - all-cap equity, mid-cap equity, equity income, and fixed income. S&T also has two traders and an analyst.
"Hiring portfolio managers is not an inexpensive undertaking," Mr. Polley acknowledged. "But the investment business is nice in that it's highly scalable, and you don't need a lot of bodies to increase assets under management."
