AmSouth Bancorp's decision last week to sell its proprietary mutual fund business to Pioneer Investment Management Inc. made it just the latest banking company to quit money management.
Some companies have acted because of the tougher, and more costly, regulatory environment; others have chosen to focus on their "core strengths"; and still others have adopted an "open architecture" approach in preference to sticking with proprietary products.
Regardless of the motivation, analysts and executives said, the trend will persist because bank executives are realizing that mutual fund management cannot be profitable without significant scale.
"The mutual fund business is very expensive to operate, and puts banks at a huge exposure to risk," said Richard X. Bove, an analyst at Punk, Ziegel & Co. "One would assume you will see banks that run small chunks of money - and $5 billion to $10 billion is a small chunk of money - looking to sell. Staying in just doesn't make sense anymore."
Mr. Bove said two things are happening at once: Small banks want to get out because they cannot accumulate enough assets to be profitable, and larger companies, like Pioneer and Federated Investors, are ready buyers in an effort to gain scale.
"This is a business built on scale," Mr. Bove said. "I am convinced we will see more consolidation in the business."
Dowd Ritter, AmSouth's chairman, president, and chief executive officer, said in a press release last Tuesday that AmSouth had decided to sell in order to focus on its "core expertise" in wealth management, trust services, and financial planning.
It is true that more banks want to focus on distribution than product development, Mr. Bove said, but this is because mutual fund management has become so heavily regulated in the past year that the profit potential no longer outweighs the cost for most small and midsize banks trying to run a proprietary fund family.
Goldman Sachs Group Inc., Reserve Funds, and Federated Investors Inc. are among the large asset managers that have been snapping up small fund families from banks.
Reserve Funds, the company that started the first money market fund, has bought four small portfolios in the past year, three from banks, and says it plans to buy more to expand in equity and fixed-income products.
Last October, Reserve, which manages $30 billion of assets, bought the First Mutual Fund and Total Return Bond Fund from First Republic's Trainer Wortham and the Froley, Revy Convertible Securities Fund from the bank itself. In January, it bought management rights to the Chicago-based Segal Bryant & Hamill mid-cap fund.
Goldman Sachs' asset management unit last year announced it would add $1.5 billion of assets with the purchase of most of a fund family from Citizens Banking Corp. in Flint, Mich., as well as an agreement to buy the Expedition Funds from Compass Bank in Birmingham, Ala.
Federated added $1 billion of assets under management with purchases during the past two years from FirstMerit Corp. in Akron, Ohio; Riggs National Corp. in Washington; and Citizens in Flint. Last August it made a deal to buy Banknorth Group's $265.5 million-asset fund family.
And last Tuesday, Federated bought $164 million of assets from Vintage Funds, owned by Amcore Financial Inc. in Rockford, Ill.
Joseph S. Machi, director of alliances at Pittsburgh-based Federated, said banks are moving toward open architecture and thus are willing to sell proprietary funds.
"They are exiting a proprietary fund strategy to an open architecture strategy," he said. "Their assets and their size just don't make it efficient to run their own fund groups anymore, and the costs of managing these products continue to rise."
Pioneer's deal for AmSouth's fund family, which has 23 portfolios with $5.5 billion of assets under management, is the second big one in two years for the Pioneer unit of a global investment management group owned by UniCredito Italiano SpA. Pioneer bought Safeco's $3.2 billion-asset mutual fund family last year.
The AmSouth portfolios are to be reorganized into Pioneer Funds when the deal closes at the end of the third quarter.
Analysts said Pioneer would be among the companies that continue aggressively pursuing banks like AmSouth that are looking to quit the mutual fund business.
"The logic for running a mutual fund operation dims for banks because it becomes too expensive relative to running a traditional trust operation," Mr. Bove said. "Trust companies are not being held up to the same regulatory scrutiny. If you sell [proprietary] mutual funds you are required to disclose what other mutual fund organizations have" disclosed.
"The mutual fund business is still an attractive business," he added, "but it is also an expensive business. Banks are trying to decide whether they want to be a distribution channel or a manufacturing channel. When a bank like Citigroup can decide it would prefer one over the other [by selling its asset management arm to Legg Mason] it makes it easier for other banks to follow this wave."
Mr. Machi agreed that when larger companies change their asset management strategies, it makes it easier for smaller ones to follow suit. More deals with banks are in Federated's pipeline, he said, and he expects the pace of consolidation to pick up.
