Confirming suspicions that banks and thrifts are looking to exit the mutual fund management business, Great Western Financial Corp. said Wednesday it is considering the sale of its proprietary mutual fund complex.
The Chatsworth, Calif.-based thrift said it has hired Goldman, Sachs & Co. to explore a sale of Sierra Capital Management, its mutual fund subsidiary which now has $3.4 billion under management. The move fueled speculation that banks have been largely disappointed with their forays into the mutual fund management business and are now looking for a quick way out.
"People have been predicting this for years," said Joy P. Montgomery, a consultant at Money Marketing Initiatives, Morristown, N.J. "Depending on what multiples (Great Western fetches,) we might start to see something start to happen" with more banks putting their funds on the auction block.
Few would have predicted that Great Western would be among the first to consider a sale. While most bank-managed complexes are weighed down by short-term money market funds, Sierra has only 9% of its assets invested in money markets. And, while most bank families struggle to get third-party brokers to sell their funds, Sierra relies on 500 broker-dealers for a whopping 40% of its sales.
"They've had a pretty successful go of it," said R. Gregory Knopf, managing director of Union Bank of California's Stepstone Funds.
But all banks that manage mutual funds are reviewing their options to determine if they should buy, build, or sell their funds, said Peter L. Bain, managing principal at Berkshire Capital Corp., New York. For those that decide to sell, the time to act is now.
"It's a seller's market," Mr. Bain said.
Indeed, mutual funds have recently fetched as much as 4.78% of assets under management, which is the premium Franklin Resources agreed to pay for Michael Price's Heine Securities last summer. While that price was unusually high, the going rate for such deals is still about 2% of assets under management.
According to a source close to Great Western, about 12 bidders have already expressed interest in Sierra. The list of possible acquirers is expected to be whittled down to a handful this week.
Other bankers in the fund business said Great Western, a $43.5 billion thrift, has been frustrated by the high cost of running a fund complex. Unlike other banks that rely on an in-house team of money managers, Great Western uses a stable of sub-advisers, including J.P. Morgan Investment Management and Scudder Stevens & Clark, to manage its 15 portfolios. It then must split its management fees with those sub-advisers.
In addition to exploring a sale, Great Western is considering retaining a stake in Sierra through a joint-venture partnership. A spokesman for the thrift said the moves are part of an overall bank strategy to boost its return on equity to 15%.
In the third quarter, Great Western missed its earnings targets by a few cents a share, the spokesman said. He added that the company remains committed to Great Western Financial Securities Corp., its broker-dealer subsidiary.
According to Ms. Montgomery, not all banks will seek a sale of fund businesses in the hopes of fetching a hefty price. Many banks see their fund businesses as part of a strategy to retain customers.
"If their decision is only profitability-driven, then more banks would have gotten out" already Ms. Montgomery said.
The possibility of Sierra's sale was first reported in the Wall Street Journal.