Every business has a magic number and conventional wisdom to go along with it.
Huntington Bancshares Inc.'s proprietary fund family has $3.5 billion of assets under management, too little by industry standards and normally cause to wave a white flag. In the past five years, many banking companies have sold or folded proprietary fund units that did not have at least $5 billion under management.
Yet Huntington has spent the past nine years nursing, rather than dismissing, its internally distributed funds. And Huntington Funds' top executive said in an interview that the company plans to add products and increase distribution to expand from its base.
Randy Bateman, the president of Huntington Asset Advisors and chief investment officer of Huntington National Bank, also said he wants to "exponentially" increase Huntington Funds' overall assets under management — proprietary and other products. Huntington had $13 billion of assets under management overall at June 30, and Bateman said he aims to double that within three years. The fund family is meant to be a major part of that growth and will undergo some changes.
"To accomplish that, we have to do a number of things differently," he said. "For the first time ever, we are going to sell our funds in third-party channels."
Two weeks ago Huntington got approval to offer its funds on Charles Schwab Corp.'s investment platforms. "We expect our fund family to grow significantly," he said. "We are now on a lot of new radar screens. We have the performance history to get our foot in the door, and we are going to have the distribution to make a splash."
Analysts and competitors said the Columbus, Ohio, company could be in for an uphill battle.
Karen M. Kruse, a senior vice president of wealth management at First Tennessee Bank, a unit of First Horizon National Corp. in Memphis, said a proprietary fund family is "an expensive undertaking with little upside." First Tennessee sold its proprietary fund unit, which had $1.4 billion under management, to Goldman Sachs Asset Management in December 2005 because it could not get "above $5 billion, which is a necessity for profitability."
"Given today's environment you absolutely need to reach that threshold to be profitable," she said. "Just because the noise has died down about oversight and regulatory fees, the hefty costs have not subsided" to cover salary, regulatory and other expenses.
Charles "Chip" Roame, the managing principal in the San Francisco consulting firm Tiburon Strategic Advisors, said a company like Huntington "could be profitable with less than $5 billion if they have the right kinds of funds."
The banking company has 23 proprietary funds: 19 equity and fixed-income funds and four money market funds. Last week, it introduced three asset allocation portfolios; each is a "fund of funds" that invests in a portfolio of existing Huntington Funds.
"Equity funds are radically profitable, and money market funds are radically unprofitable," Roame said. "If you have a company like Huntington that is skewed toward equity and fixed income, they can be profitable with less."
"The real test is to develop a strong track record and see if they sell outside the bank," he said.
Bateman said Huntington is "committed to this business in a very dramatic fashion."
"We feel we can do a better job for our customers managing their money in our funds than if we passed them to a third party," he said. "We also feel this remains a very profitable, very stable business with a lot of growth potential. We think it is pretty funny that so many banks have gotten out in the past few years. We think there is an opportunity for us to be successful where others haven't been."
This fall Huntington plans to introduce an emerging market, yield-based fund, Bateman said. From there, he said, "a lot depends on demand from our customers and our capabilities."
Roame said economies of scale will always let larger fund companies sell their products for less but that price is not everything.
Bateman said that, when he was hired by Huntington in 2000 from U.S. Bancorp, "there was not a whole lot of emphasis on the mutual fund complex." Huntington had offered proprietary products since 1985 but had not done a good job of promoting and selling its funds, he said.
In 2000 Huntington Funds had $180,000 in sales, but Bateman said he was attracted to the company because of its corps of licensed brokers, which it plans to expand by 25% — to 189 — in the next year as part of its growth strategy.
He started working with Rob Comfort, the president of Huntington Investment Co., to create products and increase internal distribution, Bateman said. And in May 2001, the company started five funds.
"We knew we had to get the internal reps involved in the process of building our funds," Bateman said. "I knew that we had a bad reputation even with our own brokers. So we started a dialogue with them. We listened, and we launched products that appealed to them. We developed products that were somewhat unique so our brokers had a story to tell."
In 2001, sales rose to $25 million. In 2002, Huntington had $80 million in sales, and Bateman said it has had more than $100 million of sales annually since. Most of Huntington's funds have three- or four-star ratings on Morningstar's five-star scale. The company's international equity fund has a five-star ranking.
"Our brokers have gained confidence in our products, and our performance has been relatively strong," he said. "We are ready to take the next step."
Kruse said proprietary funds can do more harm than good. "Reputational risks are as high as ever," she said. "This is still an open architecture sales environment. Home-grown products need to be twice as good to get on the radar screen, and products developed by banks need to be even better."
Since selling its fund unit in 2005, First Tennessee has shifted to an open architecture, registered investment advisory platform. Kruse said it has $100 million of assets under management since starting the program in January, a figure she expects to double or triple in the next year.
Bateman said that, as part of its growth strategy, Huntington plans to increase marketing.
The company "definitely" plans to keep its brand, he said. "We know that we are going to be competing against a whole new group of people, and we know that those people will use the fact that we are a bank against us, but we think that it is a strength," he said. "A lot of people think banks can't manage money. My retort is, 'Wall Street can't manage money.' With a bank, we have a responsibility and a visibility in the communities we serve. There is a higher standard of responsibility and ethics, and our customers recognize that."
