Another community banking company, Intrust Financial Corp. of Wichita, is getting out of proprietary fund management - and blaming escalating regulatory restrictions and costs.
The $2.9 billion-asset company said Wednesday that it had agreed to sell its mutual fund business, Intrust Financial Services Inc., whose American Independence Funds manage $600 million, to Arrivato Advisors LLC, a New York fund company specializing in target-date funds.
Intrust Bank is not getting out of asset management, said Rodney Pitts, an executive vice president at Intrust Wealth Management, its asset management arm. It will still offer nonproprietary products - including the American Independence Funds - to customers, he said.
"As we look at the regulatory environments and the compliance costs associated with running a mutual fund complex, we decided we wanted to focus on what we do best," he said. "We wanted to focus on serving clients rather than the intricacies of running a mutual fund complex."
Mr. Pitts said the fund family was never unprofitable but that the bank wanted to leave the business before it became so. "This was still a viable business line for us," he said. "We wanted to focus our efforts on serving clients rather than putting time, labor, and money in a highly regulated environment that continues to escalate in that regard."
The deal is expected to close in the first quarter, and Arrivato - a company started last year by two veterans of bank asset management - would then be renamed American Independence Financial Services. The trustees of American Independence Funds and the Arrivato Funds Trust have approved the deal, whose terms were not disclosed.
The 10-fund family includes five NestEgg target-date portfolios, which have $90 million in assets. Eric Rubin, the president of Arrivato Advisors, said these portfolios are to be merged with five Arrivato Dow Jones funds. The New York company launched the five target-date funds in September in a partnership with Dow Jones based on the latter's U.S. Target Date Indexes. But Arrivato had not started selling the products, Mr. Rubin said, because the Intrust deal was on the horizon.
"One of the appealing things about Intrust was that we could use it to rebrand and seed the Arrivato Dow Jones products," he said. "This meant that, rather than starting de novo, we could get a head start."
Mr. Rubin said his firm is in the market for further acquisitions. He said he "conservatively" expects to reach $4 billion of assets under management within five years.
"We are absolutely in the market to buy other fund complexes," he said. "We are looking at banks that might have fund units that are a good fit for us."
Mr. Rubin and his partner, John Pileggi, each has a track record in starting up and running bank mutual fund units. Before Arrivato, Mr. Rubin worked 15 years at companies such as Banc One Investment Advisors, ING Group, and Mercantile Capital Advisors in 2003 and 2004.
It was at Mercantile in Baltimore that Mr. Rubin began to work with Mr. Pileggi, who was the chief executive of Mercantile's wealth management unit but was fired in March 2004. Mercantile said at the time that he had failed to disclosed to superiors that the mother of another employee would get a referral fee from a firm Mercantile had hired to advise one of its registered hedge funds.
In July 2004, Mr. Pileggi filed a $240 million libel suit against Mercantile and its chief executive officer, Edward J. Kelly 3d. Mercantile countersued in September 2004, seeking $8.2 million, but the lawsuits were settled last April. An April 27 Securities and Exchange Commission filing said Mercantile paid Mr. Pileggi a $1.3 million settlement.
Mr. Rubin left Mercantile three weeks after Mr. Pileggi's firing, and the two executives started Arrivato in November 2004. Mr. Rubin said the Intrust deal would enable them to look beyond target-date funds. In addition to its five NestEgg funds, Intrust has three bond funds, a value equity fund, and an international equity fund.
"We are definitely looking to be a full-service mutual fund shop," he said. "I would say our lead product in the marketplace will be the target-date funds, but we want to be more than just that."
Other companies have jumped on the bandwagon for target-date and life-cycle products. In September, AIG Valic, a unit of American International Group Inc., introduced a series of target-date funds. The High Watermark Funds, which will be distributed through AIG retirement plans, guarantee both principal and market gains achieved during the life of the product for customers who hold till maturity.
In July, Russell Investment Group announced plans to hire wholesalers nationally as it looked to increase distribution through banks and other channels for its life-cycle portfolios - the LifePoint Funds. The family accounted for $7.5 billion of Russell's $23 billion of assets under management at June 30.
Mr. Rubin said his company would like to add assets and asset classes, specifically growth funds, to its fund lineup. "When we created our business plan," he said, "we wanted to run on day one with target-date products but after the first year diversify into other products. We are ahead of schedule. Certainly this acquisition has sped up our plan."
He said he thinks there is an organic-growth opportunity with Intrust's funds, specifically the value equity portfolio. This product, with $100 million under management, could prove to be the jewel of the deal, he said.
"The bank had focused on bank distribution," Mr. Rubin said. "With the value equity fund and the tax-exempt fund, we can certainly expand distribution. These products were never marketed outside of the bank. I think we have the opportunity to take this $100 million fund and grow it into a couple billion dollars in a couple of years."
"There is a large opportunity for [the value equity fund] to be taken outside of the bank channel to wire houses and regionals in Kansas," he added.
Mr. Rubin said Intrust would be one of Arrivato's larger clients initially. He said his company will have people in Wichita, but he said, "we are based in New York, and we will grow in New York and regionally beyond that."
