Touchstone Investments, a wholesale fund firm, says it plans to aggressively expand assets under its management by acquiring portfolios from small fund companies and small banks.
Jim Grifo, the president of the Cincinnati wholesale fund unit of Western Southern Financial Group, said it has added $500 million of assets by purchasing four funds in the past 16 months. He said he "wouldn't be surprised" if Touchstone buys more portfolios this year.
"There are a lot of adoption opportunities that are coming to the forefront," he said. "That is really the chosen method for growing our business."
Mr. Grifo said the fund scandals and the rising cost of compliance have induced many smaller fund firms to look for the exits. Touchstone wants to add small-cap and mid-cap value funds, a small-cap core fund, and an international fund, he said.
"There are going to be opportunities out there," he said. "When companies buy other companies, different mutual funds pop out that don't fit in the new organization. These are opportunities for us."
Other companies have looked to develop their asset bases by purchasing funds from companies looking to get out of fund management.
Goldman Sachs Group Inc. and Federated Investors Inc. are among the huge asset managers that have also been snapping up small fund families from banks. Some small banks want to sell their fund businesses because they lack the scale to keep up with rising compliance costs as the government cracks down on trading abuses.
Like Touchstone, Federated and Goldman incorporate the purchased assets into their own fund families and retain distribution relationships with the bank former owners to support continued sales of the portfolios.
Federated Investors has added $774 million of assets under management through purchases of fund units in the past two years from FirstMerit Corp. in Akron, Ohio; Riggs National Corp. in Washington; and Banknorth Group in Portland, Maine.
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 Bank in Flint, Mich., and a definitive agreement for the Expedition Funds of Compass Bank in Birmingham, Ala.
Executives at Goldman Sachs have said the company seeks to buy "subscale" fund families, those with less than $5 billion of assets under management. Touchstone is looking for funds with as little as $50 million of assets.
Analysts said Touchstone's approach is unique because it is willing to let the selling company continue to subadvise the divested funds. Reserve Funds, the company that launched the first money market fund, has taken a similar approach. It has bought four small mutual funds in the past three months, three from banks, and plans to buy more to expand its equity and fixed-income business.
"There are a lot of avenues for companies looking to exit the mutual fund business," said Burton Greenwald, a Philadelphia analyst. "They have all come to the market at the right time because costs are precluding a lot of firms from maintaining this business. People want to get back to their core competencies."
In addition to absorbing purchased assets, Mr. Grifo said, Touchstone hopes to expand organically. It announced Friday that its assets under management in 17 portfolios had grown 15.3%, to $3 billion, last year. The company had a record sales year, with $463 million of long-term-fund net sales.
Financial Research Corp. said Touchstone Investments ranked in the top 25 among wholesale mutual fund companies in net sales last year.
Ordinarily, the company sells through wire houses, but Mr. Grifo said Touchstone hopes to gradually increase its sales through banks. For now, however, it is focused on distributing through Merrill Lynch, Citigroup's Smith Barney, Wachovia/Prudential, A.G. Edwards, Raymond James, and UBS PaineWebber.
"It is a matter of growth," he said. "Our first focus isn't banks. But I am willing and ready to go if the opportunity is there."
Mr. Grifo said he wants to remain regionally focused on distribution through a select group of companies.
"We want to gain scale and size, but we believe we cannot be meaningful if we are spread all across the marketplace," he said. "That is why we haven't been aggressive in our pursuit of bank distribution."
He said he is confident that Touchstone can reach $10 billion of assets by 2008.
"We are not going to get there just through organic growth," he said. "We have to do some adoptions [acquisitions] to reach that target."
