Thanks to an external distribution push by Fifth Third Bancorp's asset management business, three key types of investments are now attracting at least as many dollars from outside the bank as inside it.
The Cincinnati company has increasingly offered rivals' investment management in its branches for more than five years, said E. Keith Wirtz, the president and chief investment officer of Fifth Third Asset Management Inc.
Its in-house products have faced growing competition. That has prompted Fifth Third's decision to offer its asset management nationally, Mr. Wirtz said.
Fifth Third Asset Management expanded its institutional business, which has $10 billion under management, outside the bank in 2004. Its separately managed account business, which has $2 billion under management, followed a year later. The company began offering its $13 billion-asset fund family through outside distributors last year, Mr. Wirtz said.
"We're sourcing more and more business in those three business lines away from the bank," he said.
With investors increasingly able to get third-party investment products at any bank, he said, financial institutions that manage assets in-house must decide whether to remain in that business, and if so, how to succeed.
"My opinion is that other banks are going through the same considerations as us, but haven't moved yet," said Mr. Wirtz, a Bank of America Corp. veteran who joined Fifth Third in 2003 to take charge of its investment arm.
A wave of realignment at banks and other financial firms was widely expected after Citigroup Inc. divested its asset management business in 2005 and Merrill Lynch & Co. Inc. followed suit in 2006. But that has yet to materialize, noted Alois Pirker, senior analyst with the research firm Aite Group LLC.
"I do think the overall direction is the same, though," he said. "After starting this open architecture, I don't think there is a way back into the old, cozy environment."
Fifth Third's institutional products are distributed nationally through consultants and other traditional gatekeepers. Among the efforts to spur institutional business was the development in 2006 of an advisory service based on liability-driven investing, in which performance goals are linked to the future liabilities. Fifth Third has $200 million of assets under liability-driven investing-style management from pension plans and not-for-profit clients.
Fifth Third's separately managed accounts are sold through Merrill Lynch & Co. Inc. and Morgan Stanley, and its mutual funds are available through 50 distributors including Merrill, Morgan Stanley, and Fidelity Investments.
Mr. Wirtz described fund inflows from nonbank distributors as modest, but said the bank is seeing slight net outflows of its own funds as customers take advantage of open architecture in the brokerage and private bank areas. Fund sales should take three years to gain real traction through outside distributors, he said.
Fifth Third is considering renaming its Fifth Third Funds to emphasize their independence, Mr. Wirtz said. In March the company handed fund administration, custody, shareholder record keeping, and other duties to State Street Corp. and Boston Financial Data Services, its joint venture with DST Systems Inc. As a result, all back-end functions for the funds are now handled outside of Fifth Third, Mr. Wirtz said.
Experts said the funds' name recognition and performance as among the challenges to wider distribution. Morningstar Inc., the fund rating company, said Fifth Third's domestic stock, international stock, municipal bond, and taxable bond funds as average.
But Mr. Wirtz said Barron's in February ranked the fund family 17th out of 67, its best result in at least four years. And he is pruning the lineup so that only the funds with the strongest performance and most sought-after investment approaches remain. The funds number 30, down from 34 a year ago, and should reach "the low 20s" within the next year, he said.
At the same time, the family has added funds with a modern profile, including a "130/30" mutual fund, which uses a hedge-fund-like strategy and was rolled out last year. Early this year Fifth Third relaunched its International Equity Fund, having replaced its fundamental investing approach with a quantitative strategy. "Our family is from the mid-1980s, and was designed with the bank as the primary consideration," Mr. Wirtz said. "We want to have a menu that is competitive and viable for national distribution."
