Reserve Funds, the company that launched the first money market fund, 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.
This creates an alternative for companies that want to get out of proprietary fund management but continue to subadvise their funds.
"Banks don't want to be in the mutual fund business, but they are good asset managers," said Eric Lansky, a senior vice president at Reserve, a New York asset manager. "We have the resources of an asset management company, but they can still maintain their relationships and handle the money management."
"Through this type of transaction," he added, "a small fund family can take on an open architecture model and still manage their own funds. It is the best of both worlds."
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.
Federated and Goldman incorporate the purchased assets into their own fund families and retain distribution relationships with the banks to support continued sales of the funds. Reserve's approach is different in that it allows the banks to continue managing the divested portfolios as subadvisers.
Mr. Lansky said his company has added $75 million of assets in recently buying two Trainer Wortham mutual funds and one Froley, Revy fund from San Francisco's First Republic Bank and one fund from Segal Bryant & Hamill. The four portfolios were added to Reserve's equity fund family, the Hallmark Funds, which afterward had $177 million of assets under management.
He expects to add four more funds from another bank in the first half of this year, Mr. Lansky said, and they will bring another $100 million of assets to the Hallmark Funds. He said he plans to buy at least four funds a year.
"There are 480 funds that have $50 million or less in assets; we have added four in the past year without any type of marketing" of Reserve's desire to buy, Mr. Lansky said. "I expect more deals, but this isn't just about making a lot of deals. This is about finding firms that want to exit proprietary mutual fund ownership but continue as subadvisers."
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 to buy the Expedition Funds from Compass Bank in Birmingham, Ala.
Mr. Lansky said Hallmark's strategy is different because it targets very small funds - with $15 million to $50 million of assets - whose executives want to continue managing their fund assets but need help with distribution.
"Mutual funds are becoming way too commoditized," Mr. Lansky said. "Currently, 80% of the mutual fund flows are handled by the top five fund families. There [are] good independent advisers out there that can't be lost as fund families merge."
In October, Reserve, which manages $30 billion of assets overall, bought the First Mutual Fund and Total Return Bond Fund from First Republic's Trainer Wortham and the bank's Froley, Revy Convertible Securities Fund. In January, it bought management rights to the Chicago-based Segal Bryant & Hamill mid-cap fund.
Though these funds now carry the Hallmark name, their managements and investment strategies remained intact. Mr. Lansky said portfolios bought by competitors are absorbed into existing funds in an effort just to achieve scale.
James McNamara, a managing director and the head of third-party distribution at Goldman Sachs, has said it is looking to buy "subscale" fund families with less than $5 billion of assets under management. Mr. Lansky said Reserve is looking at funds with less than $100 million of assets for its Hallmark fund family.
"We have peers that are large and successful, but their focus is on creating scale," he said. "We are built around working with each firm individually."
Reserve has been working diligently to increase its sales through banks. In October it hired four executives specifically for that channel. Mr. Lansky said 20% of Reserve's $30 billion of assets under management is held in banks. It has relationships with 75 banks, he said, and the ideal-size bank partner has $500 million to $5 billion of assets.
His company began pursuing bank distribution in 2000 when it started its Reserve Cash Sweep product. The product, which has $800 million of assets under management, attracted 12 new relationships last year and 21% growth in assets, he said.
Reserve will keep looking carefully for opportunities to expand the Hallmark Funds, which have 11 equity and bond portfolios, Mr. Lansky said.
"We are not just focusing on the bank marketplace, but we are having success there because community and regional banks want to get out of proprietary fund management but not out of advising these funds and their clients," Mr. Lansky said. "Small banks just don't want their funds to be lost in the transaction and absorbed into a megafund family."
