Touchstone Investments, a wholesale fund company, says it will look to buy small fund families from community banks and asset managers after a deal announced this week that would nearly double the size of its business.
James H. Grifo, the president of the Cincinnati wholesale fund unit of Western and Southern Financial Group, said the deal for Constellation Investment Management Co. LP would boost his company's assets under management by 70%, to $6.8 billion. Touchstone will also seek organic growth in new distribution channels, including banks.
"Opportunistically, we are going to continue to look to make acquisitions," Mr. Grifo said. "Institutional money managers that started up mutual funds in the late 1990s don't want to deal with compliance, communications, and boards. Opportunities are going to continue to pop out as more of these money managers continue to realize that they don't want to be in the fund business, they just want to manage money."
"We will certainly entertain the idea of partnering with people like that," he said Monday.
Touchstone announced a deal that day to buy Constellation, a $2.8 billion-asset fund company in Berwyn, Pa.
Mr. Grifo said Touchstone, through its parent, is well able to continue targeting potential acquisitions. "We have a lot of good capital to look for good opportunities," he said. "Western Southern has the patience, the style, and the pocketbook for us to look for opportunistic acquisitions or fund adoptions."
His company will look for small-cap growth and small-cap value managers, Mr. Grifo said. "We want to find the right institutional money managers," he said. "We are always looking for more people with specific styles."
The Constellation portfolios are managed by Chartwell Investment Partners, Clover Capital Management, Hilliard Lyons Asset Management, John Schneider Asset Management, Pitcairn Investment Management, Sands Capital Management, and Turner Investment Partners Inc. as subadvisers - and will remain so, the companies said.
"I have always said I want to be at $10 billion in assets under management by 2008," Mr. Grifo said. "It would've been difficult to get there organically. But now that we are at $6.8 billion, I will have to revisit my goal."
In addition to significant growth in assets under management, he said, the deal would add distribution through 401(k) providers, registered investment advisers, and private banks.
In addition to these channels, Mr. Grifo said, Touchstone, which has relied for organic growth on distribution through national, regional, and independent broker-dealers, would also look to increase distribution through retail banks.
Tighter regulation has changed how banks distribute mutual funds, he said. "Banks used to just push proprietary products, but now with open architecture we can increase distribution by working through banks," he said.
Mr. Grifo said that, at most banks offering nonproprietary products on the retail side, "one family or another used to dominate. Now you can see that banks want to look broader."
In the past two years Touchstone has added $500 million of assets in four purchased portfolios. Mr. Grifo said the fund-trading scandals that began in 2003 and rising costs of compliance have forced many smaller fund companies out of the business.
Other companies have looked to develop their asset bases by purchasing funds from these companies looking to get out. Goldman Sachs Group Inc. and Federated Investors Inc. are among the huge asset managers that have been snapping up small fund families from banks.
Like Touchstone, Federated and Goldman incorporated the purchased assets into their own fund families and retained distribution relationships with the former bank owners to support continued sales.
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 the former Bank- north 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 of Compass Bank in Birmingham, Ala.
Mr. Grifo said Touchstone last year increased assets under management by 15.3%, to $3 billion, and this year, before the Constellation deal, to $4 billion.
"We have reached a certain critical mass, and now that we have it, we believe we will see tremendous growth from here," he said. "We have the reputation, we have the brand, and we have the talent to really grow from here."
