Union Planters Corp. has a different approach when it comes to investing in mutual funds for clients: let the experts handle it.
The Memphis-based banking company chose to enter a strategic alliance for investment management with Federated Investors, a mutual fund company with more than $100 billion under management that is well known in bank trust departments.
Under an arrangement formalized in June, Pittsburgh-based Federated manages separate accounts for Union Planters investment management and trust clients. Three Federated portfolio managers have taken seats in offices of Union Planters, which has $1.2 billion of discretionary assets under management, to work with clients directly.
The alliance is a pilot for Federated, whose strong suit is selling its mutual funds through trust departments. The Federated employees are investing Union Planters clients' assets in individual securities and a variety of mutual fund families.
"It's moving it up to a totally different level than what we were offering the past," said John D. Temple, executive vice president of Union Planters Corp. and manager of its trust and investment division.
"We are employing much more sophisticated technology and expertise via Federated," he added.
Given their relative capital constraints, community banking companies are more likely to market the investments of other firms.
"It makes all the sense in the world," said Mark Stenson, president of Stenson Management Consulting Inc., a Marshall, Minn. firm that advises trust departments in small banks.
"Why go out and create an infrastructure when really all you are looking for is to bring product to the marketplace?" he added.
Federated Investment Counseling, a registered investment adviser that manages separate accounts for institutional investors such as endowments and charitable organizations, is supplying research on individual securities from its Pittsburgh and New York offices for the Union Planters program.
Union Planters, a $15 billion-asset banking company, has 368 branches in Tennessee, Alabama, Arkansas, Kentucky, Louisiana, Mississippi, and Missouri. The investment management division draws clients from all but Alabama. Pending its acquisition of Capital Bancorp in Miami, Union Planters will pick up an additional $60 million of trust assets in Florida.
Some 60% of its accounts are managed for institutional clients and the remainder are primarily for wealthy individuals.
The bank began looking for an alternative to managing investments independently after two portfolio managers left. Rather them replace them, Mr. Temple was amenable to some logistical changes.
He added that Federated is unbiased when making suggestions about selections of mutual funds. Roughly half of the assets allocated from accounts go to Federated funds - the same percentage as before the alliance.
Union Planters gives final approval of asset allocation models and implementation. Besides Federated, name-brand mutual funds managed by AIM Management Group, Dreyfus Corp., Franklin Resources Inc., and T. Rowe Price Associates Inc. are selected for the program.
The bank's investment management fee schedule remains the same. A minimum fee on separately managed accounts starts at 1%, or a minimum of $1,500 per year, and goes down as more assets are invested. As is the case with asset allocation accounts, clients also pay for the underlying mutual fund fees. Neither partner would disclose how much the bank pays Federated for the arrangement.
Both parties say that paying Federated for its expertise is more cost- efficient than relying on First Union's employees.
"The globalization of the investment marketplace is leading to a huge number of securities to be evaluated," said Thomas N. Munsell, director of separate-account management for Federated. "It's very difficult for a small team to analyze 15,000 securities."
Mr. Munsell joined Federated from Fleet Financial Group Inc. last year to develop a pilot program for separate-account management.
Having worked on the marketing of mutual funds and other investment vehicles to institutional and personal trust clients in the course of his banking career, Mr. Munsell believes a market for similar alliances has evolved.
"It was difficult for small investment teams, particularly teams of trust banks, to be both proficient and efficient managers of investments," he said. "Therefore, there would be a need to outsource."
The Union Planters program is split into three basic groups.
Small accounts use an asset allocation model to invest in various mutual funds. Larger accounts place the bulk of investments in individual securities, such as stocks of U.S. companies with large capitalizations and domestic bonds, and blend in smaller allocations to mutual funds for specialized investments, such as international equity. The biggest accounts are entirely invested in individual securities.
Union Planters has only one proprietary mutual fund, which invests in Tennessee tax-free municipal bonds. By paying Federated for investment management, the 100 employees of Union Planters' trust and investment division can devote more time to client service and new business development.
"These kinds of moves play to the strengths of banks," said Thomas H. Mack, a Short Hills, N.J., consultant who helps asset managers develop client retention strategies.
"What bank clients feel is best about them is that they are local, friendly and have the clients' best interests at heart," Mr. Mack added. "Then, to have the experts on the outside, if you will, managing individual pieces of the portfolios makes sense as well."
Mr. Mack said multiple manager strategies have been in vogue for the country's largest institutional investors for years, and they are being increasingly requested by smaller accounts. He said using mutual funds in separate accounts is a viable way to meet that demand.
The new portfolio managers at Union Planters in Memphis are Federated employees. One of them, Al Morris, is a familiar face at the bank. A former Union Planters employee, he was recruited back by C. Edward "Ted" Gibson, a Federated institutional product manager. They are looking for a third portfolio manager to visit with clients in other states.
"We still have two full-time portfolio managers," Mr. Temple said, but he added that they are "free to spend their time working more closely with client portfolios, individual clients and on business development jointly with us."
Union Planters targets accounts with $1 million to $10 million as prime clients and Mr. Munsell of Federated said banks could hit in that "sweet spot" more often with some outside assistance. He added that Union Planters has made it to more finals in money manager selections and recently won a $6 million institutional account.
The alliance affords bank clients a happy medium, Mr. Munsell said, because "if they had they their druthers, they would love to hire a world- class manager, but they want local service."