Leaning heavily on its banking parent and focusing on its own backyard, the mutual fund subsidiary of UnionBanCal Corp. was able to nearly double its managed assets in the late 1990s, but the fund unit’s head says it must expand distribution nationally to double assets again by 2008.
“In order to go on to the next phase of our development, we have to lessen our dependence on the banking organization and develop more business outside of the bank,” said Gregory Knopf, the managing director of Highmark Funds. “We have to control our own destiny in order to grow.”
Mr. Knopf said the San Francisco-based fund family initially gained share by riding its parent’s coattails. In 2002, it had $10 billion of assets under management, including a significant amount in money market funds and cash management products. When interest rates declined to historic lows early in the decade, however, customers shifted their assets to higher-yielding bank products, and Highmark’s asset total shrank to $7 billion by last Dec. 31, he said.
He wants to make sure that this never happens again, Mr. Knopf said.
“We want to lessen dependence on money market instruments,” he said. “We think there are excellent opportunities to leverage our franchise nationwide. By adding subadvisers, assets, and products, I think we can leverage our fund family nationally.”
Mr. Knopf said his unit would grow nationally by further expanding a network of regional sales teams that sell Highmark’s funds to small and midsize broker-dealer companies and registered investment advisers. In the past 18 months, it has established nine regional sales teams — for the Pacific Northwest, California, Texas, the Southeast, Middle Atlantic states, the Northeast, and the Midwest (three teams). The unit recruited 180 producers last year among professionals like registered investment advisers, he said.
Though half the sales force is new to selling Highmark products, Mr. Knopf said, he expects these teams to grow and gain traction. He said Highmark would like to see $400 million of net sales this year from the national network.
This goal is “ambitious but attainable,” he said, and will play an important role in realizing his aggressive overall strategy. “Within three years, both through organic growth and through perhaps an acquisition,” he said, “I think we can more than double our assets under management” from the current $7 billion.
The focus on regional broker-dealers and independent registered investment advisers is not unique, or a new strategy for Highmark. In the late 1990s, it began targeting regional broker-dealers on the West Coast in its first expansion push.
Mr. Knopf said the strategy had some success, making Highmark realize it could take the strategy national.
Analysts said the approach has worked for other companies, too. Burton Greenwald, an analyst at BJ Greenwald Associates in Philadelphia, said fund companies with less than $20 billion of assets under management may not be able to work through brokers like Merrill Lynch & Co. or Charles Schwab Corp. but can still develop share through an intelligent national approach.
“Small regional brokers like to work with a small firm,” Mr. Greenwald said. “They like to feel like they have something unique. They like to feel like they are giving their customers something different.”
Mr. Knopf agreed. He said smaller advisers are interested in undiscovered fund companies with new ideas.
“We leave Smith Barney and Merrill Lynch to the big mutual fund companies,” he said. “We prefer to call on the regionals and the independent advisers because they are growing. We are continuing to add advisers and we are continuing to grow. These firms have a need for what we offer.”
To draw more advisers, Highmark plans to continue developing its fund lineup. It now manages 17 portfolios, but Mr. Knopf said he would focus on developing fixed-income, asset allocation, and value funds and then bringing in nonproprietary managers to subadvise products to fill out the menu.
The unit has an internal group that selects and monitors subadvisers to run its large-cap value, large-cap growth, small-cap value, and small-cap growth funds, he said, and Highmark is always looking to provide institutional asset management to retail investors.
“We want to find the best managers, but it is also a plus if they are institutional in nature,” he said. “Advisers feel that if they can go to an investor and tell them that they will have access to institutional asset management that they couldn’t get otherwise it is a powerful story that will help smaller advisers develop assets.”
Mr. Knopf said Highmark is quickly expanding its equity and bond assets while money market assets remain in decline.
“We have identified where we’d like to add … products because we’d like to add fixed-income and high-yield products,” he said. “We’d also like to continue to build our equity product, and that means another growth fund and a mid-cap fund. We will look for acquisitions to do this.”
Mr. Knopf said Highmark would be opportunistic as it grows. The unit will look for an acquisition that can add $2 billion to $3 billion of assets and fill in some product gaps.
“We want to grow; that means expanding distribution, expanding our products, and being selective and smart,” he said.
