With less than $10 billion of assets under management at its mutual fund subsidiary, UnionBanCal Corp. faces the same challenges that have led other small and midsize banking companies to exit the proprietary fund management business.
But rather than leaving, UnionBanCal (which is majority owned by Mitsubishi Tokyo Financial Group Inc.) is looking for ways to give its Highmark Funds a more distinctive profile among potential customers.
Lately that has meant sponsoring local events such as wine tastings, antique appraisals, and art shows.
"It has to be about offering more than just product when you are a small mutual fund company," said Gregory Knopf, the managing director of Highmark Funds.
In June the San Francisco fund family launched its Highmark Personalized Business Development Solutions initiative. Mr. Knopf said in addition to offering advisers marketing campaigns and access to experts, it also offers client retention programs at art galleries or local vineyards to connect advisers with affluent individuals.
"This is inexpensive," he said. "Co-sponsoring a wine tasting may cost Highmark $500, but each event drives five to seven new high-net-worth clients to our advisers."
In 2002, Highmark had $10 billion of assets under management, including money market funds and cash management products. However, when interest rates fell to historic lows a few years ago, customers shifted their assets to higher-yielding bank products, and Highmark's assets shrank to $7 billion as of Dec. 31, he said.
Analysts said most small and midsize banking companies are getting out of proprietary fund management because of the costly regulatory environment, to focus on their "core strengths," or to adopt an open architecture of third-party products. Goldman Sachs Group Inc., Reserve Management Corp., and Federated Investors Inc. are among the large asset managers that have been snapping up small fund families from banks.
Richard X. Bove, an analyst at Punk, Ziegel & Co., said most of the banking companies managing less than $10 billion of proprietary funds are looking to sell.
"Staying in just doesn't make sense anymore," Mr. Bove said.
Mr. Knopf said Highmark has added $400 million of assets this year, and he expects to add another $100 million by yearend and more than $500 million next year.
"We have made a commitment to stay in the mutual fund business, despite what is going on in the market," he said. "UnionBanCal is committed to this. We want to find ways to leverage our business and grow."
Highmark will target banks and investment managers as potential acquisition targets to expand its fund family, Mr. Knopf said. It currently manages 18 funds but is looking to add a mid-cap fund, an international fund, or some fixed-income products.
"We are not unrealistic," he said. "We are not going to go out and buy a $1 billion five-star fund, but a four-star fund with half a billion in assets could be attractive. These opportunities are out there, and we are looking."
He also said, "The regulatory costs and the costs of distribution are driving people out of this business. You have to be focused in order to still be doing this. This is an opportunity for us to grow."
Highmark will grow nationally by expanding its network of regional sales teams that sell Highmark's funds to small and midsize broker-dealers and registered investment advisers, Mr. Knopf said. In the past two years it has established nine teams - three for the Midwest and one each for the Pacific Northwest, California, Texas, the Southeast, the Middle Atlantic states, and the Northeast.
Last year the unit recruited 180 producers among professionals like registered investment advisers, he said.
Also, Highmark will look to develop more retail business through defined benefit relationships, Mr. Knopf said. UnionBanCal's August 2004 acquisition of the 401(k) record-keeping arm TruSource from CNA Trust Co. of Costa Mesa, Calif., offers opportunities for that, he said.
"We want to look at every potential area for targeted growth," he said. "We want to develop new outlets for distribution."
Burton Greenwald, an analyst at BJ Greenwald Associates in Philadelphia, said small fund companies can gain share by working closely with small brokers and offering them more than just product.
"Small brokers don't get attention from large firms like Merrill Lynch & Co. or Charles Schwab Corp.," he said. "Savvy advisers want to work with a fund company that can offer them value-added solutions."
Mr. Knopf said UnionBanCal has been looking closely at all of its lines of business to find new ways to grow.
"The banks is deploying more resources to Highmark in order to spur growth," he said. "We want to continue to leverage the bank and our national network to find new assets."
