With its deal to buy Washington Mutual Inc.'s mutual fund unit, Principal Financial Group is taking its hardest direct run at the bank channel, hoping the additional distribution will eventually "springboard" it on to the list of top 25 mutual fund providers.
The Des Moines insurer said Tuesday that it had a definitive agreement to acquire the capital stock of WM Advisors Inc., the investment manager of the WM Group of Funds, for $740 million in cash. The deal is expected to close next quarter.
Greg Burrows, a vice president and the chief marketing officer in Principal's retirement and investment services division, said an important component of the deal is that Principal would distribute its products and services through the Seattle thrift company.
Principal is now intent on "expanding organically by developing our distribution through banks," he said. It has been selling fixed annuities through banks for the past three or four years with only some success, he said.
Larry Zimpleman, Principal's president and chief operating officer, said the acquisition would add $26.4 billion of assets under management - including $20 billion in mutual funds - to Principal's $205 billion of assets. It expects to have about $49 billion of mutual fund assets after the acquisition and jump 20 spots, to 43rd, in the Investment Company Institute's ranking of fund company assets under management.
"We are a top 50 mutual fund company after this deal, and that is a huge leap for a company that entered the top 100 only a couple of years ago, but we want to make more progress," Mr. Zimpleman said. "We want to grow this business."
He hopes that by working with Wamu, Principal will be able to add distribution through other large banking companies and cross-sell additional products to Wamu's customers. Bank distribution could spearhead the firm's organic growth and help become one of the 25 largest fund companies in the next three to five years, he said.
Some observers say they wonder if it is possible to move that far up the ranks organically, given how much scale the top companies already have.
Kenneth Kehrer, the president of the Princeton, N.J., consulting firm Kenneth Kehrer Associates, which tracks mutual fund and annuity sales through banks, said it could be difficult for Principal to reach the $90 billion asset threshold necessary to enter the top 25 without making another deal.
"There so many good fund companies that are firmly entrenched," he said. "In order to succeed, you need to get shelf space and provide support. This is a tough and competitive business to grow organically, and the leading providers like American Funds aren't just going to get out of your way."
Analysts said several insurers, including Lincoln Financial Group, made bids for the Wamu unit.
Mr. Kehrer said it is natural for insurers to look to gain share in the mutual fund business as banks continue to divest their interest in proprietary funds.
"I'd expect other insurance companies to look to acquire more mutual funds," he said. "This seems like a logical way to round out a full financial services portfolio."
Mr. Zimpleman said the trend toward open architecture and the mass exodus of banks from the proprietary fund business has insurers jockeying for position to gather share.
"Banks are pruning their businesses to the core," he said. "They are focusing on core areas such as deposits and credit, and we see this as a real positive for our business."
Principal has added blocks of business from banks over the past five years. In 2002 it bought a block of retirement assets from KeyCorp's investment management division, Victory Capital Management, and it bought ABN Amro Trust Services Co. in Chicago, in 2004.
Mr. Zimpleman said his company wants to focus on organic growth but will to look for blocks of retirement and mutual fund assets to acquire to develop scale.
"Banks are reshaping their strategy and changing their position," he said. "That is advantageous for firms like ours."
However, making another deal like the one announced Tuesday could be difficult, Mr. Zimpleman said. "This is a rare property. There are not a lot of fund complexes available in such a holistic fashion. Most properties are much more fragmented."
After acquiring the Wamu unit, Principal would become the fourth-largest provider of lifecycle funds, with $17 billion of assets, including $12 billion from the WM Funds. The top three firms in the niche are Fidelity Investments, Vanguard Group, and John Hancock Financial Services.
Mr. Zimpleman said Wamu's lifecycle fund business complements his company's, because Wamu focused on risk-based products, while Principal's funds are time-based.
Principal believes lifecycle funds will be the fastest growing product in the year ahead, he said.
"This deal is about growth not about finding economies of scale," he said. "We want to find synergies and expand our footprint."
