When Wells Fargo & Co. set a goal eight years ago for its investment and insurance businesses to generate a quarter of the parent's earnings, it put itself on a course that over time would run counter to a dramatic shift in banking away from proprietary mutual funds.
The San Francisco company, which launched its first fund in 1970, now has the 18th-largest U.S. fund family, according to Financial Research Corp. of Boston.
Andrew Owen, an executive vice president for Wells Fargo Funds Management, said the parent company's "No. 1 strategic initiative" has been the growth of its investment and insurance businesses.
Decisions about distribution have played a critical role in the progress Wells Fargo has made toward its goal, he said. At the end of last year it was getting 16% of its profits from insurance and investment income, versus 5% in 1998.
"In our case, we have looked at external distribution as critical since 1998 or 1999," Mr. Owen said. "Now more than half of our total sales come from outside of Wells Fargo. … Our competition is T. Rowe Price, Vanguard, and American Funds, not just other banks."
Mr. Owen, who was the controller of the investment management and trust group at Norwest Corp. when it bought the old Wells Fargo in 1996, said his company has enhanced its fund family by acquiring fund companies and using external subadvisers.
The next step to reaching its goal is to further increase distribution, he said. Wells Fargo Funds Management plans to add to its sales staff — which currently numbers 115 — in both the institutional and retail channels.
Since the end of 1999 the fund unit has more than tripled its assets under management, to $130 billion as of June 30, by making a series of acquisitions, culminating with the April 2005 purchase of Strong Financial Corp.'s fund business that added $19 billion of assets under management.
Since that acquisition, Wells Fargo's fund unit has been able to generate strong organic growth, Mr. Owen said. It has increased its assets under management 30% since that deal closed.
A trend toward open architecture has led many banking companies to exit the mutual fund business. Mr. Owen said Wells Fargo has adjusted to that trend by making its own funds earn their way on to its shelf by competing against products from companies like Vanguard Group Inc. and Fidelity Investments.
"If you are a bank, and you are just offering your own products, then you are doing a disservice to your customers," he said. "A lot of banks have divested their business altogether, because it is difficult to compete with some of the larger fund companies."
Wells Fargo wants to expand its fund family to add more alternative investment products and income-oriented solutions for retirees, Mr. Owen said.
"Clients need products in retirement that provide a consistent income stream, principal protection, and the capabilities to benefit from market growth," he said. "We are spending time trying to figure out how to deliver that with a mutual fund. A lot of these things can be found with annuities, but there are deficiencies with annuities. We want to blend the positive attributes of an annuity with the positive attributes of a mutual fund."
Laurie B. Nordquist, an executive vice president for Wells Fargo's institutional trust services unit in Minneapolis, said she believes her company can increase its fund sales with its current set of products.
Her unit, which works with institutional clients on 401(k) plans, relaunched the Wells Fargo Target Date Funds in June of last year and has increased its assets under management 50% in the past 14 months, to $1.6 billion.
Wells Fargo originally launched its target date funds in 1994, and the products, which automatically becomes more conservative as investors approach retirement, have grown increasingly popular since the Pension Protection Act was signed into law last year and employers have started to use target date funds as an automatic enrollment option in 401(k) plans.
"The design of the target date funds is very much appreciated by institutional investors," Ms. Nordquist said. "I think we are going to see a lot of cash flow into these products, because people are beginning to put all of their dollars into one packaged product."
Douglas L. Murray, an executive vice president and director of client delivery for Wells Fargo's institutional investment group, said that since June of last year 250 plan sponsors have begun offering its target date funds as an option in their plans.
Mr. Owen said packaged products, whether target date funds in retirement plans or retirement income products for retirees, are the future for fund companies.
"We need to be able to assemble products and services that are interesting to our customers," he said. "We are only going to increase distribution if we can provide best-in-class products. It starts with the client and finding out what they need."
