Some snickered when Wells Fargo & Co. agreed last year to buy Strong Financial Corp.’s assets.
The San Francisco banking company bet that it could make the Milwaukee fund company a viable part of its mutual fund family, but observers saw that as a long shot that could easily go bust.
Analysts at the time called the deal “bottom fishing,” and many saw as permanent the taint of the market-timing scandal that had led to an $80 million settlement by Strong.
But a few months later, Wells has stemmed the outflows at the former Strong funds and consolidated them into a family, Wells Fargo Advantage Funds, that it hopes will become one of the 10 largest fund companies within a decade. And its funds had inflows in April after three negative months.
“When Strong had regulatory problems, its customers were in significant redemption mode,” said Karla Rabusch, the president of Wells Fargo Advantage Funds, “but now redemptions have stabilized. Our expectation is that sales will really pick up as we get the story out there and customers understand what this fund family is.”
After the purchase closed on Dec. 31 Wells consolidated the 160 fund portfolios it then had into one fund group with 120 portfolios, created a distribution network with three channels, and dropped the Strong name to create Wells Fargo Advantage Funds.
The new fund family has begun to attract assets. Financial Research Corp., a Boston company that tracks mutual fund flows, said Wells Fargo Advantage Funds had $970 million of inflows in April after beginning the year with three months of outflows. The inflow was significant in that most large fund companies’ growth faltered in April as U.S. fund assets fell 1.6%, to $7.919 trillion, according to data from the Investment Company Institute, the fund industry trade group.
And analysts have changed their tune. Wells was intelligent and deliberate as it integrated the bruised company, some said, and in the process it has created a blueprint for how to profit by rolling the dice on a struggling company.
“This acquisition clearly broadened its product line and gave Wells the opportunity to position products differently than they ever had before,” said Geoffrey Bobroff, an East Greenwich, R.I. analyst at Bobroff Consulting. “It is really still too early to tell, but this early growth is good. It indicates that investors are breathing a sigh of relief.”
Rus Prince, a partner in Prince & Associates in Shelton, Conn., said many companies saw potential in Strong.
“Strong was damaged goods, but it was damaged goods that drew a lot of interest,” he said. “There were a lot of companies bidding on it at the time. Wells wasn’t trying to get a bargain, it was trying to build a fund unit.”
Mr. Prince said Wells has been able to turn the corner quickly because Strong was not the only company affected by the scandals.
“What worked in Wells’ favor is that the scandals have kept coming,” he said. “All of sudden, they don’t look so bad. As we see in politics, the public has a very short memory. I mean, we can kid about it and joke about it, but Wells didn’t really have to suffer through many growing pains after this move.”
Wells got a bargain when it paid $500 million to $700 million for $34 billion of assets under management — $24 billion in mutual funds — from the battered fund company, the analysts said. Ms. Rabusch said Wells sent 60 people to Strong’s headquarters to do a thorough predeal analysis.
After due diligence, she said, “we realized their regulatory problems were very, very isolated. Their problems weren’t systemic through the organization. We were very comfortable making a deal with this organization.”
The deal immediately moved Wells Fargo Funds Management, which had $217 billion under management, including $103 billion of mutual fund assets, from 31st-largest among fund managers to 22d, in the Investment Company Institute’s May 2004 data.
By this April, when Wells Fargo Funds Management had completed the integration of certain Strong funds with its own to create a single fund family, Wells was the nation’s 20th-largest mutual fund company.
Ms. Rabusch said she is confident that its breadth of products will let Wells continue this ascent.
“Our goal is to be a top 10 mutual fund organization,” she said. “We expect it is going to take more than three years, but we are on our way. I know getting to $180 billion is a big leap, but we think we can accomplish it in the next 10 years.”
Mr. Bobroff said he doubted Wells could achieve this kind of growth without making another big deal. “We are in a difficult market environment, and a firm can’t make this kind of move purely through organic growth,” he said. “We are in a saw-toothed market, and assets are just not going to grow as quickly as they did in the 1990s.”
Mr. Prince disagreed. “Considering the net outflows in mutual funds and people looking to get out of the fund business, Wells can win by default. If you have wealthy clients and bank distribution, you can succeed.”
“Retail banks are better positioned than a top-notch brokerage firm to buy some mutual fund assets, develop scale, and create revenue,” he added. “These products are just much more attractive to the classic retail client.”
Ms. Rabusch said that Wells has been building its fund family through acquisitions since 2001. To become a top 10 fund company, she said, Wells knew it had to broaden and deepen its product lineup. Growing quickly has required acquisitions, she added, rather than just creating products, but that is about to change.
In February 2002, Wells bought SIFE Trust Fund, which had $712 million of assets under management. In June 2003, it bought Montgomery Asset Management, which had 11 portfolios aggregating $1.4 billion of assets. And after announcing its deal for Strong in May 2004, Wells bought the three Cooke & Bieler mutual funds, which had $589 million of assets under management, last June.
Ms. Rabusch said the deals had let Wells develop scale quickly and lay the foundation for the new fund family. Now that the company has executed its acquisition strategy, she said, it will focus on organic growth to reach the top 10.
She is convinced that Wells can grow significantly organically, Ms. Rabusch said. After the Strong deal closed, she said, Wells reworked its distribution strategy. Before the deal, it had used one set of wholesalers to focus on fund sales by financial advisers and in institutionals such as retirement plans.
Since then, Wells has created a three-pronged sales force that will independently focus on financial advisers, institutions, and direct sales, Ms. Rabusch said.
“The direct fund channel is where Strong was started,” she said. “This was not a channel we looked at at Wells Fargo. But with our bank customer base we believe we can have a lot of growth here.”
Ms. Rabusch said Wells has added wholesalers nationally. The Strong deal strengthened Wells in both the Midwest and along the East Coast, she said, because “we hired all of their sales people and kept ours.”
Wells plans to increase its sales force by 25% to 30% in the next three to five years, she added.
