Although banks have had a difficult time growing as a mutual fund distribution channel, accounting for only 9% of mutual fund sales in 2000, that has not stopped them from creating mutual funds. While sales may be low, there are distinct advantages for bank-owned funds, according to Cerulli Associates, a mutual fund research and consulting firm based in Boston.
First Financial Bancorp (FFB) of Hamilton, Ohio, is the latest bank to try to build on the loyal, conservative customer base typically found at banks with a new family of mutual funds. Last month, the holding company announced that it had created The Legacy Funds Group, an investment management company consisting of three mutual funds. First Financial Capital Advisors, an FFB affiliate also in Hamilton, Ohio that manages common bank trusts, will manage the funds.
First Financial has converted the assets of two common trusts, holding approximately $650 million, into a multi-cap core equity fund and a core bond fund. The third Legacy fund is a newly created money market product. The idea to launch traditional mutual funds had been tossed around for years at First Financial, according to Dennis Dietz, chief investment officer at First Financial Capital Advisors. May 2002 is when everything fell into place, he said.
First Financial is not the first bank to begin offering mutual funds by converting the assets of common trusts.
"A few years ago, I know that there were 200 or 300 common funds in the Midwest area. Now there are about 40, and my guess is that most of them have switched to mutual funds," Dietz said. "In that respect, I guess we're a little late in doing this."
The funds will offer A Class shares for retail investors that will include a 12b-1 fee of 25 basis points, according to Dietz. The equity fund will include a load starting at 3%, the bond fund will include a load starting at 2.5% and the money market fund will have no load. A separate Trust Class, available only to one of the holding company's bank's trust customers, will be sold with no 12b-1 fee and no load for all three funds.
One advantage of a bank offering mutual funds is that it can leverage its existing customer base, many of whom have at least some investable assets, said Rachel Malatesta, an analyst at Cerulli Associates. First Financial has 500,000 customers with $3.8 billion in holdings in more than 100 retail banking centers in Ohio, Indiana, Michigan and Kentucky.
"The whole idea is for one institution to be able to provide a variety of services and products," Dietz said. "Over the next year, I expect we'll do extensive marketing of these funds at our banks."
Another advantage of bank-owned mutual funds is that assets sold through banks tend to be "stickier," according to Malatesta. Banks' share of redemptions has remained 10% over the past decade through a significant amount of market volatility, she said. The redemption rate in other distribution channels is far greater, with nearly 40% of all redemptions occurring at fund companies and 17% at broker/dealers, according to Cerulli [see MFMN 11/19/01].
In general, bank investors are older and less experienced investors who prefer more conservative investments, according to Kenneth Kehrer, president of Kehrer Associates, an independent consulting firm in Princeton, N.J. That type of investor is less likely to move money around in periods of market fluctuation, Kehrer said.
That might be one reason why First Financial does not feel the need to create anything beyond the three basic funds it has launched. The bank's clients are looking for fundamental investments, not niche products, Dietz said.
"This has been our investment approach for many years," Dietz said. "I have managed the equity fund since 1979 and I instituted a multi-cap core approach. I didn't think our clients should have a growth fund or value fund or a small- or large-cap fund. It's not what they want. We offer a total equity fund. It's not a specialty fund at all."
The same is true of the core bond fund, which is a simple intermediate term investment grade bond fund, Dietz added.
Because the trusts out of which the funds were launched already existed, the conversion and launch has been of little cost to the company, Dietz said.