Banking giant Wells Fargo is ready to play with the big boys in the mutual fund business.
The nation's fifth-largest bank last week became one of the 20 largest mutual fund companies after completing its acquisition of $29 billion in assets from Strong Financial. The purchase, originally announced in May, includes $24 billion in retail mutual fund assets and another $5 billion in institutional accounts, the company said. The financial terms of the agreement were not disclosed, but industry consultants have previously estimated that Wells Fargo agreed to pay at least $400 million.
The acquisition gives San Francisco-based Wells Fargo $100 billion in mutual fund assets under management in 120 funds, placing it among the 20 largest mutual fund companies. The bank said that 69 Strong funds will be integrated into the Wells Fargo family of funds, some of which will remain intact, while others will be merged into existing funds to avoid duplicity and promote greater price efficiency. Strong fund shareholders voted on and approved merging certain funds in December.
The company did not reveal how the funds will be branded, but it is likely the Strong moniker is headed for the junk pile. "The Strong name is tarnished. It just carries too much baggage with it," said Morningstar Fund Analyst Gareth Lyons
"I don't see why they would want to keep it."
"A determination on the branding aspect of the acquisition has not yet been made, but we hope to make an announcement sometime in April," said Wan Ho, a spokesman for Wells Fargo. Additionally, the company plans to ratchet down some of the morphed funds' management fees to bring them more in line with the industry average.
As for the Strong portfolio managers, 18 of them have been contracted to continue running their investment styles under Wells Capital Management, an investment management subsidiary of Wells Fargo. Those 18 fund managers make up seven management teams that run both equity and fixed-income funds and will continue to operate from their respective locations around the country.
"Wells Fargo built their business by acquiring other fund companies, and that has often involved keeping those companies where they are geographically and style-wise," Lyons said. "Asking them to change their strategies would be self-defeating." But Lyons noted that there is more pressure than ever on these funds to deliver good performance over the next few years. Strong now becomes another sub-advisor under the Wells Fargo umbrella that must compete with other in-house sub-advisors for assets.
One of the star portfolio managers brought over is I. Charles Rinaldi, manager of the $2.27 billion Strong Small Cap Value fund, which has generated a three-year annualized return of 17.9%, according to Morningstar. Noticeably absent from the list of fund skippers coming aboard was Karen McGrath, manager of the no-load Strong Dow 30 Value fund since 2000. She has not been retained, the spokesman said.
Wells Fargo is offering jobs to roughly 650 of the former Strong employees and plans to add 50 more staffers by the end of the year. That number is considerably smaller than the 1,100 employees it had before New York Attorney General Eliot Spitzer launched his blockbuster investigation. The sale of the tainted Strong Funds was the culmination of a messy trading scandal that cost founder Dick Strong his career and sent the fund complex into a tailspin. Spitzer found that Strong engaged in short-term trading of his own company's mutual funds, a violation of the funds' prospectuses.
As a result, the Menomonee Falls, Wis.-based firm agreed to a $175 million settlement with state and federal regulators, which included banning Mr. Strong from the securities industry for life. Since the fund scandal broke, Strong funds have hemorrhaged cash at an alarming rate, suffering more than $8.1 billion dollars in net outflows from September 2003 to November 2004, according to Financial Research Corp. of Boston.