CLEVELAND -- Yet another investment management operation has been launched in the wake of a bank merger, with the latest offering coming from National City Corp.
National City has completed its acquisition of First of America Bank Corp., Kalamazoo, Mich. It is absorbing First of America's stand-alone investment shop, First of America Investment Corp., to form National City Investment Management Co.
But there's a hitch in the plan. Most of the equity team at First America isn't joining Cleveland-based National City.
National City Investment Management has $22 billion in total assets under management, of which about $8.6 billion is U.S. institutional tax-exempt.
The acquisition of the First operation gives National City the chance to expand its offerings, specifically by offering First of America's well-known small-capitalization equity strategy. National City's focus had been large-cap equity.
But the absorption was not complete. First's lead small-cap portfolio manager, Roger Stamper, did not join National City when the acquisition closed at the beginning of the second quarter. Instead, he started his own small-cap institutional asset management firm, Spyglass Asset Management in Toledo, Ohio.
In fact, five of First's six equity professionals didn't make the move to Cleveland. Remaining with Mr. Stamper was midcap manager Stephen Wisneski, a midcap analyst and two small-cap analysts.
As a result, SEI Investments of Oaks, Pa., terminated its relationship with First of America after the merger. First was a small-cap equity manager in SEI's manager-of-managers program.
"We knew the track record and the performance of Roger Stamper wasn't going with National City," said Ed Loughlin, president of the asset management group.
Robert Leggett, head of business development for National City Investment, said it hasn't been determined yet which of First's performance records will go to National City.
The Southgate (Mich.) Municipal Employees' Retirement System, a former First of America client, will stay with National City because they have good performance, said Penny Young, chairwoman for the retirement board. The board has $20 million in equities managed by the bank.
While the bank's holding company has posted strong financial performance -- earnings up 22% in the second quarter -- National City's 2-year-old internal asset management group was just getting started in a very competitive industry. The investment offerings were narrow; competitive compensation for investment professionals wasn't available; and the group wasn't very entrepreneurial in spirit, sources say.
"The changes we've made have been like night and day regarding the new way this business is being approached," Mr. Leggett said.
The merger gave the group a jump start. Assets under management doubled, providing greater resources. Small-cap and midcap products are being added and the fixed-income group is being strengthened, Mr. Leggett said.
"At the heart of our business mission is the formation of an entrepreneurial, asset-gathering culture. We've increased the base pay significantly, and created a total incentive compensation package that allows them to earn over 100% of salary," Mr. Leggett said.
National City retained Bill Newberry, one of First's large-cap managers, who previously had worked with Mr. Stamper on the small-cap strategy. Mr. Newberry will launch National City's small-cap effort.
Also, National City hired Frank Korth, who used to manage the Technology Fund for Zurich Kemper Investments, Chicago, prior to the firm's merger with Scudder, Stevers & Clark Inc. Mr. Korth will oversee all of National City's equity growth strategies.
Mark Kummerer, director of fixed income for First of America, moved to Cleveland and will head the group's fixed-income efforts. Also coming from Kalamazoo are money market managers George Delaney and Greg Oviatt, and municipal bond manager Chris Swantek.
Two National City officials, in addition to Mr. Leggett, running the new investment company are Donald Ross, head of investments, and James R. Kirk, head of client services. Mr. Ross began running the bank's fixed-income assets in 1986 and was part of the original 1995 asset management team.
"They (the bank) have given us the resources to attract the quality people to run a business. It is infinitely more entrepreneurial now," Mr. Ross said.
National City's large-cap model equity portfolio returned 5.6% in the second quarter, compared to 3.3% for the Standard & Poor's 500 stock index benchmark. The two-year return for the period ended June 30 is an annualized 35.9%, compared with 32.5% for the S&P.
The Parkstone Small Capitalization mutual fund posted performance of -2.1% for the second quarter, compared with -4.6% for the Russell 2000 index benchmark. National City managers took over for Mr. Stamper during that quarter. The one-year return for the strategy is 3.2%, compared to the 16.8% for the benchmark; the three-year return was 14%, compared with 18.9% for the benchmark. The five-year return was 16.5%, compared to 15.5% for the benchmark.
National City will run institutional separate accounts only; high-net-worth accounts are handled by another division. And it will continue to advise the $10 billion in discretionary accounts for the bank's institutional trust division.
Prior to the merger, National City's asset management unit had $11 billion in total assets, with about $4.3 billion in institutional tax-exempt. The Armada family of mutual funds, offered by National City, contained $8.5 billion July 31.
First of America had $11 billion in total assets, of which about $4.3 billion was institutional. The Parkstone family of mutual funds, contained $6.2 billion July 31.
The mutual funds have been placed under one board, and National City Investment is adviser to both families.