Columbia still working to whittle costs, funds

Sep 26, 2005 @ 12:01 am

By David Hoffman

NEW YORK - Columbia Management Group Inc. last month revamped its back-office operations, creating savings that will be passed directly to investors in its funds, said Keith Banks, president and chief investment officer of the firm.

And as of today, the Nations Funds brand of parent Bank of America Corp. has been replaced by the Columbia brand.

The moves exemplify how Boston-based Columbia, one of the largest bank-owned fund groups in the country, is trying to woo investors.

The behemoth fund group was formed when Charlotte, N.C.-based B of A bought FleetBoston Financial Corp. of Boston in 2003.

Columbia also is in the process of merging and liquidating many of its more than 100 funds into a group that, in the end, will total somewhere between 50 and 60 funds, Mr. Banks said.

The first phase of mergers and liquidations at Columbia already has brought the number of funds down to about 85, he said.

To help ensure that the surviving funds perform well, Columbia also has "dramatically increased the rigor of its investment process," Mr. Banks said.

"We have much better attribution analysis," he said. "We understand where risk is, where we are taking it and why we are taking it."

Despite Mr. Banks' claims that Columbia is paying more attention to performance, some in the industry haven't seen enough improvement to cause excitement among investors.

"I can't think of any [Columbia funds] that are really standouts," said David Kathman, a fund analyst with Morningstar Inc. in Chicago. "But there are some that are pretty good."

Mr. Banks, however, disagrees. Columbia has 48 four- and five-star funds, he said.

And Nations Funds won an award from Lipper Inc. in New York as the top equity manager among large fund groups, he said.

There still is room for improvement, Mr. Banks admits, but Columbia has come a long way.

Critics have pointed to the large number of funds as one of the initial drawbacks of the merger.

Before Bank of America's acquisition of FleetBoston, Columbia, which was the brand name Fleet adopted for its fund operations, still was in the process of merging disparate fund groups from various acquisitions which included, among others, Colonial Management Associates Inc. and Liberty Asset Management Co., both in Boston; Columbia Management Co. and Crabbe Huson Group Inc., both in Portland, Ore.; and Liberty Wanger Asset Management LP and Stein Roe & Farnham Inc., both in Chicago.

After Bank of America's acquisition of Fleet, Bank of America's Nations Fund group also was added to the mix.

Is it enough?

Cutting costs and reducing the number of funds aren't the only ways to improve the bottom line, observers said.

The correct way to win sales is to emphasize improving performance, said Charles "Chip" Roame, managing principal at the research firm Tiburon (Calif.) Strategic Advisors LLC, but the goal of reducing fund costs also is important, as cost increasingly is becoming a driver of sales, specifically in wirehouse wrap programs.

Excluding its money market funds, Columbia - the 10th-largest fund group in the country when the remaining Nations funds are thrown into the mix - has continued to see net outflows, according to Financial Research Corp. of Boston.

Year-to-date through July, the fund group saw net outflows totaling $641 million, according to FRC. That figure puts it on pace to see less outflows this year than last year, when it lost $3.86 billion - but they still are outflows.

However, Mr. Banks said, looking at gross flows, excluding money markets but including such things as separate accounts and Section 529 plans, puts Columbia's assets on target to be up about 25%.

That's partly a tribute to the hard work of Columbia's wholesalers, he said.

It has a total of 104 external wholesalers and 75 internal wholesalers focused on selling to independent reps as well as the wire houses, a spokesman for Columbia said.

Cobbled together

That is a good-sized sales group, said Burton Greenwald, a Philadelphia-based fund industry consultant.

But it's a sales group that probably was cobbled together from the merged companies that now make up Columbia, particularly Colonial, which had a strong reputation for wholesaling, he said.

If that's the case, "relationships which were at one time strong have weakened or, in many cases, dissolved," Mr. Greenwald said.

And even if those relationships haven't dissolved, the sales force still will have a hard time selling the breadth of Columbia's offerings.

Columbia's ultimate goal of between 50 and 60 funds still is a lot of funds with which to contend, Mr. Greenwald said.

Columbia, like many fund companies, believes that it needs that many to fill out the style boxes - but it's a mistake, he said.

"You wind up with a lot of longtime loser portfolios that represent a drag on expenses," Mr. Greenwald said.

Not everyone was impressed with Mr. Banks' assertion that combining back-office operations will bring savings.

Columbia already agreed to reduce fees in a settlement last year with New York Attorney General Eliot L. Spitzer over its part in the mutual fund scandals.

Any further reduction achieved through streamlining back-office operations - a savings Mr. Banks said he couldn't yet quantify -probably will end up being just a few basis points, said Geoff Bobroff, an East Greenwich, R.I., mutual fund consultant.

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