• / Free eNewsletters & Magazine
  • / My Account

Related Content

  1. Videos
  2. Articles
  1. The Picks Panel: Best Ideas From Morningstar Analysts

    Whether you need to fill a hole in your retirement portfolio or want to find a world-class company at a bargain-basement stock price, a trio of Morningstar specialists share their shopping lists of topnotch candidates.

  2. Bogle on Fund Industry Progress and Imperfections

    The Vanguard founder offers his thoughts on the need for money fund reform, the dilemmas with retirement planning and savings, the fiduciary duty of fund managers, and much more, in this video exclusive to Premium Members.

  3. Bogle: Market About Fairly Valued Today

    A reasonable estimate based on dividend yields, potential earnings growth, and current P/E ratios suggests a 7% annual return for stocks over the next 10 years, says the Vanguard founder.

  4. Top Picks From Morningstar's Strategists

    Morningstar investment experts Russ Kinnel, Matt Coffina, Josh Peters, and Sam Lee answer viewer questions about the current market and the best opportunities in stocks, funds, and ETFs today.

Banking on Performance

Regional banks aren’t typically known for their mutual funds. Don’t tell that to this trio of managers.

Rob Wherry, 02/10/2014

When it comes to finding good stocks, John Portwood and David Lundgren, comanagers of Hancock Horizon Burkenroad Small Cap HHBUX, don’t like to stray far from their offices in Gulfport, Miss. While some of their peers travel the country to meet face to face with portfolio candidates, the pair confines its search to its proverbial backyard: stocks headquartered in Georgia and the Gulf states of Florida, Alabama, Louisiana, Texas, and Mississippi.

Staying close to home isn’t a novel concept in the investing world. For decades, Mairs & Power have posted solid returns investing in firms headquartered in Minnesota, its home state. Bill Frels and Mark Henneman, who help run several of the firm’s funds, were named Morningstar’s Domestic-Stock Fund Manager of the Year in 2012. There are also studies that look at local biases, including one that showed investors tended to do better owning stocks located nearby versus those from out of town.

While the Hancock Horizon fund can’t claim as long a record as Mairs & Power, it nonetheless has posted enviable returns using this regional approach. The fund’s 12.4% annualized gain the past decade through Jan. 15 lands it in the top 2% of the small-blend category and beats the Russell 2000 Index by almost four percentage points during that time period. In addition, the fund has held up well in down markets, limiting losses to less than the peer group average in difficult years such as 2008.

“They have killed the category,” says Lee Smith, vice president of Cozad Asset Management in Champaign, Ill., who has invested in the fund. While robust 2013 asset flows doubled the fund’s size last year to a current $670 million, it has largely gone unnoticed by most investing circles since it was launched in 2001. One explanation is that like the companies the fund prefers to buy it is located in a part of the country that is far from mutual fund hubs like New York or Boston. A more plausible explanation, though, could be the fund’s parent structure. Hancock Horizon HBHC is a parent company that operates retail branches throughout the Southeastern United States. In general, banks don’t have a reputation for managing top-tier mutual fund lineups. Indeed, these funds can languish unless pushed by salespeople in retail branches or private client offices. In turn, fees can be high, which means they have a hard time competing for assets with the likes of Vanguard and T. Rowe Price TRP in crowded categories such as large caps (which is why several successful bank-run funds are in small-cap categories, where it is easier to differentiate an offering.)

What may also keep investors away from bank-run funds is a concern that a fund complex housed within a financial institution could be put under pressure to help the parent make its earnings if other parts of the company underperform. The leaders of the fund complex could, in turn, decide to raise fees (or not lower them at an appropriate time) or launch trendy funds in an effort to attract assets. While both points can lead to more money in the bank’s pocket, they don’t build a solid foundation for a fund company that has shareholders in mind.

That’s not to say all bank-run fund lineups are painted with the same brush. While the fund complex at JPMorgan Chase JPM must deal with the troubles stemming from other parts of the company, there are plenty of examples of well-run mutual funds tucked away within banks. And there are also examples of those same mutual fund lineups being successful when they decide to go it alone. Victory Funds was spun out of KeyCorp KEY last year. Foundry Partners, a manager of separate accounts, was the former asset management arm of Fifth Third Bancorp FITB.

Below, we highlight three funds including the Hancock Horizon offering that have posted solid results and feature strong managers and reasonable fees—and all call their parent firms a financial institution.

Rob Wherry is a mutual fund analyst with Morningstar.

©2017 Morningstar Advisor. All right reserved.