Schwab Gets a Nice Little Fund Family With the Deal

Leading online broker Charles Schwab(SCH Quote) said today that it's buying U.S Trust(UTC Quote) for the private bank and money manager's lucrative expertise and its $75 billion in fat-cat client accounts. But what about the $8 billion in its U.S. Trust's 27 Excelsior mutual funds, too?

By all accounts, the funds appear to be just as much an afterthought for Schwab as they are for U.S Trust, who focuses primarily on clients with investable assets of at least $5 million.

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"Private bankers like U.S. Trust create mutual funds so kids of their clients who don't have millions can invest," says Jim Folwell, an analyst with Boston fund-researcher Cerulli Associates. (Point of interest: Schwab CEO David Pottruck says he's been a U.S. Trust client for a couple of years.)

Indeed, the Excelsior funds started in 1985 and have kept a low profile. Despite solid performance, none of the funds is over $1 billion.

Excelsior funds offer access to the same managers that well-heeled individual and corporate clients get, for just a $500 minimum. The no-load funds cover every broad stock and bond category and reflect a slow and steady institutional approach. Few shoot the lights out, but only about a handful lag their average peer over the past three-year and five-year periods; most have expenses under 1%, according to Chicago fund-tracker Morningstar.

Many of the funds follow a theme. The most intriguing might be the $821 million (UMBIX Quote)Value & Restructuring fund. Manager David Williams focuses on companies currently streamlining their business. He's lagged the S&P 500 only one year since the fund's 1992 inception and posted a 42% return last year, trouncing his average value peer by more than 35 percentage points.

Schwab offers more than 3,000 funds from different families in its OneSource online fund supermarket. It started its own mutual fund family in 1991 and passed the $100 billion mark (mostly in its 14 money market funds) last September.

Since they're actively managed, the Excelsior funds could complement Schwab's own 21 stock and bond funds, most of which passively track an index. But the two fund tribes will remain separate because this deal is about fat wallets, not mom-and-pop fund investors.

"Our merger is about fulfilling our commitment to our most affluent customers," said Charles Schwab in a midday conference call. Schwab has no plans to merge the funds or change their names or managers, according to company spokesman Greg Gable.

Being an afterthought might not be so bad, though. Keeping U.S Trust's managers is a major priority and taking the mutual funds away might miff them. Portfolio manager stability, modest assets and consistent strategies are real boons in the fund world, and Excelsior funds look set to keep all three.

The high net-worth clients of U.S. Trust will certainly help to round out Schwab's current client base. Today, 5% of Schwab's customers have accounts over $1 million. But Charles Schwab says that demographic is set to grow by 40% annually.

Schwab's technology and U.S Trust's lauded planning services position the new entity to offer individual investors, and the some 5,000 investment advisers who work with Schwab, access to "high-touch and high-tech wealth management" services, said H. Marshall Schwarz, U.S Trust's chief executive in the same call.

In the online brokerage field, the winners are expected to be those with the highest assets and largest account sizes. Schwab has been coveting and courting high net-worth customers in recent years. For example, the $725 billion broker gives IPO access only to clients with accounts over $100,000 and offers "select" mutual fund share classes with lower expenses, but a $50,000 minimum. It's also founding an investment bank and offering private equity investments to qualified investors -- those with at least $1 million in investable assets.