Cincinnati-based Fifth Third Asset Management Inc. has filed a proxy request with the Securities and Exchange Commission to seek shareholder approval to sell four of its municipal bond funds and two of its municipal money market funds, with about $1 billion in assets, to Pittsburgh-based Federated Investors Inc. for an undisclosed price, the company has confirmed.
Contrary to a published report about the sale last week, Fifth Third is not exiting the muni bond business, according to company spokeswoman Deb DeCourcy.
"We have no plans to exit that business, and we continue to build and grow that side of the business," underwriting in nine states and continuing to be one of the top underwriters in Ohio, she said.
The pending fund sale consists of Fifth Third's $44 million Municipal Bond Fund, $90 million Ohio Municipal Bond Fund, $128 million Intermediate Municipal Bond Fund, and $41 million Michigan Municipal Fund, as well as its $249 million Michigan Municipal Money Market Fund and its $451 million Municipal Money Market Fund.
The funds are part of 30 mutual funds from different asset classes - including money market funds, bond funds, asset allocation funds, hybrid funds, and stock funds - totaling over $13.8 billion in assets under management by Fifth Third, according to its Web site.
A source close to the pending transaction said if the sale is approved, Federated would merge the new assets from each fund into comparable existing Federated funds with similar investment strategies. No new funds would be created.
Shareholders have until the fourth quarter to approve or reject the request for the change of ownership. If approved, the Midwest firm would no longer have any municipal assets under management, according to Rick Ille, managing director of products and marketing for Fifth Third Asset Management.
He said the sale of the funds was prompted by the firm's decision to put more of an emphasis on its core equity and taxable fixed-income product lines, which includes mutual funds and separate accounts.
Ille said the deterioration of the credit market, the collapse of the auction-rate market, and other recent volatility in the municipal market did not play a role in the firm's decision.
"It's normal to manage your business around your core strengths, so it was more about our focus than anything else," he said.
The firm tapped Federated to purchase the funds because of its existing size and scope in the mutual fund industry, he added.
"We looked for scale that would provide a benefit to our shareholders," Ille explained. "We saw the scale they had and it was a good fit for our shareholders in terms of the size and resources they have in the municipal-bond fund space."
As of June 30, Federated had 13 national and state-specific municipal bond funds and 22 municipal money market funds with combined assets of $38.7 billion.
The Fifth Third intermediate muni bond fund closed at a net asset value of $10.04 on Monday, down $0.01. As of Aug. 31, it has a 2.48% year-to-date performance, as of Sept. 5, a five-year average annual total return of 2.77%, and 10-year average annual return of 3.55%.
It has an average weighted maturity of 6.9 years, and revenue debt represents 70% of the funds' assets. Meanwhile, in terms of quality, 40.7% of its holdings consist of triple-A rated debt, while it has an overall average credit quality of double-A.
Meanwhile, the long-term national fund closed at $9.38 on Monday, down $0.01 from the previous trading day. The fund has a year-to-date return of 0.21%, and a five-year average return of 3.27%, as of July 31. Revenue debt represents 57.7% of the assets, while the funds' average weighted maturity is 11.4 years.
In addition, triple-A rated bonds represent 39.6% of the fund's holdings, while its average credit quality is double-A.
Fifth Third Asset Management, a wholly owned subsidiary of Fifth Third Bancorp, was founded in 1975 and provides advisory services for institutional and individual clients. It offers a broad range of asset management products, including mutual funds, commingled funds, and separate accounts.
On the public finance side, Fifth Third Securities Inc. has 28 bankers in 12 offices across Ohio and Michigan with additional offices in Florida, Kentucky, Tennessee, and Chicago, according to Martin Vogtsberger, managing director and head of institutional brokerage. The firm counts the state of Ohio as among its biggest clients.
The department grew out of Fifth Third's acquisition of broker-dealer the Ohio Co. in 1998 and since 2005 has hovered near the top 10 underwriters in the Midwest. "We've really built that business up in a 10-year time period," Vogtsberger said.
In April, the firm closed its office in Pittsburgh with two bankers due to lack of business. No additional closings are on the horizon, Vogtsberger said.
Fifth Third avoided getting caught up in the collapse of the auction-rate securities market because it never worked as a broker-dealer of ARS, Vogtsberger said. The firm has been active in issuing variable-rate demand bonds, selling up to $5.2 billion in more than 800 issues.
With an office in the suburbs of Detroit, the firm is hoping to break into that market. "It's a goal that we haven't achieved yet," Vogtsberger said.
Fifth Third ranked 10th among senior managers in the Midwest in 2007, underwriting $2.4 billion in a total of 161 issues. Nationally it ranked 18 with $2.6 billion in issues in 2007, according to Thomson Reuters. So far this year, the firm ranks 12th in the Midwest with $1.2 billion in par volume, and nationally it ranks 25th with $1.3 billion.