TD Waterhouse to build overseas fund business

Over the next five years the nation’s No. 3 online brokerage intends to aggressively boost the sale of its own mutual funds overseas to bolster its flagging online business at home, InvestmentNews has learned.

TD Waterhouse Group Inc.’s goal is to sell 50% of its proprietary fund outside North America, compared to less than 5% today.

The company is making the move against a backdrop of slumping stock values, shrinking trading volume and an increasingly bearish economic outlook.

The New York-based company, which already sells more than 10,000 funds for other companies in the United States, is on a five-year mission to reposition itself.

To accomplish that goal, it’s going to begin selling funds in India.

It is also hoping to expand into France, Germany, Italy and parts of South America.

“Any place where we’ve opened a Waterhouse outlet, we are putting in a supermarket, and we are putting in some proprietary funds,” says Mark Wettlaufer, president of TD Asset Management Inc., which oversees $39 billion in fund assets in the United States, Canada, Japan, Hong Kong and Australia.

The firm has 231 branches, with 40 in Canada, eight in Australia, four in the United Kingdom and one in Hong Kong.

Although Waterhouse declines to reveal proprietary fund assets, the company insists it isn’t turning its back on its U.S. fund business, which includes a fund supermarket.

In October, it unveiled seven proprietary funds, and next month it plans to launch its first-ever national television and print advertising campaign aimed at boosting overall fund sales in the United States. “Most of our resources will be pushed onto the U.S. side,” Mr. Wettlaufer says.

The push into proprietary funds enables TD Waterhouse to collect a greater percentage of the management fees than it does when it sells other companies’ funds. It also reduces the brokerage’s dependence on highly volatile commissions on stock trades.

Proprietary funds

“Trading volume may go up and down with the market, but mutual fund assets are stickier,” says Peter Mangan, chief operating officer in charge of U.S. fund business. “From a shareholder’s perspective, this will even out the earnings stream.”

By focusing on proprietary funds, TD Waterhouse is following the lead of No. 1 discount brokerage Charles Schwab Corp., which launched its own family of four funds in 1991 and now has 44 funds with $130 billion in assets in the United States. In 1999, the San Francisco-based broker launched its one and only proprietary fund outside the nation, a Dublin-registered money market fund.

Selling private-label funds is anything but a slam-dunk for TD Waterhouse. Unlike No. 2 discount brokerage Fidelity Investments of Boston, TD Waterhouse is practically a nobody in the world of fund management. Why should investors choose a TD Waterhouse fund over a similarly managed fund by such established companies as the Vanguard Group or Putnam Investments?

Discount brokers also have a difficult time selling their own stock and bond funds. At Schwab, for example, $107 billion, or 82%, of the $130 billion it has in proprietary funds is in money market funds.

For more proof, look at the TD Waterhouse Dow 30 index fund. Launched in March 1998, the fund has amassed a scant $152 million in assets. During the first 11 months of 2000, it had outflows of $20 million. It lost 5.02% for the year. In 1999, when it posted a 26.98% return, it had net inflows of $82 million.

“There is a major cultural difference between running an asset management company and running a discount broker,” says Mr. Wettlaufer, who adds that during the past several years, it was “all [discount brokers] could do to keep up with account growth.”

TD Waterhouse is also a Johnny-come-lately, at least in the United States. With almost half the households in America invested in funds today, compared with just 5% in the 1950s, the $6.82 trillion fund industry is widely considered mature. That means the company’s chances of capturing a significant share of the market are almost nil.

“It’s too late in the game,” says Burton Greenwald, an industry consultant based in Philadelphia who, nevertheless, applauds the move. “What they are really doing here is providing a basin to collect assets that might otherwise move elsewhere.”

The move to court mainstream fund investors comes during a time of great uncertainty for the online brokerage industry. After growing at warp speed over the past three years, many online brokers are now feeling the pinch of a weak stock market.

Last week, Ameritrade Holding Corp., the nation’s fourth-largest online broker, said it would lay off 230 full-time and 120 temporary employees in response to smaller-than-anticipated stock trading volumes. And Morgan Online, an Internet-only private-banking service, said it would lay off half its staff of 300 in a deliberate push by parent J.P. Morgan Chase & Co. away from online financial services.

Meanwhile, Schwab instituted a hiring freeze and temporarily cut salaries of about 750 executives to counteract slower trading activity during the final months of 2000.

Last month, TD Waterhouse said its November average daily trading activity was down 14% from a year earlier and down 15.5% from October. In announcing the declining volumes, CEO Steve McDonald said business conditions were tough, but “we believe in the long-term trends of individual stock ownership and, against a backdrop of slumping stock values, shrinking trading volume and an increasingly bearish economic outlook, self-directed online investing.”

E*trade scrounging too

Rivals Schwab and Ameritrade, which is based in Omaha, Neb., also reported declines in their average daily volumes from October through November, 6% and 15%, respectively.

TD Waterhouse is not the only Internet broker scrounging for fee-based assets. Last week, E*Trade added two funds to its proprietary fund lineup, bringing to 10 the number of funds the Menlo Park, Calif.-based brokerage offers. The fund family, which will be a year old next month, has $207 million in assets.

Meanwhile, CSFBdirect, formerly known as DLJdirect, is pushing sales of limited partnerships through its Internet platform. The Jersey City, N.J.-based company recently launched the Industrial Opportunities Fund, which invests in distressed companies. CSFBdirect also runs 10 proprietary mutual funds.

“All of these online brokers are very dependent on transaction revenues,” Mr. Carrick says.

“With transactions down, it makes sense for them to be looking for ways to bring in fee-based revenues.”