Morningstar Magazine - February/March 2014 - 67

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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.

David Lundgren

Combing the Gulf Coast

Portwood and Lundgren are used to working
within the confines of a bank. In the late 1990s
their employer was bought by Bank One
(which was eventually swallowed up by J.P.
Morgan). Instead of going to work at Bank One,
which would have required them to move to
Columbus, Ohio, the pair decided to start from
scratch at Hancock Horizon. At the turn of
the century, the firm's fund lineup consisted of
traditional offerings-large-value and
core-bond offerings. To expand, they toyed with
the idea of a small-cap fund that would
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specialize in Mississippi-based firms and those
in neighboring Louisiana. But the universe
of companies consisted mostly of energy firms.
5000
"We were concerned about the risk," Lundgren
says. "We didn't want the fund to be correlated
to the price of oil."
Eventually, the mandate for Hancock Horizon
Burkenroad Small Cap was broadened to
include Georgia, Alabama and, more
importantly, Texas and Florida, which expanded
the types of holdings that could make their
way into the portfolio.
Lundgren and Portwood narrow the universe of
companies in that geographic region down
with a combination of quantitative screens and
fundamental research. The screens are
centered on three areas: momentum, valuation,
and earnings. While the managers don't
reveal the exact composition of the algorithms,
they do say they are looking at traditional
metrics such as price/earnings, relative strength,
earnings surprises, and historical stock data.
(The valuation screen is typically weighted
more heavily in their decision-making process.)
The duo will conduct fundamental analysis
to catch any factors the screens miss-a
CEO resigning, for example-and they also use

John Portwood

Hancock Horizon Burkenroad
Small Cap HHBUX
$35K

20

Russell 2000 TR USD
01/
04

01/
07

01/
10

01/
13

Category
Small Blend

Expense Ratio (%)
1.4

Morningstar Rating
QQQQQ

5-Yr Annl Total Rtn (%)
22.86

Minimum Investment
$1,000

5-Yr Total Rtn % Rank Cat
15

1/04 1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12 1/13

Data as of Dec. 31, 2013

third-party research as a double-check. For
example, the fund's name stems from Tulane
University's Burkenroad Reports stock-picking
program, where students publish analysis
of small-cap stocks that are in the same region.
The managers don't pay for the research,
which is available on the program's website.
However, they do pay a licensing fee for
use of the name. (The managers don't have a
say in how that fee is spent at the school.)
The fund gained a strong 39.8% in 2013, which
landed it in the top third of the small blend
category. That return was largely the result of
holdings such as appliance chain Conn's CONN,
casino game-maker Multimedia Games

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