The Fund Windfall That Wasn't

It seemed like a great idea. Rather than watch customers' money flood into mutual funds, perhaps never to return, banks would launch their own funds. It was almost too easy: With the markets in a three-year boom, consumers were eager to invest in funds, bank branches were a ready-made sales channel, and bank customers were a virtually untapped pool of first-time buyers.

Logical? Yes. Naive? Yes. "There were some pretty unreasonable expectations on the part of some bankers about how quickly they would be able to take the mutual-fund business by storm," says Diane Glossman, a bank-stock analyst at Salomon Brothers Inc. But with the market souring before many were able to build a solid asset base, banks are being forced to rethink the risks and rewards of the fund-management business. Some bank executives are critical of the whole idea: Robert Flowers, head of BankAmerica Corp.'s retail-brokerage unit, has said that most banks should avoid becoming fund managers and that only a handful of bank funds will be successful.

CROWDED FIELD. Many banks focused on the most lucrative approach: launching their own fund families and selling nonbank funds as a stopgap measure until their own funds built performance records. Managing their own funds meant getting lucrative management fees as well as any load fees. But while there are now about 115 proprietary bank mutual funds, only 30 or so have assets of at least $1 billion in retail funds, and many are still hashing out just what is the most effective way to sell funds. Just 18 funds out of that 115 have total assets of more than $4 billion--the minimum some industry experts say bank funds need to be profitable. And as skittish investors make new sales harder to come by, the costs of distributing funds is increasing.

Some smaller banks are even backing away from having their employees sell nonbank funds. Take New York- based Crossland Savings. "They found that the business was inherently difficult to run, that there were big regulatory penalties for screwing it up, and that it was adding red to their bottom line," says Donald E. McNees, director of Towers Perrin's New York Financial Institutions Practice. Crossland was also aware of the potential for liability from customers who don't understand that mutual funds are not insured. So rather than keep training its salespeople to sell funds, it plans to use a third party to do the selling for them.

Large banks offering their own funds have other worries. Total retail assets in Citibank's Landmark Funds grew by just .09% in the year ending July 31, according to Lipper Analytical Services Inc. And their performance isn't likely to be a selling point, says McNees, who describes the funds as having "poor performance and high expenses." A Citi official says fund expenses are competitive and that a number of the funds have been above-average performers in one-year and three-year periods.

A WINNER. At the other end of the spectrum are Chase Manhattan Bank's Vista funds. Because of some good--and heavily advertised--five-year performance numbers, along with acquisitions of outside mutual funds, retail fund assets have soared more than 55% in one year. Chase's Vista Growth & Income Fund saw retail assets almost doubled in the year ending July 31. It returned an average 17.9% for the five-year period ending August 18.

The basic design of many bank funds may also hinder sales. Many banks charge front-end loads yet are not perceived as valuable purveyors of investment advice.

Of course, if banks can't build assets, they may just buy them. Chase did that in its acquisition of six portfolios from Olympus Asset Management last March. The purchase gave Chase not only an expanded channel of distribution for their funds but a broad line of offerings--something most banks lack.

The most pressing challenge to bank funds may come from rising interest rates. According to Bank Rate Monitor, the average annual percentage yield on a one-year certificate of deposit was 4.19% as of Aug. 17, up from 3.08% on Jan. 5--a tempting deal for risk-shy investors.

Keeping their customers' money in deposits is more tempting to banks, too, because of the wide spread between what is paid on deposits and what is charged on loans. So except for perhaps a dozen large players, it appears that bank funds will be a shrinking breed.

                       Retail assets*  One-year
                         billions     asset growth*
      CHASE MANHATTAN         $3.4     55.06%
      CHEMICAL BANKING         4.6     32.52
      CITICORP                 2.8       .09
      J.P. MORGAN              4.1     -8.15
      NORWEST                  3.4    -18.17
      *Year ending 7/31/94
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