American Banks Barge In On Mutual Fund Turf

BANKS are hastening to stake out a bigger share of the lucrative mutual fund market.

Within the last month in Boston alone all the major banks have geared up to offer their own mutual funds: Shawmut and BayBanks have come out with proprietary funds; Fleet Bank has started a new drive to market funds set up in the late 1980s; and the Bank of Boston is poised to launch its own fund group.

The push into funds is largely an act of self-preservation: an attempt to retain customers disappointed with the low interest rates on bank certificates of deposit. But the move also reflects a boom in the fund industry and a better-educated public desiring more options.

"People are leaving CDs in droves," says William Rice, spokesman for Liberty Financial Company in Boston. Much of that money is being reinvested in mutual funds, pulling finances and clients away from the banks. Since 1981 more than $500 billion in bank and thrift deposits have shifted into mutual funds - much of this in the last couple of years.

So banks are fighting back.

More than half of the nation's commercial banks now offer mutual funds, many of which are managed by outside fund houses and distributed through the bank. Seventy percent of banks are expected to offer funds within two years. A handful of banks have been in the market for up to 10 years.

The mutual fund industry is growing fast, and banks have plenty of room to increase their share of it. Since 1980, the number of United States households owning mutual fund shares has soared from 6 percent to 27 percent, with people investing at a recent rate of $1 billion a day.

Growth has been so meteoric - each month's figures outstripping the last's - that mutual fund houses like Boston-based Fidelity say they are unconcerned about bank competition. The market is big enough to accommodate everyone.

For now, at least. Banks' share of mutual fund sales, now around one-third of the total, could rise to 50 percent by the end of next year, some analysts predict. Last year, bank-held funds made up 11 percent of all mutual fund assets.

One reason why banks may win business away from other mutual-fund providers: the local bank is an institution people know and trust, says Jeremiah Potts, senior vice president of financial institutions marketing at Massachusetts Financial Services, which sells its own mutual funds to banks. Also, many depositors who coasted along in the 1980s on double-digit CD rates are now looking at alternatives.

"Banks' getting involved in this business is going to expose a group of individuals who right now aren't getting investment advice," Mr. Potts says.

Another appeal is convenience. Banks have a natural distribution network and can offer "one-stop financial shopping," bundling checking, credit card, and mutual fund business into a seamless service.

Customers invested in Citibank funds, for example, can buy, sell, or transfer money between funds at an automated teller machine. At BayBanks, deposits in BayFunds can be used to waive fees on some checking accounts. Monthly statements come with fund, checking, and credit summarized on a single sheet.

When entering the fund business, banks have two options under the Depression-era laws designed to keep the banking and securities industries in separate spheres. Banks may either manage mutual funds or distribute the funds, but not both.

Although banks offer a broad range of mutual funds - money market, bond, and equity - 80 percent of their sales are in the money market category, according to Lipper Analytical Services. Low-risk and liquid, these are the mutual fund equivalent of a CD.

One worry for banks is that the "trust" factor could backfire: Customers may not realize the inherent risk of mutual funds and may feel betrayed if funds do not live up to expectations. Unlike CDs, mutual funds can lose money. Moreover, although banks carry federal deposit insurance, money invested in the funds is not covered.

The relative newness of most bank funds means most lack track records - a recommended way to assess their prospects. Most perform around the industry average. But some do better, such as Chase Manhattan's Vista Growth and Income Fund, which pulled in a 78.9 percent three-year return. Other high-flyers are Bank of America's Pacific Horizon Aggressive Growth Fund and First Interstate's Midco Growth Fund.

A further spur to banks to get into mutual funds will be a bill, expected to pass Congress this summer, enabling banks to convert trust accounts into mutual funds tax free. As one Lipper analyst put it: "Banks will go hog wild."