Bank Mutual-Fund Sales Slip

Despite stumbling in 1994, many banks see favorable fund prospects ahead

BANKS took a bite out of the mutual-fund industry in the early 1990s when they beefed up their fund offerings to woo wayward depositors discouraged by low interest rates.

But last year, bank mutual-fund sales decreased, and creation of new funds slowed. Banks' market share of overall mutual-fund sales fell to 11 percent in 1994 from a peak of 15 percent in 1993 and 14 percent in 1992, notes a report by Cerulli Associates Inc., a Boston-based consulting firm.

The situation appears to be similar this year, says Lynne Goldman, a Cerulli consultant. So far, she says, ''bank mutual-fund sales are still off from their '92 and '93 levels.''

Much of the blame for the lost momentum rests with last year's poor market returns - especially for bond funds, a popular bank product. This caused conservative bank customers to pull out of mutual funds, or to avoid them altogether. They opted instead for more stable offerings like certificates of deposit, Treasury securities, and fixed annuities.

Even with the dip in sales, at the end of this year's first quarter, bank-advised funds held close to $330 billion worth of mutual-fund assets, more than double the 1992 figures, or 15 percent of the total assets in the mutual-fund industry, according to Lipper Analytical Services of Summit, N.J.

But the Cerulli report shows that many banks have depended heavily on the conversion of money held by their trust departments, much of it pension or other employee benefit funds, to create assets for their mutual funds. The key to banks' future success with mutual funds, Ms. Goldman says, is attracting new retail customers.

''Banks need to understand, and they do understand, that they're not there to just push products.... The issue is being able to identify and target their customer base, to be able to create awareness for these types of products, and compete with traditional bank products like certificates of deposit,'' she says.

Despite their efforts, banks are still losing depositors to the snowballing mutual-fund industry. Total mutual-fund assets and commercial-bank deposits are inching closer together: At the end of April 1995, mutual funds held $2.359 trillion in assets, according to the Investment Company Institute, a mutual-fund trade group in Washington. Commercial bank deposits stood at $2.556 trillion.

''There's no doubt the mutual-fund industry is growing very fast, and bank deposits are growing very slowly. So its not a surprise that banks want to be involved in this business,'' says John Logan, executive vice president of First American National Bank in Nashville, Tenn.

But, says Mr. Logan, whose bank has its own line of funds, the main reason why banks want to provide mutual funds is because they have to ''find ways to satisfy more customer needs in order to justify the typical commercial-bank structure.''

Critics - including customers who have sued for lost money - fault banks for not making it clear that mutual funds are not guaranteed by the Federal Deposit Insurance Corporation. Regulators indicate that banks have done a better job of disclosure lately, Logan says. His claim is supported by several recent industry studies.

Returns on bank funds on average appear to be no better or worse than nonbank-managed mutual funds, says Jon Teall, a spokesman for Lipper. ''In general, what we've noticed with performance of bank-related funds versus the [total fund] universe is there isn't a great deal of difference.''

Within the average, some bank funds have not performed well. One casualty of last year's downturn is a bond mutual fund created by Mississippi-based Sunburst Bank in October 1993. Overwhelming expenses and small returns are the reason why the fund was folded into one sponsored by another mutual-fund company on July 1.

''It was absolutely just the wrong time to introduce a bond fund,'' says Bill Andrews, a senior vice president at Planters Union Corporation, Sunburst's parent company.

Mr. Teall says that further consolidations, like Sunburst's, may happen in the future should banks decide their funds have little prospect of becoming profitable. ''At this point, we certainly are not seeing any additional newcomers into the field,'' he says.

Last year, banks didn't fare much better when selling mutual funds managed by nonbanks, rather than their own. The Cerulli report notes that while some well-known nonbank funds showed increases in sales of their shares by banks, others did not. Putnam Investments, Franklin Resources Inc., and Kemper Corporation saw their sales through banks decline by about 40 percent, 33 percent, and 50 percent, respectively.

Nevertheless, mutual-fund companies remain optimistic.

''We are probably more excited about our opportunities in banks now than we ever have been before,'' says Lou Tasiopoulos, director of Putnam's financial-institutions division. He praises banks for their ability to weather the poor 1994 marketplace, and for what is widely viewed as their best mutual-fund-selling advantage: access to customers.

Although Putnam's sales through bank channels started off slow in 1995, Mr. Tasiopoulos says that ''on a month by month basis, business continues to increase.''

Tasiopoulos and others in the industry say that bank mutual funds will survive their recent lows.

''The mutual-fund business, in general, is still a growing business,'' says Cerulli's Goldman, ''and banks' portion of that should continue, over time, to expand.''