With concern over tax liabilities running high, tax-exempt mutual funds are enjoying new visibility at banks.
Fund companies and banks alike are promoting tax-exempt funds, which invest in debt issued by states, local governments, and federally sponsored agencies.
Citicorp Investment Services, for example, sent letters to customers last month promoting tax-free investments as "even more attractive now that taxes are higher."
Earlier this year, coinciding with the passage of President Clinton's tax plan, Eaton Vance Corp. and Dreyfus Corp., among others, launched advertising campaigns touting tax-free funds.
Runoff from CDs
Tax-exempt funds are attracting a sizable chunk of the money that flows out of bank certificates of deposit each month, fund industry executives say.
Sales of all tax-exempt funds have climbed steadily in the past three years. Such sales totaled $249.6 billion in the first nine months of this year, according to Lipper Analytical Services. That's up from $188.8 billion in first nine months of 1992 and $148.5 billion in the same period in 1991.
Tax-exempt funds managed by banks are also enjoying a banner year. Net sales of bank proprietary tax-exempt funds could reach $4.5 billion this year, predicts Avi Nachmany, a partner at Strategic Insight, a New York-based consulting firm.
That would be a dramatic gain, coming on the heels of sales of $2.5 billion in 1992 and $1.2 billion in 1991. "Clearly there is expansion there," Mr. Nachmany said.
Solid figures for bank sales of funds managed by nonbanks are harder to come by. "There is really no organization that tracks sales by distribution channel," said Eli Neusner, a consultant at Cerulli Associates Inc., Boston.
But anecdotal information suggest that bank customers are working up a strong appetite for tax-exempt funds.
Jerome Contro, vice president and manager of the bank group at John Nuveen & Co., said the Chicago-based mutual fund company sells 20% of its tax-free funds through the bank channel. And banks account for 30% to 40% of sales of one Nuveen fund - the MuniPreferred Fund.
At Liberty Financial Cos., which specializes in marketing mutual funds through banks, sales of municipal bond funds are up 94.6% for the first nine months of the year.
"Last year was a good year, too," said Porter P. Morgan, investment strategist with the Boston-based company. "Certainly they've caught the public fancy," he noted.
It's easy to see why tax-exempt funds are becoming Popular with bank customers.
Sales through banks are growing, thanks to three factors, Mr. Contro said: The continued strong interest in mutual funds in general in the bank channel; CD disintermediation; and President Clinton's tax bill.
With CD rates at rock-bottom levels, tax-free funds are emerging as an attractive alternative for bank customers. "It's a real nice fit for people who are rolling CDs over," Mr. Contro added.
"Mutual funds that invest in municipal bonds provide an easy way for investors to earn tax-exempt income," said Mr. Morgan of Liberty.
Relatively Stable
Bank customers are attracted by the relative stability of municipal bond funds. "Historically they have been the second-safest investment, behind government securities," Mr. Morgan said.
Municipal bond funds provide one way for investors to "fight back" against higher taxes, Mr. Morgan added.
