In a move that would make Norwest Corp. one of the top banks in managing mutual funds, the Minneapolis company is preparing to restructure roughly $3 billion of trust assets into funds.
The trust conversion, one of the largest ever, would boost the assets of Norwest's proprietary funds by about 40%, to $7 billion. That should markedly increase the efficiency and profitability of the business.
Trust conversions are a time-honored way for banks to expand a fledgling mutual fund business, but conversions of this scale are highly unusual.
Industry observers said they could not think of a recent conversion that compares with Norwest's plan, though some said PNC Bank Corp. or Nations-Bank Corp. may have matched it.
"Three billion is a big conversion," said Kurt Cerulli, a principal of Cerulli Associates, a Boston-based mutual fund consulting firm. Norwest's conversion would be substantial for even the largest institutions.
The move comes as some other banks are building their mutual fund business through acquisitions. Most notably, Mellon Bank Corp. on Monday announced that it had reached an agreement to acquire Dreyfus Corp., the nation's sixth-largest mutual fund company.
At the end of the third quarter, the Norwest Funds were the 12th-largest bank proprietary mutual fund family, with $4 billion of assets, according to a ranking compiled for the American Banker by Lipper Analytical Services. If a $3 billion conversion had occurred at that time, Norwest would have ranked fifth, just behind Wells Fargo & Co. and ahead of Northern Trust Co.
While Norwest officials confirmed the move, they declined to discuss it in any detail. The conversion, which is expected to close in the first quarter, is still subject to a raft of approvals from regulators and bank clients.
Converting trust assets into mutual funds is a complicated task that typically takes a minimum of six months to complete.
In Norwest's case, the converted trust assets would be used to seed a new class of funds -- the "Advantage Class" -- for the 401(k) plan market, said Jay Kiedrowski, head of investment management and trust.
The funds earmarked for conversion are currently in employee benefit collective funds that Norwest Bank manages on behalf of corporate clients.
Approvals Required
To clear the way for such a conversion, Norwest needs the approval of the bank clients in the funds and the consent of an independent fiduciary who has reviewed the conversion procedure, according to a lawyer who deals regularly with conversions.
Because the Employee Retirement Income Security Act of 1974 prohibits retirement plan managers from charging for investment management twice, Norwest would need to establish a system to waive either the existing management fee or the mutual fund fees levied in the 401(k) program, the lawyer said.
In the Norwest conversion, in which employee benefits are being shifted from a commingled trust fund into a 401(k) program, there would be no taxation.
The banking industry's pool of commingled trust money available for such tax-free conversions has all but dried up, Mr. Cerulli said. Banks with proprietary funds indicate that they have already converted about 75% of such funds, though hard numbers are unavailable, he said.
Big 401(k) Players
A handful of banks have also converted common trust funds into mutual funds. Such conversions are rare because they trigger taxes for the trust beneficiaries, but that could change if Congress approves pending legislation to allow tax-free conversions, said Geoff Bobroff, a mutual fund consultant in Denver. If such an initiative makes it through Congress, industry observers expect a second wave of conversion activity.
Banks are big players in the 401(k) business, commanding 27% of the market at the end of 1992, according to Access Research Inc., Windsor, Conn.
But they ranked behind insurance companies, with 37% of the market, and were losing ground rapidly to mutual fund companies, which managed 24% of 401(k) assets.
Though competition for 401(k) business is brisk, Norwest's conversion would provide the company with a solid base, said Joseph T. Chadwick Jr., a principal for William M. Mercer Inc., a Baltimore-based consulting firm.
"That is a good amount to start with -- they'll be a player," he said.
By encouraging its 401(k) clients to shift their assets from pooled trust funds to mutual funds, Norwest is simply bowing to marketplace reality, Mr. Chadwick added. As 401(k) plans gain popularity, mutual funds have emerged as the investment vehicle of choice, he said.
For one thing, they are valued daily, enabling consumers to follow their investments carefully. In addition, he said, the pricing structure of mutual funds is attractive to companies that offer 401(k) plans to their employees. With commingled trust funds, companies must pay investment-management fees out of pocket, but with mutual funds, the fees are levied against investors' assets.Norwest FundsAt a GlanceFunds 12 $4 billion beforeAssets trust conversion, $7 billion afterInvestmentadviser, Norwest Bankcustodian, and Minnesotatransfer agentAdministrator Forum Financialand distributor Group, New York
