Bank customers are becoming avid buyers of utility mutual funds, according to executives at four fund companies.
Indeed, the move to utility funds represents something of a second investment wave within the bank channel, the executives told the American Banker.
Utility funds are catching on as a first step into equity investing for customers who have traditionally favored low-risk investments, such as government bond funds.
"For a bank customer, utility funds are like growth funds with training wheels," said William Ennis, senior vice president and director of the bank division at Colonial Investments in Boston.
1st-Half Return Averaged 11%
In the first half of 1993 the average utility fund returned 11%, according to Lipper Analytical Services. That eclipses the returns posted by many aggressive stock funds.
Colonial's $1.2 billion utility fund is the company's best seller overall. In bank sales, it consistently ranks No. 1 or No. 2 each month. vying for the top spot with a tax-exempt government bond fund.
The initial minimum investment is $1,000.
Mr. Ennis expects to see a continued wave of growth. "There are 77 million baby boomers and 25 million retirees. For someone who wants a safe, income-producing product, it's ideal."
In recent months, executives at Putnam Securities in Boston have witnessed an enormous surge in utility fund sales through the bank channel.
Putnam's $1.2 billion-asset Utilities Growth and Income Fund racked up more than $349 million in sales last year. Bank customers accounted for just over a quarter of sales.
In the first half of 1993, bank customers accounted for nearly half of the utility fund's sales of $293 million.
"Utilities offer the bank customer a way to tiptoe into stocks," said Stephen Gibson, director of retail marketing at Putnam. The funds have more in common with fixed-income funds than with equity funds, because they tend not to be very volatile, he said. "Even when interest rates rise, the fund stands still."
In the world of utility fund investing, San Mateo-based Franklin Resources' claim to fame is that it has the most experience. The $3.3 billion-asset Franklin Utility Fund, formed in 1948, has has provided an annual average return of 13.99% over the past 10 years.
Kent Strazza, vice president and national sales manager for Franklin's bank division, reports that a new wave of banking customers is gravitating to utility funds.
"Bank representatives are going back to their customer who first bought fixed-income funds and they are saying, 'Let's talk equities.'" Mr. Strazza said. "They bring up the subject of utilities.
Like other fund executives, Mr. Strazza believes that utility funds are going to benefit from demographic shifts.
"Our feeling is that our utility fund is perfect for people who are planning for retirement and for those trying to save for their kids' college educations," he explained. "Those markets are booming." The minimum investment, $100, is also a boost.
Mr. Strazza estimates that this year Franklin will sell over $300 million of shares in its utility fund to bank customers, or 25% of its total bank sales.
Joint Advertising
The company is also working with several banks on joint advertising programs to promote the utility fund through the bank channel. Mr. Strazza said that Franklin advertisements are running in the quarterly magazines that banks often send to their share holders.
Come September, Boston-based Massachusetts Financial Services' utility fund will be promoted more heavily in the bank channel, when the firm will start offering a class B share of the fund. Massachusetts Financial started its fund in February 1992 and currently has $33 million in assets under management.
John Riley, a spokesman for Massachusetts Financial, said that the current up-front sales charge makes it difficult for his firm to promote this product through banks.
"Once we offer the new class of shares, we expect a boost in sales," he said.
