Star Banc stands out with unusual mix of funds.

Most banks that manage mutual funds lean heavily to conservative, plain-vanilla offerings. Not Star Banc Corp. of Cincinnati.

Eager to stand out from the pack, the $7.9 billion-asset banking company has made a specialty of equity and asset-allocation mutual funds.

Its constellation of products includes one that invests in the common stocks of undervalued companies and one that focuses on small and medium-size companies with histories of strong earnings growth.

And this fall, in perhaps its most aggressive gambit yet, Star Banc is introducing what it calls a "turbo income fund."

Formally known as the Star Strategic Sector Income Fund, the portfolio will pursue a high-growth investment strategy that is decidedly unusual for a bank-managed fund.

The fund will invest in options, international bonds, real estate investment trusts, and other offbeat instruments. The fund should give mutual fund customers junkbond yields at half the risk, bank officials say.

Star Banc's strategy is typical of banks that want to make headway in the crowded mutual fund arena, said Glen Casey, a consultant with Cerulli Associates, Boston. "They're trying to break away from what other banks offer."

Some analysts have their doubts about Star Banc's decision to offer such an aggressive product for retail customers. "It's a little surprising for a bank, given the concerns about derivatives," said Neil Bathon, president of Financial Research Corp., Chicago.

But B. Randolph Bateman, senior vice president and chief investment officer for the company's lead banking unit, defends the approach.

"Nothing we're doing is off the wall--there are no derivatives, no junk bonds," Mr. Bateman said. "It will employ a lot of energies shifting funds around to the most lucrative points on the yield curve."

Star Banc has been thinking about how to stand out from the crowd ever since it entered the mutual funds business in the late 1980s. That's when its trust department created the company's first money market mutual fund.

Back then, the bank toyed with the idea of starting some funds for broad retail distribution. But with thousands of funds already on the market, "we didn't want to offer just another equity or fixed income fund," Mr. Bateman said.

When Star Banc finally entered the retail mutual fund field in 1991, its offering was one of the banking industry's first asset-allocation funds.

That fund, dubbed the Stellar Fund, has lived up to its billing. In 1993, it was one of the top performers among bank-managed funds that invest in a mix of stocks and bonds, according to a ranking done earlier this year by CDA/Wiesenberger, an American Banker affiliate.

The Stellar Fund, then with $60 million in assets, delivered a 13.11 % annualized return in 1993, ranking it fourth in performance behind much larger funds managed by San Diego Trust, Wells Fargo Bank, and AmSouth Bank. For the same period, the S&P 500 returned 10.13 %. Since the end of last year, the Stellar Fund has grown to $80 million in assets.

Star Banc is one of the smaller players in the bank mutual fund sphere, with just $186 million under management in 6 portfolios. The company also sells 3 mutual funds from Federated Investor. all in all, the business is expected to contribute $3.7 million to Star Banc's bottom line in 1994.

Like other banks, there's been an "across the board" decline in mutual fund sales this year, but the bank is on track to meet its goal, siad Elizabeth Oaks, manager of mutual funds and investment services at Star Banc. Ms. Oaks said mutual funds sales were on a slight upswing this month.

The bank's clientele isn't made up of wild-eyed risk-takers. Most Star Banc customers are older, more conservative, retired people, Mr. Bateman said.

Indeed, he said, many are attracted to the bank precisely because of its tradition of "fiscal conservatism," a reputation that goes back to the founding of its original unit, First National Bank of Cincinnati in 1863.

Yet in the 1990s, this core customer base shaped up to be very interested in investments. When the Stellar Fund was conceived, the bank saw economic volatility looming and set out to create a fund that could help investors weather the turbulence.

The bank's investment managers saw the 1990s as an era of continued international turmoil; slower economic growth, with multiple recessions; a heavy level of consumer and business debt; a labor force growing at half the rates of the 1980s, causing high demand for labor, and the need for companies to be more productivity with fewer employees.

All of this pointed to a fund that would be diversified across multiple investment markets. The Stellar Fund's assets are equally divided into U.S. equities, U.S. bonds, international securities, and real estate investment trusts.

With the just-introduced Strategic Sector Income Fund, Star Banc is trying to attract a new and younger group of customers, such as the corporate 401(k) plan business.

Forty percent of the fund will be invested in investment-grade bonds, and Star will have five "satellite" investment strategies that combine to "maximize income cash flow, while reducing overall net asset value volatility," according to the bank.

"If they're good money managers, (the new fund) could be a really innovative way to get higher returns," said Beth Stelluto, a consultant at the Spectrem Group, San Francisco. "All you need is a couple of high-performing funds to get new distribution channels."

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