Annuities cushion fund sales dropoff; rush to short-term instruments helps make up lost ground.

A surge of customer interest in annuities and other securities is softening the blow of falling mutual fund sales, according to executives of bank-affiliated brokerages and fund companies.

The anemic mutual fund sales are due to the continuing exodus from bond funds, which have been dogged by lagging returns and rising interest rates. Stock funds continue to attract assets.

The Investment Company Institute, a Washington-based trade group for fund companies, reported this week that fresh investments in funds totaled just $3.3 billion in October.

That's roughly half of September's level, and well below the $25.3 billion of inflow in October 1993. The figures represent net new sales -- that is, new investments, minus redemptions and reinvested dividends.

[CHART OMITTED]

Most of the more than half a dozen executives contacted by the American Banker said that their mutual fund sales, too, had fallen. But other products were taking up some of the slack.

For example, while investors at Union Planters Corp. were showing tepid interest in mutual funds, they were flocking to short-term government bonds, certificates of deposit, and money market deposit accounts.

October sales of short-term government bonds jumped 20% from the previous month, said Leanne Wiggs, vice president of the Memphis banking company's brokerage affiliate.

"People aren't going much of anywhere," she said. "They're sitting on the sidelines and holding their money" in cash equivalents.

Firstar Investment Services, the brokerage affiliate of Milwaukee's Firstar Corp., has had a similar experience.

"People have moved back into money market funds and Treasury bills," said Geoffrey G. Maclay Jr., president of the brokerage affiliate. "We've been quite busy in that area."

"Sales have been difficult," added Jerome S. Contro, manager of the national bank division of John Nuveen and Co., Chicago. "As soon as we get some stability on rates, I think we'll see sales go up."

But everything hasn't been bleak at John Nuveen. The company has been selling an average of $7.5 million of unit investment trusts per month this fall through banks, twice as much as earlier this year.

Charles G. Kim, senior vice president for St. Louis-based Commerce Bancorp's brokerage service unit, said mutual fund sales from January to October dropped 40% from the same period last year. Meanwhile, fee revenue from investment sales is up a third.

Mr. Kim attributes that to a booming business in annuities, which command higher fees than mutual funds. Indeed, Commerce's fixed-rate annuity sales are up 75%.

By contrast, investors at the brokerage affiliate of Fifth Third Bancorp, Cincinnati, have been snapping up shares in equity funds. Stock funds make up more than half of the brokerage's sales. Sales of individual stocks and bonds make up most of the rest.

Fifth Third's brokerage affiliate had its highest sales this year in October and November, said Peter Bielen, president.

GT Global had a good month, too. The San Francisco-based mutual fund company, which focuses on global and international investing, saw its net sales of mutual funds more than double in October to $100 million from $44 million the previous month.

International funds have soared in popularity in recent years, as many of these funds have outperformed domestic funds.

"The big jumps were in our infrastructure and European funds, as well those [investing] in the health care sector," said Jane E. Ginsburg, director of marketing.

Money market funds are regaining some of their appeal, despite a recent spate of bailouts, added Steve Radis, a vice president with Kemper Financial Services.

"Cash is king again," he said.

Mr. Radis added that the exodus of cash from Kemper's equity mutual funds slowed markedly in October, after a record $98 million was taken out in September -- the biggest monthly decline this year.

On the fixed-income side, redemptions are slowing in government bond funds, he said.

"It's pretty much been a roller coaster all year," Mr. Radis said.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER