Bond fund off on wrong foot as market slides.

A $2 billion-asset bank in Grenada, Miss., is finding out that it isn't easy to get a mutual fund family off the ground.

Sunburst Bank launched its first mutual fund, the Sunburst Short-Intermediate Government Bond Fund, in October 1993. Four months later, the bond market went into a spin, and it still hasn't evened out.

"It's unfortunate that we hit on a bond market that went soft on us almost as soon as we started," said Frank Smith, senior executive vice president of Sunburst.

The fund, which was launched with $8 million in converted trust assets, has since grown to $14 million.

But the bumpy bond market has conservative investors clutching their wallets, and the fund is still far short of the $50 million needed to break even, Mr. Smith said. He thinks it could take until yearend before that mark is reached.

By then, the bank's expansion plans will be in the hands of Union Planters Corp., Memphis, which announced plans on Friday to acquire Sunburst Bank's parent company, Grenada Sunburst System.

For its part, Union Planters also manages just a single mutual fund. with $38 million in assets.

Even before the merger was announced, Sunburst officials said the market turmoil had prompted them to temporarily shelve plans to add an equity or long-term government bond fund to the lineup.

'Look-and-See Game'

"We are playing a look-and-see game right now," said James Plunkett, senior vice president and portfolio manager for the fund.

To help sales of the bond fund along, the bank has lowered its up-front sales fee from 2.5% to 1%. That should give customers added incentive to invest, Mr. Smith said.

He noted that Mr. Plunkett, who manages the fund, also runs the bank's own portfolio of investments, and he sees that as a selling point.

"We're basically offering our customers a mirror image of our own investment portfolio," Mr. Smith said.

The bank has been laying the groundwork for its mutual funds since 1992.

Mr. Smith said he created the proprietary fund because he saw great potential for building fee income through fund management. But he knew from the start that it would be difficult for a bank of Sunburst's size to amass enough assets to launch a wide array of portfolios.

He said he decided to launch just one fund to get started because "we couldn't get to critical mass as quickly if we offered a full family of funds."

The fund is distributed by Federated Investors, based in Pittsburgh. It is sold through the bank's broker-dealer subsidiary, Sunburst Financial Group, which is staffed by full-fledged brokers who carry Series 7 licenses issued by the National Association of Securities Dealers.

Though relatively few small banks manage their own mutual funds, Sunburst Bank isn't entirely alone.

"They aren't that small in comparison to some of the players out there," said Eli Neusner, a consultant with Cerulli Associates, Boston.

Smaller banks that manage funds include One Valley Bancorp, Charleston, W. Va., with $1.5 billion in bank assets, and Canandaigua (N.Y.) National Bank, with $300 million in bank assets.

Sunburst Bank At a Glance

HEADQUARTERS: Grenada, Miss.

ASSETS: $2 billion

MUTUAL FUNDS: 1 bond fund with $14 million in assets

DISTRIBUTOR: Federated Investors

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