Sizzling equity markets fueled strong investment results for stock mutual funds in the third quarter, but bank-run funds lagged behind their nonbank competitors.
Bank managers of stock funds churned out average total returns of 7.4% during the period, versus 7.7% for nonbank managers, according to CDA/Wiesenberger, a Rockville, Md., fund tracking firm.
Stock portfolios make up less than a quarter of the mutual fund assets managed by banks, but they are the fastest-growing segment. Strong investment performance is considered crucial to banks that want to attract the critical mass of investment dollars needed to make funds profitable.
While quarterly investment results are closely watched by investors, industry experts generally emphasize longer-term results. And on that score, bank-run funds "really hold their own" against their nonbank counterparts on a longer-term basis, said Jay Nadler, general manager of CDA/Wiesenberger. Over a one-year period, banks beat nonbanks in five of seven key mutual fund categories, he said.
During the third quarter, a handful of bank-run stock funds posted results that would be the envy of most managers.
Top honors went to a surprising new face in the American Banker's quarterly ranking: Shelby County Trust Bank, a $125 million-asset bank in Shelbyville, Ky.
The Shelby Fund, a growth fund that invests in small companies, returned 19.75% in the third quarter, defying conventional wisdom that says smaller banks can't compete in mutual fund management.
The portfolio, with $74 million of assets, is advised by a Shelby Country Trust unit, and subadvised by SMC Capital Inc., Louisville, Ky. It is marketed to trust clients exclusively.
B. Anthony Weber, president of SMC Capital, said the aggressive growth fund benefited from heavy weighting in technology stocks.
"We had a fairly large exposure to money-center banks as well, though we've since cut back in that sector," said Mr. Weber. "We're repositioning the fund right now, because of the decline of the rally, but we still feel that technology will reemerge as the leader in the market."
Second place in the stock fund rankings went to BankAmerica Corp.'s Pacific Horizon Aggressive Growth Fund, with a total return of 19.43% in the third quarter.
First of America Corp.'s Parkstone Small Cap Institutional Fund grabbed third place with an 18.44% return.
Both funds soared on their investments in small-company and technology stocks, which were all the rage during the period.
Overall, however, banks had a hard time equaling the performance of their nonbank counterparts, as they frequently do when stock funds are riding high.
That's largely because of the conservative nature in which many banks manage all their mutual funds, according to CDA/Wiesenberger's Mr. Nadler. By the same token, he said, nonbanks are often able to outstrip their bank rivals because of their more aggressive exposure to markets.
A breakdown of the stock fund numbers shows that bank- managed domestic stock funds produced average total returns of 8.11%, trailing the average for nonbank funds by 56 basis points.
In the global arena, banks fared markedly worse, with their international stock funds averaging returns of 3.87%, versus 4.70% for nonbank funds.
Among banks, the top-performing international stock fund was First Bank System's First American International Fund. It posted a 10.99% return in the third quarter, and ranked 80th among the 647 bank-managed stock funds tracked by CDA/Wiesenberger.
"International funds managed by banks are very diversified and certainly take less risk," said Mr. Nadler of CDA. "Many were not that exposed, if at all, to emerging markets that lately have been performing very well."
Stock funds weren't the only category where banks were outslugged by the competition in the third quarter. They also lagged in performance of taxable bond funds and mixed funds.
Bank-managed taxable bond funds posted average total returns of 1.57%, versus 1.94% for nonbanks. Taxable bond funds make up about one-tenth of the $354 billion in fund assets managed by banks.
Great Western Financial Corp. held the two top spots in the taxable bond category among banks with A and B shares of its Sierra Trust Corporate Income Fund. The portfolios had average returns of 2.84% and 2.65%, respectively.
Third place went to another Great Western fund, Sierra Trust Corporate Income A Shares.
Keith B. Pipes, chief financial officer for Great Western Investment Management, credits the strong showing to the company's practice of hiring top-notch money management firms to manage most of its mutual fund portfolios.
Among the companies that Great Western has drafted are Janus Capital Corp., Trust Company of the West, J.P. Morgan & Co., Scudder Stevens & Clark, and Van Kampen Merritt.
"Our corporate bond fund really benefited from the continuing drop in long-term interest rates here in the U.S.," Mr. Pipes said. "We're very conservative and we don't invest in low-investment-grade bonds."
Bank-managed mixed funds - a category that encompasses portfolios that pursue an asset-allocation or balanced-investment strategy - notched average total returns of 5.22%, a shade behind the 5.31% returns for nonbank funds.
The top dog was Bank of Oklahoma's American Performance Balanced Fund, a $10.7 million-asset fund with total third-quarter returns of 7.52%.
Banks did, however, lead the field in one key category: tax-exempt bond funds. They posted average total returns of 2.37%, edging out nonbank funds, which returned 2.31% on average.
Union Bank of Los Angeles grabbed the top two spots with separate share classes of its Stepstone California Tax Free Income Fund. The investors share class - for retail buyers - returned 3.65% in the third quarter, while the institutional share classes returned 3.64%.
Fleet Financial Group's Galaxy Connecticut Municipal Bond Fund snared third place. The $16.8 million-asset portfolio, which is not quite three years old, had returns of 3.55%.
Thomas Howe, executive vice president of Fleet Investment Services, said he was pleased with the performance, but isn't obsessed with rankings. "Our long-term objective is to be consistently better than median," Mr. Howe said.
