Q: What will be the big developments in bank proprietary mutual

Banks that blazed into the mutual fund business in recent years found the growth of their proprietary funds stymied in 1994. The bear market chased many investors away, and trust conversions, once a spigot for fund growth, dried up.

Against this backdrop, American Banker asked several bankers where bank- run mutual funds are headed in 1995.

These bankers, who oversee fund families ranging in size from $300 million to $5 billion, predict rough going because of continued regulatory scrutiny of bank mutual fund activities. Some banks, they said, may even quit the business.

Nevertheless, they predict that mutual fund management will remain a priority for many banks, and that acquisitions of fund companies will help fuel asset growth. Ronald Szejner President, FMB Financial Group, First Michigan Bancorp Holland, Mich.

I think we will see continued consolidation in the mutual fund industry this year. We've already seen Mellon Bank Corp. buying Dreyfus Corp., and First Union Corp. buying the Evergreen Funds. There will be more.

I don't foresee too many banks coming out with new funds. It costs so much to start up a mutual fund, and I would say most of the growth this year will come from conversions or acquisitions.

But real growth won't come until the banks feel comfortable that interest rates and the markets have settled, and a lot of it will come in the form of new money market funds. Gus V. Fish Jr. Principal, State Street Global Advisors, State Street Boston Corp.

You'll see additional regulatory scrutiny in 1995. With the OCC, the FDIC, and the SEC wanting more control over the way mutual funds are sold and managed, banks will have to do everything in their power to stay compliant.

They're going to be taking a closer look at the way funds use derivatives. And marketing and selling practices will come under more scrutiny.

I also think you've seen the peak of banks coming out with new funds. The big players will survive, but the smaller ones will have problems.

We had a rough year last year. More than likely, we'll be seeing smaller banks deciding to get out of the business and selling their funds off.

There are a lot of funds out there. The challenge for banks will be to convince people that they have a better product - a better widget than the others. Joseph T. Keating Senior vice president Old Kent Financial Corp. Grand Rapids, Mich.

Most of the top 100 banks have gone into proprietary funds. And in terms of sales, I think bank proprietary funds are going to be strong.

The key is that banks have access to the mutual fund-buying public. Also, a year like 1994, when there was a lot of volatility in the market, causes people to want to invest with someone they trust. That's going to help banks in the sales of bank mutual funds in 1995.

People are warming up to fixed income funds and their high yields, so I think we're going to see sales within bank proprietary funds rise sharply during the year. B. Randolph Bateman Senior vice president, Star Banc Corp., Cincinnati

You're going to see very slim growth of bank proprietary funds.

The regulations have made it more difficult to operate and utilize the client resources that the bank already has. The OCC, the SEC, the NASD, you name it, they all have issued regulations trying to protect customers of investment products. Things have become very, very restrictive and very costly. We can't advertise now without two pages of disclosures.

The overriding theme of 1995 and maybe 1996 will be that banks will be looking to acquire mutual fund companies and investment counseling firms. Everyone knows that the mutual fund business is a leveraged game. You can manage $1 million with the same intellectual output that it takes to manage $100 million - or $100 billion, for that matter.

In order for banks to do well in the mutual fund business, there will have to be consolidation, and we will be participating in that.

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