Banks' Small-Company Funds Churned Out Big Returns in Quarter

To get big performance out of a mutual fund, sometimes you have to go small.

During the first quarter, the average bank-managed mutual fund that specializes in small-company growth stocks returned 5.82%, according to data provided by CDA/Wiesenberger, Rockville, Md.

That's just short of the 6.05% return at the average nonbank fund in the same category. But both handily beat the 4.55% of the S&P 500, a common benchmark for large-company funds.

Though bank investors have traditionally preferred basic bond and stock funds, small-company equity funds promise to boost overall investment returns when used as part of a diversified portfolio.

The trick for bankers is translating that historical lesson into new mutual fund assets.

PNC Bank Corp., for one, is eager to do that. The Pittsburgh-based banking company's Compass Capital Small Capitalization Growth fund led the pack of 119 bank-managed small-company growth funds, with a 12.82% return for quarter.

"We have a lot to be proud of, and now we have to let people know about it," said Karen H. Sabath, president of Compass Capital Management, PNC's New York-based asset management unit.

Compass Capital has three institutional salespeople, or wholesalers, spreading the word to brokers who actually sell the funds to consumers. And Ms. Sabath plans to have hired three more by the end of June.

So far the small-cap fund has been available to retail investors only through PNC's brokerage. But since January, Ms. Sabath has cemented selling agreements with 50 outside broker-dealers to boost retail sales of PNC's funds.

Besides swelling its own assets, a fund with star performance can spur interest from brokers and consumers alike for an entire mutual fund family, several executives said.

"Performance plays well in helping us get recognition in the marketplace" for the Sierra Trust family, said Keith B. Pipes, senior vice president and chief financial officer for the proprietary mutual fund unit of Great Western Financial Corp., Chatsworth, Calif.

The thrift's Sierra Trust Emerging Growth fund returned 10.47% in the first quarter. Sales topped $20 million, 20% more than in the fourth quarter, Mr. Pipes said.

Like PNC Bank Corp., Great Western is looking to outside brokers to help sell funds. More than half of the sales increase came from outside its own broker-dealer, Mr. Pipes said.

Retail investors may now be willing to join institutional investors in devoting at least a piece of their portfolios to small-company stocks, said one banker who market such funds.

"The story of small companies that are growing rapidly is tangible," said Timothy J. Leach, president of U.S. Bancorp's Qualivest Capital Management unit, whose flagship mutual fund specialized in small-company growth stocks.

"They're often the small companies that are growing in the towns investors live in," he added.

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