Bank-Run Mutual Funds Keep Pace with the Industry

With several years of experience under their belts, bank-run mutual funds are performing competitively with the fund industry at large.

Over the past five years, the major bank proprietary equity funds returned 18.7% a year on average, according to data compiled by CDA/Weisenberger for American Banker. That is slightly better than the 17.7% notched by all equity mutual funds.

But neither banks nor the fund industry could quite keep pace with the Standard & Poor's 500 index, the stock market's main measuring stick. It averaged 20.8% a year.

Bank funds need to work harder to meet or surpass that mark, said Geoffrey H. Bobroff, a mutual fund consultant in East Greenwich, R.I.

The top bank funds' performances are "good, but they're not necessarily shoot-the-lights-out numbers," said Mr. Bobroff. "They may not be worth buying a lot of newspaper ads for."

The importance of long, respectable track records came into sharp relief in October, when the stock market gyrated wildly. Bank-managed mutual funds with the best performance numbers over the past five years found that their longevity brought increased credibility.

At First Chicago NBD Corp., two equity funds have turned in the best performance in their category over the past five years: The Pegasus Mid Cap Opportunity I fund, a mid-cap portfolio, and the Pegasus Equity Index Fund I, an S&P 500 Index-pegged fund.

"We have a talented marketing team that's been together for more than 10 years," said Marco Hanig, managing director for mutual funds at First Chicago NBD Investment Management.

Many banks began launching proprietary funds in the early 1990s, so only now can they point to five-year performance records.

Bankers said the maturity of the funds paid off handsomely last month, with customers tending to keep their eyes on long-term gains rather than short-term market swings.

"Investors have been very calm throughout the market turbulence," said Mr. Hanig. "We've been seeing inflows rather than outflows."

Timothy J. Leach, president and chief investment officer of Qualivest Capital Management, U.S. Bancorp's Portland, Ore.-based fund subsidiary, reported the same reaction.

"We actively reassured clients before and during the hiccup," he said. "Most looked at this as part of the ride. People are starting to trust banks."

Still, few banks appear to be actively emphasizing their funds' maturity in advertisements, said Mr. Bobroff. They are missing an opportunity but not doing so, he said.

He noted that Chase Manhattan Corp. "played it up" when its Vista growth and income fund passed the five-year mark a few years back and attracted several billion dollars in new retail investment.

First Chicago's $681.6 million-asset index fund beat out its nearest rivals by a few hundredths of a percentage point, simply because managers were able to keep down administrative costs.

This is commonly done in a variety of ways, such as finding brokers willing to charge a little less for processing trades.

As for the value-oriented mid-cap fund, the managers focus on buying companies with good growth prospects, strong fundamentals, innovative products, and strong shareholder-oriented management, said Mr. Hanig.

Though they have been converted into mutual funds more recently, most of First Chicago's funds have been around for at least a decade as trust funds, he said.

Still, a five-year track record (the Pegasus mid-cap fund, which has $765.7 million of assets, is six years old) matters, said Mr. Hanig.

"A five-year track record establishes the fund as having a serious long- term track record," he said.

U.S. Bancorp's Qualivest Small Company Value Fund has been around nearly a decade, said Mr. Leach.

The life span has allowed its managers to hone their skills and has given the fund increased market credibility, he said. The small-cap fund's average 28.24% return over the five years beat its nearest competitor, Fleet Financial Group's institutional small-cap fund, by more than 2 percentage points.

The fund has been successful by holding its stake in companies-many of the technology and financial services businesses-for the long term and paying attention to little companies the Wall Street giants overlook.

"There's an awful lot of small companies out there and the Street is putting analysts on only a portion of tiny little companies," said Mr. Leach.

He predicted that small-cap investments will outperform large-cap investments over the next year, "so there's been a fair amount of interest from the investors' point of view in moving into a fund like ours."

Riggs National Bank's Rimco Monument Stock Fund bested its rivals in the Growth & Income category with a 22.55% annualized five-year return.

Kathy Neumann, director of client services for Riggs Investment Management Corp., Washington, said the fund has been gravitating toward mid-cap companies because "that's where we see more value."

She said Riggs remains optimistic about equities.

"We think it's still a very good environment for stocks in general," said Ms. Neumann, "We're trying to find those undervalued companies that have more potential."

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