Banks have hit a wall in their efforts to capture mutual fund market share.
For the fourth year in a row, bank holding companies managed 14% of mutual fund assets, according to yearend data from Lipper Analytical Services, Summit, N.J.
Banking companies managed $635 billion of mutual funds at yearend, up 29% from 1996. That was roughly in line with the fund industry as a whole, which posted a 27% gain, to $4.490 trillion. (Tables begin on page 9)
Clearly, banks are holding their place in the fast-growing mutual fund business. But they are no longer making the strides that characterized their efforts in the late 1980s and early 1990s. Growth of bank-managed funds outpaced the broader fund industry each year from 1986 to 1994, according to data from Lipper.
"Holding your own is not that terrible," said David B. Master, a managing director for Optima Group, Fairfield, Conn. "But banks overall have not been stellar at building their proprietary fund complexes."
Still, few would say that banks should throw in the towel. Banks have emerged in the 1990s as real contenders in mutual fund management and sales. Their assets have grown eightfold since yearend 1990, and their market share has nearly doubled, according to Lipper.
"There is not much of a difference today between products distributed through bank broker-dealer networks, versus what more traditional distribution networks like wire houses and regional firms are selling," said William B. Ennis, managing director of First Union Corp.'s Evergreen Funds.
Nevertheless, many banks are up against serious marketing challenges, experts say. Few bank-managed fund families can boast a strong brand name. And many banks are too new to fund management to qualify for top Morningstar ratings-the fund industry equivalent of the Good Housekeeping seal.
Time could help banks overcome those obstacles. But banks still must grapple with the vexing matter of finding mutual fund customers.
Dennis J. Gallant a consultant for Cerulli & Associates, Boston, said banks always assumed they could "capitalize on their customer base, but their customer base might not always be looking for investment-oriented products."
This realization has prompted some banks to focus on reaching beyond their customer base for sales.
"It's only as we make more inroads to distribution that we will make our share grow," said Marco Hanig, senior vice president of mutual funds for First Chicago NBD Corp.
To get distribution, banks need strong performance. Investors are increasingly "star-struck"-highly focused on the system developed by Morningstar Inc. that assigns one- to five-star ratings to funds based on investment returns, volatility, and other key measures.
Over the last five years, 60% to 70% of net inflows to mutual funds went into portfolios with Morningstar's top ratings of four and five stars, according to Geoffrey H. Bobroff, a mutual fund consultant in East Greenwich, R.I. But only funds with a track record of at least five years can qualify for such ratings, leaving many bank funds out of contention.
Banks may need to change their conservative investment approaches to equal the aggressive performance of other fund families, said Lawrence S. Kash, vice chairman of Dreyfus Corp., the mutual fund subsidiary of Mellon Bank Corp.
"If you are too conservative and you don't have the performance, you as a bank manager of mutual funds are not going to succeed," Mr. Kash said. "That is a given."
Banks need to adopt new strategies if they hope to gain market share in fund management, said Mr. Master of Optima.
"The real question going forward is not whether they can grow proprietary assets," he said. "For many, the solution will probably be to look at acquisitions as a supplemental strategy."
Indeed, bank-managed fund assets got a significant boost last year from acquisitions. BankAmerica Corp.'s deal for brokerage firm Robertson Stephens brought the San Francisco-based banking company $2.4 billion of mutual fund assets.
Trust conversions also helped some banks shore up their fund businesses last year.
First Union Corp. for example, converted $7 billion in trust funds to mutual funds in 1997, one of the largest trust conversions to date.
"If the conversions hadn't occurred, (bank mutual funds) probably would have lost some market share," Mr. Bobroff said.
Some banks' mutual fund executives said strong sales were a significant factor in the growth of their proprietary funds last year, and are continuing to boost assets.
January, said Mr. Ennis of First Union, was the company's strongest month yet for proprietary fund sales: "We did over $400 million."
The top ranks of banking companies that manage mutual funds changed little from 1996.
Two companies-U.S. Bancorp and Bankers Trust New York Corp.-moved into the top 10.
U.S. Bancorp placed eighth with $20.7 billion of assets under management. The Minneapolis-based company was formed last year through the merger of First Bank System, Minneapolis, which ranked 11th in 1996, and U.S. Bancorp, Portland, Ore., which ranked 40th.
Bankers Trust moved up four notches, to ninth place, as its fund assets grew 32%, to $20.4 billion. The company's 1997 acquisition of Alex. Brown & Sons, a Baltimore securities firm, accounted for some of the growth.
The two newcomers displaced BankAmerica Corp., San Francisco, which fell two berths to 11th place, and First Chicago NBD Corp., which dropped three notches to 13th place. Both had subpar asset growth-13% and 20%, respectively.
Money market funds made up the biggest slice of bank-managed funds: 52.6% in 1997, versus 54.5% in 1996. Equity funds represented 32.3% of the total, up from 29.0% a year earlier.
Taxable bond funds were 8.3% of bank-managed assets, down from 9.0% in 1996. Tax-exempt bond funds totaled 6.8% at yearend, down from 7.5% a year earlier.
