Bank-run mutual funds came of age at midyear, surpassing the $1 trillion-asset mark for the first time.
Reaching $1.015 trillion is a significant milestone for banking companies, which have been beefing up their mutual fund businesses throughout the decade. That's a fourfold increase from five years earlier, when banking companies managed $227 billion of mutual fund assets, according to data prepared for American Banker by Lipper Inc. of Summit, N.J. Banking companies now manage $1 of every $6 invested in mutual funds.
Industry leaders credit the growth to a change in mindset among bankers. Banks today are less worried about disintermediation of deposits, which was always sort of a reason not to try to sell investment products, said Christopher M. Condron, the president and chief operating officer of Mellon Bank Corp. of Pittsburgh. The company manages $114 billion of mutual funds, including the well-known Dreyfus Funds.
But observers say bankers shouldn't pop the champagne corks just yet. Years of relatively easy asset growth, fueled by acquisitions, trust conversions, and a booming stock market, may be coming to an end as bank-run fund families mature.
And banking companies' share of total mutual fund assets appears to be stuck in neutral, holding steady at 17% in the second quarter. There is no solid evidence of an increase in market share of anything of significance, said A. Michael Lipper, the chairman of Lipper Inc.
That assessment doesn't faze Mr. Condron, who said he expects banking companies to place even greater focus on mutual funds over the next five years.
One reason, he said, is that shareholders are paying closer attention to how asset management and investment product sales fit into the revenue picture at banking companies and are assigning higher valuations to companies that draw significant income from these activities.
I think what we're seeing is the evolution of focus on building the sales of investment products in most banking institutions, said Mr. Condron, who is also chairman and chief executive officer of Mellon's Dreyfus Corp. subsidiary.
Many banking companies are focusing on broadening distribution and product lines to compete more effectively with other asset managers.
In many cases their efforts appear to be paying off. Bank-managed funds fared somewhat better than the overall industry for the 12 months that ended June 30. Assets in bank-run funds grew 18.58%, according to Lipper, while assets for the industry, which includes banks, grew only 17.98%, the Investment Company Institute reported.
Banks' mutual fund asset growth over the last quarter, however, was more subdued. Assets in funds managed by 101 banking companies grew a lackluster 2.13% from the first quarter, according to Lipper.
By contrast, assets of the mutual fund industry as a whole, including funds managed by banking companies, grew 5.29%, to $6.071 trillion, during the same period, the Investment Company Institute reported. Though 50 banking companies beat the average last quarter, 29 had declines in fund assets.
That's definitely not where they want to be, said Scott Cooley, a domestic equity analyst at Morningstar Inc. of Chicago. I'm sure that a lot of the banks would like to have a much bigger money management presence then they have now.
Observers said banking companies' relatively low concentration of equity funds accounts for the gap. Equities represent 33% of banking companies' assets under management, versus 56% for the industry as a whole, according to Investment Company Institute data.
Even if they are doing as well in equities as the rest of the industry, they are going to do worse overall because they have a lower percentage of equities, said W. Christopher Maxwell, the principal of Maxwell Associates, a consulting firm in Rockhall, Md.
Mr. Cooley pointed out that net inflows or outflows and performance are the two major contributors to asset growth. Janus of Denver, for example, has been very aggressive and some of its funds grew 50% to 70%. People see that, and they tend to buy in," he said.
In addition funds managed by banks typically lack the name recognition of nonbank funds, and they do not advertise as heavily, said Kent Novell, a partner and director of R.G. Wuelfing & Associates, a Simsbury, Conn., consulting firm.
Unlike mutual fund giants such as Putnam Investments and Fidelity Investments, few banking companies can afford national advertising campaigns. Companies such as Fleet Financial Group of Boston and First Union Corp. of Charlotte, N.C., are exceptions, not the rule.
Still, more banks are making investment management a top priority. That means buying existing asset managers, adding products, and expanding distribution beyond their in-house branch networks.
Sanford Bragg, the executive managing director for fund services at Standard & Poor's of New York, said that asset growth for the year that ended June 30 shows that banks have significantly broadened their product mix beyond money market funds. The growth that the bank-managed funds have enjoyed is in part caused by offering a fuller range of products, including equity funds, he said.
