William M. Ennis, president of First Union Corp.'s mutual fund complex, is nothing if not optimistic.

Three months after the Charlotte, N.C.-based banking company acquired Keystone Investments Inc., Mr. Ennis said the bank is turning around the floundering fund company.

He projected record sales for March in First Union's mutual fund unit, Evergreen Keystone Investments Inc., with much of the new money going into Keystone portfolios.

He predicted $240 million of sales for the month, with 30%, or $72 million, going into Keystone funds.

"Their market share has been flat," Mr. Ennis acknowledged about Boston- based Keystone. But "combined with Evergreen, which has 14 four-star and five-star funds, our market share will be expansionary."

Some observers have questioned First Union's $183 million purchase of the $9.7 billion-asset Keystone, which was announced last September. Keystone has lost 6.6% of assets since 1995, during a bull market that has drawn $580 billion into the fund industry's equity portfolios, according to Financial Research Corp., a Chicago company that tracks mutual fund market shares.

Money in Keystone's stock funds increased a paltry 3% from 1995 to 1996, and decreased .04% from 1996 to 1997.

"To have any drop in equity-assets during this period would be embarrassing," said Neil Bathon, Financial Research's president. "It brings into question the whole purpose of the acquisition."

Keystone also lost 20% of its fixed-income assets during that period, according Financial Research.

Mr. Ennis has a tough assignment. The way he handles the Keystone acquisition could mean the difference between making a hero or a goat of his boss, Edward Crutchfield, chairman of First Union.

After all, Mr. Crutchfield has declared publicly that he intends to boost his family of mutual funds to $100 billion of assets by 2000, largely through acquisitions.

The bank's fund family currently manages $30 billion.

"I think its fairly premature to make any type of judgments," Mr. Ennis said.

He added that the Keystone acquisition had brought First Union more than assets. It gave Keystone credibility, enough so that it has begun to be taken seriously by top portfolio managers.

Recently, the $140 billion-asset banking company has hired widely respected portfolio managers, including Warren Isabelle, a small-company stock picker from Pioneer Group, and Preston Crocker from Northstar Investments Inc.

Moreover, Keystone is a recognized name that has been selling its portfolios through brokerage firms with "a legacy" that dates from 1932, Mr. Ennis said. First Union has beefed up its sales representatives to hawk both Keystone and Evergreen portfolios to brokers.

Keystone also came with a sophisticated transfer agency system that has "brought us four or five years ahead," said Mr. Ennis.

"We are positioned as well as almost any mutual fund company," he said.

A consultant, Geoffrey Bobroff, said some of today's best known fund companies were built on mediocre acquisitions.

For instance, Houston-based American Capital was an aggregation of little-known stock fund families, he said.

American Capital eventually merged with Van Kampen mutual funds and was finally acquired by Morgan Stanley & Co.

Mr. Bobroff said Mr. Ennis' points are well taken. But what First Union acquired in Keystone was 33 portfolios with "middling" performance.

The company could have hired top portfolio managers and started up its own stock funds without having to shell out for an existing fund company, he said.

"I'm puzzled as to what they bought," Mr. Bobroff said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.