Signaling that interest in bank stocks may have life yet, American Data Services last week launched a mutual fund to invest in banks-and what its managers call "banks in disguise" - that they say are undervalued.

The Imperial Bank Fund is one of several mutual funds administered by American Data Services, a shareholder services company in Hauppauge, N.Y. David Allaire and Michael Laliberte of Retirement Planning Co., Providence, R.I., will advise the new fund.

Mutual funds that focus on financial institutions have flourished in the last few years. According to Lipper Analytical Services Inc., there were 59 financial mutual funds with $23.27 billion of assets at the end of 1998. That's up from 38 with $16.83 billion at the end of 1997.

And some predict that more such funds will be on the way as more investors are drawn to the sector by consolidation, attractive stock prices, and favorable market conditions.

That's what Mr. Allaire, 33, and Mr. Laliberte, 34, are banking on. And they cite the classic reason for bank stock investment.

"Bank stocks do offer considerable value," Mr. Allaire said. "Consolidation and low valuations make the sector too compelling to ignore."

Though consolidation in the industry has slowed, Mr. Allaire said he has no doubt that it will pick up. "Smaller banks will have to merge with larger banks in order to compete," he said. "It's one of the best ways for banks to increase their earnings and cut costs."

Because of this, 65% of the Imperial Bank fund will be invested in bank stocks. The other 35% will be invested in "banks in disguise," Mr. Allaire said.

Banks in disguise are companies with strong bank-like features that have strong business operations and takeover appeal. Merrill Lynch & Co. is commonly known as a brokerage company, but they do investment banking, credit cards, and insurance, said Mr. Allaire, noting: "Now you can even get a mortgage."

The company has $1.4 trillion and a significant distribution system, he added. "If Bank One or Chase Manhattan Bank wanted to increase distribution, acquiring Merrill would be the way to do it."

Other banks in disguise that Mr. Allaire likes include Paychex, a payroll services company, and Concord EFS Inc., an electronic transactions company. Paychex, of Rochester, N.Y., and Concord, of Memphis, have client bases that banks would find attractive, he said.

"First Union and BankAmerica may already be big, but they certainly don't have the whole country covered," Mr. Allaire said.

New England could be the next hot spot for consolidation, he said. A big bank with deep pockets could grab a big presence in New England in one fell swoop by acquiring Fleet Financial Group Inc. or BankBoston Corp., Mr. Allaire said.

Consolidation, however, is only one of the reasons for the Imperial Bank Fund. "We do not plan to put 200 banks into this fund and just hope for consolidation," he said. "That's not in the game plan."

The portfolio managers plan to focus on banks that offer consistent earnings, share repurchase programs-which help boost the stock-and regular dividends.

Mr. Allaire pointed out that State Street Corp. has increased its dividend by 16% for the past 16 years; Amsouth Corp., has offered a dividend for the last 27 years, and Fleet Financial has offered one since 1791.

"Companies can manipulate their earnings," said Mr. Allaire. "But dividends don't lie. Dividends are a pretty good sign that the earnings will be there to back them up."

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