HOUSTON -- Former Mellon Bank trust executive Donald McMullen picked an inauspicious day to move to the mutual fund business.

His first day on the job as president of American Capital Management and Research Inc. was Oct. 19, 1987 -- Black Monday.

"It was quite a way to get acclimated to the industry, I'll tell you that," he laughs as he lunches at the University Club in Houston's swank Galleria.

Founded in 1926, American Capital is an old-line mutual fund company with a somewhat frumpy image.

In a field dominated by hotshot fund management companies, American Capital is referred to by some industry insiders as the company that is run by "those bank people."

Ex-Mellon Bankers

Former Mellon Bank people, to be specific. Chairman Donald Powell, who ran Mellon National Bank's trust department before handing the reins over to Mr. McMullen, lured his protege to American Capital.

And senior vice president and bank marketing chief Peter Harvey managed sales for Mellon's institutional sales department before joining American in 1990.

Selling mutual funds through banks was a natural step for the executives, given their roots in the banking industry. Today, bank sales account for 25% of the company's sales, which are expected to reach $500 million in 1993.

Focus on Bank Sales

Indeed, American Capital, which has $16.6 billion in assets under management, was one of the first fund companies to focus on the bank-sales channel.

"We made the decision in 1989 that banks would be a very viable market," Mr. Harvey said. "It made sense in the industry to have a dedicated sales force since we had a strong banking background ourselves."

The bank sales effort was inaugurated almost by accident in 1989, when one of its wholesalers -- people who cultivate and maintain sales and support relationships with brokers -- struck up a rapport with NationsBank Corp.

In April 1990, American Capital hired John Eckard, its first wholesaler to focus exclusively on bank sales. Today the company has bank wholesalers, in Tampa, Fla., Richmond, Va., Philadelphia, Fairfield, Conn., Chicago, Houston, Tucson and San Antonio.

By yearend, American Capital plans to hire three more wholesalers. At least one will focus on building business in the Midwest.

"Clearly, I see us expanding in the number of wholesalers, the systems in which we work and products and services we offer," Mr. Harvey said.

New Opportunities

Mr. Harvey sees two areas of opportunities. The first is to seek cross-selling opportunities with banks' small business customers. A small business owner, for example, may be approached to start a personal retirement plan using American Capital funds.

The other opportunity is in selling annuities.

"As I read the tea leaves, I see the variable annuity business increasing as a percentage of total business. The tax laws make the ability to earn wealth on a tax-deferred basis more compelling than ever."

Building relationships with bankers has been only part of the job for the three Mellon expatriates.

When they arrived at American Capital, the former bankers struggled for years to modernize an antiquated servicing operation.

The servicing operation in Kansas City was inefficient to the point where information requests collected by operators in Houston were mailed to Kansas City and then mailed to customers. The process could take two weeks.

"You had the U.S. Postal Service as a partner of the team," remembered Mr. McMullen with no small amount of agony. "There was no computer system. It was notebook and a piece of paper.

"When I came, I thought you had a great old-line company. But with the new wave in mutual fund industry came a greater demand for service. The conviction to take it to the next level wasn't really there," he added.

Today, American Capital appears to have things on track again, thanks to a new emphasis on training and service.

Officials estimate that since 1988, American Capital has invested $20 million upgrading service, spending the dollars on both equipment and training.

In September, American put together a 14-bank training advisory board that works on the company's training support plan. The plan has four courses: Series 7 securities license, Series 6 license, sales assistant and branch referral.

Every year the mutual fund servicing industry eagerly awaits the Dalbar Survey of brokers for how funds meet their clients' needs.

In the late 1980s, American Capital cringed when the Dalbar survey was released because the fund company ranked near the bottom.

It is a measure of the company's servicing turnaround that Dalbar ranked American Capital first among load mutual fund companies in both servicing and marketing for 1993.

"If you look back at the history of this company, it's been a pretty drastic change," said Mr. Harvey.

American Capital is still catching up in some ways. For example, it has just begun to install an imaging system that will read and print documents.

But it does have online capabilities that give instant access to fund and account information, a computerized "university" in its gleaming Transco Tower headquarters that is hooked up to the entire system, and a broker training program, which bank brokerages demand.

Another change the new management made in 1988 was to stop writing options in its Government Securities fund, which had suffered $5 billion in redemptions the prior year.

'Hot' Fund

The fund had been known as a "hot" fund, selling call options on the Treasury securities in its portfolio and distributing the profits to shareholders to pump up the total return.

Last year, the Government Securities fund's board made the no-options policy official. Mr. Harvey said that move and others -- such as starting a mid-term bond fund, a U.S. Government Trust for Income, and a utility fund -- are designed to cater to the growing bank marketplace.

Bond managers sometimes try to hedge their interest rate risk by buying options, but Mr. Harvey points out that many conservative bank customers "want compound interest rates but not longer term capital gains."

American Capital has been criticized for having not only average performance, but offering a plain vanilla slate of fund offerings.

Mr. Harvey responds that the new fixed and utility funds will help on that side, but allows that American Capital doesn't offer state specific tax-free bond funds and probably won't in the near future.

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