Amid concern that the run-up in stocks of big domestic companies is cresting, bank brokerage customers are beginning to look beyond blue chip portfolios.
That's the word from bank brokerage chiefs, mutual fund company executives who focus on the bank channel, and industry observers.
In a round of interviews last week, these experts said international stock funds clearly are grabbing bank brokerage clients' interest. And small-cap funds-whose performance this year has been less than stellar-are attracting renewed attention.
"Everybody's appetite for traditional large-cap growth issues is diminishing," said Burton J. Greenwald, a mutual fund consultant based in Philadelphia. "I think investors feel they may have squeezed as much as they can, with three years in a row of double-digit returns."
Some observers said recent market volatility underscores the wisdom of diversification. Others argued that investors, sensing that domestic blue chip stocks are near their apex, are looking elsewhere simply to chase fat returns.
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Executives at mutual fund companies that emphasize sales through banks said bank brokerages are prodding people to look beyond blue chips.
"I think all bank programs are trying to diversify and asset-allocate their clients," said David Edlin, director of the financial institutions division at Putnam Investments, Boston.
At Putnam, "we are sensing a significant uptick in international sales in the bank channel," said Mr. Edlin, whose company is the dominant seller of mutual funds through banks.
For the first seven months of 1997, Putnam's sales of international funds were up 43% from the corresponding period a year earlier, he said. That growth rate is significantly higher than that for blue chip stock funds, he said.
Last year, flows into the international funds were 6% of Putnam's bank channel sales; this year they are running at an 11% clip.
Though small-cap performance has been flat at Putnam, "the outlook is very positive because of the new federal budget deal, which favors capital gains funds."
Michael Vessels, senior vice president at the financial institutions division of AIM Management Group, also reported a shift.
"We're seeing (customers) moving to international and global (funds) and back to income funds a little bit," said Mr. Vessels. "We think with the levels of the current market, people are saying, 'Geez, maybe we should pull some money off the table.' "
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At Riggs National Corp., investment customers are starting to buy into small-cap funds, said Phil Tasho, executive director of the Washington banking company's investment management arm.
The reason: The falling price of the underlying stocks has made the portfolios more attractive. That, Mr. Tasho said, indicates that bank customers are becoming more sophisticated.
"I think clients in general are becoming more investment-savvy," he said.
Though Union Bank of California hasn't seen a shift into the small-cap sector, the bank sees enough demand on the horizon that it plans to create a proprietary small-cap value fund, said vice president R. Gregory Knopf.
But some bank brokerage executives said don't expect to see a shift into international and small-cap funds.
Although banks have been offering mutual funds for several years, bank investment clients remain more conservative than other investors, said Nathan Morgan, head of the brokerage arm of Zions Bancorp, Salt Lake City.
"I do think our clients are somewhat different," said Mr. Morgan, president of Zions Investment Securities.
He said Zions' customers are very conscious of the stock market's high level, and they're wondering how long it can last.
"I think that's on everybody's mind," Mr. Morgan said.
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Domestic blue chip funds continue to be strong sellers throughout the brokerage business. Through June of this year, net sales of growth funds and growth and income funds - $64.3 billion - far exceeded the $45.9 billion of sales in all other long-term fund categories combined, according to the Investment Company Institute, a Washington, D.C.-based mutual fund trade group.
But so far this year, 22.5% of equity sales were into international funds, said Avi Nachmany, a partner with Strategic Insight, a mutual fund research and consulting firm.
"The trend has been "very pronounced among investors who use financial advisers, and less evident among direct investors, who are more opportunistic," Mr. Nachmany said.
But at bank brokerages, he said, the shift is unfolding more slowly. "The percentage of (international) equity investments in banks was half what it was among other consultant-assisted distributors. Clearly this is area where significant repositioning is needed."
Mr. Nachmany and others said bank customers diversifying into international funds this year are at least six months behind those buying fund shares at nonbank brokerages. That is no surprise because bank customers tend to be more risk averse than other investors-and so are bank brokers.
On the domestic front, he added, "the large-cap era is being replaced by the small-cap era, yet most bank customers are not chasing performance."
