Banks continued their march into the mutual fund business during the first quarter of 1995, boosting assets under management by 7.3%, to $327.8 billion.

The gains raised banks' share of the $2.3 trillion mutual fund business to 14.3%, from 14.1% at yearend and 10.5% in March 1994.

Mellon Bank Corp., PNC Bank Corp., and NationsBank Corp. retained their places at the top of the list of bank fund management companies, prepared for American Banker by Lipper Analytical Services, Summit, N.J.

Banks continued to amass mutual fund assets in the first quarter faster than the 6.2% rate of the fund industry at large, but their expansion has slowed from the double-digit levels of the early 1990s. Still, the top institutions remain confident about their prospects.

"We see huge growth opportunity. In a lot of ways, we've only scratched the surface," said Mark H. Williamson, mutual fund group executive at NationsBank Corp.

Though NationsBank is a notable exception, most banks have been building fund assets by reorganizing trust assets and by acquiring mutual fund management companies.

During the first quarter, for instance, Norwest Corp. catapulted to 9th place in the asset ranking, from 20th at yearend, on the strength of a $3 billion trust conversion. Its fund assets now total $7.5 billion.

While banks' heavy reliance on trust conversions has led some critics to question banks' staying power in mutual funds, one industry expert said the strategy has paid off.

"It certainly has helped banks develop a presence in the mutual fund market," said Stephen A. Schoepke, a senior analyst at Moody's Investor Services, New York. "They now have 14% of the assets, and that's enough to make people take notice."

Like the fund industry at large, banks have been experiencing the strongest growth in equity mutual funds. Balances in these funds rose 13.3%, to $74 billion on March 31. Equity funds now make up 22.6% of all bank-managed mutual fund assets, up from 21.1% a year ago.

Mellon, by virtue of its 1994 acquisition of Dreyfus Corp., leads all banks in equity funds under management, with $10.1 billion of assets.

First Union Corp. is second, with $4.2 billion - also courtesy of an acquisition, this time involving Lieber & Co., which manages the Evergreen Funds.

Rounding out the top five in equity assets under management are SunTrust Banks ($3.4 billion), NationsBank ($3.2 billion), and the U.S. banking unit of London-based Schroders PLC ($3.1 billion).

But money market mutual funds are still far and away the largest category of bank-managed mutual fund assets - $189.4 billion, or 57.8%. In contrast, money market funds make up 29.5% of assets for the mutual fund industry as a whole.

Moving toward the industry average continues to be an important goal for bankers. They point out that managing long-term funds - that is, stock and bond funds - holds significantly more profit potential than money market funds.

"We have a big money fund business, but I wouldn't want to rely entirely on it," said Mr. Williamson of NationsBank. "You really want to have a diversified product base as well as a diversified distribution base."

Within the top 10, only two banks - Banc One Corp. and First Union Corp. - had the majority of their mutual fund assets in long-term mutual funds.

Banks also remain sharply focused on achieving critical mass in their fund operations - that is, amassing enough assets to operate a mutual fund business profitably.

"The conventional wisdom is that you need $10 billion in assets to be viable," Mr. Williamson said. "I think that number's going up, and it may be going up significantly."

That suggests many banks are in for a big challenge if they want to make a go of the mutual fund business.

Only four of the 115 banks with proprietary mutual funds had at least $10 billion in assets as of March 31. And fully 55 of the banks had less than $1 billion in fund assets under management. One of those banks - Union Planters Corp. - is seeking to disband a mutual fund business started in 1993 by its Sunburst Bank subsidiary. (See story, page 1)

Some of the banks near the bottom of the list are likely to follow Union Planters' lead and bow out of fund management altogether, Mr. Schoepke said.

Another mutual fund industry observer said banks' fund management and sales efforts could be undermined by what he sees as a move away from personal service.

"Retail banks these days are machines," said David B. Dyche, a Florida- based director of Arthur D. Little Inc. "People go to them and get what they want from an ATM or a kiosk."

The problem, he said, is "that is probably not the best way to sell investment products, where a personal touch is needed. As more of these banks mechanize, I think mutual fund sales might suffer a little bit."

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