The party seems to be dying down for banks that manage mutual funds.

After years of vigorous growth, banks' share of the nearly $3 trillion mutual fund market stalled at just under 14% in 1995. Indeed, last year marked the first time in a decade that banks' mutual fund asset growth lagged the broader fund industry's.

The slowdown is troubling for banks, which have come to view mutual funds as a centerpiece of a modern line of consumer financial services. Having embraced fund management as a way to boost fee income and keep customers in their fold, banks are now finding that their strategies for gathering assets just aren't effective enough.

"The small advantage that banks had with their customer base is essentially gone, and it isn't getting any easier for them," said Kenneth R. Hoffman, president of Optima Group, a Fairfield, Conn.-based consulting firm.

Reasons for the slowdown in bank mutual fund growth abound:

*The "easy money" has dried up. Banks are no longer getting the boost they once got from converting common trust assets into mutual funds - a practice that produced roughly 60% of the $391 billion in bank-managed funds at yearend. Such conversions pumped $25 billion into bank-managed funds in 1993 and 1994, according to Lipper Analytical Services, Summit, N.J. Last year, only $4.8 billion in mutual fund assets were created this way.

*Money-center and regional banks, which bragged of plans to be avid acquirers of mutual fund companies, haven't made good on their boasts. After acquiring companies holding more than $83 billion of managed assets in 1993, banks picked up only $24 billion over the following two years, according to Berkshire Capital Corp., a New York investment banking firm.

*Banks are still struggling to compete for customers in a business where such marketing powerhouses as Fidelity Investments and Vanguard Group set the standards. Observers say banks haven't come to grips with building the sales culture and brand identity needed to thrive in the fund business.

To be sure, banks aren't throwing in the towel yet. For instance, First Union Corp. Chairman Edward E. Crutchfield has vowed to increase his mutual fund business nearly tenfold, to $100 billion, by 2000. And many bankers say they remain eager to buy fund companies, but are simply riding out a period where prices are too high.

Nevertheless, banks haven't been living up to the heady expectations that have built up in the past four years, as their aspirations in the fund business have become widely known.

With droves of loyal customers and coffers full of common trust fund assets ripe for the converting, banks were considered a natural to gain market share in the fund business.

"Banks thought they could make a go of it because of the trusting relationship they already had with millions of customers," said David R. Meuse, chief executive of Banc One Capital Holdings Corp.

For years, bank-run mutual fund complexes ran on a virtually inexhaustible supply of money.

In the early 1990s, low interest rates, roaring markets, and bank customers' voracious appetite for bond mutual funds helped fuel sales.

"Banks had it easy in 1992 and 1993, because all the markets were running, and everything was hot," said Richard H. Jones, chief asset management executive for Barnett Banks, Jacksonville, Fla. "Then when it became tough in 1994 and 1995, banks didn't have the sales discipline in place."

Conversions of trust assets into mutual funds also helped banks jump- start their mutual funds businesses.

But the problem is that "any bank that had trust assets to convert has probably already done so," said Henry Shilling, a senior analyst with Moody's Investors Service. "Having completed much of this transfer, growth has begun to diminish."

Legislation under consideration by Congress could free up additional trust assets for conversion into mutual funds. The bill would allow banks to convert common trust funds without incurring a heavy tax penalty - a move that could provide as much as $131 billion in fresh inflows, according to a report from Federal Financial Institutions Examination Council.

But passage of the measure this year is in doubt.

Another way for banks to gain a larger share of the U.S. mutual fund business is through acquisitions of respected nonbank companies. As recently as three years ago, it appeared that banks would gain much of their growth in this business through takeovers.

In 1993, the announcement of two big deals - Mellon Bank Corp.'s purchase of Dreyfus Corp., with $80.6 billion in managed assets, and First Union Corp.'s acquisition of the Evergreen Funds, with $3.8 billion in assets - seemed to be the start of a trend.

But in the past two years, U.S. banking companies have taken a pass at major mutual fund properties on the block, allowing European banks and insurance companies to carry off some of the bigger prizes.

In the past two years, the two biggest U.S. bank-mutual fund deals - Signet Banking Corp.'s acquisition of the Blanchard Funds and First Union Corp's follow-up purchase of ABT Funds - garnered a mere $1.8 billion in assets.

Most observers of M&A activity agree that fund companies are simply too expensive at their current valuations of roughly 10 to 11 times pretax earnings.

"Banks have come to understand that mutual funds aren't the slam-dunk distribution story that they thought they would be," said Peter L. Bain, a principal at Berkshire Capital, a New York-based investment banking firm. "It's hard for them to justify paying the kind of competitive multiples they need to pay."

It hasn't helped matters that the deal that became symbolic of banking's foray into the fund business - the Mellon acquisition of Dreyfus - has been star-crossed from the outset.

A few months after Mellon announced it was buying the nation's most well-known bond house, bond prices collapsed as long-term interest rates began to rise. By the time the deal closed in August 1994, Dreyfus had lost more than $10 billion in assets under management.

While Dreyfus is working to build a line of equity funds in an attempt to reinvent itself as a full-service fund complex, many critics have argued that the Pittsburgh-based banking company has been slow in repositioning the fund firm.

In addition, Boston Co., a money management and private banking firm that Mellon purchased in 1993, fell on hard times when Desmond Heathwood, the well-regarded head of its institutional asset management division, left the firm after his effort to buy the unit was rebuffed by Mellon management. Mr. Heathwood ended by taking his top lieutenants and billions of dollars in client assets with him.

"If those two deals had gone well, the industry might have had a different point of view," said Lawrence Vitale, an analyst with Bear, Stearns & Co.

But the banking industry's biggest challenge ahead lies in being able to outmarket nonbank rivals, many of which are far better known to the investing public.

According to Optima Group, banks spend less than a third of what their nonbank counterparts in the fund business do on advertising.

Currently, Fidelity Investments and the Vanguard Group - the two largest mutual fund companies - claim a whopping two-thirds of all the money flowing into mutual funds.

Moreover, few bank-managed funds are being sold through mutual fund networks run by companies like Fidelity and Charles Schwab & Co. - one of the fastest-growing conduits for fund distribution today, experts say.

So can banks get back on track and continue to build market share in the fund business? Experts say acquisitions will have to be part of the answer. But they also point to banks that have demonstrated the ability to outgrow the industry.

Take Norwest Corp. The Minneapolis-based banking company has built its fund assets by targeting consumers through 401(k) retirement plans - a channel that accounts for more than 35% of money invested in mutual funds - and other long-term investment products such as mutual fund wrap products.

Last year, the banking company's proprietary funds grew 52%. Said Daniel A. Sacklad, executive vice president of Norwest's trust, brokerage, and investment management businesses, "We are competing for share of wallet, and we should be trying to capture as much of an individual's balance sheet as possible."

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