Banks' concentration in money market funds, often cited as a weakness of their mutual fund management strategy, proved to be a strength in the turbulent third quarter.
Assets of bank-managed money funds grew 7.1%, to $415.9 billion, in the three months ended Sept. 30, according to data prepared for American Banker by Lipper Analytical Services, Summit, N.J. By contrast, banks' total mutual fund assets rose a scant 0.1%, to $755.4 billion. (Tables begin on page 8.)
Though growth in bank-run money funds as a group lagged the 9.0% average for nonbank money funds, there were notable exceptions. Among the 20 largest banks in fund management, six posted double-digit gains: PNC Bank Corp., First Chicago NBD Corp. (now part of Bank One Corp.), J.P. Morgan & Co., State Street Corp., Citicorp (now part of Citigroup), and SunTrust Banks Inc.
"We certainly benefited as a fund company from significant inflows in our money market funds-unquestionably," said Karen Sabath, managing director of BlackRock Financial Management, the asset management division of PNC. The Pittsburgh banking company ended the quarter with $29.7 billion in money market funds, up 10.7%, placing it behind Mellon Bank Corp. and BankAmerica Corp. among bank money fund managers.
The stock market decline that began in the summer and continued through early October took the wind out of banks' equity fund sales-and reminded them that money market funds are integral to a well-rounded mutual fund strategy.
Having a range of alternatives-including stock, bond, and money market funds-helps stabilize revenues during times of market upheaval, Ms. Sabath said. "That's really the heart of the issue. That's the point of diversification of the asset base and your client base."
Money market funds typically prove their mettle in tough times, said Gordon Forrester, senior vice president of product development for First Union Corp.'s Evergreen Funds.
"Any mutual fund company should offer money market products because they are the traditional safe haven in terms of whenever we go through period of market volatility," Mr. Forrester said.
Still, banks continue to struggle with their product mix, which remains sharply tilted toward money funds. As of Sept. 30 banks had 55% of their assets in money markets, versus 21% for nonbanks. Equity funds, by contrast, made up 30% of fund assets run by banks, versus 63% for nonbanks.
The typical bank mutual fund product mix, quite simply, is less profitable than that of nonbanks. Mutual fund management companies collect investment advisory fees-a recurring income stream that is based on total assets under management in a given portfolio. These annual fees run as low as 0.1% of assets invested for money market funds, but can exceed 1% of assets for equity funds.
The good news, some bankers said, is that customers didn't react to the market turmoil by yanking money out of equity funds. Rather, they began redirecting their new investments into low-risk instruments, including money market funds.
"What you saw was not so much redemptions in equity portfolios," but "a cut down in purchasing of them and people purchasing more in money markets," said Mr. Forrester of First Union. The Charlotte, N.C., banking company's money market assets rose 7.5%, to $29.3 billion. Its equity assets fell 16.7%, to $21.1 billion.
In a similar vein, State Street Corp.'s proprietary family, the SSgA mutual funds, captured fresh cash into its money market funds from institutional investors that had redeemed individual stocks, said G.V. "Gus" Fish Jr., a principal of State Street Global Advisors who oversees its mutual funds.
Mr. Fish estimated SSgA's institutional investors bought about $2.5 billion in money market funds during the quarter. At the same time, market depreciation dented the asset levels by $500 million in its long-term funds, which are primarily used by retail investors in 401(k) plans.
At quarter's end, money market fund assets were 71.9% of the $14.9 billion under management at SSgA. And that heavy concentration in the SSgA family-where it got its start-buoyed profitability.
"We're slightly up (in revenues). It's the type of client we have," Mr. Fish said. "The equity market can go up or down and we can maintain and grow our business."
As a group, bank proprietary equity funds suffered the most, with assets dipping 12.6% during the quarter, according to Lipper's data. That was in line with the entire fund industry, which had a 12.5% drop in equity assets.
The shriveling of the equity fund base at banks was due more to generally depreciated assets than redemptions, executives said. The Dow Jones industrial average fell 12.4% in the third quarter and the Standard & Poor's index of 500 domestic stocks 10.3%.
"We did not see a lot of movement out of equities," said Jeffery Wilson, senior managing director of the First American Funds at U.S. Bancorp of Minneapolis.
"We have a lot of institutional, 401(k), and high-net-worth kind of money, and that money did not run from the market," he added.
"Bank funds probably didn't experience the same level of redemptions as some of the direct marketed funds," agreed Sarah E. Jones, president of Chase Mutual Funds Corp., the proprietary fund arm of Chase Manhattan Corp.
"Funds that rely on financial advisers for sales have more staying power because people are being counseled to stay in there," she added.
Net sales of Chase Vista equity funds were up slightly during August and down about 1% in September, Ms. Jones said. The net increase was boosted by sales in a new no-load family being sold through 401(k) plans, she added.
Other long-term asset classes fared better: Assets of bank-run taxable fixed-income funds were up 5.62% for the quarter, while municipal bond fund assets rose 5.62%.
In other highlights from the third quarter:
Mellon retained its No. 1 position among banks that manage mutual funds, managing $101.4 billion, down 0.2%. It also placed first in long- term funds, equity, tax-exempt fixed-income, and money market funds under management. (See chart on page 9.)
First Union remained No. 2, with $61.0 billion under management. That is down 3% from the $62.9 billion reported last quarter. It placed first in taxable fixed-income assets under management.
BankAmerica Corp. moved into third place, with $60.5 billion of fund assets under management. The company was formed Sept. 30 through the merger of last quarter's No. 5 and No. 11 companies, NationsBank Corp. and the old BankAmerica Corp. Their combined assets rose 0.3% in the three-month period.