Banks in mutual fund business have caught municipal bond fever.
Catering to consumers' growing appetite for tax-exempt investments, banks have nearly doubled their municipal bond fund offerings in little more than a year.
The number of tax-exempt funds managed by banks stood at 125 on March 31, up from 71 at the end of 1991, according to Lipper Analytical Services. During that period, assets grew to $8.3 billion from $4.9 billion. The numbers do not include tax-exempt money market funds.
Although municipal bond funds are still only a sliver of banks' proprietary fund business -- banks managed 1,017 mutual funds with $181 billion in assets as of March 31 -- new tax-exempt offerings are coming on line fast. "Banks that don't already have tax-frees are adding them to round out their offerings." said David Nadig, senior consultant at Cerulli Associates in Boston. "It's a natural way to go for many of them."
This week, First Union Corp. announced that it is adding a Florida Municipal Bond Fund to its proprietary fund family.
The Charlotte, N.C.-based bank already has tax-exempt funds for Georgia, Virginia, and North Carolina.
The move by banks to fill out proprietary lines with tax-exempt offerings comes at a time when mutual fund companies also have been targeting banks as a major outlet to increase their distribution and attract new investors. As more banks launch their own funds, a number of fund companies are moving municipal product lines into banks or expanding the number of funds available to bank customers.
Avi Nachmany, a partner at Strategic Insight, a New York City consulting firm, says banks are playing to their strengths by managing municipal funds.
"Banks may not be perceived as great managers of small capitalization or international fund," Nachmany said. But people assume that banks could do a good job managing municipal funds in their home states because of their knowledge of local markets, he said.
NationsBank Corp. has adopted that attitude. For its sheer range of offerings, the Charlotte, N.C.-based company is the leader in the bank municipal bond fund field.
Its NationsFund family of mutual funds includes three national municipal funds and 22 single-state funds in eight states: Florida, Georgia, Maryland, North Carolina, South Carolina, Tennessee, Texas, and Virginia.
Assets in the 25 NationsFunds grew to $697.2 million on May 31 from $503.5 million on Dec. 31, 1992, according to Lipper.
The single biggest tax-free fund offered by a bank, according to Lipper, is the Hawaiian Tax-Free Trust, managed by Hawaiian Trust Co. in Honolulu. The fund had $615.5 million in assets as of May 31. Established in 1985, the fund is one of the oldest bank-related municipal funds.
Customer demand is the driving force behind the surge in bank municipal bond funds.
Crestar Bank, based in Richmond, launched a Virginia tax-exempt fund early this year. "Through focus groups with customers, we determined a tax-free was the next fund we needed to open," said John M. Mears, vice president of Crestar's mutual fund division.
Other banks that have launched tax-exempt bond funds this year include Bank of New York Co., Central Carolina Bank and Trust Co., PNC Bank Corp., and Wells Fargo & Co.
Riggs National Bank in Washington, D.C., is considering adding single-state and national tax-exempt funds to its Rimco Monument fund family.
"As we're seeing greater concern emerging over taxes, we're seeing greater demand for tax-exempt opportunities," said Deanna Belli, senior vice president and director of trust marketing.
A decisive factor for Riggs and many other banks may be the fate of H.R. 13, a pending tax bill in the House of Representatives that would make it easier for banks to convert common trust assets into mutual funds, including tax-exempts.