Big shakeout seen in banks' mutual funds.

Now that the stock and bond markets have lost their pizzazz, a shakeout could be looming for banks that manage mutual funds.

That's the word from a growing number of industry observers, who say some banks may have to sell off or shut down their fund businesses in the next few years.

These experts say that many of the 120 banks that manage mutual funds are still in a building-up stage, and haven't yet begun to reap profits. Now, to ride out the rough market, they might have to pour still more money into the business.

Kenneth R. Hoffman, president of Optima Group, a consulting firm in Milford, Conn., has concluded that no more than 20 banks are positioned to make it as mutual fund managers.

For the other 100 banks that manage funds, "the day of reckoning will come," he said.

Mr. Hoffman is not alone. Geoff Bobroff, a mutual fund consultant in East Greenwich, R.I., is generally enthusiastic about banks' entry into fund management. But he adds, "many banks will realize their funds won't make it and will deep-six them."

For his part, Mr. Hoffman maintains that the big losers will be found among the dozens of regional banks that manage minor mutual fund families. Fully half the banks that manage mutual funds have less than $1 billion in assets under management.

"Small banks have no business having their own mutual funds and most midsize banks don't either," Mr. Hoffman said.

That's not to say that banks will be pulling back from the fund business entirely. Many will continue selling the funds managed by other companies. Indeed, some observers believe that is the banks' best hope for success in mutual funds.

But tough decisions may lie ahead, particularly for banks that launched mutual funds in the past two or three years.

Many of these banks were selling funds and yearned for a bigger piece of the action. By operating their own funds, they hoped to capture management fees that they had been channeling to other fund companies.

So far, however, the expected gains have not been realized. In a recent study, the Federal Reserve concluded that fund management fees were barely contributing to the bottom lines of 48 large banks.

Fund Popularity Ebbs

To make matters worse, consumers' enthusiasm for mutual funds has waned this year as the markets have churned. Bank customers in particular seem to be retreating from mutual funds.

Industrywide, sales of mutual funds through banks are off between 40% and 50% this year, according to William O'Grady, national sales manager at Alliance Capital, a New York-based mutual fund company.

At the 20 largest banks, fund sales have dropped by 10% to 50%, Mr. Hoffman added.

Though no banks that manage proprietary mutual funds have thrown in the towel yet, the sales slump is bound to take its toll, said Eli Neusner, a consultant with Cerulli Associates in Boston. He believes some banks will eventually fold their mutual fund businesses.

For one thing, banks had been counting on brisk sales to help them get their fledgling mutual fund families to "critical mass."

Banks need between $50 million and $80 million per fund to make a fund family profitable, said John N. Ake, a law partner in the Philadelphia firm of Ballard Spahr Andrews & Ingersoll.

Mr. Ake expressed doubts about whether many banks can build their funds up to that level.

Many banks got into mutual fund management because they saw it as a low-cost way to boost revenues, he said. One reason is that many banks already have experienced investment managers in their trust departments.

But Mr. Ake said banks may have miscalculated. "Once in the business, the banks realized that the costs are greater than they anticipated."

However, Mr. Ake said, some banks will hang on to their proprietary funds, even if they are losing money.

"It's like holding a lottery ticket," Mr. Ake said. "There is always a hope they'll hit it."

Who Will Survive?

To be sure, the critics believe some banks have what it takes to succeed.

Mr. Hoffman expects the survivors to include banks that manage large institutional funds, such as PNC Bank Corp., and some relative newcomers that have made mutual fund management a top corporate priority, such as First Union Corp.

Among his other top picks are BankAmerica Corp., Chase Manhattan Corp., Keycorp, Mellon Bank Corp., NationsBank Corp., Northern Trust Corp., State Street Boston Corp., and Wells Fargo & Co.

While Mr. Hoffman clearly thinks that just a few banks are cut out to manage mutual funds, he has some advice for those that want to press on.

For a midsize bank to be successful, it needs to go outside its customer base and aggressively market its funds, Mr. Hoffman said.

And banks need to cultivate a sales culture by investing heavily in training brokers, he said.

But, he added, "very few banks will step up to the plate and make a capital investment" to bring their mutual funds to profitability.

[Tabular Data Omitted]

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