Top Bank Mutual Funds:

Everyone knows it's been a miserable year for bank-run mutual funds as a whole, but a number of individual funds have bucked the trend and have drawn in large amounts of new money.For the industry as a whole, the news was glum. Net inflows in the first half of 2000 were a meager $1.3 billion, less than half the $2.9 billion inflow during the same period of 1999, according to Boston-based Financial Research Corp., a financial services consulting firm.
That was particularly bad considering that money flows into all equity and fixed-income funds--not only those of banks--continued to boom. Net inflows rose to $115.3 billion in this year's first half, up 12% from $102.9 billion in the 1999 period, says FRC.

Yet, some bank-run funds did extremely well, as evidenced by their strong showing in U.S. Banker's ranking of the 50 largest bank-managed funds. The ratings are in three separate categories: equity, fixed-income and money market. The rankings were based on estimates of the dollar amount of fresh money that flowed into the funds in the 12 months ended June 30.

Bank of America Corp.'s Nations Funds unit was the best of the bunch, pulling in a net $4.6 billion of fresh money in the first six months of 2000 alone, according to Financial Research Corp. If it hadn't been for the strength of the Nations Funds, the entire bank group would have shown a net outflow for the first half, FRC says.

U.S. Banker's ranking of individual bank-run funds, based on figures provided by Lipper, a division of Reuters Inc., supports that assessment. Members of the Nations fund group placed at or near the top of the three ranking categories. In the equity category, Nations' funds took second and fourth place; in the fixed-income category, one of its funds placed second, and in money market funds, Nations Cash Reserve came in first.

Nations Cash Reserve Fund Daily Shares--as all Nations funds, operate under the aegis of Banc of America Advisors--reaped more than $5.9 billion in estimated new investment, more than doubling its assets in one year. Yet its 5.19% total return put it in 40th place in performance. The relative return, still well above the average for the group, didn't matter to investors because the fund is a sweep option for Bank of America's money manager account; investors park their idle cash there.

Added together, the Nations Funds family is huge; it reached the $100 billion-asset mark in mid-August, logging about $15 billion in net sales in 2000 alone. Money markets are a particular strength. It has more funds--seven--among the 50 biggest bank-run money market funds than any other company in the U.S. Banker ranking.

"In money markets, we're the fastest-growing money manager in both dollar and percentage terms," says Rob Gordon, president of Banc of America Advisors, which manages the funds. Of the nearly $15 billion in new sales this year, Gordon says about $10 billion were in money markets and almost $5 billion were in equity and fixed-income funds.

Like many other mutual fund advisers, BofA doesn't manage all of its funds directly. It engages sub-advisers with particular investment strengths and approaches, such as international equities or quantitative analysis--firms that Gordon calls "managers of distinction." But of its $100 billion in mutual fund assets, less than $10 billion is handled by sub-advisers, although the volume is growing swiftly, he says. "With each of our sub-advisers we look for either exclusivity around the product or exclusivity around distribution."

Sometimes BofA takes a stake in its sub-advisers, or even buys them out altogether, as it is now doing with Marisco Capital Management, whose founder, Tom Marisco, was famous for managing the Janus Fund.

For banks to succeed in the mutual fund business, Gordon insists they need three things: a broad array of solidly performing funds in all investment styles, heavy distribution both inside and outside the banking channel and "a corporate commitment to build a world-class investment management business."

BofA's commitment is evident from its announcement last April that it had agreed to pay $950 million for the half of Marsico it doesn't already own. It paid only $150 million for its initial stake in the company last year.

Lack of such commitment is where most banks have tripped up, Gordon says. "Asset management is considered one of the top businesses in Bank of America today," he says. "This is a growth business."Within the equity category, two other bank funds showed particularly strong growth. Northern Technology Fund, managed by Chicago's Northern Trust Co., attracted some $1.9 billion in fresh money, more than quadrupling its total assets in the year ended June 30.

Northern Technology fund's success is attributable to its sparkling returns over the three years from June 30, 1997, but also to the company's astute marketing strategy. The fund produced an average annual return of almost 70% over the three-year period and grew from $468 million at June 30, 1999, to $2.5 billion at June 30, 2000. Whether it will continue to attract a lot of new funds is hard to say; performance in the past year dropped to 20.3%.

Beyond the fund's fine performance in the three-year period, Northern Trust employed savvy marketing techniques that it copied from such successful fund managers as Fidelity and Vanguard.

With more than $37 billion in assets under management in 50 funds (both retail and institutional), Northern Trust advertised its top performers and worked to get good play in the finance press. An excellent rating from Morningstar, the mutual fund research outfit, gave the Technology fund the push it needed. It was cited in several feature articles on mutual funds in investment magazines, spurring sales far outside Northern Trust's usual client base.

In July, the Technology fund was added to the Charles Schwab & Co. network, a huge source of mutual fund sales both on- and off-line. "That's where the PR really pays off," says Jan Temple, director of marketing for Northern Funds.

Even now, Temple says, "more than half of our single-service investors have no other relationship with Northern Trust." The company must now figure out how to transform those investors into Northern Trust customers--or even whether to do so, given the institution's tight focus on wealthy individuals. "We're beginning some initiatives," Temple says, "This is a fairly new phenomenon for us, so we're still gathering market intelligence."

Galaxy's Stars

Fleet Boston Financial Corp.'s Galaxy International Equity fund was another big winner. Its influx of new money last year increased its assets by more than 51%, to $1.02 billion. At 15.73%, its three-year average annual return was not particularly good, although it was above the 14.5% average for the group. But the past year's return was the best of the group, at almost 92%.Despite the fund's spectacular return, Rich Joseph, managing director of product distribution for Fleet Investment Management, says that top investment performance isn't the company's major goal. "One of our distribution strategies is not to focus too much on returns," he says.

That's because bank distribution--that is, selling funds through the bank's own brokers or licensed branch platform staff--"requires more of a relationship approach which demands consistent performance rather than top performance," Joseph says. Fleet's objective is to produce returns that put the funds in the top quartile of all funds year-in and year-out.

On the fixed-income side, it is difficult to compare returns because some funds are tax-exempt while others aren't, and some are long-term and others have short or intermediate maturities. Still, Fleet performed respectably and did very well at gathering new assets. Bringing in more than $313 million in new investment, Galaxy High Quality Bond fund's assets more than doubled during the year, up almost 142%. Its Intermediate Government fund attracted $211 million in new investments, increasing the fund's assets by almost 90%.

In late June, Fleet completed the consolidation of its fund family with BankBoston's funds, called the 1784 Funds, bringing $9 billion under the Galaxy umbrella. The fund group now has $32 billion in assets under management, Joseph says, calling $50 billion "the next achievable goal" over the next 18 months to two years. "At this point we're taking baby steps," he says.

For the past two years, Fleet has expanded its funds' distribution beyond its Northeast branch network through its Quick & Reilly brokerage, which has 118 offices nationwide, and has forged alliances with companies such as American Express Financial Advisors and global insurance and asset management giant ING Barings.

Cleveland's National City Bank's Armada Bond fund drew in more new money than any other bank-run fund in the fixed-income category. Asset growth as a result of new investments amounted to $568 million, an increase of 158% over its assets at mid-year 1999.

These funds were among the winners. But there were many losers as well. In the equity area, the worst was Dreyfus' Founders Growth fund, which showed more than $2 billion in net outflows. Mellon Financial Corp. owns Dreyfus.

One possible explanation for the outflow: The fund is very heavily invested in technology stocks--one-third of its portfolio--and investors may have fled the fund when the hammer fell on the tech sector last spring.

Yet, the fund's return on assets was very strong, 85% for the year ended June 30, 2000, ranking it No. 2. And for the three years, 1998-2000, its average annual return was 21.4%, well above the average of 14.5%, ranking it 14th. As a result of its strong performance, Founders Growth's assets grew 12.5%, despite the net outflow.

That wasn't the case for the second worst performer in the equity group. Nations Value fund showed a net outflow of about $1.1 billion, and its total assets declined 38.7%, even after a 20.8% return on investment. In the latest six-month period, the fund's return was a negative 8.6%, which may have helped fuel the outflows. And Nations Value three-year performance, at a return of 7.1%, was less than half the group's average.

On the fixed-income side, the bank group showed a net outflow of $1.5 billion. The fund that showed the biggest outflow of assets, $505.8 million, was the Offit High Yield fund, run by New York-based money manager Offitbank, which Wachovia Corp. bought in 1999. These outflows caused the fund's assets to drop by 28.5%, to $1.2 billion.

The best that can say about this year's bank-run mutual fund performance is that there's room for improvement.

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