Investors are getting turned on to utility funds, but banks have been slow to introduce the products into their proprietary families.
Assets invested in utility funds totaled $24 billion on June 30, up from $13.1 billion a year earlier, according to Lipper Analytical Services. The number of funds offered grew from 35 to 48, Lipper found.
And while mutual fund companies report that utility funds have been hot sellers for banks (see article on facing page), only one banking company -- Bankers Trust New York Corp. -- manages a utility fund.
Bankers Trust introduced its BT Investors Utility Fund last August in response to historically low interest rates.
"We perceived the need for investors to earn higher levels of yield while taking limited principal risks," said Joseph Demmler, vice president for mutual funds at the bank. "The utility serves that purpose."
The utility fund currently has $30 million in assets, up from $22.9 million
at the end of March. The minimum investment is $5,000.
Others Expected to Follow
For the first half of 1993, the no-load fund posted a 10.02% return. "It's been a very successful fund for us," Mr. Demmler said.
Industry analysts predict that other banks will soon follow Bankers Trust's lead.
Because of the nature of their relationship with customers, "banks will try to beef up some of their conservative equity offerings," said Avi Nachmany of New York-based Strategic Insight, a consulting firm.
Utility funds are a good fit because they are relatively safe and pay high dividends, Mr. Nachmany said.
"There is a lot of retail appeal."
Conservative utility funds are often seen as a first step into owning stock funds.
Since mutual fund companies are having great success in selling utility funds through banks, "the likelihood is good" that banks will offer house brands soon, said Lipper's Geoff Bobroff.
Utility funds have been successful because they provide steady income and seem to be less volatile than other mutual fund products, he said.
Furthermore, the money currently flowing into these funds is buoying prices of the underlying securities.
However, the funds' success is closely tied to market conditions, particularly interest rates. Like bonds, utility stock prices are apt to decline if interest rates rise.
Another problem for utility companies, Mr. Bobroff noted, is that state governments restrict their ability to revise rates.
"It makes sense for other banks with a high-net-worth investor base" to introduce utility funds, said Bankers Trust's Mr. Demmler.
However, he said, "you need sophisticated investors to understand the tradeoff between risk and return."
As banks scramble to introduce funds to compete with third-party providers, utility funds are gaining recognition.
In studying banks' expansion plans in the mutual fund arena, the Boston consulting firm of Cerulli Associates is finding that banks are looking at adding balanced, municipal, and utility funds to their fund families.
Banks are interested in introducing their own utility funds because "they behave like a bank's usual investment vehicles," said Mary McAvity, a consultant with the firm.
Fleet Financial Group has been considering introducing a utility fund for about a year, said Peter Herlihy, vice president Fleet Investment Services.
"Intuitively, we feel it might make sense for a conservative audience," Mr. Herlihy said.
Fleet is trying to get customers to diversify their investments. "They have too many eggs in one basket," Mr. Herlihy said.
Utility funds are a "nice, conservative way to diversify," he said, but only as part of an investor's portfolio. "I wouldn't recommend putting 100% in utility funds."
Waiting for Customers
But Fleet thinks it should not introduce a proprietary utility fund without a "critical mass" of customer interest, Mr. Herlihy said. And so far, no customers have requested such a fund, he said.
Nor has NBD Bancorp seen any customer demand for utility funds.
The Detroit-based bank has "no plans" for a utility funds now, but may look into it in the future, said Richard Foersterling, first vice president.
In the past year, Fleet, like other banks that market proprietary funds, has been looking at diversifying its mutual fund offerings.
"In retrospect," Mr. Herlihy said, adding a utility fund "probably would have been a good thing to do."