To the rest of the banking world, the merger last April of Union Bank and Bank of California was simply one more wedding in an industry rife with marriages of convenience.

But executives at the new Union Bank of California, the offspring of the merger between the two West Coast financial institutions, said they see the consolidation as a way for the bank to grow up faster in the proprietary mutual fund industry.

With a combined total of $4.3 billion of assets in its proprietary funds, executives said, the new bank is positioned to expand.

Greg Knopf, formerly of Union Bank and now head of Union Bank of California's mutual fund division, said it would broaden its fund lineup, explore niches and new distribution channels, market more aggressively, and possibly acquire mutual fund families next year.

The union of the banks' mutual fund operations will be completed in the first quarter of 1997. Mr. Knopf said he would not even know until yearend whether the fund unit would be headquartered in San Francisco, Los Angeles, or both.

Some industry observers are skeptical of Union Bank of California's chances of survival in the fund industry. They doubt it is big enough - or experienced enough, for that matter - to increase its mutual fund business substantially.

Mr. Knopf, however, believes otherwise.

"The benefit of consolidating the funds is that we can spread the costs among a larger asset base and expenses will go down," Mr. Knopf said. The bank will be able to expand "the funds and the shareholder benefits. That's what's driving the merger of the two fund" families.

The new Union Bank of California, with $27.7 billion of total assets, is promoting itself as the third-largest commercial bank in California and among the 30 largest in the country. It has 268 branches and nearly 10,000 employees in California, Washington, and Oregon.

The bank's multistate presence, Mr. Knopf said, would give it a chance to target a wider mix of customers with a redesigned mutual fund family and more aggressive marketing.

Before the merger, Union Bank ran 14 proprietary funds under the name Stepstone, which had $2.7 billion of assets. Bank of California was slightly smaller, with 11 funds marketed under the name Highmark and $1.6 billion of assets.

The postmerger goal, Mr. Knopf said, is to have $10 billion of proprietary mutual fund assets by 2000.

The funds in Stepstone's lineup generally have outperformed - although only by a percentage point or two - those in the Highmark family in areas where the two overlap, according to data from Lipper Analytical Service.

An exception is Stepstone's retail growth fund, which returned 14.13% for the year ended Aug. 31. Highmark's comparable fund returned 14.69% in the same period.

Union Bank of California will continue to use both the Stepstone and Highmark names, but they will be used in marketing through different distribution channels. Stepstone may be the name given to fiduciary and load products, Mr. Knopf said, while Highmark funds would be no-loads.

In the months since the merger, Knopf and his colleagues have had the formidable task of paring down the banks' 25 funds; the lineup now stands at 15. Union Bank of California will offer five money market funds; seven for equities, including an international fund; two bond funds; and one for convertible securities.

Although the number and type of funds has been decided, bank executives still must choose which funds to chop, Mr. Knopf said.

Some funds in the new family could be entirely new, and some may combine those that the two banks already were marketing.

Mr. Knopf said the final decisions will take into account expense structures, performance, and pricing flexibility.

Some industry experts point out that most of Union Bank of California's mutual fund assets are tied up in money market funds, "which are not very profitable," said John Shields, a consultant at Cerulli Associates, a Boston firm that specializes in business development for financial institutions.

Mr. Knopf calculated that more than half the bank's mutual fund assets - $2.25 billion - are in such funds. But what's the difference, he asked, if money market funds generate substantial revenue for the bank?

"A very attractive part of our business is sweep accounts - retail cash and institutional cash sweeps," he said. "It allows you to amass assets. If we become the largest sweep account provider in the West, then it would be a very profitable business."

Mr. Knopf went on to say that he plans to expand well beyond money market funds. The postmerger bank will strengthen its focus on employee benefits, the small-business market for 401(k) plans, and high-net-worth clients.

And a change in Japan's banking laws, expected in the next few months, could give Union Bank of California a green light to market mutual funds there, Mr. Knopf said. He is considering the feasibility of marketing his funds through Bank of Tokyo-Mitsubishi Ltd., majority owner of Union Bank of California.

Don Wilkinson, owner of FSC Advisory Corp., an asset management firm in Newport Beach, Calif., applauded the bank's exploration of niche areas.

"If you're small like that," he said, "you have to do something different."

Meanwhile, Mr. Knopf also plans to target new distribution channels for the fund family - registered investment advisers and independent broker-dealers, for example. Some industry analysts, however, doubted the bank would succeed.

"It's on the wish lists of all banks to sign onto broker-dealer distribution," said Andrew Guillette, a consultant at Cerulli Associates. "But brokers are bombarded . . . . I don't see it happening. Unless they have stellar performance, (Union Bank of California) may not make the cut."

Plans also are afoot to break the new fund family onto the no-load fund scene. Mr. Knopf said he is negotiating with Charles Schwab & Co. to distribute the bank's funds through the San Francisco discount broker's no- load marketplace.

"This will be our first attempt in the no-load market," Mr. Knopf said. "But if you don't offer no-loads, you're missing 50% of the market. It may be more expensive for us to market these, but the increased size of the two banks will help us do it more cost effectively."

Ms. Moore is a freelance writer in Los Angeles.

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