Bremer Financial Corp. started its own mutual fund family this year-and that makes it one of a vanishing breed.

The Minneapolis banking company, which started the Bremer Funds with two portfolios in January, is the only bank so far this year to launch into managing mutual funds.

And Bremer could very well retain that distinction. The ranks of banks entering the investment management business have shrunk steadily since 1992. That year, a record 23 banks piled into the business; in 1996, only two followed suit.

While 116 banks had amassed a combined $492 billion of proprietary mutual fund assets by the end of 1996, their early excitement over the business has given way to a realization that managing mutual funds is a tough proposition.

"It's a rougher go than banks realized," said Douglas Moat, chairman of the Manhattan Group, a New York consultant to financial institutions. "It takes a substantial block of assets to create a fund family, and even then profits aren't guaranteed."

Banks have thought of fund management as a way of keeping pace with customers' needs while reaping hefty management fees. Investment advisers- who select the securities that make up a fund portfolio-collect annual fees equaling about 0.65% of assets under management in stock funds and 0.45% to 0.50% on fixed-income funds, according to Geoffrey H. Bobroff, an industry consultant in East Greenwich, R.I.

But the hoped-for bonanza is eluding most banks. Only an elite few have hired top talent or supported their funds with ambitious sales programs, as the top brokerage firms do. Bankers-even those at institutions with high- profile funds-agree that competition is fierce and that it is hard to stand out in the crowd.

But Bremer is not deterred.

"We know it's late" to be creating proprietary funds, said David J. Erickson, chief investment officer for mutual funds at the $2 billion-asset banking company. "But we figure if you want to be seriously in this business, you have to run your own fund complex."

Like other bankers who have entered the field, Mr. Erickson says, he is responding to customers' raging appetite for investment options beyond traditional bank deposits. In recent years, mutual funds have become an integral part of many bank customers' financial strategy.

Consumers "are going to continue saving for their future," Mr. Erickson said. "We want to be the investment vehicle they choose." He said he sees the retirement market as his bank's niche, whether that means helping individuals build their savings or helping corporations develop retirement programs for their employees.

To ensure a wide product selection, the banking company will offer its Bremer Funds alongside other firms' offerings. International funds, for instance, will be supplied by the Templeton Funds, which are managed by an arm of Franklin Resources Inc., San Mateo, Calif.

Although Bremer has been selling mutual funds through a partnership with Invest Financial Corp. for 12 years, it took its first steps into managing funds last winter. The bank converted $60 million of corporate trust assets to create an equity growth fund and an intermediate bond fund.

Bremer hopes to add two funds this year by reorganizing individual trust funds. The additions would bring the Bremer Funds to nearly $100 million of assets.

Industry experts said the banking company is wise to go after the booming retirement account business-but they warned that having proprietary mutual funds does not ensure success.

"Conversions of trust assets do not necessarily garner more assets," said David B. Master, managing director of Optima Group, Fairfield, Conn. "The bank has to support the program by keeping costs down and through sufficient marketing."

Indeed, even bankers with years of experience in the fund business say they are constantly challenged to build assets. One widely cited yardstick calls for at least $100 million in a fund before it becomes profitable.

A number of financial institutions have jumped in with relish. Mutual fund assets managed by banks quadrupled in the five years from 1991 to 1996, vaulting from $120 billion to $492 billion, according to Lipper Analytical Services, Summit, N.J.

KeyCorp, which operates the Victory Funds, constantly considers new funds and tweaks existing portfolios to attract investors, said W. Christopher Maxwell, senior managing director of the Cleveland-based banking company's asset management arm. He oversees an $8.3 billion-asset fund family.

Others, like Mellon Bank Corp. and First Union Corp., have used big- ticket acquisitions of fund companies to help spur growth.

Asset-building efforts may not show an immediate return, but they will pay off in a big way once banks can cover fixed costs, said Mark Hurley, who wrote a well-regarded Goldman, Sachs & Co. study of the mutual fund market, issued in October 1995.

"The cash flows and real returns are further out, and they will be quite attractive," said Mr. Hurley, who has since left the firm.

But others say the window of opportunity may be closing for newcomers to the fund business.

"At this point, it's very late for anyone to be getting into the game," said Allen W. Croessmann, director of retail and marketing investment services at Bank of Boston Corp., which manages a $5.3 billion-asset fund family.

"If you're a small bank and want fee income from investment products, you're better off to work through a third-party marking company" that shares costs, Mr. Croessmann said.

Still, Bremer believes it has mapped the right course by creating its own funds and that its program will work.

"We're going to have all our ducks in a row," Mr. Erickson said, "and show doubters that the strategy can succeed."

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