First Bank System Inc. has rolled out a mutual fund designed to cash in on an expected upturn in the real estate market.

The fund, which invests in the publicly traded property management companies known as real estate investment trusts, is one of a rare breed. Only about 15 REIT mutual funds are registered with the Securities and Exchange Commission, according to the National Association of Real Estate Investment Trusts, a Washington trade group.

First Bank System, based in Minneapolis, says its REIT Fund is aimed at investors who want higher yields than certificates of deposit or bonds.

"We want to give retail customers access to one of the largest asset classes in the world," said Jeff Wilson, a co-manager of the fund. "We think the real estate market is poised for a takeoff."

First Bank System is no stranger to innovation on the mutual fund front. It offers a top-performing technology mutual fund, and has a health care fund in the works.

The company opened the REIT fund on June 30 to institutional investors, and will make the fund available to retail investors in September.

The initial portfolio consists of shares in 32 companies, ranging from managers of shopping malls to apartment buildings. The portfolio's current yield is 7.75%.

REITs are a huge and growing market, with about $88 billion of assets, and an average dividend yield of 8%, according to the industry's trade group.

REITs are considered attractive for their yields, which generally top those of certificates of deposit and bonds, and because they are exempt from corporate taxes and from many state taxes. They also are more liquid than outright purchases of real estate or investment in limited partnerships, industry experts say.

Apart from companies like First Union Corp., which acquired a REIT fund with its purchase of the Evergreen Fund family last year, most banking companies, still stinging from bad experiences with real estate lending in the late 1980s, have steered clear of the market.

Another reason why there are few REIT mutual funds is that the REIT market has not performed well recently. In the first half of 1995, the return on REIT funds has lagged behind stock funds - an average of 3.12%, versus 16.63% for stock funds, according to Jon Teall, a spokesman for Lipper Analytical Services, Summit, N.J.

But the numbers haven't dissuaded First Bank System. Since 1990, REITs have kept pace with the Standard & Poor's 500 in terms of rates of return, said Charles Ingwaldsen, another of the fund's co-managers.

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