First Union Corp. has recruited the top executive from a major mutual fund company to lead its push into investment management - a sign that sour markets have not dampened banks' enthusiasm for the business.

Donald A. McMullen, president of American Capital Management and Research Inc., will join First Union on Feb. 1 as executive vice president and head of the capital management group.

In that capacity, he will oversee the North Carolina banking company's brokerage, mutual funds, private banking, and trust businesses. He will report to John R. Georgius, president of the $72.4 billion-asset company.

Industry observers said the appointment is the highest position a mutual fund executive has landed at a banking company in recent years.

As competition for investment dollars grows fiercer, more banks are likely to tap fund companies for management talent, said Geoffrey H. Bobroff, president of Bobroff Consulting, East Greenwich, R.I.

Indeed, the hiring of Mr. McMullen marks the second time in less than a year that First Union has raided a fund company. Last May, First Union hired William M. Ennis 2d, a former Colonial Mutual Funds executive, to head its proprietary funds.

Banks are eyeing mutual fund companies for executives who can help them prop up sales and profits, said Windle B. Priem, vice chairman of Korn/Ferry International, a New York recruiting firm.

With rising interest rates putting pressure on earnings, banks are looking to investment sales programs to generate fees, Mr. Priem said. And though mutual fund sales have been off sharply at most banks, "the slump in the market is not going to put a halt to banks' interest in hiring these people."

Though Mr. McMullen has spent the past eight years in the mutual fund industry, he is certainly no stranger to banks.

He started his career at Mellon Bank Corp. in 1972, where he eventually headed the trust and investment departments and launched the bank's proprietary mutual fund family, the Laurel Funds.

In 1987, he moved to Houston-based American Capital. The company, which manages $17 billion in mutual fund assets, merged last month with Van Kampen Merritt, a mutual fund company in Oak Brook Terrace, Ill.

The acquisition left Mr. McMullen with the largely ceremonial title of "president-administration." A source familiar with the deal speculated that Mr. McMullen moved because he had no chance of regaining the authority he once had, and wanted a chance to chart his own course.

In a telephone interview, Mr. McMullen declined to comment on his reasons for leaving American Capital.

"I love to build things, and with First Union I'll have the opportunity to grow four or five different businesses," he said. "I've found a management team that's interested in expanding and has the resources to do it."

According to a company statement, First Union plans to expand its mutual fund assets under management to $25 billion by 1996 and $50 billion by 2000.

Mr. Bobroff said Mr. McMullen is a particularly good choice to lead this effort, because he comes from "a load fund environment, just like First Union is trying to build."

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