For banks in the mutual fund business, a new gold rush is about to begin.
Bankers are preparing to pump as much as $153 billion of common trust fund assets into their mutual funds, the government has estimated, now that President Clinton has pledged to sign a tax-free conversion measure into law.
The measure, part of minimum-wage legislation Mr. Clinton is expected to sign this month, will let bankers transfer common trust assets into mutual funds without triggering capital gains taxes for trust beneficiaries.
That's good news for bankers who are still waiting to make a profit managing mutual funds. Common trust assets are the last ready pool of money available to push proprietary mutual funds toward a critical mass that would generate meaningful management fees.
"It's a very important event for the money management business in banks," said Peter F. Mackie, executive vice president at Commerce Bank, St. Louis. Commerce Bank has $700 million in six common trust funds that could be added to the bank's $540 million-asset mutual fund complex, he said.
Even banks that already have sizable fund families could benefit from simplified product lines, potential cost savings, and improved economies of scale with an infusion of assets into mutual funds. Indeed, most banks with both common trust funds and mutual fund families are expected to take advantage of the tax-free conversion, several experts said.
"Common trust funds have largely outlived their usefulness," said Eugene F. Maloney, corporate counsel at Pittsburgh-based Federated Investors, a champion of the conversion measure. "They're not as flexible as mutual funds, and because of their relatively modest size, they're cost centers" at many banks, he said.
Already, some banks have used a recent regulatory ruling by the Internal Revenue Service to make the transfer, in effect, by investing their common funds in mutual funds. Under the new conversion law, banks that have taken this route since Dec. 31 will be allowed to dissolve the common trusts they had been required to keep on their books.
Much as employee benefit plan assets helped many banks start their fund families, tax-free conversions may spark a raft of new mutual funds with investment objectives that match the common funds they supplant.
"We've got three approved mutual funds that are approved and on the shelf just waiting for assets," said Timothy Leach, president of Qualivest Capital Management, U.S. Bancorp's $2 billion-asset mutual fund unit. The three are a large-cap growth stock fund, a national municipal bond fund, and an income-equity stock fund.
The Portland, Ore.-based banking company is likely to shift nearly $300 million of common trust assets into mutual funds this year, boosting proprietary fund assets by at least 15%, Mr. Leach said.
Besides cost advantages for banks that have mutual funds, the conversion measure will enable trust departments to lean more heavily on mutual funds as their investment vehicle of choice. That promises to simplify many banks' product lines and help them appeal to consumers who increasingly prefer mutual funds as the way to invest, several executives said.
"There are clients who perceive that being in a mutual fund is somehow a step up from being in a trust fund managed world ...," Mr. Leach said.
Banc One Corp., Columbus, Ohio, has already configured its common trust funds to mirror its family of 26 mutual funds, said Mark A. Dillon, president of One Group Services Co., the administrator and distributor of Banc One's proprietary funds.
After completing a legal and regulatory review, he expects Banc One to move $2.5 billion of common fund assets into the bank's $13.7 billion-asset fund family within four months.
"Unless there are some compelling client reasons" not to, "which we don't perceive there are, Banc One would close the common trust funds," Mr. Dillon said.
But not everyone is hurrying to abandon their common trust funds for mutual funds.
"There's an opportunity to add bulk to existing mutual funds, but we wouldn't do it if there's no real customer benefit,"said Richard H. Jones, chief asset management executive at Barnett Banks Inc., Jacksonville, Fla.
Barnett, which has $4 billion of proprietary mutual fund assets, is analyzing whether a conversion makes sense, he said, adding, "We're not motivated by a need to get scale in our complex."
