The boom in mergers and acquisitions is jump-starting the growth of banks' mutual fund families, but the industry is still struggling to reach new investors.
Each of the top 20 bank-managed fund families ended the first quarter with at least $10 billion of assets under management, according to data compiled by Lipper Analytical Services Inc., Summit, N.J. Only 14 bank fund families had reached that benchmark a year earlier.
Many of the top tier, including NationsBank Corp., First Union Corp., and J.P. Morgan & Co., have acquisitions of both banks and asset management firms to thank for their newfound scale. Pending deals by these banking companies and others are expected to realign the top ranks of the bank fund business in coming months.
The Lipper data showed that mutual fund assets at banks increased 11.2%, to $706.4 billion, during the first three months of the year. They grew 36.1% for the 12 months ended March 31.
"Through mergers, some institutions are at least within shouting range of critical mass," said Peter Marshall, national director of the bank mutual fund practice at Ernst & Young, New York.
Both surges were in line with the U.S. fund industry at large. According to the Investment Company Institute, Washington, assets at all mutual funds grew 11.1% to $4.988 trillion during the first quarter and increased 36.4% for the year.
Executives at the some of the largest bank-managed fund families agreed that mergers and acquisitions were a boon to their businesses in recent months. But they stressed the need to increase sales of their funds- especially among brokers and financial advisers not affiliated with banks.
No. 2-ranked First Union, Charlotte, N.C., expanded its mutual fund business to $47.4 billion in the first quarter, partly via two acquisitions early this year: Wheat First Butcher Singer Inc., a Richmond, Va.-based brokerage firm; and Signet Banking Corp., also in Richmond.
First Union's April 28 merger with CoreStates Financial Corp., Philadelphia, brought an additional $4.9 billion of mutual fund assets to the banking company's fund family.
But more important than those merger-related boosts is new business, said William Ennis, president of the banking company's Evergreen Funds. Evergreen had record sales of $1.4 billion in the first quarter, he said, with 40% of those sales coming from outside First Union's own network.
"Our external effort is paying off," he said.
Two years ago, First Union's mutual funds were only sold by its own brokers. But when the banking company bought Keystone Investments Inc. in 1996, it began selling its funds via regional broker-dealers, national wire houses, financial planners, and other third parties, Mr. Ennis said.
J.P. Morgan & Co. experienced a 34.3% increase in mutual fund assets to $15.7 billion during the first quarter. The jump does not include the 45% stake in American Century, a retail mutual fund company, Morgan took in January. But that deal enhances Morgan's other efforts to get its funds sold to new customers, said managing director George C.W. Gatch.
In October, American Century will begin selling J.P. Morgan's mutual funds to its retail and 401(k) plan clients, Mr. Gatch said. The banking company has already taken other steps to increase sales of its proprietary funds, including lowering their minimum investment to $2,500 from as much as $100,000 and making them available through mutual fund supermarkets.
Bankers Trust Corp. has also gone the supermarket route. While the banking company's acquisition of Alex. Brown & Sons last fall brought it some $7 billion in new mutual fund assets, it has also been working hard to increase external sales.
"Our largest growth is coming through fund supermarkets and outside distribution," said Matthew F. Connors, a Bankers Trust managing director.
According to Mr. Connors, Bankers Trust logged first quarter sales of $1.5 billion. Outside distribution channels, including Jack White & Co., National Financial, Pershing, Prudential Securities and Charles Schwab & Co., accounted for $679 million of that.
Together, the top 20 bank proprietary fund families have more than $526.7 billion of assets under management, representing three-fourths of bank proprietary funds overall. According to Lipper, 111 banking companies have proprietary fund families.
Mr. Marshall said most are still handicapped by small sales forces relative to the size of their banking businesses. To increase sales, they should step outside of traditional boundaries and consider deals such as Citicorp's proposed merger with Travelers Group, he said.
Still, mergers among banking companies were of no small consequence for those in the mutual fund business. For example, the pending merger of Banc One Corp., Columbus, Ohio, and First Chicago NBD Corp. would create a fund family with $44.6 billion of assets under management, based on March 31 data.
Similarly, NationsBank, which announced in April it will merge with BankAmerica Corp., would have $57.9 billion on pro forma basis when that deal closes.
NationsBank's mutual fund business recently got a $4.7 billion shot in the arm from the Emerald Funds, the proprietary mutual funds of Florida's Barnett Banks Inc. That deal closed in January.
"Anytime that you bring assets into a complex that helps with critical mass and reduces expenses on funds," said Larry A. Medin, senior vice president of NationsBanc Advisors Inc., adviser to the Charlotte, N.C., banking company's mutual funds.
"It also helps you with distribution of products. We have successfully done that with Boatmen's and Barnett," he said.
NationsBank built its external sales efforts this fall. It now has six wholesalers and five people fielding telephone calls from registered investment advisers and financial planners, Mr. Medin said.
"You're only able to do this (external sales) if you have credibility. If we had a fund family wallowing in the bottom quartile of performance, they wouldn't sell our funds," Mr. Medin said.
All of NationsBank's equity mutual funds perform in the top-third of their categories, he added.
According to Lipper, stock funds made up about one-third of all bank proprietary mutual funds at the end of the first quarter-a milestone the banking industry first reached last summer. That lags the fund business overall, where stock funds now account for 64.5% of assets under management, according to the ICI.
But banks growth in that sector kept pace with all U.S. mutual funds. Bank's equity fund assets increased 58.7% for the 12 months ending March 31 and 15.3% during the first quarter.
The industry at large saw equity assets grow 55% for the year and 12.2% for the quarter, the ICI said.
