Defying widely held views about economies of scale, most banks that manage mutual funds are getting by with relatively small operations.

Of the 113 bank holding companies that managed mutual funds at yearend, 71 controlled assets of less than $3 billion. And 46 of those managed less than $1 billion. By contrast, some experts have contended that fund families need at least $50 billion to be truly viable.

Executives at the bank funds insist they are in the business for the long haul. If they succeed, they may redefine the requirements for success in the fund industry and leave a far less consolidated field than many have predicted.

"It's important from a profit standpoint that we gather these assets," said John Porter, president of SouthTrust Securities, the brokerage arm of SouthTrust Corp. Although the Birmingham, Ala.-based company's fund family is small at $982 million of assets, he said, SouthTrust remains committed to it. "This is really a look at where we can be tomorrow."

Expectations of an impending bank exodus from mutual fund management have been in the wind for years. The belief was that banks, which launched mutual fund families in droves in the late 1980s and early 1990s, would eventually conclude that they lacked the heft or the know-how to make a go of it.

"Investment banking firms were throwing out numbers like $50 billion to $100 billion and saying, 'You don't have the scale to be in the business,'" said Peter J. Germain, a managing director at Federated Investors, Pittsburgh, which provides mutual fund services to 26 banking companies with combined fund assets of $48 billion. But, he maintained, "Size has been overrated in terms of whether you can deliver a quality product to your customers."

Some bank fund executives are skeptical, even suspicious, of the "magic numbers."

"When the number was $3 billion, some people said you had to have $5 billion to be a player," said Arthur J.L. Lucey, president of ALPS Mutual Fund Services, Denver, which distributes First Tennessee National Corp.'s $801 million-asset fund family. "There's a little bit of me that wonders how much of this is a scare tactic by the top 30 mutual fund operations to get banks out of the business."

In a sign of banks' determination to stick with fund management, the cottage industry that sprang up to help midsize banks exit the business has found slack demand for its services.

"We have frankly been a little surprised that more banks haven't made the decision" to quit fund management, said Joseph Grause, managing director of Cypress Holding Co., Boston. When it set up shop in 1995, Cypress hoped to snap up bank mutual fund families with assets ranging from $500 million to $3 billion.

"We were waving the divest flag, no doubt about that," Mr. Grause said. But "a lot of the banks we've been pursuing just haven't done a thing. Their interest in doing a transaction is probably some time away." In the meantime, Cypress has "modified" its strategy and is now offering to do joint ventures with banks to develop a national, brand-name mutual fund family. "We recognize we can't simply acquire funds and say goodbye."

W. David Hemingway, executive vice president of Zions Bancorp, Salt Lake City, said he has heard several buyout pitches over the past five years from fund-family consolidators such as Cypress. So far, he hasn't been tempted to drop the curtain on Zions' Accessor Funds, which had $702 million of assets at yearend.

"We're making money today-maybe not a lot, but enough to cover expenses," said Mr. Hemingway. "And with the good performance we have, we think we will ultimately go past the $2 billion, $3 billion mark."

Mr. Hemingway said several Accessor Funds portfolios boast four- or five-star ratings from Morningstar Inc., a fund information company with a strong following among individual investors. The funds are also marketed nationally, with 85% of sales emanating from outside Zions' own network.

And the funds, which are managed through an affiliated company, Bennington Capital, are a niche play. "We're basically managing a family of souped-up index funds," Mr. Hemingway said. "We do modern portfolio theory with quantitatively structured portfolios. Each manager has an index to beat."

Mr. Germain of Federated said finding a specialty can give a bank fund family an edge. "There will always be room for niche products that are smaller than what some investment banker thinks is the minimum size."

The Accessor Funds, however, are in many ways atypical of a small bank- managed fund family. The $131 million-asset fund family sponsored by Brenton Banks Inc. may be closer to the norm.

"Our equity fund is not growing real fast, but we're using it a lot for our 401(k) business," said Robert Brenton, chairman of the Des Moines banking company. "We need it to compete with insurance companies that sell 401(k)s without any front-end fee."

Mr. Brenton said he sees mutual funds as an important tool in the bank's asset management kit, but added that managing funds is not a goal in itself. Brenton Banks' move into proprietary funds was prompted largely by the rapid expansion of its 401(k) business, which caters to investors ranging from "companies with as many as 500 employees, down to groups of doctors."

Retail fund sales haven't been as successful, Mr. Brenton said. "We have 32 in-house brokers who sell funds. They sell some proprietary funds, but it's a challenge selling against companies with 10-year track records." And the bank has not attempted to manage money entirely on its own, either. For instance, it uses Northern Trust Corp. as subadviser to its $37 million- asset money market mutual fund.

It is still far from clear how banks' ventures into mutual fund management will play out. After all, the industry has had the wind at its back in recent years.

With banks earning record profits, "there is no earnings pressure to look at areas that may not be profitable," said William J. Nutt, chairman of Funds Distributor Inc., a Boston-based company that helps banks develop and run proprietary funds.

What's more, even mediocre players are thriving, given the strength of the stock market and consumers' seemingly unquenchable thirst for mutual funds.

"We've had a positive market for all this time, and there's no embarrassment" in running a small fund family with so-so performance, said Geoffrey H. Bobroff, a consultant in East Greenwich, R.I. "Until the market corrects, there is no real motivation for banks to quit."

A market downturn "would change a lot of people's thinking," said Mr. Grause of Cypress. "It would seem to me an awful lot of these funds aren't making money. If the market declined, their lack of profit would be more obvious."

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