It's official: Mellon Bank Corp. is now the biggest mutual fund manager among banking companies.

By virtue of its August acquisition of Dreyfus Corp., Mellon vaulted from the No. 19 fund manager among banks to the top spot, with $68 billion in assets under management.

That's more than three times the level of Mellon's nearest bank competitor, PNC Bank Corp., according to data compiled for the American Banker by Lipper Analytical Services Inc., Summit N.J.

The Mellon-Dreyfus merger also pushed the banking industry's mutual fund assets past the $300 billion mark for the first time. Banks controlled 14% of the $2.174 trillion invested in mutual funds as of Sept. 30, up from a 10% market share a year earlier.

Now it's up to Mellon to prove its pre-merger mantra that owning a big fund company will pay dividends over the long-run.

"We're seeing a decided shift from deposit products to investment products," said Mellon Vice Chairman W. Keith Smith. "We're well positioned now to pursue that market and service it."

However, Mellon's reign as the bank fund champ is off to a rocky start. The combined assets of Mellon's Laurel family and the Dreyfus funds dropped by $1.3 billion in the third quarter.

This year's bear market in bonds has prompted many investors to bail out of funds that buy these instruments. Some Mellon money market funds, like others in the business, also have lost institutional assets.

When markets pick up, Mellon expects the assets to return, Mr. Smith said. In the meantime, Mellon is milking the merger for all it can.

For example, last month Mellon changed the name of most of the portfolios in the $5.3 billion Laurel family to Dreyfus/Laurel funds. Other portfolios had their name changed to Dreyfus or Premier. This paves the way for the funds to be sold through Dreyfus' sizable and well-established distribution network, which should boost sales, Mr. Smith said.

In December, investors will get the added benefit of being able to use their telephones to move money between Dreyfus funds and Dreyfus/Laurel funds, just as they can with the various Dreyfus portfolios.

Back-office savings are expected by consolidating the two fund families' administration, Mr. Smith said.

Mellon also has begun marketing some bank services, including credit cards and mortgages, to Dreyfus investors.

Mr. Smith said the deal puts Mellon easily into the camp of mutual fund managers that are big enough to survive a shakeout. Other banks, he added, don't appear to have gotten there.

A. Michael Lipper, president of Lipper Analytical, agreed.

He said that in order to have a solid shot at being profitable, fund managers need to have at least $10 million of annual advisory fees now, and to be on a pace to hit $20 million within a few years.

A fund manager also needs to be able to generate net new sales of long-term funds of at least 20% per year, he added.

Mr. Lipper said he doesn't see many banks that will be able to make these numbers.

One statistic is particularly telling: the banking industry's combined mutual fund assets have only just surpassed those managed by the company that dominates the industry, Fidelity Investments.

At the end of September, the 113 banks with proprietary funds had a total of $303 billion of assets. Boston-based Fidelity had $262 billion.

At the end of June, banks were managing a combined total of $227 billion of fund assets.

Mellon wasn't alone in gaining assets through acquisitions in the third quarter.

BankAmerica Corp. added $1.7 billion of money market fund assets from its September acquisition of Chicago's Continental Bank Corp. But the gains were offset by outflows in BankAmerica's other funds, and the company closed the quarter with $9.4 billion in fund assets, down from $10.2 billion as of June 30.

The biggest loser of assets among the 10 largest bank fund families in the quarter was Northern Trust Corp., which lost $360 million from its proprietary funds.

John T. Hogan, a Northern vice president, said the drop came in money market and short-term bond funds, as institutional investors chased higher returns elsewhere.

Additionally,'a major client moved $70 million from a short-term bond fund to another investment, he added.

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