Banks may be newcomers to the mutual funds business, but they are outpacing the pack in asset growth.
In the 12 months through June 30, banks boosted the mutual funds assets they managed by 36%, to $190.9 billion, according to data compiled for the American Banker.
That was well ahead of the 23% growth recorded by the fund industry over all, which had $1.803 trillion of assets at midyear.
During the same 12-month period, banks boosted their tax-exempt fund assets by about 83% to $9.7 billion, marking the sector as one of the strongest areas of growth among bank proprietary funds.
While the gains underscore the growing involvement of banks in the mutual fund business, it is still unclear whether banks can reap substantial profits by managing mutual funds, said Geoffrey Bobroff, a senior vice president at Lipper Analytical Services, which assembled the data for the American Banker.
Bobroff noted that banks have been waiving investment advisory fees as they build their fund businesses.
"As late entrants, banks have had to engage in subsidization to maintain competitive returns," Bobroff said. "At some point, it may come home to haunt the bank executive if true revenues cannot be achieved from this venture."
Lipper ranked 103 bank and thrift holding companies that act as investment advisers to mutual funds, comparing their assets in the second quarter with assets three months and one year earlier.
In the municipal fund sector, Wells Fargo & Co. in San Francisco ranked as the top bank, managing $959 million of tax-exempt assets.
NationsBank Corp. was second, with about $707.2 million of municipal assets under management as of June 30. The third largest bank municipal fund manager was U.S. Trust Corp., with approximately $542 million in assets, Lipper said.
The overall rankings, which will be updated quarterly, showed nearly universal gains in fund assets, though there was on striking exception.
PNC Bank Corp., which took first place with $18.9 billion of fund assets, nevertheless experienced a nearly 40% decline from mid-1992 as institutional investors seeking higher yields shifted assets into other investments, including Treasury securities and the funds of rivals.
"Our trading volume is about $5 billion a day," said Thomas H. Nevin, president of PNC Institutional Management Corp. "People will move that kind of money, believe me, even for a basis point."
Closing in on PNC, BankAmerica Corp. ended the second quarter with $18.3 billion of assets, up from $11 billion a year earlier. Like PNC, BankAmerica specializes in running money market funds for institutional clients.
BankAmerica's growth has been fueled by the strong performance of its Prime Fund, a money market portfolio. The bank has also stepped up its retail marketing and is developing new funds.
Third-place honors went to retail-minded NationsBank Corp., which broke into double digits with $10.5 billion of fund assets.
Much of the money came from conversions of trust assets, as NationsBank geared up for a big sales push via its joint venture with Dean Witter Financial Services, Bobroff said.
Though a few banks have managed mutual funds for as long as 20 years, most of the 103 banks with proprietary funds have entered the business in the past five years.
One attraction is the investment advisory fees that banks can collect. "Every day you turn on the lights and you're assured a stream of income," Bobroff said.
By contrast, banks that only sell other companies' funds earn only sales commissions.
Consumer demand for alternatives to low-yielding deposits is also driving banks into the fund business.
"Every banker in the country has woken up to the fact that his customer has a need for mutual funds," said David B. Dyche, director of financial industries at Arthur D. Little Inc., New York.
But while consumers are developing an appetite for fixed-income and equity funds, the data show that the banking industry is still heavily tilted toward money market funds.
About $128.2 billion, or some two-thirds of the money invested in bank-managed funds, was in money market funds. In comparison, money market funds make up about 30% of the overall fund industry's $1.8 trillion of assets, according to the Investment Company Institute.
Some industry experts foresee changes, though.
"We are seeing a shift into non-money-fund sales," said Richard Stierwalt, president of Concord Holding Corp., a New York mutual fund distributor that has helped several major banks boost their fund sales.
One reason, Stierwalt said, is that "banks are maturing in their retail delivery systems. They're going to be selling more and more product."
Though the 103 banks had $29.4 billion of equity fund assets under management, only 10 had more than $1 billion each. The leader was NationsBank, with $1.9 billion of equities.
Taxable fixed-income funds totaled $23.5 billion. Wells Fargo & Co. led in that category with $2.9 billion of taxable funds.
In a clear sign of banks' growing stature as fund managers, the Lipper data show that 29 banks have $2 billion or more of mutual fund assets under management. That places them squarely within the top 100 mutual fund companies, Bobroff said.
"Even though the banks are still money fund-dominated, they are very much a significant player in the industry," he said.
"They've got to grow assets from the current level, and they need to diversify the assets into products that are less interest rate sensitive," Bobroff said.
Debra Cope is a reporter for American Banker, a sister publication of The Bond Buyer. Sharon R. King contributed to this article.