At a time when many small banks are considering dropping out of mutual fund management, some big banks and fund companies are preparing to step into the breach.
Hit with stagnant growth for much of the past year, many smaller players are looking at ways to get out of the business entirely, or at least shrug off the costlier aspects of maintaining mutual funds while retaining the product on their shelves.
Established mutual fund companies and fund servicers, along with larger banks, are emerging as the winners. Some companies are arranging to take over management of bank-run funds, while others are snapping up assets outright and merging them into existing fund complexes.
"Many banks are realizing that there are opportunities that exist for them in the mutual funds business, but certainly not as a manager of funds," said William J. Kearns Jr., a vice president at Eaton Vance Corp., a Boston fund management firm.
A case in point is Sunburst Bank in Grenada, Miss., which is merging its lone bond mutual fund into a similar portfolio run by Pittsburgh-based Federated Investors. Banks officials said they threw in the towel after the bond market tanked, killing the fund's chances of reaching a critical mass of assets needed to become profitable.
Out of the universe of 115 bank-run fund families, Mr. Kearns expects there to be only 100 or so by the end of the year, and 80 by the end of 1996.
Eaton Vance has received inquiries from at least 18 banks that are interest in shedding their roles as fund managers. Three banks have asked about entering into the company's hub-and-spoke program, which Mr. Kearns runs and which was developed by Signature Financial, New York.
Under the hub-and-spoke arrangement, a bank would merge its fund assets into a single pool, or hub, that Eaton Vance manages, for example. The bank can continue to offer mutual fund shares, which are now a spoke of the pooled fund but can retain the bank identity and fee structure, if desired. Similar structures go by the name master-feeder.
"Under hub-and-spoke a bank can have significant cost savings in the areas of custody, transaction fees, fund accounting, and in administrative efficiencies, which are all shared," said James E. Hoolahan, senior vice president at Signature.
Still others are putting their faith in larger banks, and entering into arrangements known as white labeling. Under that arrangement, a bank that decided to stay out of fund management could offer customers another company's mutual funds, but under its own name.
Chase Manhattan Corp., New York, has white labeled its Vista Funds Family for five investment management companies and is negotiating with six banks, according to Steven R. Samson, director of product management for Vista Capital Management.
"There are so few banks that have created profitable mutual fund capabilities that you can name them on one hand," Mr. Samson said. "Based on what happened in the markets last year, many banks came to the realization that things simply don't always point up."
Mr. Samson would not disclose the names of the banks Chase is talking with. But he said that Chase executives have been expecting many banks and money management companies to get out of fund management for the past two years.
The bank has offered small players the chance to either merge their fund assets into existing Vista portfolios or enter into white-label arrangements with the bank.
"There are some institutions that have created mutual funds that have reached $500 million or even $1 billion (of assets) in the past few years but have found it very hard to grow past that point," Mr. Samson said. "Yet they're still saddled with the costs of maintaining those portfolios."
The Blanchard Group of Funds, advised by Sheffield Management Co., sells the Blanchard Federal Money Market portfolio to its customers, but the fund is actually Vista's Federal Money Market portfolio - with the Blanchard moniker. The arrangement, introduced in April 1994, has brought $100 million to the Vista portfolio, whose assets now total $500 million.
Industry executives agree that though many banks are reexamining their roles as fund managers, most will continue to offer investment products to their customers one way or another. And it is also agreed that the growth in the number of bank-run funds has hit its peak.
"My suspicion is that the banks that want to be in the fund business already are in there," said Signature's Mr. Hoolahan.