As equity markets crumbled during much of 2002, some banking companies built a foundation of innovative investment products and services in anticipation of a year for which analysts and bankers have high hopes.
Banks launched 529 college savings plans, developed managed account programs, and offered investors alternative investment products such as hedge funds to fill out their product menus.
"Everyone is fond of saying, 'Wait till next year,' " said Chris Tomecek, the president of Bank of New York's Lockwood Advisors. "But it was the banks that acted, acquired, and moved that are best positioned for [2003]. You can't sit still if you want to succeed."
Lipper Inc. has reported that equity funds suffered their worst drop since 1974, losing 20.25% of their value in 2002. It was the third consecutive year of decline for equity funds, after they had grown in eight of the 10 years in the 1990s.
Mutual funds managed by nonbanks fell 9%, to $6.20 trillion, while funds managed by banks fell 5.2%, to $1.58 trillion. But 91% of the fund assets distributed by banks were held in money market funds or fixed-income products. Only 59% of the fund assets distributed by nonbanks were in these products.
Lloyd Wennlund, the managing director of mutual funds at Northern Trust Corp., said the Chicago banking company holds 79% of its $46.3 billion of mutual fund assets in money market funds. He said this foundation gave banks in general a strong position with investors entering 2003.
"Cash funds make our fund complexes profitable in this market," he said. "They offer us the scale to compete. They have given us a good foundation of assets to develop when markets recover."
Some large banking companies spent 2002 broadening their array of products. State Street Corp., Bank One Corp., and Wachovia Corp. continued to develop their 529 college savings plans, and other banking companies began selling the popular investment vehicle when withdrawals became tax-free at the beginning of 2002.
More states, including Alaska, Arizona, Nebraska, Nevada, New Mexico, and Virginia, began offering more than one 529 plan, and this prompted more banks to look into becoming plan providers as the business grew.
Assets in 529 plans reached $25 billion by yearend, up 163% from the end of 2001, according to Financial Research Corp. The plans could have assets of $100 billion by 2005 and more than $380 billion by 2010, according to the Boston research company.
As college savings plans grew, so did the number of banks offering managed accounts. Bank of New York made the biggest splash when it bought Lockwood Advisors Inc., the largest provider of individually managed accounts to independent financial advisers, in August.
In addition Pittsburgh's PNC Financial Services Group Inc. and Wachovia Corp. and Bank of America Corp., both of Charlotte, started managed account programs in 2002.
Assets under management in managed accounts have doubled in the past two years, to $1 trillion, according to the Money Management Institute, a Washington trade group that tracks the industry. But according to Christopher Davis, the institute's president, banks control only about 1% of managed account assets.
"Managed accounts can become a sizable revenue stream," said Lockwood's Mr. Tomecek. A "bank needs to be the adviser if it wants to succeed in managed accounts."
Frank L. Campanale, the president and chief executive officer of Salomon Smith Barney's managed account unit, said managed account assets have grown tremendously and more investors are looking at them seriously - from the ultrawealthy to affluent investors with as little as $50,000 to invest. He said he expects 2003 to produce more of a multimanager approach in managed accounts, with banks serving as the "quarterbacks."
"You see the statistics, [and] managed accounts are growing at a faster rate than mutual funds," he said. "Managed accounts are knocking on the door and have gotten everyone's attention because people want choice and people want advice."
Mike McKeon, a managing partner at the management consulting firm Booz Allen Hamilton Inc., said offering more products and more advice will be crucial for all asset managers this year. Customers want access to sector funds, international funds, different investing styles, and star managers, he said. According to Lipper, the number of funds registered in the United States rose from 1,300 in 1990 to 8,300 by 2001.
"As the range of options has increased, end customers have increasingly sought advice," Mr. McKeon said.
Scott Sarber, a vice president at Petersen Hastings, an Orlando resource consulting company, said not all investors are sold on active management, though. Even after the bear market of recent years, he said, index funds offer a broadly diversified basket of stocks - a wise choice because of the diversification and their lower cost.
"Active management adds speculative risk, is more expensive, and has not been shown to deliver results for investors over time," he said. "The sooner an investor understands that, the less likely it is that he or she will be frustrated with results that fall short of what may have been promised."
Analysts said successful banks would continue to expand their range of products. Steve Miyao, an analyst at kasina, predicted that managed accounts and 529 plans would get a bigger share of the space on asset management firms' Web sites in 2003.
Managed accounts and 529 plans are two of the primary growth areas for many managers, he said, and additional online resources will be allocated to supporting these products.
"These trends are consistent with what we've seen for the last few years - the use of online strategies to improve operational efficiency and a general movement of e-business beyond Web sites," Mr. Miyao said. "For 2003, we expect to see more emphasis on targeted programs as firms look to manage costs by both focusing on their most important customers and by moving more and more of their communications efforts online."
A study by Financial Executive International and Duke University's Fuqua School of Business said that bank executives are expanding their offerings because they are optimistic about 2003. The study said that 77% of chief financial officers in banking, finance, and insurance companies were more optimistic about next year than they had been about 2002. Overall, 55% of chief financial officers were more optimistic.
An analyst said optimistic banks that are preparing for a recovery will not be disappointed.
"There is reason to remain positive about 2003," said W. Christopher Maxwell, a money manager at Conestoga Capital Advisers in Conshohocken, Pa.
Institutional and individual investors have put 90% of their assets in large-cap value products during the bear market years, Mr. Maxwell said, but there is less clumping in that category now.
"We are seeing people turn to fringe products like hedge funds, international products, bond funds, real estate, and private capital," he said. "Maybe large-cap value was 90% of their asset allocation; now it may be 70%." It is good for the market that investors "are coming out of their shells."
