The riskier kinds of equity mutual funds were the best performers among bank-managed funds in the third quarter, according to a survey for the American Banker.

Returns increased dramatically for funds that invest for maximum capital gain, long-term growth, or in small companies. Nineteen in the group posted returns of more than 10%, beating the second quarter's top performer in the category, which returned 9.82%.

With top bank equity funds providing double-digit returns, some industry executives expect more customers to invest more heavily in the segment.

Most mutual funds managed by banks easily outshined the Standard & Poor's 500 index which averaged a 2.57% return, up from 0.4% in the second quarter. However, the 226 bank-run equity funds tracked in the survey returned an average 4.61%, versus 5.47% for all equity funds.

Global Funds Scarce

But that doesn't mean that bank-run funds are subpar performers, said Richard Tierney, who compiled the numbers for CDA/Weisenberger, a mutual fund tracking service in Rockville, Md.

The main reason that banks' equity funds don't rank as high as the overall industry, Mr. Tierney explained, is that few banks yet offer international funds - the big performers in the equity category this year.

"I don't think it's a matter of bank managers not managing as well. It's just a factor of the types of funds they're managing," he said. "As a group, bank funds are a little more conservative. But if you look [at the two groups' performance] over time, it evens out."

The top-performing fund this period, with an 18.7% return rate, belongs to Washington-based Security Trust Co., a banking company purchased by Nations Bank Oct. 1.

The bank's Capitol Special Equity Fund, a maximum capital gain fund, which was started Oct. 2, 1992, returned 79.9% from its inception through last month.

Fueling the Rise

Stock picks in the semiconductor, telecommunications, gaming, and technology sectors contributed to the last quarter's spectacular growth, said Gil Knight, managing director of special equity investments for ASB Capital Management, a Washington-based NationsBank subsidiary that manages the fund.

Among the stocks that fueled the Capitol Special Equity Fund's growth were MFS Communications, Mobile Telecommunications, Charles Schwab, BHC Financial, and General Nutrition.

Mr. Knight expects the $5.5 million-asset fund's performance to bring new investors. "We don't have the distribution of someone like Fidelity. But as long as we can keep making returns like this, we hope we will attract interest among investors," he said.

Conditional Forecast

Despite the fact that people who buy mutual funds through banks traditionally favor more conservative offerings, Mr. Knight expects "bank customers will eventually become more aggressive and more of them will buy equity funds."

However, he added, a lot will depend on the overall market.

If performance continues to be good, he predicted, consumer interest in small-cap funds will grow. And with tax rates going up, investments falling under the less oppressive capital gains tax are looking more attractive to the wealthy.

"It won't take investors long to make the switch" to investments that generate capital gains, predicted Jon R. Hickman, vice president and senior portfolio manager at San Francisco-based Wells Fargo Bank.

Funds investing in small, but promising, companies rounded out the top five performers in the period from July 1 to September 30, the study found.

Star from Wells

Second place overall and first in the small-cap category went to Wells Fargo Bank's Overland Express Strategic Growth Fund, which returned 13.76%.

First of America, Kalamazoo, Mich., which had previously occupied the second spot, captured third and fourth with separate classes of its Parkstone Small Capitalization Fund. The C class returned 13.34% and the A class returned 13.15%.

The bank, which manages over $4.1 billion in assets, also snagged the No. 1 and 2 spots in the long-term-growth category with two of its Parkstone Equity Funds. The funds both posted returns of more than 11%, up from 7.6% in the last quarter.

Steve Wisneski, vice president and portfolio manager for the Parkstone Equity Fund, expects some "tapering off," given the strength of the third quarter. "It seems like we had an inordinate number of names that did really well," he said.

Another member of the Parkstone family, the International Discovery Fund, tied with Core-States Bank's CoreFund International Growth for first place in the international category. Both funds returned 10.76% this period.

A Plus for Marketing

Sweeping spots near the top in three categories is "not going to hurt" sales efforts, said Roger Stamper, managing director of equities for First of America Investment Corp. "Maybe we can attract new investors who come to us because the numbers are good, but we don't want clients buying for short-term results."

So far, those fears appear unfounded. While mutual funds that invest in equity far outperform their fixed-income brethen, bank customers continue to flock to more conservative funds.

On average, fixed-income bank funds returned 2.26% close to the industry's 2.28% return for the quarter. Both groups fell short of the 3.3% return rate for Lehman Brothers' bond index.

In the fixed-income category, the Huntington German Government Bond, managed by New York-based Bankers Trust Co., took the No. 1 spot with an 8.15% return rate in the third quarter. Wells Fargo's Stagecoach U.S. Government Allocation Fund came in first in the government securities group, returning 6.27%.

Among municipal bond funds, the front-runner was the UST Master Long-Term fund, run by U.S. Trust Company of New York. The fund returned 4.21%, compared with an average of 3.3.% for all municipal mutual funds.

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