A small bank in upstate New York is jumping into the retail mutual fund market.

Canandaigua (N.Y.) National Bank and Trust Co. has created two proprietary Canandaigua Funds that it plans to sell in two states by the end of the quarter.

The bank converted $20 million of collective trusts into a bond fund with $600,000 of assets under management and an equity fund with $19.4 million.

Canandaigua, with less than $400 million of assets, has had proprietary funds for five years, but only its trust customers could buy them. Few banks so small have created their own funds, which must compete with those of bigger banks and third-party mutual fund companies.

Small banks that have turned trust assets into mutual funds in the past six or seven years acted largely to stem disintermediation resulting from low interest rates, said John Shields, a consultant for Cerulli Associates in Boston.

"Banks seem to like to have proprietary funds," Mr. Shields said.

However, he added, few of these funds have succeeded in attracting additional assets.

Kenneth Kehrer Associates Inc., Princeton, N.J., said that 15% of the 7,000 community banks with assets less than $500 million sell investment products.

Information from Lipper Analytical Services Inc., Summit, N.J., shows that the number of bank proprietary fund families launched each year has declined dramatically. In 1992, banks started 23 fund families. Four years later, banks launched only two. In 1997, banks created five funds.

American Data Services Inc., Hauppauge, N.Y., will distribute the Canandaigua Funds initially in Florida and through the bank's 10 branches in New York.

"We work with smaller regional banks to help them form mutual funds," said Michael Miola, president of American Data Services, who claimed Canandaigua is the "smallest bank in the U.S. to be in the mutual fund business."

Bob Swartout, vice president of Canandaigua, said that his bank is offering the new funds "as another arrow in the quiver of our investment advisory services."

Canandaigua did not offer them earlier, he said, because it wanted to "develop mass" first. The $20 million it has just converted to fund assets is enough "to have an outside distributor," he said.

Though the funds now have no load, Mr. Swartout added, the bank will eventually add one to offset the expenses of an outside distributor and of brokers.

The management fee is 1% on the equity fund and 0.5% on the bond fund. However, Mr. Swartout said, the management fee on the bond fund is being waived for a limited time to attract customers.

The trusts on which the equity fund is based returned 16.31% last year; the bond fund's trusts returned 7.89%.

Other sources said Canandaigua faces a long haul, competing against much larger mutual fund entities.

Thomas E. Gunderson, president and chief executive officer of Investment Centers of America of Bismarck, N.D., said most community banks are too small to have proprietary mutual funds. Most focus as a first step on developing trust divisions, he said.

His firm runs investment product services for 200 community banks with assets of $500 million or less in 20 states.

Proprietary mutual funds are "not a wise choice" for small banks, Mr. Gunderson said, because the programs are expensive.

"Canandaigua may have a market they see they can dominate," he said, "but they are up against the big boys. I wish them good luck."

The new funds are now too small to turn a profit for the bank, Mr. Shields said.

"Many of the models start at $50 million before a fund is breathing on its own," he said. "Some of the models are $100 million. Twenty million dollars is clearly below the self-sufficient level."

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