More and more, fund companies are hawking to investors and bank brokerages portfolios that invest at least 65% of their holdings in a single state or region. While the concept is still relatively new, fund companies are rolling out such funds at a rapid clip, observers say. Indeed, two small money managers, Emerald Advisors Inc. in Lancaster, Pa., and Aquila Funds in New York, are now trying to persuade banks to sell their versions of regional funds. "This is a perfect vehicle to get the traditional bank customer involved in the equity markets and mutual funds," said Scott Rehrer, senior vice president overseeing marketing and compliance at Emerald Advisors. Most investors want to park their money in stocks of companies with which they are familiar, he explained. What fits the bill better than those that are closest to home? Mr. Rehrer asked. But bank brokerages should be wary of the 29 regional and state funds currently available, according to an analyst at Morningstar Inc., a Chicago-based company that tracks mutual fund performance. "These are pretty gimmicky funds," said analyst Russell Kinnell. Most regions do not have a wide enough variety of industries to enable a fund to spread its risk, Mr. Kinnell said. In some areas, the pickings are especially slim. He added that the returns of most these funds, which generally invest in growth stocks, fall short of their peers over one, three, and five year periods. "That's not a real ringing endorsement of the concept," he said. Mr. Rehrer, whose company manages the four-year-old Homestate Pennsylvania Growth Fund, said the Keystone State is home to more than 500 companies that are attractive to investors. The group is diverse enough to keep the portfolio safe and performing well, he said. Indeed, Morningstar has given the fund its top rating of five stars. Mr. Rehrer has made some headway in the bank marketplace, striking selling agreements with four Pennsylvania banks, including $8 billion-asset Sovereign Bancorp in Wyomissing. Aquila Funds, meanwhile, is trying to persuade U.S. Bancorp., Portland, Ore., and Banc One Corp., Columbus, Ohio, to sell its two-month old Cascadia Equity Fund, said the New York firm's president, Lacy Herrman. The fund invests primarily in seven states in or near the Pacific Northwest, near the Cascadia mountain range. It also invests in Hawaii and Alaska. Aquila relies on independent fund managers based in the region."One advantage of having a local investment manager is you find a number of companies in these areas which are not followed by Wall Street," Mr. Herrman said. Joni Naugle, director of retail banking at Sovereign Bancorp, said sales have been nominal since the thrift began offering Mr. Rehrer's Homestate fund a year ago. The reason, she said, is that the fund company has not aggressively pushed the product to Sovereign's investment representatives. But she expressed confidence that the concept will catch on with customers eventually. The fund allows investors to feel "more in touch with the investments," she said. "You can read what's going on with companies in the local newspapers as they cover earnings and such," she said. "I personally own Homestate. It's done fabulous," she said.

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