Slowly but surely, banks are amassing assets in one of the most coveted sectors of the mutual fund business-equities.

Stock portfolios held nearly one-third of all assets invested in bank- managed mutual funds at the end of the second quarter, according to data compiled for American Banker by Lipper Analytical Services, Summit, N.J. That's up from less than one-quarter two years earlier.

Though the bulk of the increase is due to performance gains, a substantial portion can be attributed to new money flowing into bank- managed equity funds, experts said. Banks have been adding equity portfolios to their product lines at a rapid clip, and investors have been responding enthusiastically.

"There's been a surge in interest in equity funds," said Michael C. Baker, senior executive vice president and head of capital management for Amsouth Bancorp., Birmingham, Ala. "Performance drives investment decisions, and most equity funds have done very well."

Amsouth added a new equity income and a capital growth fund to its product line this summer, bringing the total number of equity portfolios in its fund family to four.

To be sure, equity funds are still a relatively small part of banks' product mix. Banks have traditionally been big managers of money market mutual funds, and these portfolios represent 53% of assets invested in bank fund assets at the end of the second quarter, according to the Lipper survey.

That stands in stark contrast to the fund industry at large, where money market funds accounted for only 24% of assets and stock funds represented 53%, according to the Investment Company Institute.

Yet even A. Michael Lipper-a noted skeptic on banks' ability to stay competitive in the cutthroat fund world-said the rise in equity funds at banks is heartening. According to Mr. Lipper's calculations, new sales were the second-largest factor, behind the stock market's stellar performance.

Indeed, new sales were a larger contributor than acquisitions and the conversion of trust assets to mutual funds, he added.

"It's a positive that banks are getting new sales, particularly in equity," said Mr. Lipper, president of Lipper Analytical. "Let's hope they are making these sales in an appropriate way."

Bank salespeople are as competent as their nonbank counterparts, he said, but their customers still need more information than other fund buyers about the risks of investing.

Overall, the data revealed that mutual fund assets at banks swelled 25.4%, to $553.1 billion, in the 12 months ended June 30, solidly in line with the 25.7% growth in the mutual fund industry at large.

Progress in the second quarter was less impressive. While banks boosted their assets under management by 7%, the entire fund universe increased by 10%, to $4.031 trillion.

The asset rankings, along with second-quarter performance data from CDA/Wiesenberger, Rockville, Md., begin on page 8.

In a quarter in which the Standard & Poor's 500 rose 17%, many bankers kept their eyes on equity assets, which grew 17%, to $175.2 billion, according to the Lipper data.

Big gainers in equity assets included First Union Corp., which saw its stock funds swell 118%, to $15.1 billion, in the year ended June 30. The Charlotte, N.C., banking company completed its acquisition of Keystone Investments Inc., which represented some $9.7 billion in fund assets, in late 1996.

Chase Manhattan Corp. posted a 97% gain in equity assets for the year ended June 30, finishing the first half of 1997 with $7.4 billion. The nation's biggest bank was helped in part by a conversion of $4.8 billion in trust assets to mutual funds at the end of last year.

"Equity funds will support a higher investment advisory fee than bond funds or money market funds," said James Kirk, a vice president in the asset management group at National City Corp., Cleveland. "You make or break your reputation as an investment manager on the stock side."

Mr. Kirk said No. 24-ranked National City has seen its equity fund assets grow at a rate of 50% a year since 1992. According to Lipper, the bank ended the quarter with $630 million invested in six equity portfolios.

"You have to keep in mind we have a number of different products, such as 401(k) plans, where mutual funds are the product of choice," Mr. Kirk said. Mr. Lipper agreed that the growth in equity assets at banks reflects their increasing participation in the 401(K) retirement market.

On Monday, National City said it added three new stock funds to its Armada family - an international equity fund; a core equity fund; and a small cap growth fund.

National City has hired a subadviser, Wellington Management, for the small cap fund. It marks the first time the bank has gone outside its walls for mutual fund advisory services.

Competition within that category is keen. According to CDA, seven out of the 10 top-performing equity portfolios at banks in the second quarter were small company growth funds. Wells Fargo Bank's Stagecoach Small Cap fund took top honors, turning in a 24.38% return during the three months ended June 30.

The larger Parkstone Small Cap fund, managed by First of America Bank, posted a 24.77% return during the quarter.

At National City, Mr. Kirk said the new equity funds would allow the bank to sell more proprietary rather than third-party investment products to its customers-a sentiment shared by Amsouth's Mr. Baker. But both bankers said they have no intention of pushing stock funds at the expense of other offerings.

"Our objective is to have a broad array of funds-both equity and fixed income-for our customers," Mr. Baker said. "We're not pushing a particular kind of investment. That's not our job. Our mission is to determine what our customers' needs are."

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