Utility funds had a rough time during the first quarter, and new data show that the handful managed by banks lagged behind the industry average.
Of the 61 utility funds with more than $20 million of assets, bank portfolios managed by First Union Corp., Mellon Bank Corp., and Fleet Financial Group Inc. finished in the bottom 25%.
Utility funds were among the poorest performing groups last quarter, with an average return of only 0.01%.
Banks tend to invest conservatively, so their funds usually lose less value than average during a down period and gain less when the market goes up.
"It's a little surprising," said Meagan Morris, research manager for CDA/Wiesenberger, a Rockville, Md., mutual fund tracking firm. "Bank funds tend to be more conservative in any sector."
Some observers attributed the bank funds' poor performance, however, to their conservative approach.
"The more conservative you were, the more you got hurt," said Louis Harvey, president of Dalbar Inc., a Boston-based research firm. Bank fund managers tend to invest in the largest companies, he noted, which are most vulnerable to long-term interest rate increases.
Fleet's Galaxy II Utility Index Fund was the biggest loser among banks' funds, ranking 55th among the funds surveyed by CDA. The portfolio lost 2.39% in value during the first quarter.
Mellon's Dreyfus Edison Electric Index Fund ranked just ahead of Fleet's, losing 2.38% of value in the same period.
Last month, Dreyfus announced a plan to liquidate the electric utility fund because of a "lack of asset growth," a Dreyfus spokeswoman said.
First Union's Evergreen Utility Index Fund also had sluggish returns. The portfolio's "A" shares lost 1.94% in value during the first quarter, ranking 51st in the CDA survey; its "B" shares lost 2.13% of value during the period.
Mutual fund executives at Fleet, First Union, and Dreyfus could not be reached for comment.
When long-term rates shot up three-quarters of a percentage point in the first quarter, Mr. Harvey said, it drove up the cost of borrowing money and hurt utility company earnings. Smaller companies fare much better during such periods because the base from which profit increases are figured is so much lower, he said.
For example, the Lindner Utility Fund had small energy companies in its portfolio and was the highest-ranked utility fund last quarter, with total returns of 10.7%