Though some data suggest bond mutual funds are hot these days, observers say there is less to it than meets the eye.

Figures from the Investment Company Institute, Washington, show a surge in "net new cash flows" to bond funds during November. But a big reason, the trade group said, was that some banks reorganized common trust funds as mutual funds.

The conversion trend was so pronounced that the group singled it out for mention in its monthly report on mutual fund sales.

In all, the institute estimates, $8 billion flowed into bond and income funds in November, the largest amount for one month since the $11 billion in inflow in January 1994.

First Union Corp., Charlotte, N.C., converted $7 billion of common trust assets in November. The bank used the assets as seed money for 16 new mutual funds called Evergreen Select.

Other banks making big conversions this year include First Chicago NBD Corp., Bank of New York Co., and Fifth Third Bancorp. Cincinnati.

The Investment Company Institute said it first noticed a surge of common trust assets in bond funds at the end of the summer.

A spokesman said that in August common trust conversions accounted for half of all bond inflows.

Sarah Miller, a senior lawyer for the American Bankers Association in Washington, said changes to the 1996 tax law and the approaching end of the year may have caused the conversion surges.

"There had been a delay, and people were getting their ducks in order," she said. "These were bigger funds that had more questions to be resolved, and there was the issue of timing as close to the end of the tax year as possible."

Bank fund distributors have also been noticing staggering sums of assets flowing out of common trusts and into mutual funds.

Robert McMullan, executive vice president for Bisys Funds Services of Columbus, Ohio, said that in 1997 his company administered $14 billion from common trust conversions. Half of the converted assets came from First Union.

Bisys said it administered common trust conversions of $3 billion in the first quarter, $2.5 billion in the second, $200 million in the third, and the rest in the fourth.

"We've got a backlog of another $6 to $8 billion of conversions within our client base," Mr. McMullan said, and that will be distributed in the second quarter.

SEI Investments, Oaks, Pa., said that in 1997 it administered the conversion of 80 common trust funds with $10 billion of assets. Ten banks held the trusts, SEI said, but it declined to name them.

John L. Shields, a consultant for Cerulli Associates, Boston, said banks "used the old collective trusts to seed their mutual fund businesses.

"Over the years, with rare exceptions, the banks have not done a great job of growing their asset bases," he said.

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