DAVID BERNARD, president of June 4th Corp., says the name of his financial firm commemorates the standoff in Tienanmen Square.

His newest offering, a hedged preferred stock fund, also shows an interest in the less powerful. It allows small-bank Davids to offer a proprietary investment vehicle ordinarily offered only by banking Goliaths.

The product is intended for trust departments seeking to beat the yields of certificates while maintaining liquidity and safety of principal. Moreover, it's set up to allow small banks to wrap their names around the fund -- thus enhancing their image, says Mr. Bernard.

He adds that June 4th would offer geographic exclusivity to trust departments investing in the fund.

Double-Hedging Strategy

The fund buys preferred stock in utilities to capture its dividends, and double-hedges the portfolio with Treasury puts and a second set of utility preferreds purchased with the purpose of selling them before they shed their dividends.

"The strategy has been around forever," says Mr. Bernard. "What we're doing is taking a fund for institutional investors and turning it into a retail vehicle for small-bank trust departments.

"If big banks want to start a fund, they just go the 50th floor, start a new money management operation, give it a name, print a prospectus, and offer the fund. Small banks don't have that many floors, and starting a fund is out of the question for them."

A trust department would have to invest at least $2 million to $4 million in the June 4th fund, which is traded by the firm, but held, in the name of the bank, by PaineWebber Inc.

So far in 1993, says Mr. Bernard, the strategy has posted a 3.10% yield, or 12 5% more than comparable certificate rates.

Thomas M. Cattell, vice president and senior trust officer at $75 million-asset Maine Bank and Trust Co., Portland, says, "It seems like they have to work awfully hard for a modest increase in certificate yield, and we wouldn't be interested in any fund that turns over frequently and requires a management fee greater than 80 to 100 basis points."

He adds that "a lot of banks are understandably worried about disintermediation, and there's a bit of desperation for attaining higher yields, but I think it's a passing fad -- and I think I'd have trouble explaining this strategy to an elderly widow."

John Kautz, chief investment officer for $725 million-asset United National Bank, Plainfield, N.J., says the June 4th fund "is a great idea, but the preferreds don't have a mandatory sinking fund, and I don't think you could have a perfect hedge without paying far too much of a premium."

Mr. Bernard says, "It's technically correct that the preferreds don't have a sinking fund, but we're trading them every 46 to 50 days, and as you're repurchasing, the preferreds are marked to the market yield." He agrees that a "perfect hedge" would be prohibitively expensive, but maintains that "in he last 10 years, investment managers haven't lost a principal with the double-hedged strategy."

Heavier Regulation Predicted

Marshall Davidson, a managing director of Rothschild Inc., New York, warns that funds like June 4th's will be more heavily regulated in the future, and adds:

"In general, this results in capital fleeing to unregulated areas. This makes it harder for banks to break even with their services, so, small banks, in particular, have to find ways to trim their fixed costs and turn them into variable costs. I think you'll see a lot more products like this fund in the future."

The Office of the Comptroller of the Currency issued a July 19 warning against private labeling for uninsured retail products -- requiring banks to "conspicuously disclose" the originator of the products, according to Lee Cross, a spokeswoman for the agency.

Mr. Bernard says June 4th "is not like a mutual fund company that offers a common fund and puts the name of different' banks on it. The fund is managed by the trust department of the bank, and traded by June 4th in the name of the bank."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.