THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Sunday, September 29, 1996 TAG: 9609270717
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY TOM SHEAN, STAFF WRITER
LENGTH: 134 lines
NationsBank Corp. hasn't lost its appetite for auto loans or new credit-card accounts. And First Union Corp. isn't giving up its pursuit of commercial loans and home mortgages.
But both companies are racing into a less traditional business for banks: the sales and management of mutual funds.
At First Union, Chief Executive Edward E. Crutchfield Jr. has said he wants the company's Evergreen family of mutual funds to be managing at least $100 billion of assets by 2000.
Earlier this month, the Charlotte-based company moved a bit closer to that goal by agreeing to acquire Keystone Investments Inc., a Boston mutual-fund advisor that manages $11.6 billion.
First Union's Evergreen group already oversees $16.2 billion and ranks No. 6 among bank-owned families of funds.
Meanwhile, rival NationsBank is preparing to launch a mutual-fund ``supermarket'' that will allow investors to choose from more than 300 funds without paying a sales commission. Individuals using the service will be able to invest in an assortment of mutual funds with one account.
NationsBank's mutual-fund group, which already manages $18.5 billion, is likely to pick up several billion dollars early next year. Charlotte-based NationsBank agreed in August to acquire Boatmen's Bankshares in St. Louis, which has $5.5 billion of assets in its own group of funds.
Only a few years ago, most banks were reluctant to offer mutual funds, fearing their customers would withdraw deposits to make the investments. Any outflow of deposits, the banks figured, would threaten their income from the bread-and-butter business of making loans. At NationsBank, that concern has disappeared.
``We're past the point of thinking that we have to protect our deposit balances from mutual funds,'' said Robert H. Gordon, senior vice president and director at the company's Nations Fund group. ``To attract and hold onto customers, NationsBank has to have a strategy that embraces investing.''
``We recognize that the customer wants choices,'' he said. ``If we meet their needs, the customer is more likely to stick around.''
Indeed, it's been tough for banks to ignore the explosive growth of mutual funds. Fueled partly by the influx of retirement savings, assets in U.S. mutual funds have soared to $3.14 trillion from $1.06 trillion in 1990 and $135 billion in 1980.
Today, almost a third of U.S. households have mutual funds, compared with only 6 percent in 1980.
With more of their customers seeking investment alternatives, some banks decided there was money to be made from managing mutual funds - as well as selling them. The expense of handling $15 billion of assets isn't much more than handling $5 billion, but it can generate significantly greater earnings.
Today, the nation's banks manage $410.7 billion of mutual-fund assets, which is slightly more than 14 percent of all fund assets. The banking industry's share of the mutual-fund business is likely to expand, but institutions are using different approaches.
NationsBank has relied more heavily on internal growth, while First Union has resorted to acquisitions of fund managers. In 1994, it bought Lieber & Co., advisor to the Evergreen group of funds, and last year it bought a small advisory firm in Florida, ABT Funds.
In addition to picking up 700,000 accounts, First Union will gain a network for distributing its mutual funds through 27,000 stockbrokers when it acquires Keystone early next year.
Buying Keystone and its distribution system makes sense for First Union, said Louis Harvey, president of the Boston consulting and research firm Dalbar Inc. That's because banks cannot depend on their branches to generate sufficient volume of mutual-fund sales, he said.
Earlier this month, NationsBank broadened its reach by making some of its mutual funds available through discount broker Charles Schwab & Co. Schwab's OneSource service allows individuals throughout the country to choose from hundreds of funds without paying a sales charge.
Hoping to attract investors who do their own research when choosing funds, NationsBank also has dropped the sales charge on its mutual funds.
Efforts to capture a greater share of the fund business come amid a wave of consolidations. Heine Securities Inc., advisor to the highly regarded Mutual Series group of funds, attracted attention earlier this year when it agreed to be bought by mutual-fund giant Franklin Resources Inc.
Keystone, like Heine Securities, had put itself on the auction block. Even with 700,000 accounts and $11 billion of assets, Keystone found it more difficult to compete with much larger mutual-fund advisors, said John McAllister, a Keystone spokesman in Boston.
``The cost of doing business is rising, and you need a critical mass to compete,'' he said.
Banking Goliaths like NationsBank and First Union aren't the only institutions in the region chasing the mutual-fund business. Three Richmond-based banking companies - Signet Banking Corp., Crestar Financial Corp. and Central Fidelity National Bank - have beefed up their fund operations. Central Fidelity, which manages $250 million in its group of funds, expects to broaden its offering of outside funds in 1997, said Tom Battle, the bank's retail products manager.
How well have bank-managed mutual funds performed?
In February, the financial newspaper Barron's teamed up with the investment research firm Lipper Analytical Services to analyze the investment results of 62 mutual-fund families for 1995. Among the 10 best were three groups of bank-managed funds. One of these, First Union's Evergreen group, placed ninth.
NationsBank was No. 24 in the Barron's/Lipper rankings, while Signet's Virtus Capital group of funds was No. 40. Virtus Capital had the best investment results for tax-exempt bond funds in the survey, but its domestic stock fund finished second-to-last.
However, attracting mutual-fund investors will require more than strong investment returns.
``Banks have to insure that their people are capable of delivering a wide range of advice,'' Dalbar's Harvey said.
So far, the banking industry's pursuit of mutual-fund buyers has been clouded by allegations of slipshod sales practices. Several institutions have come under fire for failing to disclose mutual funds' risks.
In addition, some banks have done a poor job explaining to prospective buyers that mutual funds are not protected by federal deposit insurance, consumer advocacy groups and banking regulators have said. ``Banks are aware of these problems, and some are doing a good job with disclosure,'' said Laura Polacheck, senior analyst with the American Association of Retired Persons' Public Policy Institute in Washington. Still, ``it's not a situation that's been fully corrected.''
Doing a better job of disclosing the investment risks is crucial, Polacheck said, because many individuals will rely on mutual funds to accumulate assets for their retirement.
``People can't count on Social Security. They will have to look to their investments to have enough to live on,'' she said. ILLUSTRATION: Photo
The nation's banks now manage slightly more than 14% of all fund
assets.
Graphics
JOHN EARLE/The Virginian-Pilot
ASSET GROWTH OF NATIONSBANK'S NATIONSFUND
SOURCE: NationsBank Corp.
BANK-MANAGED MUTUAL FUNDS IN THIS REGION
SOURCE: The companies and Dalbar Inc.
ASSET GROWTH OF FIRST UNION'S EVERGREEN FUNDS
SOURCE: First Union Corp.
[For complete graphics, please see microfilm] by CNB