Tar Heel banks gain mutuals admiration

Tar Heel banks gain mutuals admiration

C, Christopher

Tarred as part of a group that costs too much and does too little, the best bank-run mutual funds are fighting back with the only weapon that matters–performance.

At midyear, NationsBank Corp.’s fund family was outpacing those of other banks, says CDA/ Wiesenberger, a Rockville, Md., mutual-fund tracking company. Wachovia Corp.’s $34.5 million Special Values Class A series fund made Fortune magazine’s list of the five top-performing bank funds. And Centura Banks Inc. saw its Equity Growth Class C fund snag Morningstar Inc.’s top rating of five stars for the three years ending Aug. 31. Banks are also chipping away at the perception their funds are too expensive. The average expense ratio of bank equity funds is 1.37%, says CDA/ Wiesenberger. The average for nonbank funds: 1.65%.

“They earned their bad reputations, but they aren’t the ugly ducklings anymore,” says Tony Sagami, chief investment strategist for InvestorSquare.com, an Internet mutual-fund researcher in Los Angeles.

Despite the emergence of some solid offerings, equity funds managed by North Carolina banks, on average, still chalk up only middling performance. Over the three years ending Nov. 31, their average cumulative return, 70.3%, edged out the nationwide average for equity funds of 65.5%, says Lipper Analytical Services Inc. But over the last year, their 16.4% return fell short of the average of 20.4%.

Still, even mixed performance is better than three years ago, when a North Carolina bank that could tout a handful of top-performing funds was rare. What’s behind the improvement? Bank CEOs are finally paying their fund managers top dollar, preventing them from jetting to higher-paying jobs. And banks such as Charlotte-based First Union Corp. have bought mutual-fund companies, enabling them to exploit economies of scale to cut costs.

Not surprisingly, First Union and Charlotte-based NationsBank offer, by far, the largest menu of mutual funds among North Carolina banks. First Union has $40.5 billion in mutual-fund assets, as of mid-December, making it the second-largest bank fund group in the country. Ahead of it is New York-based Mellon Bank Corp., with $88 billion. NationsBank is fourth with $33 billion.

Four other Tar Heel banks offer their own mutual funds. Winston-Salem-based Wachovia has $4.7 billion in fund assets; Winston-Salem-based BB&T Corp., $1.5 billion; Rocky Mount-based Centura, $458 million; and Durham-based CCB Financial Corp., $321 million.

Banks love having their own mutual funds. They make more from them than those they merely sell for other managers because they pocket the management and sales charges. North Carolina banks all say they’re profiting from fund sales, though they refuse to be more specific. Selling funds is part of their strategy to become financial supermarkets. And judging by numbers compiled by Lipper Analytical Services, the strategy is working. Industrywide, investors have poured $199 billion into bank-run equity funds, up from just $21 billion three years ago.

Banks, however, face a fight. They’re up against behemoths like Fidelity Investments Inc. and the Vanguard Group, which have decades of experience and brand names. Banks also still carry the stigma that they prey on unsophisticated investors. In May, NationsBank agreed to pay $850,000 to settle a complaint of deceptive sales practices, only the most recent of several such settlements by big banks.

No North Carolina bank has been more aggressive in chasing fund business than First Union. Three and a half years ago, it managed only $3 billion. Today it offers 71 funds, including 35 stock funds. Morningstar has awarded four or five stars to seven of the 23 First Union stock funds it tracks.

One is Evergreen Small Cap Equity, which has hit $100 million in assets, up from $14 million two years ago. Its Class Y shares, for trust customers, returned 38.5% for the year ended Nov. 31, ahead of the 27.1% peer average, Lipper says. A Morningstar five-star fund, it invests in growth companies with market caps of less than $500 million and above-average dividend yields, says Nola Falone, one of two managers. Falone looks for companies in consolidating industries that may be acquisition targets. The fund requires a $1,000 minimum investment.

NationsBank has 53 funds, up from 30 four years ago. Nineteen are stock funds. Morningstar has given 10 of them four or five stars. Two of the bank’s better performers, Managed Index and Managed Small Cap, were launched too recently to be ranked. They are built around standard market indices with a gimmick. They try to edge out the index performance by loading up on stocks managers deem the most attractive. For the year ending Dec. 9, Managed Index, with a return of 34.4%, beat the S&P 500, which returned 34.0%. Managed Small Cap, with a gain of 27.1%, outpaced S&P’s SmallCap 600 index, which gained 25.4%.

The expense ratio of the funds’ Primary Class A shares, purchased through fee-based financial planners, is 0.5%, below the 1.14% and 1.72% peer averages, says Strategic Insight Corp., a New York mutual fund analysis company. The funds were launched in late 1996 and together had $180 million in assets at the beginning of December.

Wachovia’s Special Values Class A fund, a small-cap fund, outpaced the Russell 2000 index, a diversified index of smaller companies, with a 27.7% gain for the year ending Dec. 11. The fund’s assets are spread across 100 stocks, co-manager Roger Glenski says. Launched in 1993, it requires a minimum investment of $250 and has an expense ratio of 1.21%, lower than average.

Emboldened by the numbers, banks are crowing that the performance of some of their funds has improved. Sure, plenty of their funds are still poor performers weighed down by heavy expenses. But the investor who pays close attention to returns and expense ratios should be able to ferret out good values.

Copyright Business-North Carolina Mar 01, 1998

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