Bank funds offer solid, if not exotic, choices

August 24, 1994|By ANDREW LECKEY

You can bank on it.

That's how most investors view the hard-earned dollars they place with their local financial institution. Federal deposit insurance lends credibility to the venerable concept of "safe as money in the bank."

However, as more banks offer mutual funds to their customers, a lot of novice investors believe such funds are covered by the same federal guarantees as certificates of deposit or bank money market accounts.

They aren't. A stock or bond mutual fund offered by a bank is subject to the market vagaries and risks faced by a fund offered directly by a mutual fund company or through a brokerage house. The value of your holdings can go down, as well as up. Principal can be lost.

Invest in a bank mutual fund if it's convenient, you're satisfied with its track record and you like the service. Just make sure you know exactly what you're doing.

Assets in bank-offered mutual funds have exploded from $18 billion three years ago to more than $66 billion. There are 724 funds distributed by banks, 150 of them managed by the banks themselves and the others by outside advisers.

This growth came from a loosening of federal restrictions on the products that banks can offer and the realization by banks that they were losing great sums of money to nonbank competitors. Promotional efforts have been aggressive.

Average returns of bank-offered funds are slightly worse than direct-marketed and broker-sold funds, since they don't offer some of the more adventurous types of funds, generally require a "load" (initial sales charge) and tend to emphasize bond rather than stock funds.

Bank funds over the past 12 months had an average return of 0.76 percent, compared with 2.20 percent for direct-marketed funds and 1.42 percent for broker-sold funds. Not as many bank funds have extensive track records, so you may have a year or two of returns to scrutinize rather than longer comparison figures. In such cases, examine the fund's portfolio.

"Many bank funds don't take the risks or chances to be No. 1," noted Don Phillips, publisher of the Morningstar Mutual Funds investment advisory, which supplied the data for this column. "Since they want to ensure that they won't be the worst fund, you're left with a lot of near-average funds."

Bank funds are more likely to have a solid run-of-the-mill growth and income fund, plus a solid government bond fund, with fewer sizzling or exotic choices, he said.

"Some people may not understand funds aren't insured, but we have had a campaign a couple of years to educate consumers," said Malin Jennings, spokeswoman for the Investment Company Institute, the mutual fund trade organization.

A common sight in the securities areas of bank lobbies is a red circle with a slash over the letters FDIC. Banks can manage or do the back office work of a fund, but not both. Institutions have individual strategies for handling their funds.

"While our CD sales are handled by bank employees, mutual fund sales are done by a third-party marketing firm," explained Steven Samson, director of product management for Vista Capital Management at Chase Manhattan Bank in New York.

Best-performing bank-offered stock funds over the past 12 months, according to Morningstar, were:

* Compass Capital International Equity, Midlantic National Bank, Edison, N.J.; $35 million in assets; 3.75 percent load; $2,500 minimum; up 20.56 percent.

* BT Investment International Equity, Bankers Trust, New York; $44 million; no load; $20,000 minimum for bank clients or $2,500 if bought through a financial adviser using Charles Schwab & Co.; up 19.69 percent.

* Rodney Square International Equity, Wilmington Trust Co., Delaware; $25 million; 3.5 percent load; $1,000 minimum; up 19.08 percent.

Investors tend to be conservative. "We're drawing more fixed-income investors, averaging 67 years of age, who are unhappy with the decrease in CD interest rates," said Alfred DiMatties, director of trust investments for Midlantic National Bank.

Top-performing bank-offered bond funds over the past 12 months were:

* Pacific Horizon Capital Income, Bank of America, San Francisco; $213 million in assets; 4.5 percent "load" (initial sales charge); $1,000 minimum; up 3.29 percent.

* Seven Seas Yield Plus, State Street Bank & Trust, Boston; $1.3 billion; no load; $1,000 minimum; up 2.98 percent.

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