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Where the Money Is? More Banks Roll Out Mutual Funds

Some fund watchers say bank-run funds underperform other funds.

If you're looking to invest in mutual funds, should you take it to the bank?

As banks scramble to become one-stop shopping supermarkets for consumers' personal-finance needs, they are rolling out more mutual funds to complement their stables of banking accounts, credit cards and loan services. Chances are, you get the hard sell for their fund offerings at the ATM machine, the local branch or in your mail.

But before you put more of your money where your money is, there are some important matters to consider. Bank-advised mutual funds have been stuck with a rep for not performing as well as nonbank mutual funds. Among the reasons often cited: Banks can't recruit or retain top managerial talent for the funds and bank funds are too conservative in their investment strategy.

This has led many financial planners to shy away from bank-managed funds. But do the numbers bear out this sentiment?

According to a recent research report from Jennifer Thompson, CFA and vice president at

Putnam Lovell Securities

, they do. The overall one-year return for the average bank-run fund in


rated fund universe through June 2000 was 12.9%, compared with a 19.4% average rise for all rated funds.

"If you size them up side by side, the banks just haven't performed that well on average," she says.

Of course, Putnam Lovell is an investment bank specializing in asset management, so it behooves them to convince banks that they need to buy investment shops to boost returns.

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Over the long haul, the case against bank-managed funds isn't clear-cut.

Nonetheless, the lack of outsize performance by bank-managed mutual funds has led many financial planners to seek better performance elsewhere. "If you look at funds in general and take a look at the top funds and their performance, the bank funds are rarely there at all, so I tend not to recommend them," says Elisabeth Plax, a certified financial planner based in Pepper Pike, Ohio.

Thompson says underperformance by bank funds in the past year has led many investors to flee them in favor of products offered by better-performing fund companies. In the first half of this year, Morningstar-rated bank funds suffered net new cash outflows of $2 billion, while other mutual funds had more than $66 billion in inflows during the same period, says Thompson.

A screen of bank-managed and nonbank-managed domestic equity funds shows the average tenure of bank fund managers at 3.8 years, slightly less than an average of 4.3 years for the nonbank funds.

"Banks have been more conservative on a pay scale and they often see their top people lured away," says Morningstar's director of fund analysis Russ Kinnel.

There are some potential selling points for bank-run mutual funds. Kinnel says that most bank funds tend to invest more conservatively than their nonbank counterparts, so they hold up well in times when hot tech names are selling off. A screen of bank- and nonbank-managed domestic equity funds showed that 32.3% of bank-run funds had a below-average or low category risk, compared with 25% for the nonbank funds.

Bank-managed equity funds weathered the second-quarter equity selloff better than their nonbank peers, shedding an average of 2.85%, compared to the nonbank funds' 3.67% loss.

"That conservatism may have helped," says Kinnel.

The small-cap arena is another area in which bank funds have performed relatively well, according to Putman Lovell's Thompson, whose report says that the average one-year total return for bank-run small-cap funds for the period ending June 2000 was 42.4%, slightly higher than the 41.1% average return earned by all of the rated fund groups during the period. But for the three-year period ending June 2000, bank-run funds underperformed the nonbanks by 7.8%.

Even if the average bank-run fund isn't far from the average nonbank fund, some fund watchers advise that if you're looking for the top performers, you might want to look outside the bank arena.

"Over the last two or three years, you've had a disproportionate amount of funds going to a few fund families, and in that environment, none of the bank funds have had a shoot-the-lights-out type of performance," adds Philadelphia-based fund consultant Burton Greenwald.

"Above-average performance is not going to cut it in this market; you need extraordinary performance," he says.