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New Bank Funds Ignore Sector Performance


Despite poor returns on bank stocks over the past two years, at least a couple of money managers are creating new products tied to the banking industry, signaling that the worst may be over for bank funds.

The two new funds are the Merlin U.S. Community Bank Stock Fund and the Senbanc Fund. The Merlin bank fund will invest in community banks and will be advised by Merlin Advisors of Columbus, Ohio. The Senbanc Fund is a value fund and will be advised by Hilliard Lyons Investment Advisors of Louisville, Ky. It invests in banks and other financial institutions affiliated with banks. Hilliard Lyons itself is a subsidiary of a bank, PNC Bank Corp. of Pittsburgh. The two funds filed registration statements with the SEC in early April.

The two funds have yet to be approved by the Securities and Exchange Commission, but they already face daunting circumstances. Two other well-known bank funds, the John Hancock Regional Bank Fund and the Fidelity Select Regional Banks Portfolio, have both lagged in performance recently compared to their three- and five-year performance numbers. Both funds returned above or near 25 percent over a three- and five-year period.

In fact, the Fidelity bank fund had a total return of 46.77 percent in 1995 and 45.5 percent in 1997, according to Wiesenberger. It returned 25.12 percent over three years and 25.52 percent over five years, according to Lipper. But through March 31 the fund had lost 3.13 percent for the year after returning just 11 percent last year, its lowest return since 1994. In the 12 months ending March 31, the fund lost 2.4 percent, according to Lipper.

The John Hancock Regional Bank Fund lost 7.71 percent over the 12 months ending March 31, according to Wiesenberger. This year, it has lost 3.17 percent as of March 31. Its 3-year performance was 23.27 percent and its five-year performance was 23.64 percent. Shareholders have responded to the recent poor performance by pulling their money from the fund. In 1998, there were net outflows of $722.4 million, and in the first two months of this year, investors pulled $360.7 million out of the fund, according to Lipper of New York.

Financial services funds as a category lost 1.4 percent over the one-year period ending March 31 and gained two percent in the first quarter of this year, according to Wiesenberger. Over the 3-year and 5-year periods, financial services funds as a group gained 24.79 percent and 24.07 percent, respectively. In the first three months of 1999, financial services funds as a whole have had estimated redemptions of $1.73 billion on returns of 8.60 percent for the category, according to Lipper.

But the poor performance that has led to shareholder redemptions is not expected to continue, according to Gerard Cassidy, a bank analyst and senior vice president with Tucker Anthony. Cassidy says there has been a lack of banking mergers in the past two years because of Year 2000 fears and that has weakened the performance of bank stocks.

"The banking stock market is poised to show substantial growth over the next two years due to the anticipated consolidation of the banking industry," Cassidy said. Now that the turn of the century is slightly more than six months away, and it usually takes six months to close a merger, consolidations may again begin to pick up, he said. After New Year's Day, 2000, any fears over mergers arising over Y2K will either be realized or dispelled, he said.

Joseph McCloud, president of the Merlin Funds Group and portfolio manager of the Merlin bank fund, is not concerned about the past performance of other bank funds. One of the reasons he is introducing his community bank fund is to fill a void in the market, McCloud said. He is aware of only one other mutual fund that invests in small community banks - those with less than $15 billion in assets under management, with anywhere from one to 10 branches total and serve entire communities, he said.

"That's the place everybody goes to get a loan," he said.