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Bank-Sold Funds Weather Volatility


September proved one of the worst months in the history of the fund industry in terms of flows, but bank sold funds appear to have weathered the storm better than other sales channels, according to industry observers.

Overall, the fund industry suffered $29.5 billion in net outflows in September compared with net outflows of $4.82 billion in August, according to the Investment Company Institute.

Bank-sold funds did not take as devastating a hit, but like all other channels, bank sales of mutual funds were down in September, said Kenneth Kehrer, president of Kehrer Associates, an independent consulting firm in Princeton, N.J. While revenue generated from fund sales dropped 30% from the previous month, that number does not provide a clear indication of the hit banks took in redemptions, Kehrer said.

In September, the bank channel was coming off one of its strongest months of the year in fund sales, posting an 8% increase in revenue in a year in which net revenues have generally been flat, he said. Plus, factoring out the four days the markets were closed, it is likely that banks would have been on the positive side in September despite market conditions and the Sept. 11 attacks, he said.

Not So Bad

"We generally thought [sales] would be horrendous," Kehrer said. "And for a few banks it was down more than average but the mere fact that it was down 30%...we would expect that just from the number of days they were closed. My sense in talking to people who run bank-advised funds is that their assets have been pretty sticky."

Overall, banks and bank broker/dealers have not been selling mutual funds at the rate they were in the past, according to a report Kehrer put out earlier this month. Revenue from mutual fund sales was down 18% on an annualized basis in the third quarter from the second quarter, making it the ninth quarter in a row that revenue has declined, according to the report. Nonetheless, compared to the rest of the fund industry "bank sales of mutual funds held up better than sales in other channels," the report said.

That was certainly the case with the HighMark Funds, a group of 13 funds advised by HighMark Capital Management that are distributed through Union Bank of California.

While new sales have been impacted by the prolonged bear market, HighMark Funds have been holding on to their assets, and picking up new investors, said Greg Knopf, managing director of HighMark Capital. New sales have outpaced redemptions by about two to one over the past year, he said. Knopf estimates that sales are down from last year's ratio of about three to one "but it did not go negative," he said.

And September had little, if any, effect on HighMark's sales, Knopf said. Not including the sales of HighMark's cash funds, sales were flat in September, he said. Not surprisingly though, the firm's cash business posted record sales for the month, as investors flooded out of equity funds into cash, he said.

Holding on

Banks have been able to hold on to their assets where a lot of other channels have experienced redemptions in large part because of bank investors investment tendencies, as well as the kinds of products in which they invest, Kehrer said. Bank investors are generally older, less experienced investors who lean toward more conservative investments like bond and money market funds, he said.

That type of investor is not as likely to redeem as a result of market volatility compared to equity investors, he said. In that sense, banks' conservative image has been a boon in difficult times, he said.

Knopf agrees. "The way our distribution works is we have a strong cash business and 401(k) business and most of our retail sales come through branches, which are bank customers, who are more conservative," he said. "A lot of our retail sales have been in bond products which are very sticky and sales in September came in fixed income which is very sticky."

Another factor that should not be overlooked is the full-service nature of the relationship banks have with their investors, said Rachel Malatesta, a consultant with Cerulli Associates. "Those relationships go a little deeper, there are more hooks in the customer," she said.

Banks' redemption rate has remained steady at about 10% over the past several years despite the downturn in the economy, she said. "The conclusion that we draw is that bank channel assets tend to be more sticky."