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On Fund Switches, Many Banks Exercise Caution

Last year was a brutal one for mutual fund performance, but that has not prompted bankers to revamp their lineups of preferred funds and fund families-possibly because they wisely erred on the side of caution and prudence in the first place.

"We've always been focused on quality, and we made the decision years ago not to get involved in certain types of funds," said Andrew Ellis, the president of UMB Financial Services in Kansas City, Mo.

As a result, the UMB Financial Corp. broker/dealer subsidiary, which has a little over $1 billion of assets under custody for its brokerage clients, has not replaced more of its 600 mutual funds than usual over the past few months, he said.

Ellis' counterparts at several other companies expressed similar sentiments.

But one exception was Ross Rogers, the president of Comerica Securities. Rogers said his Comerica Inc. unit put two mutual fund families on its watch list at the end of last year, because more than half their funds failed to perform in the top two quartiles of their peer groups. The unit reviews the one-, three- and five-year performance of its fund families every two years, but putting two families on the watch list at once is unusual, Rogers said.

The two fund families, which he would not name, will receive increased scrutiny this year and next, the Comerica Securities president said.

Comerica puts whole fund families in its lineup, rather than selecting individual mutual funds, Rogers said. "We stay away from micromanaging the mutual funds that a family has," he said.

Keeping a Sharp Eye On Fund Parent Companies

Investment performance is not the only criterion bankers use to decide which funds to offer to their clients.

Harris Private Bank, a unit of Bank of Montreal, is keeping a close eye on structural changes at mutual funds and their parent companies, according to Jose Santillan, the head of investments at the private bank. The unit, which has about $3 billion of long-term mutual fund assets under management, has not had especially high fund turnover, Santillan said.

The list of third-party products at its financial advisers' disposal currently includes 67 actively managed mutual funds, he said. A year ago there were 71. That amount of turnover is about par for the course, Santillan said.

But with weak to downright disappointing earnings for last year and the first quarter starting to come in for many fund companies, "structural changes will take the limelight, and there might be additional turnover," Santillan said. "We'll be quicker on the trigger."

Nonetheless, Harris recognizes that mutual fund companies' assets under management have declined across the board in the past year, and that the decline has put revenue from fees under pressure, Santillan said.

As a result, fund firms are cutting costs, and Harris is monitoring whether that will result in changes of funds' managers, he said.

Harris also expects consolidation in the mutual fund business, as private-equity firms and others pick off wounded funds and families, Santillan said. Thus, when mutual funds move from one company to another, incentives for maintaining performance and remaining faithful to style mandates may change, as well-for better or worse, he said.

"It's one of the things we're going to look at closely," Santillan said.

In addition, many banking companies are reporting increased activity from mutual fund wholesalers these days.

Comerica's Rogers said wholesalers are working harder to reassure financial consultants and help them guide their clients through the market turbulence.

"Whenever you see a really volatile market, it's normal to see a pickup in wholesaler activity," he said.

Santillan said more mutual fund companies have been lobbying to get their funds on Harris' shelf, perhaps because they sense rivals' performance problems have created an opening. Such fund companies find there are no shortcuts at Harris; the products are put through an extensive internal review process and then go through another review with a consultant, Rogerscasey of Darien, Conn.

"I'm getting more calls but am being upfront about how the process is the same for everyone," Santillan said.

Ellis of UMB Financial said that the ranks of mutual fund wholesalers "seem to be decreasing in reaction to the markets and the economy."

Quality and Security

As for the sorts of investments products that clients are seeking, Rogers said, "Quality remains very, very high on every investor's list." Thus, he and and other broker/dealer executives said that demand for certificates of deposit, Treasuries, fixed annuities and money-market funds remains high, while interest in more profitable equity-based products, from variable annuities to mutual funds to hedge funds, remains low.

"People are still very nervous about their investments and the quality of those investments in these markets," Rogers said.

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