Star Banc Stands out with Unusual Mix of Funds

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Most banks that manage mutual funds lean heavily to conservative, plain-vanilla offerings. Not Star Banc Corp. of Cincinnati.

Eager to stand out from the pack, the $7.9 billion-asset banking company has made a specialty of equity and asset-allocation mutual funds.

Its constellation of products includes one that invests in the common stocks of undervalued companies and one that focuses on small and medium-size companies with histories of strong earnings growth.

And this fall, in perhaps its most aggressive gambit yet, Star Banc is introducing what it calls a "turbo income fund."

Formally known as the Star Strategic Sector Income Fund, the portfolio will pursue a high-growth investment strategy that is decidedly unusual for a bank-managed fund.

The fund will invest in options, international bonds, real estate investment trusts, and other offbeat instruments. The fund should give mutual fund customers junkbond yields at half the risk, bank officials say.

Star Banc's strategy is typical of banks that want to make headway in the crowded mutual fund arena, said Glen Casey, a consultant with Cerulli Associates, Boston. "They're trying to break away from what other banks offer."

Some analysts have their doubts about Star Banc's decision to offer such an aggressive product for retail customers. "It's a little surprising for a bank, given the concerns about derivatives," said Neil Bathon, president of Financial Research Corp., Chicago.

But B. Randolph Bateman, senior vice president and chief investment officer for the company's lead banking unit, defends the approach.

"Nothing we're doing is off the wall--there are no derivatives, no junk bonds," Mr. Bateman said. "It will employ a lot of energies shifting funds around to the most lucrative points on the yield curve."

Star Banc has been thinking about how to stand out from the crowd ever since it entered the mutual funds business in the late 1980s. That's when its trust department created the company's first money market mutual fund.

Back then, the bank toyed with the idea of starting some funds for broad retail distribution. But with thousands of funds already on the market, "we didn't want to offer just another equity or fixed income fund," Mr. Bateman said.

When Star Banc finally entered the retail mutual fund field in 1991, its offering was one of the banking industry's first asset-allocation funds.

That fund, dubbed the Stellar Fund, has lived up to its billing. In 1993, it was one of the top performers among bank-managed funds that invest in a mix of stocks and bonds, according to a ranking done earlier this year by CDA/Wiesenberger, an American Banker affiliate.

The Stellar Fund, then with $60 million in assets, delivered a 13. …