Banking news: ... and liberty for all.

New Orleans bank partners with Edgar Lomax Co. to create mutual fund

The consolidation of the nation's largest financial institutions has hit traditional community banks with some rather severe body blows. In the years ahead, financial analysts expect a few battered concerns to taste canvas, as larger companies extend their reach through mass marketing efforts, electronic services, convenient branch and ATM locations, and a vast array of financial products.

But where one person sees obstacles, another sees an opportunity to expand. Alden J. McDonald Jr., president of New Orleans-based Liberty Bank and Trust Co., is counterpunching with a new offering: the Liberty Freedom Fund. "If black banks are going to stay competitive, then we'll have to offer the same products as the large institutions," says the silver-maned McDonald, whose bank is No. 8 on the BE BANKS list with $147.7 million in assets and $134 million in deposits. "Our customers realize they can make better returns in the equities market than with passbook savings accounts and CDs."

What makes Liberty's mutual fund unique? It represents a rare example of an African American bank teaming up with a black money-management firm to create such a vehicle. Liberty will serve as the manager while the Edgar Lomax Co. in Springfield, Virginia, will assume the role of subadvisor, meaning it will select the stocks that compose the blue chip fund's portfolio. New Orleans-based Jackson, Shanklin & Sonia will handle the marketing chores as the fund distributor.

"To my knowledge this is the first time three black-owned firms that were not main players in the mutual fund arena have undertaken such a task," says Randall Eley, the president and chief investment officer of Edgar Lomax. In most cases, small and black-owned institutions have offered mutual fund products by striking deals with such majority institutions as American Express or Fidelity, pocketing a rather small chunk of the administrative fees. Since there will be no middlemen involved, Liberty will handle all the fees involved.

Liberty estimates fee income of $300,000 for 1998. That figure indicates the bank will break even on its investment in developing the fund within its first six months of operation. The fund provides for two classes of stock: Class I for institutional investors, which requires an initial investment of $250,000; and Class A for retail customers, which requires an initial investment of $ 1,000.

McDonald says Liberty had to bolster the bank's line of products and services. "We needed to expand the offerings to our 35,000 depositors and, at the same time, try to reel in more institutional customers," he says. "But we wanted to make sure that black companies would have complete control of the financial products and benefit exclusively from the income flow."

In order to achieve the stellar returns that would make the fund competitive with more established offerings, McDonald and his development team reviewed a number of black-owned money-management firms. They selected Eley, who ran the Profit Value Fund, cited by BE as one of the top-performing African American equity funds.

Yet, some analysts believe only a few black institutions will be able to follow Liberty's lead, For one, smaller banks don't have the reach or infrastructure to compete with mammoth financial services organizations that control a global marketing apparatus. "The question is whether these institutions can respond to the economies of scale," says Joe Gladue, an equity analyst with Baltimore-based The Chapman Co. (No. 12 on the BE INVESTMENT BANKS list). "To the extent that Liberty and its partners have the infrastructure, it may prove to be successful."

Gladue says banks should also be prepared for the marketing challenges inherent with such Products. "They will be selling these products to customers who have to understand that their money is open to market fluctuations and will not be federally insured in such vehicles, he says. "If not, they can leave themselves open to legal challenges."

Liberty Freedom represents the first plank in McDonald's mutual fund strategy. He wants to use the network of black banks to build a family of funds that will include fixed-income and more aggressive equity products. Moreover, he will continue to strengthen the bank's financial services over the next 18 months through the acquisition or development of an insurance company. "We want Liberty to be a true financial supermarket," says McDonald. "When our customers come to us, we want them to engage in one-stop shopping. It will be the only way for us to beat our competitors."

Adds Eley, "As long as it is successful, Liberty Freedom will prove to be a model for small banks and insurance companies that never believed they could be competitive in pension funds or mutual fund management because they didn't have access to billions of dollars."