to Bermuda's banks and financial services sector.

While unlikely to rival the international insurance sector in size, the number of Bermuda-registered funds has increased by more than 150 percent since 1986, producing valuable earnings and jobs.

Business looks at how the sector has grown and what the future holds. As Bermuda has made great strides in recent years in the area of offshore insurance, another sector of the international business community has grown virtually unnoticed.

But as Bermuda's three banks know only too well from the huge annual fees they earn, the Island is fast becoming an increasingly popular domicile for international investment funds.

The total net asset value of some 300 funds registered here currently stands at $6.79 billion.

The number of mutual funds, which form the bulk of the funds, has grown from 115 in 1986 to 298 to the end of February, 1993 -- an increase of 159 percent.

About one-fifth of mutual funds are actually managed from Bermuda but the main benefits to the Island's economy lies in the custody of funds and the provision of other support services.

All mutual funds registered in Bermuda must appoint one of the Island's three banks to act as custodian of their assets, which is the area where they earn most of their service revenue.

Apart from custodian or trusteeship fees, banks and private companies earn income from services to the underlying shareholders of the funds, such as valuing the assets of the funds, preparing financial statements and general administrative duties.

Although no official figures exist for the amount of fees generated, one leading banker said an estimate of one-fifth of one percent of the total net asset value of funds based here would provide an approximate number.

Using this rough method of calculation, Bermuda's mutual fund industry currently generates annual fees of a little under $14 million.

The Bank of Bermuda acts as custodian for 80 percent (248) of the 298 mutual funds registered in Bermuda and employs some 180 people at the Ingham and Wilkinson building on Front Street to service them.

Mr. Tom Davis, the Bank's senior manager/corporate trust and a recognised authority on mutual funds outside Bermuda, said: "There's no question that the mutual fund industry has grown significantly over the last few years.

"In the late 1980s a lot of Japanese money was starting to be pooled together in the form of mutual funds to take advanatage of the investment management expertise in the US.

"The American investment management industry is really the most mature and innovative in the world. They are the world leaders in investment products.

Their investment market is so huge compared to the UK or any other market.

"We are seeing pools of wealth being located here in Bermuda to tap into that investment expertise. The reason it doesn't go directly to the US comes down to tax efficiency and fewer regulations.'' In the US, there are some 2,000 registered investment money managers and a mutual fund industry worth more than $1 trillion, he said.

But Bermuda has put in place an infrastructure that is attracting more and more investment money, said Mr. Davis.

"I joined the Bank at the end of 1979 and we had only about 20 funds then with maybe about $500 million in assets,'' he said.

"As at December 31, 1992, we had just over 200 funds under administration which had assets of over $6 billion.'' The growth of the industry locally can be illustrated by the remarkable growth of the Bank of Bermuda's in-house International Bond Fund -- its first ever in-house fund -- which was launched in April, 1980, with assets of some $30 million.

"Those assets today are valued at over $545 million in this fund alone,'' he said. "The bank has also started another 13 in-house funds.'' The Bank of Butterfield acts as a custodian for a number of funds and also operates its own in-house funds under the name of Buttress, which have assets of some $360 million.

Mr. David Notman, manager of newly-formed Butterfield Asset Management Ltd., said: "Bermuda wants mutual funds. The fall-out effect for the accounting, legal and banking community is fantastic. It is a very lucrative business.'' The Bank of Butterfield and the Bank of Bermuda recently co-sponsored separate two-day conferences on offshore funds which were both held in London.

Mr. Peter Rodger, the Bank of Butterfield's group legal adviser, has vast experience in the mutual fund industry.

Before joining the Bank of Butterfield, Mr. Rodger was general counsel of Save and Prosper which, in the late 1970s, was one of the largest unit trust (the same as mutual funds but with a different structure) companies in the United Kingdom.

Mr. Rodger said: "With the exception of Fidelity, which actually has a physical presence in Bermuda, most of the mutual fund business is carried out in the investment centres of the world, such as London, Toronto, Tokyo, New York.

"Mutual funds are an important part of our international business but they are not in the same league as our insurance industry. There are a lot of reasons why that cannot change.

"One reason is that a lot of mutual funds are invested in equities and Bermuda has no tax treaties or double tax treaties so it does not always make sense to establish a fund in Bermuda investing in on-shore equities. You can't get any credit for withholding tax.

"The major offshore jurisdictions for equity funds are Luxembourg and the Netherlands Antilles.'' Mr. Rodger said in recent years a lot of new mutual fund business in recent years went to the Cayman Islands because of its lack of regulations, which suited money managers who often liked to set up funds virtually overnight to take advantage of emerging money-making opportunities.

By comparison, there is a three week minimum incorporation period in Bermuda and a more likely incorporation period of six weeks.

But after being caught up in the BCCI financial scandal, as was the dominant offshore mutual domicile, Luxembourg, the Caymans are in the process of tightening up its regulations, including the introduction of its first ever fund legislation.

Neither Mr. Rodger nor Mr. Davis knew of any instances of mutual funds being used to launder money.

But there have been instances outside Bermuda of crooked money managers defrauding investors of their funds.

Fraud, incompetency, unethical sales practices and unfair presentations of the investment attributes of a mutual fund were some of the areas of concern for regulators, they said.

Both said Bermuda had a diligent vetting system in place which had kept out undesirables and ensured that Bermuda's mutual fund industry remained scandal-free.

Mr. Rodger forecast future growth for the industry in Bermuda, particularly in bond funds and derivative funds, such as futures, options and commodities funds.

"In the early 1980s, there was a big debate between the banks and the Bermuda Monetary Authority as to whether Bermuda should accept derivative funds,'' he said. "It was largely as a result of the Bank of Butterfield's actions in the face of opposition from the Bank of Bermuda that they were allowed in. there was a difference of philosophy about which way to go.'' He added: "There's been a substantial interest in this area because you don't need any tax treaties for derivatives.

"Bermuda has grown into a major player in offshore derivatives. Only now are people beginning to realise the enormous role derivatives are playing in the world markets. I'm very optimistic about growth in this area.

"Another area of growth is in the international pension fund business.

Pension funds and mutual funds are very closely related in terms of underlying investment and in terms of support services.'' Some of this growth might originate from Canada, where there has recently been a substantial increase in the percentage of pension funds that can be invested overseas, he said.

Mrs. Edith Conyers, corporate/mutual fund manager at Bermuda Commercial Bank, said BCB is custodian to about 50 funds which have a total net asset value of some $700 million.

"The bank has no in-house funds but it is currently looking at setting some up,'' she said.

"The growth of mutual funds in Bermuda has been significant. When I first moved into the corporate management part of the group in 1987 we had some small funds, small not only in terms of value but also in terms of investors.

"A year later we had our first major fund with over 100 investors and it's just been booming ever since.'' Bermuda's excellent overseas reputation and absence from financial scandals like BCCI has made it a desirable domicile, she said.

Mrs. Conyers said mutual funds are vetted even more carefully by the Bermuda Monetary Authority than other companies seeking to incorporate on the Island.

By far the largest private mutual fund company in the world is Fidelity Investments, which has some $190 billion worth of assets under management.

Only a small number of these are registered in Bermuda, but more than 100 are administered by Fidelity's operations on the Island, said Finance Minister the Hon. David Saul, who is president of Fidelity International (Bermuda) and executive vice-president of Fidelity International (Worldwide).

"Mutual funds incorporating in Bermuda have gone up a tremendous amount over the past three years, mirroring the growth of mutual funds throughout the western world,'' he said.

"It is a very, very important part of our economy and is continuing to grow at a healthy pace.'' Mutual Fund Facts Bermuda registered mutual funds in 1993 Unit Trusts 52 Partnerships 2 Total "collective investment funds'' Net asset value of funds $6,788,114,760 First fund in Bermuda Signet Fund, 1958 Mr. Peter Rodger Mr. Tom Davis Mrs. Edie Conyers.