NEW YORK -- In the glossy report that passes for the mutual fund industry's crystal ball, the future looks like this: a continuing proliferation of mutual funds, with big firms getting bigger, but a much lower rate of return for investors than the Golden Eighties provided.
Investors seemed to finally discover mutual funds in the 1980s. The industry had about $134 billion in assets in 1980; now it has about $1.1 trillion, a ninefold increase. The number of funds exploded, from 564 to 2,916. The growth came from money market funds, which started the decade with $74.5 billion and ended with $410 billion, and bond and income funds, which went from $17.4 billion to more than $300 billion.
Much of that growth was due to competition that created those funds. "The proliferation that occurred in the 1980s is not going to occur again," said James Riepe, new chairman of the Investment Company Institute, which commissioned the study, and head of investment services for T. Rowe Price in Baltimore. "If you had 350 mutual funds in 1980 and each created a money market fund and a bond fund, you had the growth, but they don't have to do that anymore."
But despite the growth, the 20 largest funds, which controlled 70 percent of the market in 1980, still control 70 percent and could be expected to continue or increase that dominance, said Heidi Fiske, the New York financial consultant who wrote the report, titled "The Environment for the Investment Company Industry in the 1990s."
"They are trying to get as big a piece of the market as they can keep, and that may mean mergers or selling other companies' products to keep their customers," Fiske said.
Michael Hines, marketing vice president at Fidelity Investments, the largest mutual fund company, said, "Investors tend toward larger companies because they can provide the services and a wider range of product better and more cheaply than smaller companies."
But the slower growth rate Fiske predicts -- 12 percent a year against the almost 30 percent the industry enjoyed in the overheated 1980s -- is still huge. "Which is better, 12 percent of $1 trillion or 30 percent of $100 billion?" she asked. Even that lower rate will more than double mutual funds' assets by 2000. There are about 3,000 mutual funds now, and Riepe and Fiske said they expect more new funds in the 1990s. It is an interesting problem for an industry that investors turned to when trying to pick individual stocks became too confusing. Now the number of funds sometimes seems to rival the number of stocks and bonds available.
Are there too many funds? "I think there will be more funds and it will be beneficial for investors," Fiske said. "It might lead to more disclosure and lower fees."
"I don't think the important thing is whether there are too many," said Kurt Brouwer, author of "Kurt Brouwer's Guide to Mutual Funds" (John Wiley, New York, $14.95). The most important decision someone has to make is whether they want to be in a fund, then what kind (stock or bond), and then narrow the choices to aggressive growth or growth and income, et cetera. Finally, you have to decide which fund, and by then you may have only 100 funds to study.