Direct marketers and sales forces target different types of fund investors

MUTUAL FUNDS

September 27, 1992|By WERNER RENBERG | WERNER RENBERG,1992 Werner Renberg

Think you're a typical mutual fund shareholder?

You are, according to the Investment Company Institute's latest survey, if you are male, married, 43 years old, employed, earn $45,000 a year and bought your first fund shares before 1985.

But marital status, income and the like are only a few of the characteristics that are analyzed by fund companies to target potential markets. There also are a variety of traits that help to explain why you invest the way you do -- and why fund sponsors market the way they do.

On the basis of their sales methods, the institute divides mutual funds into two categories:

* Direct marketing -- those sold directly to investors by mail or telephone or in fund offices. They are primarily drawn to your attention through advertising and direct mail. Such funds include -- but are not synonymous with -- no-load funds. Some impose loads of as much as 3 percent.

* Sales force -- those sold to investors by sales forces, who are primarily securities brokers, but also life insurance agents, financial planners and bank personnel. Funds sold by a sales force impose front-end sales loads (or charges) of up to 8.5 percent (varying with the size of a purchase) or back-end loads of up to 5 percent or so (depending on how long shares are held) at redemption. Salespeople are paid out of the loads.

Whether you prefer to deal directly with a fund organization or to buy through a salesperson may depend on a number of factors, according to analyses by the institute and by Avi Nachmany, analyst with Strategic Insight, a fund research service.

If you are well-educated, self-reliant, concerned about sales charges and comfortable with funds and with mail transactions, directly marketed funds are likely to be for you. While there must be exceptions, you are more likely to be responsive to opportunities for optimizing investment results and willing to take greater risks, Mr. Nachmany says.

But if you desire personal contact in making investments, need guidance and are not particularly concerned about the fees associated with the advice you receive, funds marketed by sales forces are likely to be for you.

If this description fits you, Mr. Nachmany observes, you are more likely to be anxious about risk and confused by the great variety of funds. You may be a former bank saver who was attracted by funds' higher yields. Given that you tend to be more cautious, you probably are willing to adopt the more modest goals of safety and reliability. Moreover, you are less likely to switch opportunistically with changes in the financial environment.

These attributes are compatible with brokers' interests. Eager to cement customer relations with their firms, they would be less likely to recommend more risky funds, for example.

Of last year's $134 billion in bond and income fund sales, funds sold by sales forces accounted for more than 70 percent. The $89 billion in equity fund sales were about equally divided.

Within the direct marketing and sales force classifications, there are significant differences among investment objective categories.

As the table shows, directly marketed funds account for about 75 percent of aggressive growth fund sales. That may be explained by the fact that investors who invest in such funds have a greater inclination to take risks.

On the other hand, investors' lower inclination to take risks -- and brokers' tendency to recommend funds offering less downside risk -- would explain why sales forces account for 50 percent to 60 percent of growth, growth and income, and equity income fund sales.

Making two-pronged sales pitches of yield and (relative) safety, brokers and other salespeople have been selling the overwhelming majority of U.S. government income and Ginnie Mae fund shares.

Pitched for their yields, if not their safety, high-yield bond fund shares also have been predominantly sold by sales forces.

Direct marketers account for only 30 percent of single-state municipal bond fund sales. Unable to use national advertising, they must use local media and may not always want to incur the costs.

The 91 percent share of global bond fund sales by sales forces illustrates another Nachmany point: Fund firms using sales forces are more likely to innovate.

The first mutual fund, MFS' Massachusetts Investors Trust, founded in 1924, was a load fund. So were the first bond funds -- including a high-yield fund -- produced by Keystone, the first municipal bond fund (Kemper), and the first fund investing in mortgage-backed securities having government backing (Federated).

But neither Mr. Nachmany nor anyone else would say that direct marketers fail to innovate. Scudder, which introduced the first no-load fund (Scudder Income) in 1924, came out with the first fund having a target maturity. Other direct marketers' firsts included the first index fund (Vanguard) and the first zero-coupon fund (Benham).

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