Higher returns fuel boom in mutual funds

Investing

September 25, 1995|By Bill Atkinson

T. ROWE PRICE executive James S. Riepe was hosting a party recently when he was reminded of just how big a business mutual funds have become.

A waiter serving hors d'oeuvres and cocktails buttonholed Mr. Riepe and rather than taking his drink request, he asked for investment advice.

Mr. Riepe was surprised -- not so much with the question but by who asked it. Here was an average guy, presumably with a modest income, trying to figure out how to make a bigger return on his buck.

Mr. Riepe pondered the question and then asked: "How much money do you have?"

"About $2,000," replied the waiter. "I was thinking about getting into one of those stock funds."

Mr. Riepe told him to leave his money in the bank for the time being or put it in a money market fund.

"I did not advise him to roll the dice," Mr. Riepe says.

But Americans in great numbers are rolling the dice on mutuals funds: In the past four years, the mutual fund business has doubled to $2.3 trillion in assets, the number of funds has increased by 73 percent, and shareholder accounts are up by 84 percent, according to Investment Company Institute, the industry's trade group.

The business is so hot it is close to overtaking banks, which held $2.9 trillion in deposits in 1994.

"All of a sudden, we are players," says Mr. Riepe, a congenial man, who oversees 65 funds as the company's managing director.

What's got everybody from waiters to executives hyped about mutual funds is the prospects of big returns -- bigger than the 3 and 4 percent offered by banks on savings and checking accounts.

Just take a peek at some of the funds T. Rowe Price offers and it's easy to see why mutual funds are so tantalizing. One sizzler is the Science & Technology Fund, which invests in computer hardware and software, media and pharmaceutical firms. In the past eight months, it has more than doubled in size to $2 billion in assets, and in the last five years, it has produced a 28.5 percent annualized return on investment. Compare that to the Standard & Poor's 500 Stock Index -- a general benchmark for the entire market -- which had an annualized return of 12.9 percent over five years.

Another standout is the company's New Horizons Fund, which invests in small growth companies.

It has $2.4 billion in assets and over the last five years has returned 19.92 percent on investment. Or the newly formed Capital Opportunity Fund, which invests in a wide spectrum of companies. Capital was introduced in December, and to date has returned 34.3 precent on investment through July 31.

Like anything that looks too good to be true, there is a downside. Mutual funds are not immune to the vagaries of the market, so investors stand to lose if the fund performs poorly.

In fact, Mr. Riepe worries that some investors are getting swept away by the tide of euphoria. In July, the company mailed a letter to investors in the Science & Technology Fund warning them that technology stocks are a "hang-on-to-your-hat" kind of investment.

"We wanted to warn them that it [their investment] does not come without some risks," Mr. Riepe says. "We were concerned that people were chasing performance instead of making the investment for the right reason. Trees don't grow to the sky."

How times have changed since Mr. Riepe got into the business in the 1970s. That's when mutual funds looked like a sapling drooping from lack of water. Mr. Riepe recalls an industry meeting in 1975 where 150 grim-faced executives listened to a speaker who told them they had to come to grips with the fact that the mutual-fund industry was maturing and growth was bound to slow down.

But before the business vanished, many companies, which traditionally provided fully financed pensions, literally began forcing employees to make investment decisions by offering them defined contribution plans, such as 401(k) plans. The shift gave mutual funds new life.

"There has been this massive social change," Mr. Riepe says. "People now have to learn how to invest. I think it is a major shift in our society. Mutual funds are now commonly accepted. Fifteen years ago, I couldn't have told you that."

The question remains whether or not T. Rowe Price and other mutual-fund companies can continue to grow at their current pace. They probably can't because the industry has penetrated about 80 percent of U.S. households that have money to invest, says Mr. Riepe.

But Mr. Riepe sees baby boomers as a potent force that could throw more business his way. "If they have money, you will have a powerful demographic surge," Mr. Riepe says.

Bill Atkinson covers banking and brokerage houses for The Sun.

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