Trillion house of wealth and worry

A $5.5

July 04, 1999|By Miriam Hill | Miriam Hill,KNIGHT RIDDER/TRIBUNE

The mutual fund industry is rolling in cash, with its assets at $5.5 trillion, a 24 percent increase over last year's levels. However, gloom reigned over the industry's recent national conference.

"As we stand at this peak, are we really standing at the peak of the golden age?" Oppenheimer Funds' Bridget Macaskill asked in a speech to the Investment Company Institute. "What would happen if the bulls stopped running for more than three weeks or three days?"

A potential market cool-off is far from the only fear bugging industry leaders these days. Despite the continued rapid increases in fund assets, 1998 sales growth for all mutual funds -- bond and equity -- was the slowest since 1994, said John Brennan, chairman of ICI and the Vanguard Group in Malvern, Pa.

And only a handful of companies are benefiting from the new cash. Of 5,700 stock and bond funds, 25 accounted for almost all new investments in the first quarter, according to Financial Research Corp. in Boston.

The winners of the money grab were mostly equity funds that delivered performance. The majority invested in large, quickly growing companies with such household names as Dell Computer Corp. and America Online Inc. The most popular fund in the first quarter, Janus Twenty, raked in $4.7 billion, an astounding 10 percent of all new dollars, leading the Denver fund family to close its top seller to new investors. Vanguard's 500 Index was the second-best seller.

Most of the industry had either flat or negative net flows in the first quarter as fickle investors chased performance.

"If you don't have a large growth fund, you're just not getting new money," one industry executive lamented.

Predictions about the significance of this phenomenon vary as much as fund performance. Fund consultant Burton Greenwald expects more mergers as companies band together to reap economies of scale in paying for the high costs of marketing funds. With more fund families on the block, sellers probably won't fetch the prices they would like, said Neil Bathon, president of Financial Research.

For fund investors, the intense competition for new dollars should mean better service in the form of more 24-hour access to customer service representatives, clearer fund statements and other benefits, all delivered at today's prices. "There are so many competitive options that I can't imagine the fees moving up," Bathon said.

Also, fund families will rely less on gimmicks and more on traditional funds, he said. Families without substantial offerings in growth stocks will add them. Gimmicky funds, such as the short-term global bond funds of a few years ago, will disappear because they frequently deliver large losses that decimate a company's reputation, Bathon said. "Why let something that has only $150 million or $200 million in annual sales damage the rest of the asset base?" he asked.

Then there is the Web, which can be a tool for wise fund companies even as it would appear to menace them.

"The Web is a great threat to the mutual fund industry," said Priceline.com founder Jay Walker. "It's going to absolutely overhaul the industry in the same way that autos overhauled the horse- and-buggy industry and the television overhauled the movies."

The Web, with its quick access to information and point-and-click ability to buy and sell stocks, increases the threat that people will begin managing money on their own. Yet, little evidence exists that people are withdrawing money from mutual funds en masse to trade their own stocks. Indeed, Bathon of Financial Research said that most people are withdrawing from mutual funds because the strong performance of the stock market has made them feel rich. They're spending the excess on cars and other consumer items, he said.

Even so, industry leaders are fighting investors' perceptions that they can beat fund managers by investing on their own via online brokers.

Brennan said investors can be retained, through results.

"By the end of 1998's third quarter, 1,600 of the country's 7,000 or so listed stocks had lost more than 50 percent of their value," he said. "Among mutual funds, the news was quite different, however.

"Just seven mutual funds -- out of about 3,000 equity funds and more than 7,000 funds overall -- had equivalent losses," Brennan said. "At a time when substantial efforts are being made to seduce ordinary investors into becoming day traders, this is an especially powerful reminder of the value of investing through mutual funds."

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