Industry adjusting to changing times

Mutual funds

August 22, 1999|By Kathy Bergen | Kathy Bergen,CHICAGO TRIBUNE

After being smitten with mutual funds through much of the 1990s, American investors are finding their passions waning a bit.

Emboldened by the long-running bull market, many feel confident enough to build their own stock portfolios. Others have seen their nest eggs grow spectacularly through price appreciation alone and figure they don't need to keep adding money to the pot.

Meanwhile, the transition by much of corporate America from traditional pensions to employee-directed retirement plans, such as 401(k)s -- which has boosted the fund industry -- is winding down some.

All of which seems to be translating into slowing growth rates for an industry that has grown like gangbusters. As chief executive of Morningstar Inc., an influential mutual fund research and rating firm based in Chicago, Don Phillips keeps close tabs on the mutual fund world. In this interview, Phillips, 37, discusses the prospects for the industry.

Investors seem to be getting more interested in individual stocks, and particularly in trading online, and there seems to be at least anecdotal evidence of a lessening of interest in mutual funds. Why is this happening?

I think that our research director, John Rekenthaler, made a really good point here, that mutual funds and stocks are interchangeable commodities. And what's happened is the price of trading stocks has come way down with discount brokers.

So the price of assembling a stock portfolio has come way down while the price of a mutual fund has either gone moderately up or it's come down a little bit, but it hasn't come down precipitously, as [commissions on] stocks have. So you have the same commodity. One's gotten less expensive, and because of that, you have more assets going there.

How is online trading changing things for the mutual fund industry? Are funds having problems with investors getting in and out of funds more than they used to?

One of the things that's happened with the advances in technology is that people have more access and more control over their money.

And on the one hand, philosophically, that's a terrific thing because it's the investors' money -- they should have control over it.

On the other hand, what we've really done by lowering the barriers to movement of capital and by lowering the price for the individual to move in and out of funds or in and out of stocks, what you've basically done is level the playing field between the professional and the individual.

So what the industry has to do is move forward and say: "OK, yes, all these barriers have come down. You've got a lot more information, you've got a lot more ability to move the money and impact your portfolio, but we need to enlighten you on why, even when you have the ability to do that, doing so may not be wise and you still want to have very much a long-term perspective."

Another thing I think investors find a little bit overwhelming is there are so many funds right now. Do you think that will continue or will there be some consolidation?

Somebody said to me the other day, "Oh, you know, we have too many funds, they shouldn't allow any more funds to be created." It struck me as sort of akin to saying, "There are too many novels, you know we can't read the ones that we have, so don't write anymore."

Well, you're always going to have someone who thinks they can produce a great fund or write the great American novel, and so you'll have new things coming out.

But I do think for the first time you will see some consolidation in the fund industry. The economics of the money management business are such that it's an incredibly lucrative business to be in, if you can reach a critical mass. But at smaller-asset levels, it's not a particularly attractive business.

What's your view on how mutual fund companies are doing in terms of fees and expenses?

I think fund companies are doing better. The answer isn't uniform. Clearly, organizations like Vanguard and TIAA-CREF and USAA, a number of organizations, have very low fees.

So I think funds on the whole remain a good deal, but I think that the industry needs to think more about fees.

What do you think will change in the next five years in the mutual fund industry?

Well, I think you'll see a higher percentage of money invested in passive investment styles, like indexing.

I think you'll see 401(k)s continue to grow and become an even more critical part of the fund industry. I think you will see fees come down.

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