A look at what you might expect on the funds front this year

Your Funds

Dollars & Sense

January 09, 2000|By Charles A. Jaffe

IN THE mutual fund business, the most important year is always the one that lies ahead.

With that in mind, here is my annual attempt to call the shots on the big stories for 2000.

Since I started this ritual back in 1995, about five in every seven calls have come out right, with most of the rest being premature, ahead-of-their-time predictions that simply took longer than anticipated to materialize.

Not wanting to volunteer to look stupid, I long ago stopped forecasting the market. But I am not afraid to predict that fund investors will see the following things in the next 12 months:

Layoffs at major fund companies.

With the 10 biggest firms getting virtually all of the money that's flowing into funds, there is a temptation to call for a wave of mergers. That's unlikely, however, given that even the companies that aren't growing assets seem to be turning nice profits.

Instead, expect a wave of layoffs, a backlash against the excessive staffing of the 1990s, when firms made big money without a lean-and-mean operating structure. If you hear of cuts at your fund families, don't worry; this won't be a pruning of operations so much as a clearing out of deadwood.

Legal action against questionable performance ads.

Well over 100 funds had gains of more than 100 percent in 1999, and about two dozen had gains of over 200 percent. That's unheard of in the history of the fund business.

The Securities and Exchange Commission will be all over any big winners hyping '99 gains, especially small or esoteric funds with no realistic chance of duplicating their performances.

Any fund that overhypes its recent accomplishments or makes triple-digit returns look sustainable is in for a legal showdown.

Social investing goes mainstream.

Up to now, investing in companies that follow a social or moral agenda has been a small but interesting corner of the fund world. People like the idea of aligning their actions and investments, but they fear reduced investment returns and have wanted to see big, established fund firms enter the fray.

That's happening, with Vanguard, the world's second-largest fund firm, opening a new social index fund. The result is a stamp of legitimacy that social investing heretofore lacked, plus exposure through many retirement plans featuring Vanguard funds.

Another good year for active managers.

Index fund performance is tough to beat, but more active managers did it last year than during most of the 1990s.

Given that narrow segments of the market drove many of the gains in 1999, it's a reasonable assumption that active managers may again gain ground against broad-based indexes.

"Exchange-traded funds," or index shares, become the "next big thing."

Active managers may thrive, but there will be no slowing the expansion of index products, notably exchange-traded funds, which essentially are mutual funds that trade like stocks. (Spiders, or Standard & Poor's Depositary Receipts, are the most popular of these investments.)

Look for hundreds of new index share flavors in 2000, some carrying 12b-1 sales and marketing fees to entice financial advisers to sell them. Some traditional funds also may try to create a separate class of shares that can be traded on the exchanges.

Several firms also may develop "interval funds," a hybrid-fund type that can buy heavily into private placements and make venture capital investments.

Investors rediscover international funds.

You can see this even with a dull crystal. International markets, most notably Japan, boomed in 1999, yet went nearly unnoticed amid the hullabaloo over huge gains in domestic tech stocks. With international markets poised to beat the broad domestic market again this year, a lot of investors will wake up and decide to move money abroad.

"Pay-as-you-go" mutual funds.

Fund companies desperately want to wean investors from paper documents and telephone lines. This year, we'll see some upstart fund firms offer an ultralow-cost fund that charges a fee for services such as paper copies of statements or calls to its phone center. Like it or not, this is the next step for the fund industry, assuming a cost structure like this can get approval from regulators.

More investors disillusioned with funds.

Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe.com or at the Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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