Fund executives revise stocks, bonds strategies
A rising stock market floats all the ships. Old Wall Street saying
The mutual fund industry is hoping that it, too, will get to float. The industry is gearing up to sell stock and bond mutual funds, figuring to latch on to some of the $230 billion that is currently invested in the money market funds. Mutual fund executives are formulating strategies to inform investors how to ride what many industry observers hope is another bull market.
''We're moving,'' says Steve Reynolds, vice-president for mutual funds at Investors Diversified Services (IDS), ''from a period of acquisition of hard assets such as gold, cars, or art into a period of acquisition of financial assets.'' To attract investors to IDS's products, the Minneapolis-based company intends to begin a national advertising campaign this fall, including TV ads during the college football season.
At Fidelity Management & Research, part of the Fidelity Group of funds, Victor Kramer, head of retail marketing, says sophisticated investors have already started to move their funds. He notes that Fidelity has seen a significant number of investors move funds into the tax-exempt bond fund, locking in high tax-free yields.
To encourage still more to do so, Fidelity is beginning to stuff the statements of its 600,000 money market clients with information about other Fidelity funds. It also anticipates spending more on advertising this fall in national publications. Exactly how much money it can expect to woo from its $8.9 billion in money-fund assets, Mr. Kramer says, ''is an unknown question.''
In fact, in mutual fund circles the question of how much money will leave the money market funds and where it will go is probably the most talked-about issue. Marshall Front, president-elect of the No-Load Mutual Fund Association, says the mutual fund industry so far has received a very significant number of inquiries about non-money market funds.
However, at the Stein Roe Farnham mutual fund group, where he is a partner, he says the actual shifts by customers so far have been modest. Mr. Front says Stein Roe will be stressing to its clients that the time to buy mutual funds is when stocks are cheap - not overpriced. '
'You want the individual to invest early and not come in late,'' he says.
Some individuals have been following that advice. According to the Investment Company Institute, the mutual fund industry trade group, equity-fund sales so far this year have been $1.6 billion more than redemptions. Alfred Johnson, chief economist for the ICI, attributes this rise to sophisticated individuals who recognized the depressed nature of the stock market. Last year, for the whole year, net sales were $1 billion.
Mr. Johnson anticipates the funds will lose some assets later in the year if interest rates stabilize or edge back up. Money fund yields usually lag the market when rates fall but also rise slower when rates go up. In 1975-77, when interest rates fell sharply, Mr. Johnson recalls, assets remained stable even though fund yields were only in single digits. The assets then were much smaller: $5 billion compared with $230 billion today.
Even if some of the assets start to flow out of the funds, Mr. Johnson says a substantial portion will remain since many people now use the money market funds to keep their assets liquid. They are not yield chasers, looking for the highest interest rates.
Still others, states Mr. Johnson, may reallocate where they put their new savings. Instead of placing new savings in money market funds, they may put their money in the stock or bond markets. Every year, people have an additional multiple investment objectives, and the smart investor reallocates his funds as the investment scene changes.''
If the past is any indication of the future, fund executives can expect mixed results from their efforts to lure investors. Michael Lipper, president of Lipper Analytical Services Inc., a firm that keeps track of mutual fund performance, said that if the market were to hit a new high it would probably cause people to buy mutual funds.
Paul Johnston, senior editor of the Wiesenberger Investment Companies Service , which also tracks mutual fund performance, says sales will rise in a bull market but so will redemptions. The worst kind of market for mutual funds, he notes, is one that ''sits in the doldrums.''
Redemptions also rise, Mr. Lipper says, if the market rises and then stalls. ''People don't realize that when you reinvest your dividends and distributions, you are lowering your cost.'' Thus, an individual who bought a fund ten years ago at $10 per share has probably received $10 per share worth of dividends. However, when the fund gets back to $10 per share, says Mr. Lipper, the individual would probably redeem the shares.
In September he expects some funds to see additional pressure on redemptions as some people sell their mutual fund shares to help meet college tuitions.
At IDS, Mr. Reynolds says, the larger funds have started to see net outflows as people who bought mutual funds in the 1960s as part of their retirement savings start to withdraw their funds. ''There was a bulge in sales about 20 years ago,'' said Mr. Reynolds, ''and now people are cashing in those shares.'' However, he notes, other IDS funds are still attracting money, including its successful Growth Fund.
Some mutual funds will show excellent results this year. However, many were caught by surprise when the market staged its turnaround. Mr. Lipper says that in one recent survey of 300 mutual funds followed by his service, the average fund still had 20 percent of its assets in cash. And many of them had 30 to 50 percent in cash. So some of the funds may have missed the market when it turned, he said. This may make them even more aggressive on the next leg up in the market.