More firms offering funds exclusively for IRA and other retirement accounts
With IRA money growing steadily as a source of assets for mutual funds, the funds are stepping up their effort to rope those assets in. IRAs have accomplished what the investment community has tried -- unsuccessfully -- to do for years: persuade young adults to invest money for retirement. And mutual funds want a big chunk.
Four such companies -- IDS, Oppenheimer, Gintel, and Fidelity -- have assembled mutual funds exclusively for IRAs and other retirement accounts. They target the fact that IRA investors have long-term retirement income as their goal, plus the tax advantage of an IRA account, which allows for differing portfolio strategies.
Oppenheimer's Regency and Retirement Funds, Fidelity's Freedom Fund, Gintel's Erisa Fund, and the Managed Retirement Fund from IDS all hope to attract IRA money by gearing up just for those accounts.
Although slow to catch on initially, these funds seem to be gaining. Two of them opened up only in January, accompanied by brisk sales; and Fidelity reports January sales that set a record, up 80 percent over January 1984.
Whether as a marketing gimmick, investment strategy, or both, fund managers claim an advantage in not having to consider the tax consequences of their trades. They can take a short-term capital gain without regard to the tax impact on their shareholders.
Short-term capital gains -- those on the profit of a stock owned less than six months -- are taxed as regular income. Since all returns on an IRA account are taxed equally when the account is cashed out, an IRA-only mutual fund allows its manager to move in and out of stocks at will.
``It's nothing but a marketing ploy,'' counters the manager of a mutual fund open to all investors. ``If you buy a stock for the fund, you're doing it because you think that stock is going to rise to a certain price level for certain reasons. When it hits that price, you should sell . . . no matter how long you've owned the stock.
``If you don't, you ignore your initial strategy for buying in the first place and risk the stock moving against you. I can't afford to pay much attention to tax consequences in something as volatile as the market. We're here to make profits, not tax shelters.''
George Vanderheiden, who manages Fidelity's Freedom Fund, concedes that the tax advantage is slight, particularly since the short-term gains holding period was shortened from 12 to six months, but insists that it gives him more freedom.
``Some stocks have been in since the fund started. I've bought some other stocks that never saw sunset; I bought them in the morning and sold them after lunch. I'd think twice about doing that if I had to worry about short-term capital gains. I run another fund here called Destiny, and the directors get very upset if our capital-gains distribution is heavily short term.
``Last year, for example, over 90 percent of the gains in Destiny were long term. In Freedom over the same period, over 90 percent of gains were short term.''
Gordon Fines, manager of the the IDS Managed Retirement Fund, agrees that having no tax consequences ``lets me make investment decisions as I see fit, but it is not my intent to `day-trade.' I am very cynical about a person's ability to do that with a portfolio.''
With its two funds, Oppenheimer & Co. has gone after both ends of the IRA spectrum: conservative investors building a nest egg and young, aggressive investors who feel they have the time and flexibility to raise the risk/reward ante with their IRAs. Both funds are relatively new. The Retirement Fund opened in January and has pulled in $10 million to date. The more aggressive, $130 million Regency Fund opened in 1983.
``As a result of extensive market research, we found that the [IRA] investing consumer is interested in diversification -- not a lot of decisionmaking, but something that offers flexibility,'' says Donald W. Spiro, president of Oppenheimer & Co. The company's response was the Retirement Fund, which accepts money only for IRA, Keogh, and 401(k) retirement accounts.
This fund maintains three portfolios -- blue-chip stocks, government bonds, and a money-market fund -- and allows investors to move their money among them anytime and in any proportion. They can also buy life or disability insurance through the fund.
``For conservative investors it strikes me as an opportunity to do something they couldn't otherwise do themselves -- what the prudent wealthy would do,'' comments Reg Green, editor of Mutual Fund News Service. ``It is the classic balanced portfolio of safety, income, and growth, the root and branch of investment thinking for wealthy people.''
For the new IDS fund, which started last month and has raised $8 million, Mr. Fines seeks the same flexibility. The fund will move in and out of stocks or bonds to whatever degree the market dictates. ``We can be as aggressive or defensive as we need to be,'' he says. Right now he is optimistic about the stock market, the economy, and interest rates. The mix is 80 to 20 in favor of stocks, with special emphasis on the transportation (``For truckers and railroads, it doesn't matter if you're carrying a Ford or a Toyota,'' he says); communications media; and financial service groups.
``The asset mix will be under continual review,'' he adds. ``What we're providing the IRA investor is professional investment management, making the investment decisions about where to put IRA money every year as well as during the year.''
Unfortunately, one of the mutual funds best suited for IRAs has fallen out of their reach. Qualified Dividend Portfolio I Fund, from the Vanguard Group of investment companies, deliberately sought short-term capital gains and dividend income returns to lure corporations, which can exclude part of dividend income from taxes. Just over 70 percent of the fund goes to common stocks, with the largest groupings in utilities, natural gas, telephones, banks, and autos.
Although aimed at companies, the fund attracted considerable IRA money, since the dividend income for the fund, normally taxed as income for individual investors, takes a deferred tax status. On the good-news side, QDPI returned 17 percent for the year ending Oct. 31, 1984, and has averaged 21.7 percent annually over the preceding 10 years. Now the bad news: You can't get in. The fund was too popular, says Brian Mattes, assistant vice-president of the Valley Forge, Pa., mutual fund family, and was on the verge of collecting too much money for the available investment choices.