Mutual Fund Industry Watches Sales Slacken
Fed's hike in interest rates prompts a shift within fund groups
BOBBY DUNCAN is watching the incoming mail with special care. As chief operating officer of United Services Advisors Inc., based in San Antonio, Mr. Duncan wants to ensure that investors continue to buy into his company's family of 15 mutual funds, despite the downturn that appears to be settling into the United States stock market.
So far, he is upbeat: Although a few people have redeemed shares, most investors are merely ``shifting assets'' from one fund to another - in many cases into liquid accounts such as money market funds.
Duncan has good reason for giving the stock market special scrutiny. Over the past year, money has poured into United Services Advisors. A year ago, the company had total assets of around $800 million; today, it manages $1.3 billion.
Moreover, the company has had the top-ranked government money market fund for the past 38 months, based on total return and yield. The fund, the US Government Securities Savings Fund, has assets of $550 million, up from around $425 million in April of last year. The current yield is around 3.3 percent, just slightly under the yield of 3.4 percent a year ago.
Throughout the mutual fund industry, the talk is of a slight drop in the pace of sales and a shifting of assets between funds, thanks to the falling market.
``January was a record month for us [in terms of sales], and February was also a good month,'' says Tracey Gordon, a spokeswoman for Boston-based Fidelity Investments, the nation's largest mutual fund company. ``But we've noticed a definite change in March; money is still continuing to flow into equities. But there is a shift toward more conservative stock funds, such as asset allocation funds or balanced funds. And in the case of fixed income funds [bond funds], redemptions are now outpacing sales. The shift there is to money market funds, or investors are moving their assets into equities.''
Sales of stock funds have slowed since late February, according to companies that monitor mutual fund sales, such as AMG Data Services, based in Arcata, Calif. Much of the new money going into equities is reportedly being placed in international funds, rather than domestic funds. And some assets are being shifted to money market funds.
Reaction to interest rates
The slight drop-off in sales - as well as some redemptions of equities - is clearly linked to the Federal Reserve Board's interest rate hike in early February, says Gregory Nie, chief market technician for Kemper Securities Inc., an investment house in Chicago. Since its record high on Jan. 31, when it stood at 3,978.36, the Dow Jones industrial average has fallen around 3.5 percent and is now wobbling around 3,850.
Mr. Nie says the market will continue to drop. ``The market will probably come down around 10 percent, although it will then resume its upward course later in the year.''
Still, Nie notes that many variables could put a new bull market on hold. These include concerns about a resurgence of inflation, international troubles, and growing unease over the Whitewater political controversy in Washington.
Just how bad a hit will the mutual fund industry take in this bearish climate?
For now, perhaps not too great, experts say. Final results will not be clear until early April when figures for March are released.
Many mutual fund specialists say that at the least it will be difficult for the industry to maintain the hectic sales pace of late 1993 and early 1994. In December 1993, for example, about $14.5 billion poured into stock funds. In January, the industry set an all-time record: Stock funds scooped up $18.3 billion in sales, according to the Investment Company Institute, a Washington-based trade group.
The industry has not experienced a year when sales fell below prior-year totals since 1983.
Mutual fund companies say their products will continue to do well, given the lack of solid alternative investments. Thus, United Services has just introduced a new fund - the US China Region Opportunity Fund - a no-load mutual fund that invests in China's ebullient economy. Minimum initial investment: $1,000.