“Funds on the Defensive”

The New York Times

Sunday, February 28, 1988
Business Section 3:1:2
By BROOKE KROEGER

THE bull in the Merrill Lynch television commercial, which galloped along a breezy coast while a woman sang, ”To Know No Boundaries,” is off the air. Today, Merrill’s ads feature straight-talking financial consultants with no music and sober advice. One of them might be speaking for the whole mutual fund industry when he intones, ”These are uncertain times.”

”What happened after Oct. 19 is the customers went on a buyer’s strike,” said Dennis Reens, vice president and mutual funds marketing manager at Merrill Lynch & Company, which manages $76 billion in mutual funds. ”Not a seller’s rampage, but a buyer’s strike. There’s an attitude of, ‘You’ve got my money, O.K. But you’re not going to get any more.’ ”

Companies are recasting their ad campaigns, retraining their staffs and devising new products to hold on to their customers – attracting new ones has become a secondary consideration – in a climate of extreme investor reluctance to part with money.

So far, the industry has no cause for panic, although Fidelity Investments, based in Boston, was expected to lay off as many as a quarter of its nearly 8,000 employees because of the reduced investor activity since the crash. Fidelity, the industry leader, manages about $80 billion in mutual funds.

Given the losses suffered last quarter, investors have withdrawn surprisingly little money from the various funds. According to the Investment Company Institute, net redemptions in equity funds on Oct. 19, the day of the market crash, added up to only about 2 percent of the nearly $800 billion in mutual fund assets at that time. And 80 percent of that activity involved investors switching from equity to fixed income funds within the same mutual funds company.

Despite the stock market crash and the severe bond market drop in April, total assets in the industry increased by $53.6 billion last year. But that figure was far below the $220.8 billion increase in 1986, and off the pace of 1980 to 1987, when industry assets increased eightfold.

The mutual fund industry derives the overwhelming majority of its profits from management fees, and a much smaller portion from sales charges, so a dropoff in new business is not fatal. For 1987, the industry earned about $3 billion, according to A. Michael Lipper, president of Lipper Analytical Services. Mr. Lipper believes it is too early to forecast a profit figure for the industry in 1988, but said, ”it certainly won’t be as good” a year as 1987.

And the general feeling in the industry is that investors will be back. For one thing, there are limited choices for investors who want to try to earn more than bank interest on their money. ”It’s a time when people would prefer to keep their money under their mattresses,” said Howard M. Stein, chairman of the Dreyfus Corporation, which manages about $40 billion in mutual funds. ”But under their mattresses, they can’t earn the right amount of income. They will find bank yields unsatisfactory.”

Indeed, some firms report that January figures were looking up. For the industry, net sales (excluding money market funds) totaled $1.8 billion in January, up from $1.2 billion in December, but well below the $18.1 billion of January 1986.

The question remains how to cope with the current environment. Many firms are concentrating on customer service and education in ways they never have before. Others push tax-exempt Government bond funds. A few are gearing up Individual Retirement Account campaigns, hoping to persuade investors that they are still a good deal, despite tax changes.

There is no better symbol of the change in the mutual fund industry than Fidelity Investments’ personal finance center on Park Avenue at 51st Street. Less than a year ago, more than 1,500 people a day traipsed through the sleek office, chatting with financial representatives, punching computer keys to check the progress of their funds, watching the electronic tape ripple by with the green letters and numbers that told the story of their personal financial boom.

Sales manager Elaine Joseph said that some days, now, it’s just plain boring. There were more workers than customers on a recent Thursday, shortly before lunchtime, and all the representatives were free; they used to be booked up days ahead.

AT the Dreyfus personal finance center seven blocks uptown, traffic has also slowed considerably since the market collapse. The visitors during one half hour on a recent morning consisted of a woman and her daughter who wanted to invest in tax-exempt Government bonds, an elderly couple, and an older fellow in a beige parka and red baseball cap who sang, ”I Just Called to Say I Love You” while he waited for the elevator. He comes in regularly, the representatives say, as much for the company, it seems, as for the consultation.

”We’re putting a lot of attention for the first time on existing customers,” said Ms. Joseph of Fidelity. The biggest sellers now, she said, are money market mutual funds. But they tend to be less profitable for the mutual fund companies, because they generate lower management fees and no sales charges.

”Sure, we’d like to generate sales charges,” Ms. Joseph said. ”But on money markets we still get a management fee and that keeps the money coming in and the clients with us.” She said the center was running frequent investing seminars ”to keep people coming in.”

Fidelity’s marketing vice president, Michael J. Hines, said that investors were moving to fixed-income funds to avoid the volatility of stocks. ”Cautious” was how he described the investor of early 1988. The Investment Company Institute said assets of money market mutual funds, which promise no risk to capital, have been reaching record highs almost every week, up $37 billion from the end of September to Feb. 24.

Most mutual fund executives agree that it has become especially difficult to sell funds that invest primarily in common stocks.

”It’s beating your head against a rock to push equity sales,” said Thomas V. Williams, senior vice president and mutual funds managing director for the Kemper Financial Services, based in Chicago, which manages about $18 billion in mutual funds. Equity sales at his firm have fallen from around 35 percent of the total to about 15 percent or less. ”It ain’t what it used to be,” he said.

One exception to the trend is the Dreyfus Corporation, according to Mr. Stein. Last spring, believing that the bull market was nearing an end, the firm developed a group of funds called ”flexible strategic funds” that differ from other mutual funds in that they have the freedom to move among the various sectors of the market whenever conditions change. They can also use futures and options to hedge their positions. Because of that flexibility, Mr. Stein said, they are benefiting from the current climate of uncertainty. The funds are drawing $20 million to $25 million a week in new investments, he said.

T. Rowe Price, which manages about $14 billion in mutual funds, is also emphasizing fixed-income funds and I.R.A.’s, according to Charles Vieth, vice president for individual marketing. T. Rowe Price, like most other fund operators, has cut advertising expenditures to reflect the drop in sales. In December, mutual fund companies spent $5.7 million on print advertising, the lowest of any month in1987, according to Advertising Information Services. The figure for the previous December was $7.5 million, the highest ever recorded.

Fidelity, T. Rowe Price and Twentieth Century Investors are among the few companies contacted that are pushing I.R.A.’s this year. Suzanne Mahoney, who heads I.R.A. marketing for Fidelity, said she believed that I.R.A.’s could account for the major part of sales for the industry this year. Executives at other firms disagree; they believe that because most contributions are no longer deductible I.R.A.’s will be much less attractive to investors. Those pushing I.R.A.’s argue that the tax-free accumulation feature of the accounts means that they are still worthwhile.

Sales of I.R.A.’s have been an important contributor to the industry. As of September, mutual fund companies were managing $81 billion in I.R.A. investments, according to the investment company institute.

All the marketing specialists interviewed said they were placing renewed emphasis on educating customers about diversifying their portfolios – and accepting risks.

”You can get professional management,” said Mr. Hines of Fidelity. ”But that doesn’t mean you can hand your money over and forget about it. And if you want to be an investor, you have to accept fluctuation.”

Oppenheimer Management, which handles about $9 billion in mutual funds, is shifting away from advertising individual funds to pushing the concept of ”whole investment needs,” said Bridget Macaskill, executive vice president for marketing.

AS a partial antidote to volatility, Oppenheimer is also pushing the investment technique called dollar-cost averaging, in which investors are encouraged to make regular investments, rather than trying to time market surges and drops. ”Those who invest on a consistent basis, even $100 a month, are less likely to get hurt because of investing and liquidating at the wrong time,” Ms. Macaskill said.

Oppenheimer, however, also has addressed the crash issue directly. In January it ran an ad with the headline, ”Last Year We Took the Bear by the Horns.” Below was a chart showing the 7 Oppenheimer mutual funds (out of 20) that ranked first in their categories for 1987.

Merrill Lynch, which sells its funds through its own brokers, is instituting a new data program that provides brokers with mutual fund research on their Quotron machines, so they can relay it to customers immediately. And it is updating its sales literature to make it easier to understand, Mr. Reens said.

At Twentieth Century Investors, based in Kansas City, Mo., which manages about $5 billion in mutual funds, marketing vice president Gordon Snyder said net investments were half as strong as a year ago, but still positive.

”There’s no doubt that the crash has caused us to make a tactical shift,” he said. ”People have lost their confidence. We now have the chore – the opportunity – to rebuild that confidence.” He said his firm was emphasizing Government bond funds in its advertising, to appeal to people looking for security, and I.R.A.’s, which he thinks ”are still a great idea.”

William F. Hostler, senior vice president for individual marketing at the Vanguard Group, which manages about $30 billion in mutual funds, said his firm had been preparing for three years for the changes witnessed in October. ”We had been educating the customer to the risks and the overvaluation of the market,” he said.

When the bond market dropped in April, the firm, based in Valley Forge, Pa., stepped up preparations for expanding customer service. It gave additional training to 50 phone representatives so that those licensed to deal with such questions as the investment policies of the funds, the economy and the stock and bond markets, could also help with such administrative issues as setting up accounts and exchanging money from one fund to another.

One of the things Vanguard and others have had to cope with is investors’ inflated expectations. Mr. Hostler cited a very informal and unscientific survey that his firm conducted last June with people who happened to call in. It found that those surveyed believed a fair return on stock investments was 20 percent, and a fair return on fixed-income investments was 12 to 15 percent. Reality is much less generous. ”The stock market over the long term has done about 9 percent,” Mr. Hostler said.

Part of the reason people have these inflated expectations, Mr. Hostler said, is mutual fund advertising that features misleading performance figures and the published rankings of funds with the best last-quarter performance. At Vanguard, he said, ”we have not drawn people in with false expectations. We have not advertised performance. We have spoken out against it.”

NONETHELESS, performance sells mutual funds. During the 1970’s, when the stock market performed poorly, there was a net outflow of money from mutual funds, according to Mr. Lipper. If the stock market stays down, said Richard B. Ross, of the Center for the Study of Investor Behavior in Chicago, the mutual funds industry could suffer significant losses.

For now, however, Mary Driscoll, of Donaghue’s Moneyletter, said she had been surprised to see how well business was holding up; recent promotions by various firms seemed to be getting a good response. ”A lot of folks are learning the hard way that you can’t look at the last quarter,” she said. ”People who were going to leave should be in banks anyway, and were tempted in by the big numbers,” she said.

Mr. Lipper believes that the need of Americans to save for retirement will help the industry grow over the long term. He also thinks the industry will benefit from adjusting to the stock market crash. ”One thing people have learned is to build up their operational base to handle sales and redemptions,” he said.

Moreover, a slowdown was inevitable. ”This decline is normal and natural and gives the industry a chance to get its house in order,” he said.

”All industries are cyclical, some on an upward bias, and this is a cyclical industry too and the bias is still up.”

Brooke Kroeger is a freelance writer based in New York.

© 1988 The New York Times Company

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