Attractive Yields, Flexibility Help Mutual Fund Sales Suge
Sparked by a surge in popularity of government securities funds and relatively low yields on savings accounts by banks and S&Ls;, mutual funds are racking up unprecedented sales gains so far this year.
Sales of mutual funds investing in stocks, bonds and long-term government securities, excluding money-market funds, hit $19.9 billion in the first three months of this year, 68% better than the year-ago quarter and 58% better than the previous record set in the second quarter of 1983, according to figures released last week by the Investment Company Institute, the trade organization for the mutual fund industry.
Total assets of non-money market mutual funds rose to $156.9 billion in the quarter from $137.1 billion at the end of last year.
“It’s sort of like breaking the sound barrier,” ICI spokesman L. Erick Kanter says of the growth rate.
The gain comes after a period between early 1983 and mid-1984 when gains in mutual fund sales and assets were sluggish at best, hurt by a lackluster stock market that depressed sales of stock funds.
The last major sales surge had come in 1982 amid a robust stock-market rally and new rules allowing more investors to open individual retirement accounts (IRAs), which mutual funds offer.
New Rules This Year
Industry officials aren’t certain whether the magnitude of the latest first-quarter gain can be sustained. The unusually strong gain, some say, may be due in part to new rules this year that disallowed investors to make IRA contributions after April 15 for deductions taken in the 1984 tax year.
But industry officials are encouraged by the fact that investors now have such a wide choice of funds to choose from, allowing them to shift quickly out of poorly yielding funds into funds with higher returns.
The number of mutual funds that are not money-market funds now totals 852, up from 695 a year ago, and includes funds offering nearly every type of investment, from real estate to zero-coupon bonds.
“The mutual fund industry is in much better shape in the sense that it has a whole panoply of products now, as opposed to bygone days when it had a very narrow product base,” says A. Michael Lipper, president of Lipper Analytical Services, which tracks mutual fund yields.
Industry officials say much of the latest growth has been enjoyed by government securities funds, which primarily invest in long-term U.S. Treasury bonds and securities backed by mortgages packaged by the Government National Mortgage Assn. (Ginnie Mae).
These funds currently boast yields of between 12% and 13%, as much as four percentage points above money-market funds and as many as two percentage points above many bank certificates of deposit. Such funds, however, carry a greater risk because their market value can fluctuate as interest rates rise and fall.
Guarantee From Uncle Sam
Investors also are attracted by the fact that Uncle Sam guarantees the principal and interest of these securities.
Some government securities funds have shown herculean growth rates. Franklin U.S. Government Securities Fund, for example, has become the nation’s largest non-money market mutual fund by growing to $3.7 billion in assets from only $18 million at the end of 1982. The fund currently invests only in Ginnie Mae securities.
Industry officials also attribute mutual fund growth to the increase in IRAs and company-sponsored tax-deferred savings plans known as 401(k) plans, which both invest heavily in mutual funds. Mutual funds also have piggybacked on the success of money-market mutual funds, which started in the early 1970s and now total $211 billion in assets, larger than all stock, bond and long-term government funds combined.
“People are getting more and more aware of mutual funds,” says Charles B. Johnson, chief executive and president of San Mateo-based Franklin Resources, which manages the Franklin U.S. Government Securities Fund and other funds. He adds that investors like the convenience of the Ginnie Mae fund, which saves investors the hassle of collecting and reinvesting principal and interest payments.
Industry leaders also cite more aggressive marketing tactics by fund firms, particularly by the largest, such as Fidelity, Dreyfus, T. Rowe Price and Vanguard, which are increasingly using television and radio to mass market their wares.
This aggressive marketing has helped the largest fund firms grab a bigger share of the industry. According to analyst Lipper, the number of funds with assets exceeding $1 billion now total 28 and account for 32.2% of investor funds, compared to seven $1-billion-plus funds in 1981 with only 16% of the industry.
Although most experts believe that mutual funds’ growth will continue, they are less sure that they can sustain the high growth of the first quarter, noting that today’s highest-yielding funds often become tomorrow’s losers.
Whether growth can be sustained “depends on how the bond and stock markets perform,” says Marshall B. Front, a partner in the Chicago-based mutual fund firm of Stein Roe & Farnham. The second quarter so far “has not been remarkable for either the bond or stock markets,” he adds.
Some officials also are concerned that the aggressive marketing tactics may backfire by giving investors unrealistic expectations about the performance of their funds.
For example, fund companies have been luring investors to Ginnie Mae funds with claims about their relative safety. Less emphasis has been placed on telling customers that these funds carry considerable interest-rate risk.
Although Uncle Sam will make good on interest payments and pay back the principal when the securities mature, the government will not guarantee against a loss of value should interest rates rise before maturity. Like bonds, Ginnie Maes have fixed rates of return, and thus their value falls when interest rates rise, and vice versa.
“If you expect interest rates to go back to 20%,” Franklin’s Johnson says of Ginnie Mae funds, “you wouldn’t want to buy them.”
