INVESTMENT OUTLOOK : MANAGING THE NEW CHOICES : Sift the Options, Satisfy Financial Goals : As Confidence Soars, So Do Myriad Mutual Funds
Warier and savvier after surviving two Wall Street routs in 25 months, mutual fund investors appear to be edging into a period of favoring some risk over safety.
A slow but steady increase nationally in the flow of money into equity funds--and a corresponding slowdown in bond fund growth--indicates that investors are coming out of their post-crash shells smarter and more aggressive, market authorities say. They’re willing to make calculated gambles on stocks instead of just socking most of their money away in income-oriented accounts.
A. Michael Lipper, president of Lipper Analytical Services, the country’s leading assessor of mutual funds, points to the tentative move to stock funds as the promise of the next decade.
“The long-term key to the ‘90s is how quickly people evolve out of their somewhat bunkerlike mentality” of having less than a quarter of their mutual fund portfolios in stocks, he said.
“Investors who have a great deal of money in money market and short-term bond funds will not be the winners over the next decade,” Lipper added. “The winners will be those who have money in equity funds.”
The exploding mutual fund industry certainly offers its customers a choice. In 1969, there were 220 equity funds and 49 bond and income funds, according to the Investment Company Institute, a Washington-based trade group. A decade later, there were still only 278 equity funds and 170 income-oriented funds.
But today, investors face an array of more than five times that many. The trade group reported that through September investors could pick from 1,030 equity funds, 1,156 bond and income funds, 197 municipal bond funds and 450 money market funds.
For the vanguard of ‘90s-style investors, the choice has been stock funds as part of an attempt to diversify their portfolios.
They have been ringing the phones off the hooks at Fidelity Investments, the nation’s largest purveyor of mutual funds. New sales of stock funds are triple the level of November, 1988, according to Fidelity vice president Michael Hines. Meanwhile, sales of short-term bond funds, which had experienced huge growth in the past couple of years, have flattened out.
“Stock funds and money markets are the stars this year,” Hines said. “When you talk about people diversifying, that’s it: One side of their brain is saying, ‘I need to save money for retirement.’ And the other side is saying, ‘I would like something extra, too.’ ”
Joyce Fensterstock, president of PaineWebber Mutual Funds in New York, said that scarred and scared investors lost sight of the excitement of building portfolios with “an opportunity for upside” following the October, 1987, crash. But she also sees a change coming.
More shares of her stock funds were being redeemed through the first few months of this year than new money was entering. But since May, with a slight bump following the 190-point plunge on Oct. 13, she said, sales of global stock funds and money market accounts have steadily risen.
Her forecasters believe that the U.S. stock rally has peaked, however, while substantial opportunities persist overseas. “The flight to quality and safety was so extreme that the time has come to turn back to conservatively managed equity,” she said.
As you slowly begin to lay bets on the market again, how can you tell whether a stock fund is conservatively managed?
Lipper said the collapse of the high-risk, high-yield junk bond market and the waning of takeover mania will make the task somewhat easier. Many institutional fund managers, he said, are returning to a system of evaluating stocks on their earnings and dividends rather than their potential as takeover candidates.
The stocks of takeover candidates may be inflated, Lipper said, and the performance of firms recently bought with large amounts of debt is increasingly questionable. He recommends that amateurs stay clear of funds that buy them.
That’s fairly simple. You can simply inspect a fund’s prospectus to see whether it includes a number of companies that have been acquired or restructured within the past couple of years. “Anyone can have one RJR or Federated,” Lipper said, “but if you have a number of them, that is a clue.”
Or just ask the fund salesman. “He won’t know, but he should be able to find out,” Lipper said. If firms involved in buyouts exceed 15% of the total in the portfolio, he added, that “should be a yellow flag, if not a red one.”
Another tip from Lipper: Buy funds as you would buy individual stocks. Purchase more than one--five is a good start--and seek funds that have good long-term records but are now performing poorly.
Look for bargains--but also value. Ask the salesman why the fund is in the tank; if the fund is suffering from a short-term problem that is likely to be resolved over the period you expect to own the fund, then it could be a good buy.
Lipper pointed to funds specializing in energy firms as an example. “I think in the ‘90s we will see higher-priced energy, and it’s the oil companies that will benefit first,” he said. Energy funds could be turnaround prospects.
Hines, the Fidelity economist, said the “creeping enthusiasm” for investments such as energy stocks can be seen as part of a broader trend. He believes that the market’s recovery after the ’87 crash showed individual investors that a long-term “buy and hold” strategy is more effective than darting in and out of stocks for short-term gains. And more broadly, that dovetails with opinion polls indicating that Americans today are more interested in preparing for the future rather than just living for today.
A national Gallup Poll commissioned by Fidelity in the days following this year’s market plunge, for instance, asked Americans why they invested. The answer from 95% of them: to prepare for retirement.
U.S. government figures on household savings back up that claim. The national savings rate--the amount people have left over after spending their disposable income each month--hit a historic low in April, 1987, of -0.40%. That began to turn around soon after October, 1987. Today, the rate is holding steady at about 5.5%.
That’s bad news for certain parts of the economy--sales of durable goods such as refrigerators and automobiles are way down--but good for investment firms.
“The days of people just squandering their money are behind us,” Hines said. “People are really trying to discipline themselves, and they are building for the future.”
AN EXPLOSION IN MUTUAL FUNDS
The number of stock, bond and income funds has increased nearly fivefold in the last decade.
1989 (As of September): 2,186
Source: Investment Company Institute
