Market Watch : Mutual Funds Get Boost
The baby boom generation impressed the world with its spending habits in the ‘80s. Now, in a shift with dramatic implications, the boomers are learning to be savers.
Mutual funds, the choice of millions of investors who want to own stocks or bonds without a lot of hassle, have been shocked by the surge of individual retirement accounts opened this year.
Fidelity Investments in Boston, the nation’s largest fund group, saw its IRA business in the first four months of this year nearly double versus a year ago, said Michael Hines, vice president of marketing. Likewise, Capital Research & Management, the Los Angeles-based fund group, said its April IRA business alone was almost double that of April, 1989. Other funds report similar gains.
The IRA boom is reflected in total mutual fund share purchases this year. Despite a roller-coaster stock market, investors have continued to be big buyers of stock mutual funds. The latest figures, released Friday, show that net purchases of stock funds were $3.2 billion in March, versus $2.5 billion in February and $233 million in March, 1989. Net purchases are total fund purchases minus investor redemptions for the month.
Vanguard Group of Valley Forge, Pa., another fund giant, said it saw a net inflow of $732 million into its stock funds in the first quarter--a record for any quarter, even topping 1987 levels. The rush continued in April: Fidelity’s Hines said the number of stock fund accounts opened at Fidelity this month has been nearly triple that of April, 1989.
The backdrop for all of this is a stock market that is weak and getting weaker. Meanwhile, despite a lot of talk, Congress has done nothing to enhance IRA attractiveness. In 1986, many higher-income taxpayers lost the right to deduct IRA contributions, though they still can create the accounts and shelter from taxes any investments contributed.
To Hines, the strong mutual fund purchases this year despite the short-term negatives are a sign that Americans--especially the baby boomers in their 30s and 40s--are serious about saving for the future. The IRA boom, says Hines, shows that “people have become more disciplined and are planning for long-term goals.”
More proof of a savings mind-set: Trading in and out of funds for fast profit is out, Hines said. Within Fidelity, “people are moving from fund to fund at one-third the rate of a few years ago.”
Motel Mania: Motel 6, the no-nonsense budget chain, suddenly is a rumored takeover target. The stock jumped to $16 from $12.50 last week on rumors that Kohlberg Kravis Roberts & Co., the leveraged buyout kingpin, is mulling a $20-a-share offer. KKR already owns 53% of Motel 6. Another rumor said KKR was looking for a buyer for its stake and the rest of Motel 6.
William Fellows, analyst at Montgomery Securities in San Francisco, sees a bargain in Motel 6 any way you look at it. The Dallas-based firm is a limited partnership, not a traditional corporation. So the shares actually are units in the partnership. As a partner, Motel 6 pays you a $1.22-a-unit annual cash flow distribution--a yield of 7.6% at the current price. But the big attraction in Motel 6 isn’t the current yield (partnership payouts have different tax rules than regular dividends). The real lure is the chain’s growth potential, which should translate into a rising stock price over the long term as the value of the franchise grows.
Motel 6 is the leader in the budget motel business, with 523 motels in 42 states. As anyone who’s ever stayed at a Motel 6 knows, you get a clean room for a very cheap price (often under $26). No mint on the pillow, no restaurant--but then, Motel 6’s budget-conscious clientele don’t care for those amenities.
The formula works extremely well, says Burland East, analyst at Bateman Eichler, Hill Richards in Los Angeles. Motel 6’s occupancy rate, 69% in the first quarter and about 77% on an annualized basis, consistently runs 10 points higher than the industry average. While the hotel business in general is ailing, “Motel 6’s fundamentals are great,” said East.
The only catch if the takeover talk fizzles: Two troubled L.A. financial giants, Columbia Savings and First Executive Corp., held 6.6% and 2% of the stock, respectively, at Dec. 31. If they’re forced to sell, the stock could tank short term. But long term, Fellows and East say Motel 6 is a top-notch growth pick.
MUTUAL FUND BOOM
Investors continue to purchase mutual fund shares at a strong pace. March purchases for specific fund categories:
March purchases Change vs. Fund type (in millions)* March ’89 Growth & income $2,417 +122% Growth 1,611 +105% Long-term muni bond 1,048 -9% Aggressive growth 988 +131% State muni bond 971 +20% U.S. government bond 822 +48% International 799 +492%
* new purchases, not including purchases from reinvested dividends
Source: Investment Company Institute
