Fund Firms Prep Their Troops for Client War Jitters

Investors are supposed to be ready for a U.S.-Iraq war, and the fear-induced selling is supposed to be finished.

But what if they aren’t, and it isn’t?

Many mutual fund companies and discount brokerages, which deal with do-it-yourself investors, aren’t taking chances. They are gearing up to handle what they expect could be an unprecedented flood of callers once the conflict begins--and also, perhaps, when it ends.

With still-fresh memories of jammed phone lines during the October, 1987, market crash, fund companies and discount brokerages are hoping to prove that they have dramatically improved their service since then. If you need to get through to them--to buy, sell or just ask questions--they think they’ll be ready.


A look at the companies’ contingency plans:

* Almost all major mutual fund companies are ready to boost the number of telephone service representatives sharply on a moment’s notice. Most would come from management ranks or other parts of the organizations.

Fidelity Investments in Boston says that it has 1,000 phone reps in reserve and that it asked all employees to cancel vacations planned for January. Vanguard Group, in Valley Forge, Pa., said it could boost its 200- to 300-person phone corps by 150 immediately. T. Rowe Price Associates in Baltimore could raise its corps to 150 from 100.

Many fund companies say they’ve already been handling a sharp rise in calls in recent days. In San Mateo, Calif., the Franklin Group of funds said it fielded 10,477 calls Tuesday by the market close, up 25% from a year ago. Spokeswoman Virginia Marans said most callers are simply asking questions--"They want to know how will this (the war) affect my fund?” she said.


* The biggest fund firms and discount brokers have in recent years installed automated systems that allow customers to buy and sell, get account balances or perform other functions by keying in commands on a touch-tone phone.

In San Francisco, Charles Schwab & Co. says its touch-tone system, introduced last year, handles 15% of the company’s daily trading. Fidelity, Vanguard, Franklin and many other fund companies also have systems that can perform a variety of account functions, eliminating the need for human contact.

* In some cases, fund representatives and discount brokers have rehearsed general advice for panicked callers--a far cry from the days when the funds and discounters merely took orders. At T. Rowe Price, spokesman Steve Norwitz says the firm’s phone reps “will really try to discourage people who are long-term investors from totally disrupting their investment plan.”

* Most stock mutual fund portfolio managers have built up high levels of cash on hand to meet any crush of redemption requests that may occur. Without those cash cushions, the managers could be forced to sell stock in a falling market--which could lead to major losses for investors who remain in the funds.

The average stock fund had 12.4% of its assets in cash in late November, the latest figure available from the Investment Company Institute. That level may well have risen further by now. Readings of 11% to 12% cash have been typical at market bottoms in recent decades, so the funds believe they’re prepared for the worst.

Fidelity Investments, meanwhile, has gone a step further than most fund families: Last year, it got shareholders to revise fund bylaws to allow one Fidelity fund to lend cash to another in an emergency. Such loans would only take place if they benefited both funds involved, Fidelity says.

Neutrogena Block for Sale?Shares of Los Angeles-based toiletries firm Neutrogena Corp. could take a beating in the next few weeks as a major investment fund liquidates its large position in the company.

The Cypress Fund, a New York-based investment fund, is going out of business. But instead of giving investors their cash, Cypress is distributing to each shareholder a prorated number of shares in each of the companies that Cypress has in its portfolio.


Neutrogena is Cypress’ largest holding: The fund has 600,000 Neutrogena shares, an investment it has held since the late 1980s.

Those shares will land in former Cypress shareholders’ hands--or, more probably, in the hands of their brokers--over the next five to 10 days, Cypress says. Then, the investors will have to decide whether they want to keep Neutrogena or dump it.

Given Neutrogena’s earnings problems over the past year, some brokers and analysts fear that the investors won’t want to stick with it. The stock has fallen to $11.125 now from $24 last spring as the company’s decade-long string of earnings gains ended: Net income in the year ended Oct. 31 fell to $17.2 million, or 65 cents a share, from $26.7 million, or $1 a share, in 1989.

Neutrogena had been one of the great growth stocks of the 1980s, as the company carved a profitable niche selling soaps, lotions and shampoos for sensitive skin. Revenue jumped to $203 million in 1989 from $29 million in 1980.

But last year, sales slowed significantly, edging up to just $210 million, a 3% rise.

Andrew Shore, a consumer products analyst at Prudential-Bache Securities in New York--and someone who money managers say knows Neutrogena extremely well--says the company’s major problem is that “it’s right now in between its rapid growth phase and its maturity phase.” And for many businesses, Shore says, “that’s where a lot of problems crop up.”

Shore says Neutrogena’s product niches have finally become big enough that much larger competitors are taking note and invading its turf. That’s pressuring sales and margins. The answer, Shore says, is for traditionally risk-averse Neutrogena management to change its tack.

That may be happening. The company reshuffled management last spring, and only last year it agreed to begin advertising on TV. It still avoids borrowing: Neutrogena has no long-term debt, a rarity among firms its size.


Bruce Kanter, Neutrogena’s chief financial officer, won’t comment on the sales outlook other than to say that the company expects “this year to be better than last year, but more in the second half than the first half.”

Shore believes that Neutrogena’s future ultimately lies with a bigger company. He expects that 61-year-old Chief Executive Lloyd Cotsen, whose family owns more than 50% of the stock, will sell the firm within two to three years. A fair price today might be around $18 a share, Shore says.

In the meantime, what about the Cypress stock? It represents about 2% of Neutrogena’s total shares, but 4% of the stock held outside the Cotsen family. “It’s a huge amount when you consider the float,” Shore says.

Kanter says the company doesn’t expect massive dumping of those shares, and notes that some of the biggest holders are more likely to use the shares to cover “short” sales positions (bets made last year that the stock price would fall). “I have no reason to believe that there will be a large number of shares coming on the market,” Kanter said.

Cleaned Out? Neutrogena Corp. stock has lost more than 50% of its value since last March, as the company’s earnings have dropped. Tuesday close: $11.125, up 12.5 cents Footnote: Stock trades over-the-counter