New Investors Worry Some Managers

Are stock mutual fund shareholders prepared for the possibility that their favorite fund lost money in the first quarter?

Long-time shareholders probably won’t care--they’ve seen the stock market ebb and flow before. What concerns the funds is the tidal wave of novice investors who cashed in bank CDs to buy stocks earlier this year--because they expected stocks to keep rising at a brisk pace.

If some of those new investors suddenly decide that they made the wrong decision--and choose to pull out of the funds--they could help spark a stock market selloff.

Veterans of the mutual fund industry remember all too well the carnage of the early 1970s, when many stock funds ballooned in size, only to collapse overnight in the bear market of 1973. Those were the days of the Enterprise Fund and the Manhattan Fund, go-go funds that became the stuff of cocktail-party chatter.

During that period, mutual funds were almost exclusively sold by brokers--and their outrageous hype drew in a lot of investors who didn’t belong in stocks, older fund managers remember.

“A lot of young brokers came into the business who didn’t really know better,” says Roger Servison, president of Fidelity Retail Marketing, an arm of the Boston-based mutual fund giant.

Today, Servison contends, the average investor buying mutual funds is “much more educated” about the market and the risks.

James Stowers III, head of the Twentieth Century mutual fund group in Kansas City, Mo., also argues that individual investors are far more sophisticated today and won’t be shocked by short-term volatility in the stock market.

“I think they realize that this is a long-term investment,” he says. “We really sell ourselves that way.”

One big plus for the fund industry is that many people today are buying fund shares for retirement plans, which virtually forces investors to think long term. Individual Retirement Accounts and 401(k) retirement plans were unknown in the early 1970s.

Even so, some fund managers worry that the first-quarter surge in new investors could come back to haunt them.

“You’ve got a lot of fickle people out there who were nervous (going into stocks) to begin with,” says Robert Bacarella, who manages the Monetta Fund.

His shareholder base has doubled in the last three months, from 17,000 to 35,000 accounts. Bacarella admits that he feels the pressure. “I’ve got a lot more shareholders to account to,” he says. “They’re little guys. To them, $50 means a lot--and it means a lot to me too.”