With Bankers in Fund Frenzy, It’s Time to Worry
When investment giants like John Templeton and Howard Stein decide to sell the mutual fund companies that they’ve built up over three decades, a lot of tongue clucking and head shaking naturally follows on Wall Street.
Do these brilliant investors know something the rest of us don’t? Is it time to get out of stocks and bonds--or at least out of mutual funds?
Those questions dogged Templeton a year ago, when he sold his fund group to competitor Franklin Resources for $913 million. They’re the same questions being asked of Stein today, in the wake of Monday’s announcement that Mellon Bank Corp. will buy Stein’s Dreyfus Corp. fund company for $1.7 billion.
With the stock bull market 37 months old and wearying, and with interest rates at 20- to 30-year lows, it’s fair to ask how much better things can get for stock and bond markets. When the next bear market arrives, it’s logical to assume that more than a few of the millions of investors who have piled into mutual funds since 1990 will suddenly want out.
The fact that a bank is buying Dreyfus only bolsters concerns that the fund industry is peaking. “The banks have been wrong on everything they’ve ever done before,” says Jon Fossel, president of the Oppenheimer Funds in New York.
He’s exaggerating, but maybe not much. Bankers are notorious for herding into the wrong businesses at the wrong times. Witness their push into Third World lending in the late 1970s, commercial real estate lending in the mid-’80s and takeover financing in the late-’80s. All of those forays ended in disaster for the banks.
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Now the bankers desperately want to be in the fund business. They’re rushing to either create their own funds (like Wells Fargo’s Stagecoach Funds) or to sell others’ funds in their branch lobbies--or both. Tuesday, Bank of Hawaii became the latest entrant, saying it will launch the Pacific Capital Funds, including a stock fund, a short-term bond fund and a long-term bond fund.
“Clearly the fund industry is in a ‘fad’ stage now,” concedes John J. Brennan, president of the Vanguard Group, the second-largest U.S. mutual fund company. In financial history, he says, “there have been few frenzies like the banks’ entry into the fund business in recent years.”
Of course, it’s hard to blame the banks for wanting in. They’re merely following their customers, who have pulled $382 billion from small savings certificates since 1990. Much of that money has flowed into mutual funds, in search of higher returns. As the accompanying chart shows, giant Fidelity Investments had $75 billion in assets five years ago. Today, its assets top $226 billion.
But every fad eventually fades. Are the banks, as usual, too late?
Dreyfus’ Stein answers that with a yes and a no. He suggests that many banks will have an extremely difficult time making much of their fund businesses in the ‘90s, simply because they’ll never reach the critical mass necessary to compete with the industry’s giants. Indeed, the largest U.S. bank-owned mutual fund operation is run by Mellon rival PNC Bank Corp., which has just $19 billion in assets.
But the Mellon purchase of Dreyfus, he notes, catapults Mellon to sixth place in total fund assets, with $77 billion. The goal, Stein says, is to link Dreyfus’ huge fund-management operations with Mellon’s extensive trust and estate services unit, to offer investors a complete menu of financial planning and investment management services.
“I’m talking about a program that could take care of all financial needs,” Stein says. While that sounds suspiciously like the “financial supermarket” talk of the 1980s, Stein says the Mellon/Dreyfus deal is more about providing advice than simply providing product. Fund companies’ inability to provide advice to clients, he notes, is perhaps the industry’s greatest limitation.
What about the issue of selling out? “This is not a sale, it’s a merger,” says the 67-year-old Stein. He isn’t taking his money and running, he says; he’ll continue to run Dreyfus.
Not surprisingly, neither does Stein believe that the unprecedented mutual fund boom will end in disaster. Where, he asks, are investors going to run if they decide to leave the funds? Back to 3% passbook savings accounts?
“The saving era is over,” Stein argues. “An investing era is developing.” In a sense, Stein and others say, Americans lived in a fantasy world for much of this century, thanks to strict bank savings regulation and the blanket of federal deposit insurance.
But historically, peoples’ savings haven’t been protected by government. Instead, how well you invested determined how well you lived.
The argument for the long-term growth of the fund industry is that we are returning to what’s normal, meaning that people with money must choose a certain level of risk for a certain expected reward. That is what the funds provide.
Vanguard’s Brennan notes that, for the individual fund investor, it doesn’t really matter how many players jump into the industry, or when, or at what price. What will matter to you, in the long run, is how well your specific fund is managed, and how willing you are to stick with an investment plan through bull markets and bear markets.
Fund Explosion How the Top 10 mutual fund companies ranked by assets, have grown over the past five years.
Assets (billions)
Pct. Fund company 1988 1993 chng. Fidelity $74.5 $226.6 +204% Vanguard 34.0 128.0 +276% Merrill Lynch 70.0 116.5 +66% Capital Group 19.6 97.5 +397% Franklin/Templeton 35.9 89.2 +148% Dreyfus 35.9 76.7 +114% Federated 37.2 67.6 +82% Dean Witter 35.3 58.5 +66% Putnam 29.4 56.5 +92% Prudential 23.4 52.0 +122%
Source: Investment Company Institute
