Stock Products Just Get More Popular

Everybody knows that the stock market has reached record-high territory in recent months and that the number of mutual funds has never been greater. But there’s another way to measure the growing importance of stock funds that really underscores how popular these investments have become.

Simply put, stock funds have out-muscled bond and money market funds for a fatter slice of the overall pie. The proportion of total industry assets invested in stock portfolios has risen to close to 50% for the first time since 1978, shortly after money market funds were introduced.

Stock funds weighed in with 47.5% of the $3.2 billion invested in mutual funds through August, the most recent month for which information is available. That was before the most recent uptick in stock prices.

The latest figure represents a steady climb from 45% of assets at the end of 1995 and 40.1% in December 1994. Stock funds’ popularity hit a nadir of 17.1% of assets in 1981 and stayed below 30% throughout the 1980s.

Several factors help explain the new popularity of equity funds.

One is the increased interest in retirement planning by investors. In 401(k) and related workplace programs, mutual funds are becoming the investments of choice.

“People have finally come to the realization that they’re personally responsible for their long-term retirement needs,” says Gavin Quill, a marketing vice president at Scudder, Stevens & Clark in Boston.

Also, many people seem to have capitulated in trying to select and monitor stocks on their own.

“Most people do not have stock-picking insights,” says Scott Lummer, managing director at Ibbotson Associates, a Chicago research and consulting firm. “Astute investors used to buy individual stocks but now buy mutual funds.”

This capitulation, Lummer believes, has been hastened by those occasional plunges of 25% or more of a stock’s value on a single day on word that a company will report subpar earnings or other disappointing news.

And perhaps years of financial education directed at the general public--on the part of fund companies, the media, brokers and others--is starting to take hold. Such education typically plays up the merits of investing for lengthy stretches in the stock market.

“We’re seeing the reflection of a long period of educational efforts,” says Quill. At investor focus groups conducted by Scudder, for instance, there’s no longer a need to explain such concepts as the importance of long-term investing because people understand them now, he says.

But what really can’t be interpreted from the numbers is the degree to which greed enters into the equation. The flow of cash into stock funds has accelerated over the last year or so, and aggressive small-company and technology funds have been targets of much of the enthusiasm.

On the other hand, relatively conservative funds, such as those in the growth-and-income and equity-income camps, account for about a third of the assets in stock funds. There’s another sizable slice in international funds and other counter-cyclical categories.

“People are not putting everything into a mass of aggressive, high-tech funds,” says Quill.

In fact, people have not been pulling money out of bond and money market funds to satisfy their hunger for stock investments. The bond and money market categories were hovering near record asset levels themselves in August with $834 billion and $858 billion, respectively. But income funds have not captured as much new cash inflow in recent years, nor can they match the appreciation potential of equity products generally. That’s why their slices of the pie have been shrinking.

Even with equity fund ownership climbing, many investors still have a ways to go before being overexposed in the stock market.

A rough rule-of-thumb allocation for a typical individual would be to have perhaps 60% of assets in stock funds, 30% in bond funds and the rest in cash.

“On average, I’d still say people have too little money in equities,” says Lummer. “The stock fund percentage wouldn’t set off alarms in my mind until it went over 60%.”