Success Since ’87 Crash Is More Than ‘Mania’

Ten years ago today, investors were licking their wounds and wondering if the plunging stock market would drag the economy into a recession or worse--a repeat of 1929.

During that dark moment, few people would have guessed that the country would within a few years embark on an amazing stretch of prosperity, that the stock market would more than quadruple in value, and that mutual funds would lead the market charge.

The fund industry, a relatively small market force a decade ago, has emerged as the big winner in the post-crash era. While the number of individual stocks has grown over the years, the ranks of mutual funds have increased more rapidly. So too has the diversity of fund categories.

Although some Wall Street pros worry that the funds have become a dangerous investment mania, they have flourished for many good reasons.

For starters, most well-diversified portfolios generally rise and fall in line with the broad stock market. So when prices recovered in the crash’s wake, nearly all funds also rallied. For example, 97% of all growth-stock funds with 10-year records have at least doubled since the crash, according to fund tracker Lipper Analytical Services.

In the meantime, plenty of individual stocks, especially those of small, obscure companies, have languished since the crash. Funds thus have offered a more predictable way to participate in the market’s long-term upward march.

Mutual funds are also easier to research and select than individual companies, at least for many investors. And since fund share prices fluctuate less dramatically than prices of most individual stocks, there’s less need to monitor them as closely.

“Mutual funds allow you to put your toe in the market and learn as much as you want at your own speed,” says Troy Shaver, executive vice president at State Street Research, a Boston fund group.

Millions of Americans have done just that in the crash’s wake. The Investment Company Institute, the funds’ chief trade group, estimates that 37% of American households owned at least one mutual fund in 1996, the most recent year for which figures are available. That’s up from 25% in 1987, 20% in 1986 and just 6% in 1980.

Mutual funds have also benefited from many individual investors’ embrace of basic “asset allocation.” This investment philosophy preaches the merits of diversification. In particular, it’s a system for mixing different types of investments into a portfolio, on the assumption that dissimilar assets won’t all rise and fall together, thereby providing an overall smoother ride. Asset allocation strategies aim to identify the best combination of investments, given a person’s risk tolerance. And, as many Americans have discovered, mutual funds fit nicely into an asset-allocation framework. Each fund represents a single relatively low-cost way to gain exposure to a particular investment category--anything from blue-chip U.S. stocks to short-term municipal bonds to Latin American shares.

Hence, the number of funds, as well as the diversity of categories, has mushroomed over the past decade, partly reflecting the popularity of asset-allocation strategies. The Investment Company Institute today counts roughly 6,700 funds, compared with 2,300 a decade ago.

Among today’s categories that were not available back then are funds that target real estate securities, emerging foreign markets and micro-cap U.S. stocks.

Also, scores of money-management firms have entered the fund business over the last decade, widening the choices even further.

Fund companies also have risen to the post-crash challenge by providing better service.

Several firms, especially those in the no-load camp, took some criticism on Oct. 19, 1987, for failure to answer phone calls promptly. Although the industry hasn’t faced such a tumultuous day since then, many fund companies say they have improved their response times and contingency plans for handling heavy shareholder call volumes that might occur during a market crisis.

“Fund companies have significantly increased their phone services, including both the quality and quantity of people answering the phones,” says A. Michael Lipper, president of Lipper Analytical.

Toll-free phone numbers now are standard, as are features such as retirement accounts and free switching among funds in the same family.

Also, Internet access is fast becoming standard, and some firms offer amenities such as foreign-language prospectuses, and shareholder statements that calculate, for tax purposes, the average cost of shares acquired over the years.

Is the fund industry in the midst of a mania? Perhaps. But many individual investors who have chosen to participate in the stock market would argue that they’ve had very good reasons to do so through the funds. And many of those reasons won’t go away, regardless of what the stock market’s near-term future may hold.

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Russ Wiles is a financial writer for the Arizona Republic.