New Fund Money Going to Bestsellers

The mutual fund industry will release figures later this week showing that individual investors are putting large amounts of new money to work in stock and bond funds, something they haven’t done for a while.

By one estimate, investors poured roughly $27 billion into stock and bond funds in March and are on track to invest about the same amount in April. Official figures from the Investment Company Institute will be announced in a few days.

Yet the industry’s numbers belie troubles facing many fund companies, analysts say.

For instance, only a handful of funds and fund companies are enjoying the lion’s share of that new money.

In fact, the 25 best-selling funds for the first quarter of 1999 accounted for roughly 96% of the quarter’s net new stock fund and bond fund investments, according to Financial Research Corp., a financial services consulting firm in Boston.

In other words, more than 10,000 other funds had to fight for the remaining 4%.

For the first quarter of 1998, by contrast, the 25 best-selling funds accounted for just 35% of all net new inflow to stock funds and bond funds.

What’s more, just five fund companies--Vanguard Group, Janus, Fidelity, Pimco and Alliance Fund Distributors--saw nearly $42 billion in net new investments during the quarter. That’s virtually equal to the entire industry’s totals.

The net effect: Nearly half the nation’s 636 mutual fund firms saw net redemptions during the first quarter of this year, almost doubling the 26% of the first quarter of 1998, according to FRC.

Just as stock market leadership has narrowed to a handful of companies in recent months, fund flows “are now very, very narrow,” says Bill Dougherty, an analyst with the Boston-based mutual fund consulting firm Kanon Bloch Carre.

In general, investors are putting money only into the best-performing funds, such as Janus Twenty and Vanguard Index 500, each of which contains a large number of growth stocks.

“Five years ago, people knew about the hottest funds,” Dougherty says. “But they didn’t chase them. Today there’s more press about the hottest funds, so there’s more awareness, and people tend to follow the leaders.”

And despite a slight broadening out of the stock market in April--with a mid-month surge in out-of-favor sectors such as value stocks and smaller stocks--there’s little indication that things have changed this month.

For instance, the Santa Rosa, Calif.-based research firm Trimtabs.com says that on an average day during the first quarter of this year, slightly less than half the funds it tracks reported net inflows.

In April, it’s been much the same. On an average day this month, only 47.3% of the funds Trimtabs follows saw net inflows.

“It’s not a good sign when less than half of all funds are seeing inflows,” says Carl Wittnebert, Trimtabs’ director of research.

The concentration of flows into a small number of funds is obviously bad news for those funds that don’t get the money. Funds experiencing net redemptions are often forced to sell some stocks in order meet those redemptions, which could trigger taxes and hurt overall fund performance.

But having this much money go to such a small group of funds is also difficult for the funds that get the money, money managers say.

For instance, two of the nation’s top-selling funds, Janus Twenty and Vanguard Health Care, recently shut their doors to new investors.

Janus officials cited the difficulty in putting so much new money to work at once in the stock market.

While investors often flock to “hot” funds in hopes of enjoying big returns, they often hurt the chances of actively managed funds to deliver big returns by pouring so much money into them at once.

Geoff Bobroff, an industry consultant in East Greenwich, R.I., says the fund flow trends reflect a general slowdown in the industry, which could lead to even more consolidation. “We’ve been flattening out for the last five years as an industry,” he said. “We’ve been plateauing.”

Bobroff adds that the picture may be even bleaker, since 401(k) plan participants often invest more money at the beginning of each calendar year than at the end.

“From a business standpoint, this could be a predictor of future consolidation in the industry,” Bobroff said, or even downsizing.

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The Lion’s Share

A relatively small number of mutual funds drew almost all the net new money invested in stock and bond funds in the first quarter of 1999, leaving more than 10,000 funds fighting for the remainder. This is a turnaround from last year, when the best selling funds got little more than a third of new investments.

First-Quarter 1998

25 best-selling mutual funds: 35%

All other mutual funds: 65%

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First-Quarter 1999

25 best-selling mutual funds: 96%

All other mutual funds: 4%

Source: Financial Research Corp. of Boston