Equity funds: 1980 Cinderella?
For the US mutual fund industry, 1979 was the year of the money fund. The assets of these investments more than quadrupled, from $10.6 billion to some $46 billion.
But the "new discovery" this year may well be the equity funds, a lately overlooked part of the industry that invests in common stocks.
"The stock market is cheap by all historical standards," points out Howard P. Colhoun, vice-president of T. Rowe Price Associates, a fund group.
Alfred Johnson, vice-president and chief economist at the Investment Company Institute, the main trade group for the mutual fund industry, says that the equity funds will be "the new discovery of the 1980s" and that they have already shown substantial growth in value of assets.
David Silver, president of the trade group, notes that people who are purchased funds investing in equities saw the value of their holdings grow an average of more than 20 percent last year.
Mr. Colhoun says he believes many investors will "overstay" their current attachment with money-markets funds, when in fact they should be seriously looking at resource-and energy-related equity funds.
For now, however, equity funds remain the "problem children" of the industry, with redemptions of them exceeding sales by a hefty $2.8 billion during 1979, compared with $2.3 billion in 1978. Higher stock prices, not more sales, are largely responsible for the growth in assets of equity funds, from $32 billion in November 1978 to $35.2 billion a year later.
But for investors who want a choice, the mutual fund industry today offers a broad range of funds -- from the highly successful (though interest-rate-sensitive) money-market funds to "go-go" gold funds, growth funds, and energy-related funds, as well as the equity funds.
Mutual fund officials are almost unaminous in agreeing that Timingm decisions for investors -- whether to keep money in a particular fund or shift it to another fund, such as from a money-market fund to a bond fund to tie up high interest rates for a longer period -- will be particularly important during 1980 . Volatility in political affairs (plus the fervor of a presidential election campaign) adds up to potential volatility and uncertainty for the stock market and the mutual fund industry as a whole.
What happens in coming months in the Middle East, in congress, where defense and energy-related policies are being debated, and in the stately conference rooms of the Federal Reserve Board here will largely determine whether fund officials can point to another phenomenal year of growth for the industry at this time a year from now.
At the same time, the funds are finding themselves under mounting pressure from competing financial institutions. Brokerage houses argue that 1980 is indeed the year to buy individual common stock issues. Banks and savings and loan associations are offering high- yield short-term savings instruments, which , they note in a pamphlet striking at money-market funds, have the protection of federal deposit insurance. In addition, banking institutions are stepping up pressure on Congress for authority to sell "investment funds" that would compete directly with mutual funds.
The success of the money-market funds, especially in 1979, has made it a good deal easier for the industry to withstand this pressure. While overall industry assets reached about $95 billion by the end of 1979, up from $56 billion a year ago, the lion's share of the industry's growth went to the money funds. Assets of these funds shot up to around $46 billion at the end of the year, from $10.9 billion at the start of the year -- an incredible propulsion that reflects high short-term yields that somewhat surprised the managers of many funds.
Most other funds outperformed the money-market funds (gold funds, for example , posted highly successful records, with several of them showing gains of more than 100 percent). The public infatuation with money-market funds remained high , however. For the industry as a whole, therefore, the big question is how much longer that infatuation will continue, particularly if, as many analysts expect, short-term rates drop during the latter part of this year.
Robert Pruyne, who heads the bond research department for the Boston-based Scudder family of funds, says he believes that while there will likely be a "leveling off" of short-term rates, it won't be enough to drive most investors -- including large institutional investors -- out of the money-market funds. Mr. Pruyne, however, points out that there will be many solid opportunities for investors this year, including bond funds and municipal bond funds, as well as the equity funds.
Meantime, the mutual fund industry must deal with some knotty and potentially serious short-term political issues in the months ahead:
* The Senate Banking Committee has been considering whether federal controls -- such as limitations on the rate of return -- should be slapped on money-market funds. The Securities and Exchange Commission has already stepped up its internal surveillance of these funds.
* The industry will also have to face a strong challenge by the banking industry this year, which is seeking to amend the Glass-Steagall Act. That act, in effect, prevents banks from offering mutual funds.