Will the Reagan years be good for mutual funds? Fund managers have already begun to assess their prospects under a Republican administration, and the early thinking is that the "Reagan team" will be good for the industry.
Marshall B. Front, a member of the board of governors of the No-Load Mutual Fund Association, is optimistic that the outlook for all types of mutual funds should continue to improve under Mr. Reagan. For mutual funds in equities, he states, Mr. Reagan should be good because of changes that are likely to take place in the capital-gains tax. The Reagan administration has talked about reducing the capital-gains rate to 20 percent, from its current maximum rate of 28 percent.
"This would be favorable for stock prices," Mr. Front explains, "and hence would benefit equity types of mutual funds."
Equity funds, in fact, had one of their better years in 1980. Sales of common-stock funds rose 87 percent, their best performance in 11 years, while redemptions of funds fell 2 percent. The end result is that sales will exceed redemptions by about $379 million, the first year this has happened since 1971.
At the same time, the funds far outpaced inflation and the common-stock averages. Aggressive-growth types of mutual funds rose by 47 percent on average. Growth funds, aiming for long-term growth of capital, gained 34 percent.
Mr. Reagan could also be a boon to the bond funds, Mr. Front says, since "the major thrust of his economic program is an attempt to reduce inflation through a tight fiscal policy and a continued restrictive monetary policy." He figures that such a combination could have a favorable effect on inflation and increase investor attention to bonds. Faced with rising interest rates and declining prices for outstanding bonds, investors have been turning up their noses at these fixed-interest securities.
Finally, the industry expects that as inflation comes under control, interest rates will moderate but stay high by historical standards. "Investors will continue to move assets from low-yielding passbook savings accounts into money-market funds, as they have over the past two years," Mr. Front predicts. Last year the money-market funds hit a high of $78 billion in assets.
The industry will not only be facing a new president, but also a new Congress , which will be considering several bills that could have a substantial effect on the mutual fund business. David Silver, the president of the Investment Company Institute (ICI), in Washington, notes that Congress will be looking at such matters as:
* Repeal of the Glass-Steagall Act.
The American Bankers Association has stated that its No. 1 priority is appeal of this act, which limits the activities of banks to strictly commercial purposes. The bankers are upset because an increasing number of mutual funds are applying for state banking charters so they can set up trust departments to run pension funds on a pooled basis. Forbes Magazine estimates that there are about half a dozen such "demibanks" in the country. The ICI says it will actively oppose the repeal of the act.
* Probable hearings on the money-market funds.
Mr. Silver expects Congress to study whether the funds are being run honestly and whether the check-writing aspect of some of the funds is creating unfair competition for the banks.
Congress is also concerned about where the funds are investing their billions of dollars in assets. For example, some senators have become concerned that the money-market funds are investing their money only in certificates of deposit (CDs) of major money-center banks, freezing out smaller banks.
In an effort to remedy this problem, the ICI has looked into the possibility of recycling some of this money into smaller banks. A key problem is that the funds usually do not buy CDs in amounts of less than $1 million because of the administrative expenses of dealing in smaller amounts. So far two money- market funds, one run by Investors Diversified Services in Minneapolis and one by Federated Securities in Pittsburgh, have invested funds in a package of CDs. This package, worth over $1 million, was composed of CDs of many smaller banks and included amounts as small as $100,000.
* A complete examination of the federal securities code.
A blue-ribbon group, headed by Dr. Louis Loff of Harvard University, has suggested that Congress consider reworking all the securities laws. Mr. Silver compares this effort to making all the railroad track gauges around the country the same standard gauge. "This is a long-term project," he states, "and I don't think Congress will enact anything, although it might hold hearings."
The industry will probably continue to see an easing of restrictions on its ability to advertise its products, making it easier for consumers to get information about the funds.
The Securities and Exchange Commission is also continuing to simplify the regulatory framework within which the industry must work. Mr. Silver says the industry is hopeful that the SEC will adopt reforms that will allow prospectuses to be written in English instead of legalese.
Consumers are also likely to see some new equity mutual funds introduced in 1981. "There has been an increased interest in equity funds," Mr. Silver says, "and I suspect the industry will meet that interest."