Boston — NO one who is trying to sell investments to the public has failed to see the effects of last October's debacle on Wall Street. Real estate brokers have seen it in fewer home sales.
Stockbrokers have seen it in clients who aren't as quick to act on their recommendations to buy new stocks.
And even purveyors of mutual funds, those refuges of the common investor, have seen it in the lack of new money coming in.
Almost no one, it seems, is in a mood, or has the capital, to commit additional money to investments of any kind.
Fortunately for the investment companies, almost all of the old money has stayed with the funds, where the catchwords of diversification and professional management have helped build an $800 billion industry; investors have just moved their money to safer ground, usually away from stock funds to money-market and short-term bond funds.
For now, at least, investors seem to be less concerned with large capital gains and high yield than with safety of principal and a reliable, steady income.
But trying to lure new money is a problem for most funds. Sales of stock and bond mutual funds fell almost 50 percent in July compared to July 1987, from $13.2 billion to $7 billion, according to the Investment Company Institute, the Washington-based mutual fund trade group.
``The new money coming in is about even with redemptions,'' says Binkley Shorts, portfolio manager for the Over-The-Counter Securities Fund in Boston. This happened despite the fact that the fund gained 25 percent in the first half of the year, compared to about a 12 percent gain for the Standard & Poor's 500 index.
``I don't think the public is in this market,'' Mr. Shorts says. ``People were so shook up by October they never went back.''
Although the Brady Commission report on the stock market plunge examined many of the issues that are needed to restore investor confidence, he says, there has not been enough follow-up by national political and business leaders to get people interested in committing serious money to the markets, either directly or through mutual funds.
``People don't know what to do,'' says Jack Thompson, secretary- treasurer of the Janus Funds in Denver. ``They are afraid to commit to the market. They are inclined to go with fixed-income [bond] funds, but a lot of people had bad experiences there, too. We have not seen a large number of redemptions, but sales are very slow.
``I suspect we're losing market share to the banks.''
Small-company funds impressive
Those investors who were brave enough to venture into the stock market through mutual funds have looked for funds that specialize in small companies, where a few million dollars in extra sales can translate into big percentage jumps in profits and stock price.
``The values out there are tremendous in small companies,'' says Gerald Perritt, editor of the Mutual Fund Letter in Chicago. ``There are certain characteristics of this economy that tend to bode well for small companies regardless of what industry they're in. You're talking about companies that have equity [capitalizations] of $40 or $50 million and, in some cases, sales of $100 million or so. So a 10 percent sales boost adds significantly to their bottom line.''
``The only funds that have been really outstanding [since October] have been the small companies,'' agrees Sheldon Jacobs, editor and publisher of the No-Load Fund Investor, a newsletter in Hastings-on-Hudson, N.Y. ``By and large, they're all up: income, growth-income, growth, and aggressive growth. The only thing that's really died has been the precious metals. They're way off.''
Income-oriented mutual funds, especially, have been the big winners in the last few months, Mr. Jacobs points out. In the last three months, the no-load income funds were up 3.9 percent, on average, he says, and growth funds were up by the same amount. Small-company funds gained 3.2 percent, while growth funds were up 3.1 percent, and aggressive growth advanced 2.9 percent.
Although these gains would be more than respectable most of the time, they still haven't been enough to attract many new investors, or to get old investors to commit more money. But the slowdown this year may not be all that bad, if longer-range history is taken into account.
The years 1986 and 1987 were ``an aberration,'' says A. Michael Lipper, president of Lipper Analytical Services in New York, ``an aberration caused by excessive money-supply growth. The fund industry FUNDshould compare itself to 1985. Then the industry produced gross sales of $114 billion. This year looks like $100 billion to us.''
The bull market that ended last October, Mr. Lipper says, made almost every broker or financial service salesperson look good. This ``brilliance of the bull market,'' where even mediocre salesmen did well just by being order takers, is now history, Lipper says. ``Now the customer has to be coaxed into buying and there are fewer people capable of doing that.''
The earning power of $800 billion
For now, Lipper observes, ``the basic earning power of the industry is in the assets, which are at $800 billion. Just through reinvestment of dividends, the industry is probably going to grow $30 or $40 billion a year. That's not too bad.''
What is bad, Lipper believes, is that many of the funds are still carrying heavy costs for marketing and service based not on a more ``normal'' year like 1985, but on the aberrations of 1986 and 1987.
``You had lots of marketing people earning more than portfolio people,'' he says. ``And the key word was `earning' because they were generating sales. They're not generating sales today, but they're still drawing large pay numbers relative to what they are generating.''
This, then, is a time of reassessment for the mutual fund companies. First, they are trying to figure out what the public wants, looking for new products or pushing existing offerings to meet that demand, then thinking about ways to get the public's attention and let people know those new products are available.
In the 1970s, an earlier period of doldrums on Wall Street, money-market funds were introduced as a way of keeping investors' money with the funds companies. By the end of that decade, they also had the unexpected benefit of offering a highly attractive alternative to bank savings accounts, which for several years were paying just 5 percent while the money funds paid as much as 16 or 17 percent.
Now, in the final years of the 1980s, the new fund products are far more complicated. Where terms like ``balanced'' and ``growth'' were the standards of the industry before, now phrases like ``asset allocation'' and ``investment pools'' are heard more often.
Allocating assets in one fund
With an asset allocation fund, the money is typically spread among five or six different types of investments, which might include stocks, bonds, gold and precious metals, international equities, and money-market instruments. Such a fund has been introduced by the Colonial Group in Boston, among others.
Other companies have capitalized on the 1986 Tax Reform Act with funds that use sophisticated hedging and trading strategies. That tax law declared that gains from all investments, including such ``derivatives'' as futures, qualified as income. The law also allowed the exemption of certain hedging gains from the short-term rule, which says that no more than 30 percent of a fund's income can come from short-term capital gains of less than 90 days. Several companies, including the Dreyfus Corporation, now have funds that depend on a portfolio manager's ability to use derivative investment techniques, like hedging, to cushion sudden changes in the markets.
The fund companies even have some help for those investors who thought the safety of bonds funds provided a refuge from the vagaries of the stock market, only to see the value of their principal fall dramatically on two occasions last year. With their portfolios of short-term securities, money-market mutual funds are safe, but they don't have the yield many investors want. Longer-term bond funds offer higher yields, but their share price can be far more volatile.
So in the last year or two, most of the major funds, including Putnam, Vanguard, T.Rowe Price, and Fidelity, have FUNDB7B5brought out short-term bond funds. The securities in these mature in just three to five years, compared with the 10- to 20-year maturities of the longer-term funds. For investors seeking even more security, the companies have also provided short-term government bond funds.
One such fund, the Huntington Short-Term Government Mortgage Fund, was reopened to investors on Sept. 6 following a short introductory opening period in late June. At least 65 percent of the fund is invested in short-term United States government mortgage-relates securities, says Donald Gould, president of Huntington Advisors Inc. in Pasadena, Calif.
Stress on safety and income
``It's our perception that people's priorities have shifted quite a bit,'' Mr. Gould says. ``Safety, income, and stability have become much more important.'' The aim of the new fund, Gould says, is to give investors 90 percent of the yield of 30-year Treasury bonds with only 20 to 30 percent of the volatility of those bonds. ``We anticipate an 8.5 percent yield'' on an annual basis this year, he says.
More-complicated mutual funds, along with more uncertainty about the markets, have helped restore the status of one element in the business that had been eroding somewhat before last October: the salesman. When almost all mutual funds were doing well and the investment strategies were fairly simple, the no-load funds went from having almost no share of the market in the 1970s to more than a 30 percent share in the 1980s. Today, that's back down to about 25 or 30 percent. Meanwhile, fund companies that had promoted themselves heavily as no-loads have added sales charges to some funds or opened new funds designed to be sold through brokers or financial planners, who will receive a commission.
Fidelity Investments in Boston, for example, one of the giants of the no-load business (where this year's slump in financial services has resulted in the layoff of 16 percent of its work force) has added ``low-loads'' of around 2 percent to many of its offerings, particularly equity funds. And last year, Fidelity introduced the Plymouth Group of funds designed to be sold through brokers, instead of directly to the public, as are the rest of the Fidelity funds.
The funds in the Plymouth Group carry a 4 percent sales charge and a small 12b-1 fee for marketing expenses, says Ronald Gwozdz, Plymouth's president. There are four equity funds, four fixed-income funds and three money market funds in the group, he says. Some of them are managed by the same people that run similar Fidelity funds.
The loads get lighter
``Roughly three-quarters of the funds bought, excluding money market funds, are load funds,'' Lipper says. ``We know that many of the no-load operations are not doing particularly well. There are fewer no-loads, and many of the no-loads are developing loaded products.''
Some of those formerly no-load funds that added sales charges did so to get brokers and planners selling them. These funds have found they can sell more this way than they can through advertising or articles in the press.
Reasonable fees and charges, investment advisers say, are acceptable to the public as long as they are fully disclosed and the customers feel they are getting something in return for the fees: research into new funds, explanations of how the funds work, and periodic updates on the funds.