Seventy-five years and more than $5 trillion after the modern mutual fund was born, the fund industry is finally showing signs of age.
For the first time in a decade, Americans' net new investment in stock funds declined last year from the previous year, industry data show.
While mutual funds over the past decade may have been the greatest democratizing force in the history of Wall Street -- allowing investors with modest sums to ride the spectacular 1990s bull market -- the industry faces increasing competition for its mountain of dollars.
On one front, more investors are opting to manage their own money rather than pay mutual funds to do it. The current mania for Internet-related stocks is one manifestation of that trend, experts say.
On another front, some investors' mutual fund accounts have grown so large that they are ripe targets for the fund industry's competition, including full-service brokers and private money managers.
Mutual funds remain the hands-down favorite investment vehicle for most middle-class Americans, especially in their 401(k) retirement plans.
Not only do the funds allow investors to put small amounts of their savings into securities markets -- relatively safely -- they promise higher returns than passbook savings accounts or bank certificates of deposit could.
"We've gone from a high-growth industry to a rapidly maturing business," said Jeffrey Shames, chief executive of MFS Investment Management, whose company created the first modern fund, Massachusetts Investment Trust, in 1924.
"All of the easy market share gains have already been made," he said. "Most people who have ever thought of switching out of traditional bank savings or cash have already done that and own mutual funds."
Now, fund companies aren't expanding the pie so much as they're guarding their pieces.
More than a third of the nation's 613 fund companies experienced net redemptions last year -- meaning investors pulled more money out than they put in, according to figures compiled by Financial Research Corp., a financial services consulting firm in Boston.
The industry's fear is that, in the face of a true sustained bear market in stocks -- something that hasn't occurred in a quarter-century -- the fund business may go from slow growth to no growth.
The industry's experience last year with new investments and redemptions by its 66 million individual investors point to some of the challenges the business faces.
Gross purchases of stock funds totaled a record $702 billion, up 21 percent from 1997, according to the Investment Company Institute, the funds' chief trade group.
Investor redemptions from stock funds rocketed 48 percent to $534 billion last year, as many more investors cashed out -- many of them amid the market turmoil late last summer.
Adjusting purchases for redemptions and exchanges within the same fund families, the net amount of new cash invested in stock funds tumbled to $158.8 billion, down 30 percent from the record $227 billion in 1997 and $222 billion in 1996.
"I think too much is made about cash flows," said John J. Brennan, chief executive of Vanguard Group, the second-largest mutual fund company. "In real dollar terms, the amount of cash flows that have come into the industry in the aggregate over the past five years has been unbelievable."
Last year, while stock fund net cash flows fell, investors didn't abandon the industry. They poured $235 billion into short-term money market funds and $74 billion into bond funds.
The soaring prices of Internet stocks in recent months, fueled by individuals, is making it appear more lucrative for average investors to play directly in the market than hand their money to a fund, experts note.
That trend is more worrisome for the fund industry because the nation is about to see the greatest wealth transfer in history, as baby boomers are expected to inherit from their parents an estimated $13 trillion over the next 15 years, argues Dalbar President Lou Harvey.
How much of that money mutual funds can retain will depend on how they react to the changing investing landscape.
Pub Date: 2/07/99