Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!news.media.mit.edu!americast.com!americast.com!usa-post Newsgroups: usa-today.bonus From: usa-post@AmeriCast.Com Organization: American Cybercasting Approved: usa-post@AmeriCast.com Subject: bonus Wed, May 20 1992 Date: Wed, 20 May 92 05:20:57 EDT Message-ID: 05-20 0000 BONUS: Mutual funds grow sky-high USA TODAY Update May 20, 1992 Source: USA TODAY:Gannett National Information Network Mario Gabelli spent just $29,000 in advertising to launch the Gabelli Small Cap Growth Fund in October - peanuts in the world of mutual-fund advertising. Within five months, the fund had $60 million in assets and 12,000 shareholders. It is a story repeated throughout the fund industry the past year: A volcanic stock market and subterranean certificate-of-deposit yields have shot fund assets to $1.4 trillion - an all-time high. Today, executives representing more than 3,500 funds meet in Washington at the industry's annual convention to discuss the industry's success and evaluate its future. WHAT IS THE INDUSTRY'S BIGGEST PROBLEM? Other businesses would envy their biggest problem: How to handle the flood of new money and new customers. But it's no small problem. In the late 1960s - the last time the public placed such faith in them - the funds botched the job badly. Back then, highly aggressive stock funds burned many investors when the red-hot stock market flamed out. COULD THAT PROBLEM REPLAY ITSELF AGAIN IN THE 90'S? The mutual-fund industry shows a few signs of excess, but it's doubtful that the '90s will be a replay of the late '60s. The industry today is far more conservative, to the point where it has largely spurned an opportunity to ease the restrictions placed upon it by the Investment Company Act of 1940. If it handles the wave of new investors well, the fund industry could reign for the next century as the nation's favorite way to save and invest. HOW POPULAR ARE MUTUAL FUNDS? Mutual funds are the fastest-growing sector of the financial -services industry. Last year alone, investors opened six million new accounts, entrusting them with $107 billion in new savings. The rush to the funds has been so great that some companies have had a hard time handling the sheer volume of calls for prospectuses. WHAT HAPPENS IF THE STOCK MARKET TAKES A DOWNTURN? Several large fund groups, worried that new investors will be scarred forever when the stock market has its inevitable downturn, have told investors to temper their expectations. "Stock funds can be volatile and it would be unwise to expect any fund to sustain unusually high returns for extended periods," wrote Edward Johnson III, chairman of Fidelity Investments, in Fidelity's funds' annual reports. HAS THE INDUSTRY INDULGED IN ANY BOOMTIME ANTICS? Yes. The fees fund managers charge investors have increased the past few years. The median stock-fund management fee - half charge more, half less - was 1.4% of assets last year, vs. 0.9% in 1981. Typically, as funds get larger, their expenses should fall, not rise. In fairness to funds, however, the large number of small, new stock funds has raised the median fund's expense ratio somewhat. ARE THERE ANY OTHER ANTICS THE INDUSTRY HAS INDULGED IN? Yes, fad funds. The industry continues to pump out about one fund each business day - a pace it has kept for a decade. But many funds are launched simply to give investors a way to play the latest market mania. Often, those funds are highly specialized - and risky. DON'T THESE ANTICS CREATE CRITICISM FOR THE INDUSTRY? Still, the fund industry gets little criticism. "It's basically an honest, efficient industry," says Norman Fosback, editor of Market Logic, a newsletter based in Fort Lauderdale, Fla. Indeed, the fund industry's squeaky-clean image is a big part of its success. The mutual funds of the 1960s built their reputations on gun-slinging portfolio managers who invested in stocks so small, they were virtually untradable. Those abuses have since been outlawed by the SEC. WHO WAS RESPONSIBLE FOR MUCH OF THE INDUSTRY'S SUCCESS? The fund industry's biggest star in the 1980s was Peter Lynch, the retired manager of Fidelity's Magellan fund. Lynch, who powered the fund to a 2,510% gain during his 13-year tenure, proved that investors can get rich slowly - and honestly. "Lynch made the mutual fund a household word," says Gabelli. ARE THERE ANY LAWS THAT PROTECT THE INDUSTRY? That substance is the Investment Company Act of 1940, the law that governs the fund industry. The act's strict regulations have kept the industry out of trouble. "To a great extent, mutual-fund executives are looking at their brethren in the banking, savings-and-loan and brokerage industries and saying, `There but for the grace of the 1940 act go I," says Louis Harvey, president of Dalbar, a fund-research firm. JUST HOW ENAMORED OF ITS REGULATION IS THE MUTUAL-FUND INDUSTRY? During the past two years, the Securities and Exchange Commission has been consulting with the industry about what parts, if any, of the 1940 act should be changed. The response: very little. Thursday, the SEC will unveil long-awaited proposed changes to the 1940 act. Some the SEC can make itself, and others will require legislation. WHAT WOULD BE THE LIKELY CHANGES TO THE ACT? Streamlined investment process. Funds generally have to send an investor a prospectus and application before they accept cash. The SEC will probably allow investors to fill out a coupon from a newspaper ad and send cash directly to a fund - provided the ad has enough information for the consumer. WHAT OTHER CHANGES WOULD LIKELY APPEAR? Negotiated commissions. Brokers can compete among one another on stock commissions, but the act forbids negotiating fund commissions. The SEC will probably let brokers charge what they like for fund commissions. That could drive down commissions, just as it drove down stock commissions - welcome news for investors who now pay up to 8.5% of their investment in initial sales charges, or loads. ANYTHING ELSE? One-fee funds. Most investors' eyes glaze over when they try to decipher a fund's annual fees listed in its prospectus. One-fee funds would charge a one-time, upfront fee to cover nearly all of a fund's expenses except its brokerage commissions. Also periodic-withdrawal funds. Most funds let an investor redeem shares on demand. A new type of fund would restrict redemptions to a specific day each month or quarter. That would help eliminate unexpected outflows from the funds, which can force fund managers to sell a fund's holdings at fire-sale prices. ARE THERE ANY LARGER SCALE CHANGES IN STORE FOR THE INDUSTRY? By and large, however, the fund industry doesn't plan to tamper with a formula that obviously pleases so many people. "We're an industry that believes in tough regulation," says Matthew Fink, president of the Investment Company Institute, the industry's trade group. It's a winning formula. "We've changed from a little corner of the financial-services marketplace to one of the savings places of the nation." Bonus Editor: Annette Semprit. (1-919-855-3491) Making copies of USA TODAY Update (Copyright, 1992) for further distribution violates federal law. This article is copyright 1992 Gannett News Service. Redistribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM