In the long, mostly happy relationship between mutual funds and their investors, something’s a little off these days.
We’re not talking sudden disillusionment, or bitter dispute. It’s subtler than that. But let me make my case and see if you agree.
At first glance, the picture looks as bright as ever. In January, the most recent month for which Investment Company Institute statistics are available, a record $40 billion poured into stock funds. Early estimates on February peg it as another big month of inflows.
And why not? Stock funds, which are attracting much of the money, have gained an average of 19 percent a year since 1995, according to Bloomberg Analytics. At that pace, your investment doubles in less than four years, and you’re well on your way to reaching any reasonable long-term goal.
Yet there’s also evidence that investors, for the first time in decades, have stopped learning more about funds and are relying more on paid advisers instead of the funds themselves to provide them with a diversified approach to managing money.
In a just-published study of more than 2,600 fund owners, the consulting firm Spectrem Group in Windsor, Conn., reports a rise in the number who feel “overwhelmed” by investment choices that are “too complicated.”
Just 54 percent of the people surveyed via questionnaire last summer said they stay informed about their investments, down from 61 percent in 1998 and 55 percent in 1997.
“In 1998 the mutual fund investor was becoming more sophisticated, more knowledgeable,” Spectrem said in its report. “The 1999 study suggests some retreat.”
At least some of the blame falls on the fund companies’ shoulders, Spectrem says. It isn’t alone in that view.
“Our industry has done a horrible job of just flooding the marketplace with so many options,” says James E. Stowers III, chairman of American Century Investment Management Inc., manager of a $112 billion fund family which itself includes, yes, more than 70 funds.
The Investment Company Institute says there are now 7,810 funds on the market, five times as many as there were 15 years ago.
For that or other reasons, fund investors have turned in greater numbers to paid advisers. In the Spectrem survey, 22 percent said they preferred a “self-directed” approach to investing, down from 29 percent the year before.
Maybe it’s just prosperity, the sheer growth in investors’ nest eggs thanks to the great stock bull market, that’s driving more people into advisers’ offices. Managing $20,000 by the seat of your pants is one thing, $200,000 something else.
Whatever the reason, this doesn’t add up to a plus for funds’ long-term relations with their investors. Funds were designed to be simple, easy-to-understand vehicles for small investors.
If investors now hire other intermediaries to help them plan diversified portfolios, they’re getting less value than before from the funds themselves. As people use the Internet in increasing numbers to get information and invest, the funds’ role and purpose comes under more intense scrutiny.
For their part, fund executives worry that investors’ expectations have gone beyond what mutual funds can reasonably hope to deliver.
“The public’s tolerance for risk has gone up a great deal, and they want portfolio managers to be more aggressive,” said Henry Herrmann, chief investment officer at Waddell & Reed Financial Inc., an Overland Park, Kan., fund firm that manages more than $25 billion. “It makes you wonder.”
Memories die hard in the fund business of the “cult of performance” that developed in the 1960s bull market, and the recriminations that followed when the go-go funds of that era collapsed.
For 10 straight years from 1972 through 1981, according to the ICI, the number of investor accounts in mutual funds declined, falling from 10.9 million to 7.2 million. Funds’ total assets dwindled over that span from $60 billion to $55 billion, before the bull market in the ’80s got them growing again.
The funds have come a long way since then, approaching $7 trillion in assets now. But with all that’s changing in the world these days, this isn’t an auspicious time for any business and its customers to be drifting apart.
Chet Currier is a columnist for Bloomberg News.
