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Putnam Lovell Sees Direct Investment Gaining Popularity Over Funds


It appears that investors are beginning to buy stocks directly rather than investing in mutual funds, a fact which will contribute to a decrease in mutual fund sales of 8.6 percent this year, according to an industry report.

Putnam, Lovell, de Guardiola & Thornton, the investment bank based in San Francisco, predicted that sales of equity funds -- mutual fund companies' most profitable product -- will decrease by 27.2 percent, or about $52 billion, this year. Overall sales will be down nearly $53 billion, only the second time in the last 10 years that mutual fund sales will have decreased. Fund sales dropped by more than 36 percent in 1994, to $190.5 billion.

Investors may be showing "an emerging preference for directly- held investments" over mutual funds, according to the Feb. 24 report. Putnam Lovell called the trend "the disintermediation of mutual funds."

Sales figures for equities and funds are "highly suggestive, if not conclusive, that a permanent trend shift has emerged," according to the report. "For now, many investors feel compelled to take matters into their own hands,' and so they reach for the mouse."

While sales will be down in 1999, Putnam Lovell estimated that overall fund assets will rise by 16 percent to $6.4 trillion.

Neal Epstein, a vice president at Putnam Lovell, said last week that the direct purchase of securities was only one factor which appears likely to reduce fund sales. Top-performing mutual funds have tended to invest in large capitalization growth stocks or technology stocks. Investors can mimic those investing strategies by buying stocks directly, Epstein said.

In addition, the savings rate is declining as investors find their assets increasing because of market appreciation in the past four years, Epstein said. Investors now are spending rather than saving a portion of their discretionary income, he said. The Putnam Lovell report also suggested that the proliferation of new funds may be overwhelming investors, leading them to invest directly in securities. Market volatility was another factor Putnam Lovell cited as discouraging fund purchases.

Net sales are a key ingredient of growth in the mutual fund industry. Sales accounted for 83 percent of the growth from 1989 to 1994, according to Putnam Lovell. Market appreciation contributed 17 percent. From 1995 to 1998, net sales represented 54 percent of the growth. Putnam Lovell estimates that for 1999, net sales will account for 63 percent of the growth.

Epstein said it is too soon to know how fund companies' profitability will be hurt by declining sales. Key expenses have remained fairly constant as a percentage of revenue, he said. And not all companies will be effected equally by decreasing sales industry wide, he said.

"It will take a bit more pressure to really see who gets hurt and who doesn't," Epstein said.