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Top Funds Attract Bulk of Assets

New money being invested in stock and bond mutual funds is down markedly from a year earlier and what is being invested is concentrating in only a handful of top-performing funds, according to Financial Research Corporation (FRC) of Boston.

Long-term net flows were $42.1 billion in the first quarter, down 51 percent from $86.7 billion in the first quarter of 1998, according to FRC. That was the lowest first quarter net inflow since 1995's $18.6 billion, according to FRC.

And of this $42.1 billion flowing into mutual funds, $40.4 billion, or 96 percent, went into the top 25 best-selling funds, FRC data showed.

That means the 10,000 other funds available competed for the remaining $1.7 billion of net new money invested in stock and bond mutual funds in the first quarter.

By comparison, the 25 best-selling stocks accounted for only 35 percent of all net new inflows into stock and bond funds in the first quarter of 1998, according to FRC.

Indicating that investors are looking for stellar performance, these 25 funds that attracted 96 percent of all new investments in the first quarter of 1999 averaged 30.4 percent returns in 1998, according to Lipper Analytical Services of New York.

Janus Twenty, the best-selling fund in the quarter, with $4.7 billion in net new sales, was up a stunning 73.4 percent in 1998, according to Lipper. Because cash was pouring into the fund so quickly, in fact, Janus decided to close the fund in late April.

The Vanguard 500 Index, the quarter's second best-selling fund with $4.5 billion in net new sales, was up 28.6 percent in 1998, according to Lipper. And Alliance Premier Growth, the third most popular fund in the quarter, with $2.9 billion in net new sales, was up 48.9 percent in 1998, according to Lipper.

"It shows that investors are interested primarily in performance," said Chris J. Brown, an analyst with FRC. "In every case of these top 25 funds, they have recently been performing extremely well, and investors are looking for these top performing funds."

"There's no question that people are chasing performance," said Burton Greenwald, president of Burton J. Greenwald Associates, a mutual fund consulting firm in Philadelphia. "People now expect outstanding returns, but if they don't get them, redemptions are going to continue to rise markedly."

Spokespeople at the fund complexes that enjoyed top sales in the first quarter agreed it was performance that drove those sales.

Janus had two funds make the list of the top 25 best-selling funds. Besides the Janus Twenty fund, the Janus Worldwide fund ranked as the 16th best-selling fund, attracting $1 billion of net new investments in the quarter, according to FRC. It was up 25.9 percent in 1998, according to Lipper.

In addition to its Vanguard 500 Index fund, seven other Vanguard Group funds made the list of best-sellers, earning the company a total of $18 billion in net new investments in the quarter.

Last quarter's narrow concentration of money in only a few funds is not a good sign for the industry, Greenwald and Brown said.

"At the moment, it's tough for funds without a big brand name or distinguishable returns to generate solid inflows," said Brown. "Investors are reading all of the articles about top performance and overlooking many good, solid funds that can't quite match those numbers."

If Brown's theory holds true - that investors are focused on recent performance and are chasing funds with the highest returns - then the 25 funds that garnered all of the net inflows in the first quarter of the year may experience redemptions in the second quarter. That is because they returned an average of only five percent in the first quarter of 1999, according to Lipper.

Net inflows may be down overall because investors may be taking their money out of mutual funds and investing in the individual stocks found in many of the funds with outstanding performance, Brown said. For the time being, many investors may believe they do not need the advice of an investment professional, he said.