Fund Sales Are Up, But So Are Redemptions
July 12, 1999
Mutual funds are supposed to be long-term investments. Somebody tell shareholders, quick.
Shareholder redemptions this year are rising at a faster rate than sales, a fact which is starting to roil the mutual fund industry. Industry executives and consultants say that, although it is difficult to find reliable data on the issue, shareholders appear to be selling out of their mutual funds quicker than they did only a few years ago.
In 1993, an Investment Company Institute survey determined the median mutual fund holding period was five years. That figure probably has been cut at least in half as investors chase performance, according to consultants who follow the industry's sales trends.
"The investor's patience is getting shorter and shorter," said Burton Greenwald, one of those consultants, based in Philadelphia, Pa. "It's creating an environment which I think is very dangerous."
Recent sales figures offer support for the view that investors still like mutual funds but are selling them more quickly than in the past.
Long-term fund sales, excluding exchanges within a fund complex, totalled approximately $513.8 billion through May, according to the Investment Company Institute. That is well ahead of the $429.2 billion in sales over the same period in 1998.
Redemptions, however, are turning what should be a good year into a mediocre one for all but a few firms. Shareholders redeemed $421.1 billion in assets through May 31 compared to $278.5 during the same five-month period in 1998, the ICI reported.
The result is that net sales - a key to profitability for mutual fund firms - are down about 31 percent this year compared to 1998, according to the ICI.
"It's the redemptions that are slowing down net sales," said David Haywood, director of research at Financial Research Corp., a fund tracking and consulting firm in Boston. There is no data which explains why redemptions are rising or reliably depicts where the redeemed mutual fund assets are going. But, executives and consultants have identified five trends - some of them inconsistent - which they believe account for the increase in redemptions:
-Investors are using mutual fund proceeds to invest directly in stocks.
-Shareholders are parking assets in money market funds because they are unsure about the stock market's prospects.
-Shareholders, encouraged by years of market appreciation in their holdings and confident in the economy, are selling out positions to buy non-essential goods and services.
-Intermediaries serving high-net-worth clients and sponsors of large defined contribution retirement plans are turning from funds to lower-cost separate accounts for their clients and employees.
Shareholders now pull the trigger quicker on funds which are not performing, causing fund companies with hot funds or a combination of good performance, brand name and distribution, to capture new sales at the expense of their competitors. (FRC noted in a report in February that it is impossible to track assets which are sold out of one fund group and reinvested in another.)
Greenwald and other consultants predicted that, if the increase in redemptions and the shortening of fund holding periods continue, a majority of mutual fund companies will find their margins narrowing. Restructurings will follow, consultants said.
Scudder Kemper Investments of New York took a step in that direction last month. On June 28, the firm said it would lay off approximately 200 employees, about two percent of its work force. All of the employees are being cut from Scudder's direct fund business. Scudder intends to devote additional resources from the layoffs to developing its Internet distribution efforts, Shapiro said.
Excluding Scudder Kemper's Kemper Funds, Scudder had net redemptions of $684.3 million through May 31, according to FRC. Scudder had $1.4 billion in net sales during the same five-month period in 1998, FRC reported.
Slow sales of Scudder's products did not cause the layoffs, said Steven Shapiro, a spokesperson for Scudder. But, the firm did make the cuts to increase its efficiency.
"It's just what needs to happen in this business," Shapiro said.
Geoffrey Bobroff, a mutual fund consultant in E. Greenwich, RI., predicted the restructurings and layoffs are only beginning.
"As an industry, we haven't had to downsize," Bobroff said. "In many ways, this is going to be a re-engineering."
Not everyone is suffering, of course. Three firms - Fidelity Investments of Boston, the Vanguard Group of Malvern Pa. and the Janus Funds of Denver, Colo. - accounted for 71 percent of the mutual fund industry's net sales through May, according to FRC. Of the 25 largest fund groups, six have sales which are ahead of 1998, FRC reported. Those firms are Fidelity, Vanguard, Janus, American Century Investments of Kansas City, Mo., MFS Investment Management of Boston and PIMCO Advisors of Newport Beach, Calif.
Bobroff and fund consultant Darleen DeRemer of Wrentham, Mass. in a recent report described the fund industry as having evolved into an oligopoly in which a couple of firms are consistently prosperous while the remainder churn up and down in the fight for market share based largely on performance.
Despite the pressures on the industry, some observers said that the perception that mutual funds have become passe is inaccurate given the gross sales numbers. Even though net fund sales are off compared to 1998, gross sales remain strong, said Neil Epstein, vice president at Putnam, Lovell, de Guardiola & Thornton, an investment banking firm of San Francisco.
"Seeing net sales go down has gotten everybody pretty excited," Epstein said. "But for all of the hooting and hollering, the industry is actually capturing new money."