Internet Seen as Direct Business Reviver
May 15, 2000
William M. Lyons, president and chief operating officer of American Century Companies of Kansas City, Mo., is the chairman of this year's general membership meeting of the Investment Company Institute. Lyons discussed the state of the mutual fund industry with Mutual Fund Market News reporter Mike Garrity. An edited account follows.
MFMN: Do you expect that a majority of fund distribution in the future will come through some sort of intermediary?
Lyons: There is no doubt that in the last three to five years, we've seen a big shift in distribution patterns moving from direct distribution to intermediaries, particularly through fund supermarkets like Schwab. But I think the future of distribution at this point is unknown. The largest single factor that is impossible to assess right now is the Internet.
The Internet is a tool that could greatly enhance direct distribution and has the potential of returning some of the asset gathering power to that channel. I don't think mutual funds have effectively used the Internet to promote their direct distribution.
Compare funds to what's happened in the online brokerage industry, for example. In that industry, the Internet has created tremendous asset growth because of the sophistication and convenience of some of the tools. In the mutual fund area, we have not yet seen a lot of investors using transactional capabilities through the Internet.
MFMN: Do you think the Internet will provide growth in market share for funds that are sold directly?
Lyons: I do, and I may be in the minority. I think that if mutual fund firms can provide the right electronic experience for their customers, it could reinvigorate direct channel asset gathering. We need to do a much better job of creating tools such as advice to gather assets to reinvigorate that channel.
The movement toward intermediaries in my view has been in large part about advice. I do not think the mutual fund industry at this point has created good enough advice tools and other services that surround the core investment management service. Once we do that and create the right experience, I do believe that we could see increasing flows in the direct channel.
MFMN: Are the demographics of the mutual fund investor different than that of the online brokerage investor?
Lyons: I think the difference in the demographics is real and I think the difference in psychographics is real. I think the demographic information would show on average a younger, probably more aggressive investor, one that's more oriented toward aggressive equity investing. It's certainly an investor profile that would suggest shorter holding times for investments and more frequent trading.
Mutual funds have not tried to build their services specifically for that demographic or psychographic. It is very disturbing for the mutual fund industry that average holding periods have dropped from 10 or 11 years, looking back a decade, to now something around two years or less. That kind of change in behavior would not be at all a concern to the online brokerage community. Most mutual fund companies have not built electronic environments that promote frequent trading or short holding periods. In fact, it's just the opposite.
There is something different about the electronic medium because it is so immediate. It fits better with the online investor psychographic. There is immediate feedback to doing a trade online, immediate gratification. You can see it. Investing in our Ultra Fund with the expectation of staying there for years doesn't have quite as much thrill.
MFMN: Does the shrinking mutual fund holding period run the risk of making mutual funds irrelevant or diminishing their popularity?
Lyons: I don't think we know the answer to that. I do think what we're seeing now in terms of holding periods may be a product of the unique environment we've been in. If we get into a period of less favorable performance or a bear market, I think we could see enormous shifts in the opposite direction in terms of holding periods.
I don't believe that we have permanently shortened average holding periods. I have every expectation that holding periods could change as market conditions change, as they have in just the last couple of weeks.
MFMN: Fund sales were down last year from 1998. Do you attribute that to a maturing of the industry, new competition or other factors?
Lyons: The demographics would suggest that it's not simply a maturing of the industry. We're right in the middle of the baby boomer generation at its peak savings and investing years. I don't think that demographic is going to change for a good number of years. It's more of a product shift, in my view.