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Funds Seen Increasing Equity Holdings

The movement of open-end mutual fund assets into equity holdings in the past decade has been more dramatic than might be expected, according to the Institutional Investment Report, released last month by The Conference Board of New York. The percentage of open-end mutual fund assets invested in equities grew from 23 percent in 1990 to 58.8 percent at the end of 1999, according to the report. While this shift has encompassed all institutional investor assets, accounting for 26.4 percent in 1990 and 50.3 percent at the end of 1999, the open-end mutual fund category grew more substantially than the rest, according to the report.

The report provides a breakdown of total U.S. institutional assets and how the assets are allocated. An institutional investor is defined as any investor with money under professional management, and these assets are split up into five categories: investment companies (primarily mutual funds), pension funds, insurance companies, bank and trust companies, and foundations.

Since 1999, total U.S. institutional assets have nearly tripled since 1990, with assets at $18.6 trillion up from $6.3 billion. While pension funds comprise the largest part of these total assets, with over $8.8 billion, the largest growth has come from open-end mutual funds, which made up nearly 22 percent of institutional assets at the end of 1999, up from 14.5 percent in 1990 and only 6 percent in 1980, according to the report.

Due to the volatile market in 1998, assets in open-end mutual funds grew only 9.8 percent, the lowest compounded annual growth rate of any institutional investment category. However, mutual funds rebounded the next year, growing 25.2 percent by the end of 1999. Foundations and pension funds had the second highest growth rate at only 15 percent.

Specifically, mutual fund assets grew in the form of equity holdings. Since 1990, assets in open-end mutual funds grew from $914.6 billion to over $4 trillion, according to the report. Although growing in assets, bond and income funds fell relative to equities, comprising only 19.4 percent of these assets, down from over 30 percent in 1990. Taxable money market funds dropped from 38.9 percent to 18.1 percent and tax-exempt money market funds dropped from 7.8 percent to 3.7 percent, according to the report.

The reason for this flow of assets is due to the recent success of the equities market combined with a more educated and less risk averse investor, according to analysts.

"People are realizing the longer term potential of an equity over a bond," said Paul Fullerton, an analyst with Cerulli Associates of Boston. "People are more educated about investments and they're realizing that if they stick it out with certain equity investment vehicles, they may be better suited to achieve their long-term objectives, getting more bang for the buck. One reason is the increased education of investors. The prevalence of intermediaries and consultants combined with the Internet have increased awareness of and brought attention to the equities market."

While the percentage of open-end mutual fund assets in equities has risen, the percentage of total U.S. equity holdings that come from institutional investments has flattened over the last decade, after dramatic increases in previous years, according to the report. A total of 6.1 percent of equity holdings were institutional assets in 1950, but that rose dramatically every decade to 12.6 percent in 1960, 19.4 percent in 1970, 33.9 percent in 1980 and 47.2 percent in 1990. At the end of 1999, the percentage had only risen to 49.6 percent, according to the report.

There are three reasons for this slow down, according to the report. While equity markets have grown, due to huge increases in IPOs and growth in small cap companies, institutional investors tend to focus on large cap companies, which have had less of an impact on the equity boom.

Another reason is that the strong stock market and the slowed growth of corporate pension funds has driven investors to invest in equities through brokers and online accounts and not merely institutional means.

Finally, some larger institutional investors are beginning to make direct equity investments abroad as well as investing in privately held securities.

"These trends will, in time, reduce the percentage of U.S. equity markets accounted for by institutional investors," according to the report.