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Bear Market Puts the Brakes on New Funds

Responding to a protracted bear market, fund complexes registered 34% fewer new mutual funds with the Securities and Exchange Commission this year than during the year-ago period, according to data provided by New York researcher Strategic Insight.

Through July 18, firms filed applications for 323 new funds, compared to 489 filings during the same period in 2001, the data shows. The data does not include the issuance of new share classes, and Strategic Insight cautioned that some of the funds, although filed, may not have been launched.

Analysts said the decline is largely due to the fact that as troubles continue to plague the equity markets, investors are not willing to gamble on new products.

"In an environment like this, people are just not buying," said Peter DiTeresa, a senior analyst at Chicago fund tracker Morningstar. "They're very reluctant to take a flyer on a new fund."

Before the stock boom ended abruptly in the spring of 2000, fund companies had been bringing hundreds of new products into the marketplace. Firms were desperate to build relationships with intermediaries, who are typically loyal to only a few fund families, said Matt McGinness, a senior analyst at the Boston research firm Cerulli Associates. To that end, fund complexes released a myriad of funds in an effort to get financial advisers to use their products.

"They were trying to be all things to all people," McGinness said

In fact, fund complexes filed 547 new products during the first seven months of 1999 and 711 during that period in 2000, more than twice the number of funds that have been filed this year.

Complexes began to retrench when the stock bubble burst. And now companies are "finding that it makes sense to look at collapsing portfolios and whether or not they'll actually spin off or try to get rid of funds," McGinness said. In the first half of this year, fund companies merged or liquidated 532 funds or fund share classes, whereas throughout all of 1999, there were 560 such transactions, according to Thomson Financial's Wealth Management group in Rockville, Md. [see "Weak Market Drives Record Fund Mergers," MFMN 7/22/02].

"Firms are more concerned about rationalizing their current product lines than expanding them," McGinness continued. They are "trying to sort out their problems and identify their strengths before they go forward with any new products."

The data shows that fund companies filed to launch 96 growth funds during the past seven months, compared to 157 during the same period last year and 243 in the comparable period of 2000.

Analysts said the large number of growth filings, although significantly less than previous years, may signal that fund companies are positioning themselves for an upturn in the markets, when growth vehicles are likely to be back in vogue.

Growth products got hammered when markets began their decline. Some have posted gut-wrenching, double-digit declines since 1999, muddying their long-term records and frightening investors away.

But launching a growth fund at a time when markets are swooning could work wonders for the fund's record, analysts said.

"If they actually go ahead and launch the fund, they might not have great success raising assets right off the bat," said Whitney Dow, an analyst at Financial Research Corp. in Boston. "But this is a good time to build a track record."

Fund companies, meanwhile, filed 12 balanced funds this year compared to only five during the same period in 2001. McGinness said the increase in balanced funds makes sense because the products, which invest in both stocks and bonds, prove an easy solution for frustrated investors.

And, with the equities markets still plummeting, analysts were not surprised that fixed-income products made up the majority of the new filings this year. Firms filed for 110 new fixed-income vehicles, including municipal and corporate bond products, during the first seven months of this year. They filed 101 fixed-income funds during the same period last year.

"People are trying to capitalize on the lack of investor confidence in the equity markets," Dow said.