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MARKET SAVVY : SAVVY CONFIDENTIAL: A Briefing for Investors : Inflows Target Fund Giants, Indexes

August 31, 1999|PAUL J. LIM

Though individuals are on track to invest a net new $18 billion into stock funds this month, up from $12.3 billion in July, the numbers belie ongoing problems facing the rapidly maturing mutual fund industry.

Net new investments into stock and bond funds continue to be concentrated in a handful of the best-known mutual fund companies--many others are bleeding assets.

In July, for instance, nearly three-quarters of net "inflows" into the nation's stock and bond funds, or $8.9 billion, went to funds run by three companies--Vanguard Group, Fidelity Investments and Janus--according to Financial Research Corp. of Boston.

More than a third of those inflows went into passively managed index funds, which mirror stock market benchmarks, such as the Standard & Poor's 500 basket of blue-chip stocks. FRC figures show that four of the 10 best-selling funds in July were stock index funds.

The trend appears to be continuing in August. Charles Schwab, which runs one of the nation's largest fund supermarkets, reported net redemptions of $158.8 million from its stock funds this month through Friday. Yet its stock index funds attracted a net new $187.6 million during the same period, meaning actively managed funds saw outflows.

This is hardly good news for the industry's bottom line, because index funds charge far less to manage money. While the typical actively managed domestic stock fund charges investors $146 a year for every $10,000 they put in, the average index fund charges only $59, according to fund-tracker Morningstar Inc. in Chicago.

"Actively managed funds are where fund companies make money and where they add value to shareholders," noted Chris Brown, an analyst for FRC.

Last year at this time, investors pulled $11.6 billion out of stock funds amid global market turmoil that sent U.S. equities reeling, in contrast to this month's $18-billion net inflow estimate. But for 1999, net new investments into all types of mutual funds, including money market funds, are down 40%.

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