The Daily Interview: How Fund Companies Are Dealing With Outflows

If you think you're worried about the dramatic decline in the markets, you can bet that your fund company has some concerns of its own.

Burton Greenwald President, B.J. Greenwald & Associates

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Burton Greenwald, a veteran consultant to some of the largest mutual fund complexes, says a number of fund giants are worried investors will continue to pull money out of their funds. To try to keep money from rushing to the doors, fund companies are dusting off longer-term returns, Greenwald says. They're also trying to persuade investors to at least keep their money within their firms, perhaps by moving it to a value, fixed-income or bond fund, he says.

Nonetheless, fund companies don't expect the markets' current turmoil to last forever and most are keeping a cool head during the market declines. Here's a glimpse into what some of the biggest fund companies are thinking now, and why, in spite of the current market turmoil, Greenwald still foresees mutual fund assets doubling from $7 trillion today to $14 trillion by 2008:

TSC: In the first quarter of this year, 94% of all domestic equity funds posted negative returns, and in 2000, 62% posted negative returns. That bad news has begun catching up to fund companies, with investors withdrawing billions of dollars from equity funds over the last four weeks. How are fund companies hedging against these outflows?

Greenwald: The largest concern right now is restoring investor confidence after years of extraordinary returns when investor expectations were ratcheted up to extraordinary levels.

For a long time, investors were on cloud nine. One of the ways the fund industry is trying to restore confidence is by first focusing on retaining existing shareholders. For a long period of time, the fund industry was so ebullient that the focus was on attracting new investors.

To reinforce their bonds to shareholders, fund companies are now emphasizing a longer-term perspective. They're improving shareholder communications, trying to attract rollover IRA accounts, providing more advice and finally, promoting other products such as fixed-income and value funds.

TSC: Are fund companies viewing the decline in the markets as a crisis?

Greenwald: It's more a crisis of confidence than anything systemic in the marketplace breaking down. Most people in the industry who have a reasonable perspective know that inevitably you could not sustain the 20%, 25% a year growth that the market posted between 1995 and 1999. In 1999, more than 100 funds had triple-digit returns.

While it's true that some fund complexes like Janus pushed their triple-digit numbers in 1999, there were many fund groups that resisted the temptation to push those numbers. Most of the seasoned people in the industry realized that the market's ascent was unreal, and that the rate of growth of the industry had to slow down.

Mutual fund assets have grown at a compound rate of 20% over the past 20 years, doubling about every four years. I believe we are now headed for a period when the industry's assets will grow at 10% a year, doubling every eight years or so. Growth will be fueled by modest appreciation in the markets, some net new money, expansion of the fund industry overseas and reinvestment of dividends.

A 10% a year growth rate would mean that the fund industry could near $14 trillion in assets by 2008. That's still incredible growth.

TSC: While your pragmatic approach to investing makes sense for the long term, the fact is that the markets are dramatically hemorrhaging and investors are pulling billions of dollars out of stock funds. Aren't fund companies concerned about what's happening right now?

Greenwald: Naturally, anyone has concerns when they see money flowing out. But in fact, even with the dramatic growth of the industry of the past five years, one of the most disquieting trends has been turnover -- turnover not only of the holdings in a fund, but in the length of time investors have been holding funds. I think that's a factor of the extraordinary amount of information on mutual funds that is available to investors today.

Investors today hold funds for an average of three or four years as they try to chase performance in the rearview mirror. Only 10 years ago, they held funds for eight years. That's the bigger question that fund companies need to address.

TSC: What kinds of products are fund companies now promoting?

Greenwald: Fixed-income funds, value funds and variations of value funds. An increasing focus on a spread of investments, rather than a concentration in highly volatile or sector funds. That's especially the case at large fund complexes that have a wide array of products.

There will probably be a diminution of new products, particularly sector funds, which got out of hand to become a mainstream mutual fund product. Originally they were conceived of as a convenient package of securities for people who bought individual securities and felt they had a pulse on a particular sector of the market.

TSC: What about "go-anywhere" funds?

Greenwald: Go-anywhere funds are a marketing approach more than an investing strategy, because these are essentially core-type funds and have existed for years. These got lost in the rush to technology funds in the past few years. I don't think more go-anywhere funds will necessarily be created, but you might see more fund companies promoting the ones that are already there.