Big Wall Street brokerages were the wallflowers at 1997's mutual fund industry ball. While U.S. stock and bond mutual funds as a whole enjoyed a 17.5% gain in net cash flows from 1996, in-house fund families of brokerages such as Merrill Lynch & Co. and Salomon Smith Barney Holdings Inc. saw net cash flows plummet by 79.8%.
Meanwhile, Dean Witter Reynolds Inc. saw its inflows turn to outflows. Prudential Investments continued to suffer net redemptions, albeit far less than in 1996.
Industry players provided the annual brokerage sales figures, which exclude money market funds, to InvestmentNews, a sister publication to Pensions & Investments. New York consulting firm Strategic Insight, which compiles the figures in its Quarterly Net New Flows report, declined to confirm the numbers.
The data suggest the nation's largest brokerages continue to struggle as they balance attempts to offer objective mutual fund advice to customers with the desire to draw assets into their own fund families. Like any fund company, brokerages want the ongoing revenue stream that comes from management fees.
Dean Witter had the toughest time attaining that goal in 1997. The New York-based firm, a unit of Morgan Stanley, Dean Witter, Discover & Co., saw $130 million leak out of its portfolios in 1997, compared with 1996 when it raked in nearly $1.5 billion, even though a recent industry study suggests its brokers are more likely to hawk its own funds over others.
Officials at Dean Witter InterCapital Inc., which manages the funds, declined to comment.
According to the Strategic Insight data, others also were hurting. Merrill Lynch & Co. and Salomon Smith Barney Holdings saw far less cash flowing into their mutual funds than in 1996 -- with declines of 87.7% and 80.7% respectively.
But PaineWebber and Prudential, which had 1996 net redemptions, saw turnarounds in 1997. PaineWebber attracted $522 million in net cash flows. Prudential's net redemptions dropped to $294 million from a whopping $1.79 billion the prior year, when its parent, Prudential Insurance Co. of America, was embroiled in a scandal over its annuity sales practices.
Net cash flows in 1997 for the mutual fund industry as a whole were $27.2 billion, up 17.5% from 1996, according to the Investment Company Institute in Washington. Net cash flows into the brokerage houses were $3.6 billion in 1997, according to the cash flow figures obtained by InvestmentNews. The Investment Company Institute does not release individual companies' net cash flows.
There are many reasons brokerages have failed to capture new assets for their in-house mutual funds. Dean Witter notwithstanding, brokerage houses increasingly are encouraging the use of funds of outside firms.
Performance also played a role. While brokerage house funds in general fared well, they couldn't match the returns of no-load funds such as American Heritage Fund, up 75%, or Munder Micro-cap Equity, up 71.53% -- the top funds of the year, according to Lipper Analytical Services Inc., New York.
Spokesmen for PaineWebber and Prudential, which have $7.9 billion and $56.6 billion in long-term funds, respectively, attributed their fund families' turnarounds to better performance and increased marketing. Smith Barney would not comment. Merrill Lynch & Co. did not return calls by press time.
Avi Nachmany, Strategic Insight's president, would not confirm the data but agreed to speak in general terms about why the largest brokerages were suffering.
He said brokerage houses -- except Merrill Lynch -- lack a significant presence in the retirement plan market where big mutual fund companies such as Vanguard and Fidelity are leaders. What's more, brokerages have nice stables of bond funds, but far more limited selections of stock and international funds than other big players.
Mutual funds are only part of the profit picture. Brokerages saw record sales in individual securities, initial public offerings and unit investment trusts in 1997. What they lost in mutual funds, they probably gained elsewhere, he said.
Still, some of the drops in cash flow appear dramatic. Investors were less bullish on Merrill Lynch funds last year, parking $404 million of net new cash there in 1997 vs. $3.29 billion in 1996.
One reason might be that Merrill Lynch's largest fund was hard hit by the Asian crisis. The $9.88 billion Merrill Lynch Global Allocation Fund underperformed its peers as well as domestic equity funds.
Reuben G. Brewer, an analyst with Value Line Publishing Inc., a New York firm that tracks mutual fund performance, said the fund family overall held up well, but global market volatility probably scared some Merrill Lynch brokers into recommending a lot more money market funds. Indeed, the data show Merrill Lynch's net cash flows into mutual funds nearly doubled in 1997 from 1996 when money market funds are added to the mix.
At Dean Witter, fund flows might have slipped because brokers were getting used to new share classes for in-house funds introduced in 1997, said Michael Lipper, president of Lipper. Until last year, Dean Witter funds carried only back-end loads, which customers pay if they sell before a certain number of years.
Observers say Smith Barney may have been hampered by the defection last summer of mutual fund marketing head Jessica Bibliowicz, who was replaced in November by Laurie A. Hesslein, director of mutual funds. "A whole new management structure is in place. . . . We are seeing some signs of growth in the business," Ms. Hesslein said.