CHICAGO -- The verdict is in: bigger is bad, especially in growth stock mutual funds.
Value funds with large asset bases fared better across the board than did growth funds, according to a recent study by Morningstar Inc. that compared mutual fund performance and size.
While conventional wisdom always has suggested the performance of small-capitalization funds suffers the most as assets grow, Morningstar's analysis of risk-adjusted returns found value funds tended to have better performance than growth funds regardless of the market capitalization range.
One of the study's authors, Tricia Rothschild, said value funds carry their weight better because they have an easier time buying positions in out-of-favor stocks at discounted prices. Growth funds have a harder time putting assets to work, and often are forced to buy stocks at premium prices to get the portfolio manager's hottest ideas.
Morningstar found large funds often have to take on more risk than small funds to pump up returns, especially until they cross the $3 billion threshold. The middle- to large-sized funds generally fell into the category with the highest standard deviation and higher volatility than did the smallest and very largest funds.
Morningstar was able to isolate risk-adjusted performance effects for funds with as little as $150 million under management. But Morningstar was unable to reach a firm conclusion about how big is too big. Some large-cap growth funds with just $500 million under management started to show loses of up to 100 basis points in return per year, after being adjusted for risk and style. But some large-cap growth funds did well until they reached $2 billion and more under management.
One upside of size: some big funds enjoy lower trading and investment costs as assets under management grow. The overall expense ratios of small-cap funds, however, have so little room to fall, they don't enjoy the same economies of scale many large-cap funds do as their assets grow.
Mutual fund assets up 27% in 1997
WASHINGTON -- Mutual funds, especially equity mutual funds, had a respectable year in 1997, with assets increasing 27% to $4.5 trillion, according to the Investment Company Institute.
Investment performance accounted for 56% of the increase in assets. Higher stock prices contributed strongly to asset growth; 80% of the investment performance for all funds was concentrated in equity and hybrid (investing in both equity and fixed-income) funds. Equity fund assets increased 37% to $2.4 trillion.
New net cash flow to all fund categories hit an all-time high for the third year running -- $378 billion. The ICI found equity fund shareholders showed a muted response to the October turmoil in financial markets. Domestic equity funds showed only a very small outflow on the day the Dow Jones industrial average declined 554 points. Only 7% of respondents to an ICI survey said they conducted any kind of stock fund transaction in response to market volatility and most of those said they purchased new mutual fund shares, rather than sold them.
Mutual fund ownership broadened only slightly between mid-1996 and mid-1997. The number of U.S. households owning mutual funds represented 37.4% of all households in 1997, compared with 37.2% in 1996. In terms of individual fund owners, an estimated 65.52 million people owned a mutual fund in 1997, compared to 62.92 million the prior year.
Fidelity introduces video seminars online
BOSTON -- Fidelity Investments will be combining video, audio and slide technology on its Web site, www.fidelity.com, to create a series of online presentations on investment topics.
In a collaboration with CNBC/Dow Jones Business Video and using Microsoft's NetShow software, Fidelity is creating three- or four-minute segments accessible to any investor with an Internet connection.
The first online seminar is on the Roth individual retirement account. The company is getting a record number of calls and personal visits to its investor centers from interested consumers. Inquiries and new IRA accounts doubled since the beginning of the year; 65% of new IRA accounts opened were Roth IRAs.
Two Fidelity execs move to Optima
FAIRFIELD, Conn. -- The Optima Group snagged two Fidelity Investments' professionals to expand its strategic consulting practice for financial companies.
Stephen S. Boeschenstein was director of new business and product development at Fidelity Investments, Boston. He evaluated new business and acquisition opportunities and also headed a companywide drive to develop investment advice products for retail and defined contribution plan customers.
Dyan N. Goodwin held the same position within Fidelity Investments Institutional Services, where she supported bank trust clients, particularly in serving the employee benefit plan market.
Both were appointed senior consultants and project managers and will provide investment product strategy and product design advice.
Northern Trust open to purchase of managers
CHICAGO -- The Northern Trust Co. would consider buying a mutual fund manager or investment manager to fill gaps in the spectrum of its product offerings, said Stephen B. Timbers, president of Northern Trust Global Investments.
Because Northern Trust's active equity style is growth-oriented, it may purchase a value manager, Mr. Timbers said.
Northern may consider purchasing mutual fund firms to gain access to their stronger distribution networks. The company definitely will introduce a high-yield bond management strategy later this year, Mr. Timbers said. The bank is deciding now whether to build management capabilities from within its investment management subsidiary or to hire high-yield bond specialists.
Cerulli surveys independent broker/dealers
BOSTON -- A survey of independent broker/dealers by Cerulli Associates Inc. found between 10% and 15% are opportunistic sellers of 401(k) plan business. Most IBDs target small plans.
Independent broker/dealers are accustomed to working with insurers and selling their products, and Cerulli researchers were not surprised to find most sell group annuity products. In the absence of a strong support network for 401(k) plan sales, group annuities have been the most popular way to offer defined contribution plans an investment product. Group annuities also offer a flexible commission structure.
However, Cerulli's study found evidence that mutual funds are starting to gain momentum among broker/dealers. The broker/dealers are more familiar than ever before with mutual funds and have become more comfortable promoting them over more expensive group annuities. The broker/dealers are getting referrals for 401(k) plan business from third-party administrators, attorneys and accountants and, sometimes, from community banks.
Direct sales begin to Japanese investors
BOSTON -- Fidelity Investments began direct sales of mutual funds to Japanese individuals and through Japanese banks April 1. Six funds were introduced for sales directly to individual consumers: the Japan Growth, Japan Smaller Cos., Fidelity U.S. Blue Chip, Europe, U.S. High Yield and the Money Pool fund. Six other funds previously were available through bank and broker channels.
Moody's expands offerings on Web
NEW YORK -- Moody's Investors Service has made its managed funds rating and research available on a free Web site at www.moodys.com/mfund. Available on the Web page are daily credit and market risk ratings, credit opinions, real-time rating actions and the full library of Moody's international market commentary.
Web browsers can even access risk profiles and opinions for each of the 300 money market and bond mutual fund, pension funds, unit investment trusts and local government investment pools rated by Moody's.
Three fund families sign with First Data
WESTBOROUGH, Mass. -- First Data Investor Services Group Inc. was hired for online mutual fund shareholder services by Alleghany Funds, Firstar Trust and Salomon Brothers Asset Management.
Alleghany, managing $2.3 billion, and Firstar, with $75 billion under management, are using First Data's IMPRESSNet service for customized online mutual fund inquiries and transactions. Salomon Brothers, with $2.2 billion under management, is using the program only for online inquiries.
Stein Roe hires three Van Kampen specialists
CHICAGO -- Stein Roe & Farnham Inc. hired three syndicated loan management specialists from Van Kampen American Capital, Oakbrook Terrace, Ill.
Hired were: Brian W. Good and James R. Fellows, both who were vice presidents and portfolio managers for the Van Kampen American Capital Prime Rate Income Trust Fund; Kathleen A. Zarn, vice president and assistant portfolio manager, and Brian Murphy, assistant vice president and assistant portfolio manager.
Their titles have not been determined, but they initially will focus on managing $200 million in prime rate assets for Keyport Life Insurance Co., a sister company to Stein Roe, said Marilyn Morrison, a spokeswoman.
She declined to comment on whether Stein Roe will introduce a prime rate trust vehicle, citing regulatory restrictions.
A Van Kampen American Capital official said replacements have been appointed to fill the vacancies, but declined to name them.
* American Century Investments, Kansas City, Mo., recently collected its five billionth dollar through Charles Schwab & Co.'s OneSource mutual fund supermarket.
American Century's funds have been available through the supermarket of San Francisco-based Schwab since mid-1993. The $5 billion under management garnered through Schwab represents about 7% of American Century's total assets under management.
The Twentieth Century Ultra Fund is the most popular mutual fund in the OneSource program. Ultra assets from OneSource were $2 billion as of March 31.
Overall, third-party marketing efforts of American Century funds have attracted $15 billion since 1990.
* Phoenix Duff & Phelps, Hartford, Conn., introduced the Core Equity Institutional Fund, managed by its institutional core value equity team.
The fund will be managed using the same quality-driven, large-cap value strategy used in managing $4 billion institutional separate account assets and in a retail mutual fund. The retail fund opened in September last year and has attracted about $20 million.
Paul A. Atkins, senior vice president and director of institutional marketing, said there was demand for the new, advantageously priced fund from existing smaller defined contribution plan clients and from defined benefit plan clients who wanted to offer the same strategy in their 401(k) plans.
Mr. Atkins said the firm might introduce more institutional mutual funds later this year from its subsidiary, Roger Engemann & Associates, Pasadena, Calif., which was acquired last year.
* Fleet Financial Group, Boston, introduced the Galaxy Strategic Equity Fund, which brings its core institutional equity management strategy to a mutual fund vehicle.
The fund is managed by one of Fleet Investment Advisors Inc.'s institutional equity managers, Peter B. Hathaway. Mr. Hathaway uses a disciplined screen to select stocks from among 300 to 400 large- and midcapitalization companies representative of those in the Standard & Poor's 500 index.
Mr. Hathaway's model forecasts two-year returns for the stocks and ranks them relative to price and earnings sensitivity.
* The Dreyfus Corp., New York, closed a mutual fund for size reasons for the first time in its 47-year history April 1. The Dreyfus Small Company Value Fund was closed to new investors because the fund had hit $500 million under management.
* Lord, Abbett & Co., New York, introduced the Lord Abbett Alpha Series Fund.
The new fund-of-funds invests in three existing small-cap equity funds managed by the company in the following allocations: about 30% to the Lord Abbett Developing Growth Fund, about 30% to the Research Fund -- Small-Cap Series and about 40% to the Investment Trust -- International Series.
Robert Morris, director of equity investments, is the fund's lead manager and will control its asset allocation.
The Lord Abbett Research Fund -- Small Cap Series will close to new investors April 9 when assets are expected to reach $650 million.
The fund is being closed to keep assets at a manageable size for the fund's manager, Robert Fletch.
* The American AAdvantage Funds, Dallas-Fort Worth Airport, hired subadvisers to manage two funds in its mutual fund family. Bankers Trust Co. will manage the S&P 500 index fund; Barrow, Hanley, Mewhinney & Strauss Inc. will manage the new Intermediate Bond Fund.
AMR Investment Services also renamed the Limited-Term Income Fund as the Short-Term Bond Fund to more closely reflect its investment policy. AMR manages the fund internally.
Paul Barr contributed to this column.
Christine Williamson can be reached at [email protected]