Investors liked Fidelity Investments' index funds almost as much as its active funds last year.
Forty percent of the net cash investors poured into Fidelity's funds last year went into its six index funds.
That was almost twice the percentage of the year before, a huge leap for the manager of some of the largest and best-known actively managed mutual funds in the world, including $88.2 billion Magellan.
Investors sank $4.6 billion (net) into the Boston-based company's passive equity mutual funds during 1998.
Fidelity was the second-largest seller of indexed mutual funds in the country, after The Vanguard Group, Malvern, Pa.
Fidelity executives said the move is mainly from retail fund investors and that sales of index funds to defined contribution plans were flat last year.
Fund flow and asset data were provided by mutual fund trackers Financial Research Corp., Boston.
Still a pittance
Fidelity's passive mutual fund assets are still a pittance compared with Vanguard's $155.6 billion in index fund assets. But Fidelity's $26.6 billion total in indexed mutual funds still was more than twice as much as the third-largest indexed mutual fund manager, Charles Schwab & Co. Inc., San Francisco, which had $12.3 billion in passive funds as of Dec. 31.
Through a combination of market gains and cash flow, Fidelity's total indexed mutual fund assets in 1998 increased $9.6 billion, or 56.4%.
This heightened trend toward passive management took place in a year when overall net flow to Fidelity's long-term mutual funds fell more than 28% to $11.3 billion as of Dec. 31, from $15.9 billion a year earlier. Net flows in 1998 to Fidelity's index funds were up 32% from 1997 levels, according to FRC.
Proportion is growing
Jessica Johnson, a Fidelity spokeswoman, said actual net flow into Fidelity's long-term funds in 1998 was $12.9 billion, making the flow into index funds closer to 36%. But that still is more than one-third of the total flows received into all of its long-term mutual funds.
The $26.6 billion managed in passive equity funds represents only 5% of the $520.5 billion invested in long-term Fidelity mutual funds as of Dec. 31, but the proportion is creeping up. A year earlier, index fund assets were 4% of Fidelity's total long-term assets of $418.4 billion.
Fidelity outsourced management of its indexed mutual funds to Bankers Trust Co., New York, in 1997 and slashed fees.
Robert L. Reynolds, president of Fidelity Investments Institutional Retirement Services Group, said growth of sales of indexed mutual funds to defined contribution plans was "flat" for 1998 from 1997. Defined contribution plan assets invested in Fidelity's index funds were $13.5 billion as of Dec. 31, compared with $8.9 billion a year earlier. That defined contribution plan participants remained invested in Fidelity's equity index funds "reflects what's going on in the market. Interest in indexed funds is high, there's a lot of publicity about them and they are getting great returns. People will choose what funds they deem most appropriate, and they have been choosing index funds," he said.
While it is unlikely any other mutual fund company will catch up to the breathtaking, record net inflows of Vanguard's indexed mutual funds -- $27 billion in 1998 -- active managers are quietly satisfying the appetite of retail and 401(k) plan participant investors for passive products.
Passive fund management has gained market share by leaps and bounds in the past three years. According to FRC data, 22.5%of long-term mutual fund assets were held in index funds as of Dec. 31, compared with 14.5%in 1997 and 11.8%in 1996.
A pretty good year
While 14 of the 25 largest mutual fund complexes tracked by FRC experienced significantly lower net cash flow overall to their long-term funds last year, some active managers, like Fidelity, found their passive offerings had a pretty good year.
For example, T. Rowe Price Associates Inc., Baltimore, saw its net cash flow to index funds increase modestly to $792 million, about 23%of total net cash flow in 1998. Overall, net cash flow dropped 62%for long-term T. Rowe Price funds, to $3.48 billion as of Dec. 31, from $9.14 billion the previous year. About 30%of 1998 net flow to its index funds came from 401(k) plan investors, said Rowena Itchon, a spokeswoman for the company.
Norwest Investment Management Inc., Minneapolis, had a 47.5%increase last year in the size of its S&P 500 index fund, the Norwest Advantage Index Fund. After adjusting for strong market gains, net cash flow into the fund was about 20% mostly from 401(k) plan investors, said Laurie White, director of the reserve asset management division.
According to FRC data, Norwest saw flows of $211 million into its index fund in 1998, up from just $12 million in 1997. Norwest had a total of $991 million in index funds Dec. 31.
American Century Investments, Kansas City, Mo., managed more than $12 billion in various enhanced index funds as of Dec. 31 and had cash flow of more than $2.8 billion in 1998 to these funds. But in response to strong demand from bundled defined contribution plans, American Century, well-known as an active manager, is introducing a standard S&P 500 index fund at the end of February, said spokesman Chris Doyle.
Appetite still strong
Market observers said it's difficult to say exactly where flows to index funds are coming from, but it is clear 401(k) plan investors and sponsors have sharpened their hunger for index funds and have been moving assets and contributions into them.
According to data from the Spectrem Group Inc., Windsor, Conn., 41.6%of 401(k) plan investors who had a choice of an indexed equity option invested in that option in the summer of 1998, compared with 37.7%in the summer of 1996 and 34.9%in the summer of 1994. Spectrem's data comes from its biennial survey of the attitudes and behavior of 401(k) plan participants.
About 56% of defined contribution plans offered some kind of indexed option the last time Hewitt Associates Plan LLC, Lincolnshire, Ill., checked sponsor records, according to Stacy Schaus, principal.
"Sponsors are trying to offer a full spectrum of investment options across asset classes and adding more indexed options as part of that move, including more specialized asset class indexes, such as the Lehman Aggregate (bond index) and small-cap indexes, like the Wilshire 4500 or the Russell 2000," Ms. Schaus said. Passive options are more likely to be offered as core options, rather than in a mutual fund window, she added.
Participants have a tendency to "chase performance. The S&P 500 has had such good performance over the last few years and participant assets are flowing that way," she said.