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April 19, 1999 01:00 AM

MUTUAL FUNDS: BOND, MONEY MARKET FUNDS SURGE AS INVESTORS SEEK TO EQUITY BALANCE; EVEN FIRMS BETTER KNOWN FOR STOCKS SEE FIXED-INCOME SALES FLOOD

Christine Williamson
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    BOSTON -- Mutual fund companies better known for stock funds than bonds, now find themselves wearing a bond label.

    Bond mutual funds had a huge surge in popularity last year, racking up growth in net sales of 140% to $74 billion, up from $31 billion in 1997.

    As a result, traditional stock managers like Fidelity Investments and Vanguard Group of Investment Cos. found themselves with greater relative sales growth in their bond funds than in their stock funds, according to data from Financial Research Corp.

    Money market funds also had a great year, leaping 130% to $235 billion, the biggest annual net flow ever, up from $102 billion in 1997, according to FRC data.

    Industrywide net cash flow to equity funds, on the other hand, went into negative territory, down 25% in 1998 to $141 billion from $189 billion the previous year. Net flows to international and global equity funds sank 87% to just $5.7 billion, compared with $44 billion at year-end 1997.

    The pace seems set to continue, according to mutual fund managers and FRC data, which reported equity funds had net cash flow of $16 million in the first two months of 1999. Bond funds had $12 million in net flow for January and February and money market funds brought in $82 million.

    Bond growth

    Although better known as a stock jockey, Boston-based Fidelity Investments watched net flows to its bond funds surge to $4.1 billion, from a negative net flow of $27 million in 1997, even as net flow to stock funds dropped a precipitous 68% to $4.4 billion, from $13.7 billion in 1997. Net cash flow to both asset classes was almost equal last year.

    The popularity of its indexed equity funds notwithstanding, Vanguard, of Malvern, Pa., also saw a stronger proportional growth in net flow to its bond funds of 124% to $13.1 billion in 1998 from $5.8 billion a year earlier. Vanguard's stock funds, while still enjoying huge fund flows, only had net flow growth of 17% to $34.5 billion in 1998 from $29.5 billion in 1997.

    Fidelity spokeswoman Anne Crowley stressed that net mutual fund sales at her company more than doubled to $32 billion last year and that flows to equity funds were strong until late summer, when three and one half months of market volatility chilled retail investors' appetite for equity funds.

    Participants in 401(k) plans, however, continued to direct plan assets into equity funds, with only a slight movement into bond and money market funds, Ms. Crowley said.

    Ms. Crowley contested FRC's fund flow numbers and said a net $8.5 billion went into equity funds in 1998, $4.4 billion went to bond funds and $19.7 billion was allocated to money market funds.

    For first quarter 1999, a net $6 billion went into Fidelity's equity funds, $1 billion into bond funds and $5 billion into money market funds, indicating a smoothing out of flows, said Ms. Crowley.

    Officials from Vanguard said the company doesn't disclose or discuss fund flows.

    Bond fund net sales growth was a phenomenal 201% in 1998 for PIMCO Advisors LP, Newport Beach, Calif. Strong Capital Management Inc., Menomonee Falls, Wis., had net bond sales growth of 26%; OppenheimerFunds Inc., New York, had 35%; bond fund net flows for American Funds Distributors Inc., Los Angeles, were up 188%. Growth of net sales of bond funds shot up a staggering 1141% in 1998 to $1.8 billion from $143 million the prior year at Eaton Vance Management, Boston.

    Factors for change

    While mutual fund managers and market observers say they can't make a direct correlation between what asset classes mutual fund cash is flowing out of and back into, they point to several factors pushing the fund flow changes.

    Investors seem to be parking their assets in less risky mutual funds for the time being, said Charlie Bevis, a consultant at FRC, pointing to the growth of net flows and lower redemption rates of bond funds and the record-breaking flows to money market accounts last year and to date this year.

    Rebalancing necessary

    Mr. Bevis and others suggested the first fairly serious bubble of stock market volatility last summer, combined with nervousness about high stock market valuations, might have pushed many investors to move some assets to bond and cash funds.

    Another explanation lies in the need to rebalance portfolios swollen by huge equity gains made through 1997.

    The increasing narrowness of the equity market, with returns very concentrated in large-capitalization stocks, resulted in underperformance over the past three years for some well-known equity managers, prompting institutional investors to review and make manager changes in 1998, said Brent Harris, chairman of PIMCO Funds.

    These equity manager reviews coincided with a need to rebalance bond allocations back to recommended levels, during a time when the bond market was showing some real yields and real value for investors. "It was a great environment (last year) to be making changes to increase bond fund allocations," Mr. Harris said.

    'A new financial market'

    "People are seeing that we are in a new financial market now, one we haven't seen for 30 years," said Jerry A. Webman, director of fixed income at OppenheimerFunds.

    "For years, inflation or disinflation was the most important story for the macro-economic environment . . . people thought the stock and bond markets always moved together. But when inflation is not an issue . . . (there is) a divergence in the behavior and relationship of the stock and bond markets," Mr. Webman said.

    "People are falling into a pattern of bond fund use. They like bond funds, they're beginning to lose their fear, but don't want to assume a lot of interest rate risk. They don't like the volatility at the long end of the bond market so are using shorter term bond funds as a balance against stocks," said Stephen B. Ward, chief investment officer, Charles Schwab Investment Management Inc., San Francisco.

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