The mutual fund boom of the 1990s has slowed in 2000; the number of new funds is down and other funds are being liquidated at a record pace
By the end of September, 176 funds had been liquidated this year--which was on pace to break the record of 222 mutual fund liquidations set in 1998 -- and 419 had been merged into other funds.
With just 236 new mutual funds introduced in the first nine months of 2000, the net number of funds on the market dropped by 359, according to Wiesenberger Thomson Financial, a Rockville, Md.-based firm that tracks mutual funds.
Ramy Shaalan, mutual fund analyst at Wiesenberger, said that since most fund liquidations historically occur in the fourth quarter, the number could surpass 250 in 2000.
The mutual fund liquidation numbers have been fueled by the bull market of the 1990s and, in turn, investor intolerance of poor returns, Mr. Shaalan said, an impatience that has become more marked during the nine-year bull market.
The number of mutual funds hitting the market grew so fast throughout the 1990s, said Neil Bathon, president of mutual fund research firm Financial Research Corp., Boston, that something had to give. In 1999 alone, 807 funds were launched, according to Wiesenberger data. Because the market has become more competitive, more fund companies are willing to shut down unsuccessful funds, he said.
This year, municipal bond funds and emerging-market equity and fixed-income funds have had the highest number of liquidations. Since 1996, 124 municipal bond funds have gone belly up, which is the most in any asset class.
Emerging market and international equity and bond funds have gone under this year largely due to poor performance, said Mr. Shaalan. The lingering effects of the emerging-markets and international downturn in 1998 have come home to roost in 2000 as all-important 3- and 5-year track records suffer.
The Chase Vista Latin America Fund and the Delaware Global Opportunities Institutional Fund are among the emerging-market funds that have shut down.
If INVESCO Funds Group Inc., Denver, gets shareholder approval, at least two more emerging market funds will be liquidated this year. In September, the firm filed papers with the Securities and Exchange Commission to close the INVESCO Latin American Growth Fund and the INVESCO Pacific Basin Fund.
"We won't offer an investment we don't believe provides you with the potential you deserve," INVESCO Funds Chief Executive Officer Mark Williamson wrote in a letter to shareholders, noting that the geographic areas the funds invest in "have been weak and volatile for an extended period of time."
International funds are not the only equity funds that have felt the pinch. Through Sept. 30, 34 domestic equity funds were liquidated, the highest number in five years.
Fallout from a lousy couple of years for the style, a number of value funds have closed, but a rocky 2000 may be leveling a number of growth funds too. Among the value funds that have been liquidated are the Munder Value Fund, the Prudential Midcap Value Fund and the Kemper Small Cap Relative Value Fund.
Ben Hock, senior investment officer at AIM Advisors Inc., Houston, said this year's downturn in the U.S. equity market is a cause of increased liquidations.
A bull market allows a lot of smaller funds to get by on asset growth, even if sales growth isn't there, he said. "All of a sudden you get a market that goes sideways or goes down, you don't have asset growth or sales growth." That exacerbates the need to merge, liquidate or sell out to another mutual fund firm.
"If it doesn't have an established track record, it's not a 4- or 5-star fund and doesn't have a reasonable hope to get there, shut it down or merge it out," said Mr. Hock.
William Dougherty, president of mutual fund research firm Kanon Bloch Carre, Boston, said 401(k) assets have been the biggest factor separating the haves from the have-nots in the mutual fund world.
"The 401(k) market drives fund sales," said Mr. Dougherty, adding some $3.5 trillion to fund sales since the 401(k) market began 15 years ago. And because large firms dominate the 401(k) and defined contribution markets, it's difficult for smaller firms to grab a slice of pie.
AIM has been one of the fastest growing mutual fund families in the United States with $11.2 billion in net flows in the first nine months of 2000, up from $1.4 billion for the same period in 1999. Behind Janus Corp., Denver; Putnam Investments Inc., Boston; and Vanguard Group, Malvern, Pa., AIM was fourth in net flows through Sept. 30.
But overall, 2000 has not been as good a year as last year for the top 10 behemoths. Through Sept. 30, $121.7 billion flowed into the top 10 mutual fund families, according to FRC. In the first nine months of 1999, $129.6 billion flowed into the top 10 fund families.