Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, October 18, 1993 TAG: 9310160009
SECTION: MONEY PAGE: A-10 EDITION: METRO
SOURCE: JOHN CUNNIFF ASSOCIATED PRESS
DATELINE: NEW YORK LENGTH: Medium
It is anything but that now. Millions of investors are making far better returns on their money than they could find in savings certificates, and the industry is growing like no other in the financial world.
Almost any day, a new calendar-year record for net sales will be announced, exceeding last year's record of $197.3 billion. At the end of August, the 1993 total already was at $182.5 billion, and assets totaled $1.9 trillion.
But as the numbers rise, so do the worries. The latter aren't always expressed publicly, because many of those who do the worrying are involved in the business and not anxious to see their own paychecks diminished.
The scenarios of how it could happen differ in details but not in the generality. They go something like this:
Mutual fund investments are considered long-term investments, but many of those who buy them are looking for short-term results, seeking to finance retirement and education, and subject to unexpected demands on their finances.
Moreover, many of them are relatively unsophisticated, more accustomed to savings certificates and other fixed-income contracts than they are to the risks of the markets in which mutual funds invest. They could become jumpy.
What would make them jump? A sudden rise in interest rates might. Or an announcement of war or a decline in mutual fund results or any kind of general pessimism that might depress confidence and their sense of security.
Any of many factors could make them redeem shares, and if they act en masse they could present their mutual funds with liquidity problems. Where would the funds get the money to redeem shares? At least some of it by selling their own investments, which could cause share prices of the funds to fall even more.
The danger to investors in a sharply falling market is that they might not be able to redeem in time. A direct buyer of liquid stocks usually can sell out in minutes or hours, but mutual fund holders might not be able to do so.
In the mutual fund marketplace, a sell order placed after 2 p.m. may be executed on the basis of the following day's closing price. If that occurs late on Friday, the effective price might be the closing figure on Monday.
Bad news travels swiftly, but mutual fund sales executions do not always. Moreover, mutual fund investors, less sophisticated than full-time stock investors, are less likely to hear the news as quickly.
Many are brand new to risks, migrating to funds from the banks that once sold them certificates of deposit with an assured return.
According to the Investment Company Institute, banks accounted for 14 percent of long-term mutual fund sales in the first half of 1992, and one-third of the 4,300 funds are now available through banks.
Have worries about a debacle been overstated? Are they a reaction to the calamities of recent years involving limited partnerships, savings and loans and others that have overwhelmed small investors?
Perhaps. But in theory, it could happen; and those in the business are acutely aware of it. Whenever the public masses in one area, they say, there is a tendency of the ship to tilt and take on water.
"It's not a matter of if, but when it will happen," says Richard Schmidt, who publishes The Risk Report from Naples, Fla. Bluntness of that sort is rare, and so are the fears. But the fears do exist, and they are widespread.
by CNB