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Lita's Mutual Fund Trends

© Kirk Lindstrom

Guest Article by Lita Epstein

Lita Epstein is a Teaching Assistant in ZDU's Investing on the Web class and writes columns on long-term investment strategies. She has her MBA in Management and Marketing from Emory's Goizueta Business School. Lita is Coordinator of Facilities Management at The Emory Clinic in Atlanta, Georgia, the clinical arm of Emory University's Medical School. She has also worked as a daily newspaper reporter, magazine editor, and press secretary in the U.S. Congress. She enjoys writing, financial planning, scuba diving, science fiction, and is an avid photographer, even certified for underwater photography.

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Is Recent Poor Performance Leading Mutual Fund Industry Toward Consolidation and Globalization?

By Lita Epstein

At a time when the mutual fund industry is in its most powerful position, one would think mutual fund companies should be basking in their glory, instead they may be in a state of siege. Look at these contrary statistics*:

The industry successes:

• Mutual funds, when you include private accounts managed by fund advisors, hold 1/3 of all U.S. equities and participate in 2/3 of all trading in U.S. stocks.

• In 1998, 99% of net additions to savings by American families went into mutual funds, or $401 billion of the total $406 invested.

• Twenty years ago, total assets in mutual funds was $50 billion, by the end of 1998 the total was over $5.5 trillion.

So why is the industry in trouble?

Here are some of the failures:

• Eighty percent of stock mutual funds failed to beat their respective indexes for the first quarter of 1999, which makes things look even worse than 1998 when 75% failed to beat those averages.

• Only 17 of the 414 stock funds that have a 15-year performance history beat the market by at least 1%.

• The market's average annual return was 18.6% since the start of the 1982 bull market, yet mutual funds average annual return is only 15.8% for that period.

Even with these dismal performance stats, the industry continues to increase its revenue:

• Industry revenue in 1982 was $2 billion, by 1998 it has increased to $60 billion.

• Mutual fund average fees have risen by 40% since 1980, from 1.1% to 1.57%.

After seeing these statistics is it difficult to understand why there appears to be a drop in mutual fund investing and an increase in direct stock purchase? Until last summer, the industry was able to count on an average monthly net investment of $20 billion. Since the brief market downturn last summer, the average monthly net investment has dropped to $2 billion.