Muffled Firepower

LIKE an army repeatedly assaulting an impregnable fortress, the Dow Jones industrial average last week mounted yet another attack on the magic 1,000 mark, and once more retreated. After opening the week by pushing to a 44-month high of 974, the index fell back to close at 966. Such performances have become almost routine, and a different specific cause can be found for each failure to crack 1,000. But one underlying reason is that Wall Street misses the massed investment firepower that mutual funds once brought to bear on the market. Throughout the 1960s, mutual funds, which pool the savings of more than 8,000,000 mostly small investors, regularly raised growing amounts of cash with which to purchase stock by selling more of their own shares. But now money is draining out of the funds at a startling rate.

In ten of the past 15 months, investors have redeemed--that is, sold back to the funds--more mutual-fund shares than they have bought. In the past six months, customers have pulled a net $950 million of their money out of the funds, putting the cash instead into savings accounts, real estate investment trusts and tax-sheltered municipal bonds. That does not exactly leave the funds broke; last year their assets exceeded $55 billion, equal to the combined assets of General Motors, General Electric, Jersey Standard and IBM. But fund managers can no longer dismiss the excess of redemptions over sales as a temporary fluke. It seems to be turning into a chronic problem that if not solved could halt for good the funds' once dazzling growth. As a result, some funds are taking direct action. Last week in a management shake-up at Dreyfus Corp., Chairman Howard Stein returned to his former job of running the day-to-day operations of Dreyfus Fund Inc., the third largest mutual fund.

The problem is not so much too many redemptions as too few sales. Fund men believe that the rise in redemptions is at least partly the inevitable price of past success. Each month, people who became mutual-fund shareholders in the 1960s complete their investment programs and withdraw their money for such purposes as sending children to college. But the funds have signally failed to find new customers to replace these dropouts. Since early 1969, monthly sales of mutual-fund shares have been cut nearly in half.

The reason is obvious: sales are down mainly because there are fewer salesmen. During its bull years, the industry built up an impressive corps of high-pressure salesmen, most of them employed not directly by the funds but by brokerage houses. Many lost their jobs in the wave of brokerage mergers and consolidations that swept through Wall Street in the past few years. Those who remain are less eager to sell mutual-fund shares now because they no longer make as much money out of it as they once did. During the 1960s, a mutual fund would often order a broker who executed a stock trade for it to surrender part of his commission to another broker who had been especially successful in selling the fund's own shares to the public. But the New York Stock Exchange banned such "give-ups" late in 1968. Now, the Securities and Exchange Commission proposes that the funds stop channeling their stock-trading business to the brokers who do best at selling fund shares. The SEC wants to remove any temptation for a broker to pressure his customers into buying fund shares so that the broker can collect juicy stock-trading business from the funds.

What the funds can do to revive sales is less clear. Some are contemplating dispensing with salesmen altogether and joining the growing ranks of the so-called "no-load" funds (TIME, March 6). No-load funds sell by newspaper ads and direct mail; they do not charge their customers the normal 8.5% sales commission, or "load." While mutual funds as a group have been losing customers, sales of shares in no-load funds have continued to run far ahead of redemptions. Recently two large funds, Financial Programs, Inc. and Steadman Security Corp., converted to no-load status.

Chicken-or-Egg. The industry is also experimenting with other new marketing techniques. Boston's Keystone Custodian Funds, Inc. has built up a force of 500 salesmen to sell a combined package of mutual-fund shares and life insurance plans. In February, Dreyfus Corp. started a new fund with a scaled-down commission rate that is being sold as a payroll-deduction plan to companies, unions and trade associations. The industry's trade association, the Investment Company Institute, is conducting a $400,000 advertising campaign in newspapers and magazines, designed to convince the public that, for example, it is more profitable to put money into mutual-fund shares than into bank savings accounts.

In aid of such efforts, the funds now have a good investment record to cite. As a group they performed badly in the 1969-70 bear market, but last year and in the first half of 1972 the value of stocks bought by mutual funds generally rose more rapidly than the popular market averages. But the funds may have got themselves into a chicken-or-egg situation. Undoubtedly the greatest possible stimulus to sales of fund shares would come from the public excitement about the market that would be generated by the Dow Jones average breaking the 1,000 mark. The question is whether the market can muster the buying power to achieve that breakthrough without a prior revival of the mutual funds.

This file is automatically generated by a robot program, so reader's discretion is required.