Investors' Buying Revival Gives Brokers Pause

This year's stock market correction is all but forgotten.

Fed by information from magazines, talk shows, and occasionally from brokers, bank customers and other investors are lining up to buy mutual funds, particularly international and small-cap portfolios.

But if demand reflects a keen eye for the latest trends, it may neglect the reality that mutual funds are investments, not bank deposits with virtually guaranteed returns.

"I try to tell people, it's not like we take a ruler and draw a straight line," said Joel Calvo, president and chief executive of PNC Brokerage Corp., Pittsburgh.

But as much as bank broker-dealers may have to warn them of potential pitfalls, customers are more savvy about choosing funds. After all, the leading trade group for mutual fund companies estimates that one in three U.S. households owns a piece of one.

"As people put more money in mutual funds, they're reading more and hearing more," said Philip Tasho, CEO and chief investment officer at Rimco Monument, the fund family at Riggs National Corp., Washington, D.C. "And right now they're branching out overseas."

Fund investors are using bank broker-dealers to buy both proprietary funds and funds from other companies. And bankers have been only too happy to supply them.

At Riggs, the proprietary Rimco small-cap fund has attracted cash while gaining 6.8% this year-an indication, Mr. Tasho said, of resurging interest in small-company stocks.

"Small-cap (investment) will continue," said Mr. Tasho. "We're expecting more flow into it."

Of non-Rimco funds, an international fund offered by Ivy/Mackenzie Group has lured investor cash, he said.

"It tends to do well when the market gets difficult," Mr. Tasho said of the Ivy fund, which has a five-star rating from Morningstar Inc. and is up 9.7% this year.

Cash flow into international mutual funds grew 13%, from $6.04 billion in March to $6.82 billion in April, and by 24% from April 1996, when sales totaled $5.51 billion, according to recently released data from the Investment Company Institute, Washington.

At PNC, two proprietary Compass Capital funds, the international equity and emerging markets portfolios, have attracted interest this year, Mr. Calvo said. Through Monday's close of trading, the international equity fund was up 5.6%; the emerging markets fund, 15.7%.

PNC investors have also flocked this year to three outside funds: AIM's international fund (up 5.8%), Putnam's international new opportunities fund (up 11.2%), and the Colonial Newport Tiger fund (down 0.7%).

While investors are looking internationally for growth, they're also exploring more cautious investments-for example, moving from aggressive- growth to balanced funds or into annuities, said Mr. Calvo.

Indeed, industry numbers back him up.

Investment in aggressive growth funds totaled $7.32 billion in April, a decline from $7.51 billion in March and $9.47 billion in April 1996, the Investment Company Institute reported.

Meanwhile, balanced funds attracted $2.12 billion in April, an increase from $2.06 billion in March and $1.94 billion in April 1996.

Still, the move into balanced funds is a far cry from the bunker mentality rampant during the market downturn early this year, when investors sought protection in money market funds.

Money market funds had an outflow of $22.31 billion in April, compared to a net inflow of $1.37 billion in March. Despite the decline, money market funds had attracted net new cash of $22.77 billion through April 30.

"It's hard to monitor money market funds. Much of the flow in and out simply has to do with" investor liquidity, said Mr. Tasho.

Overall, stock mutual funds won back investors in April, reporting $15.74 billion of net inflow, up from $10.75 billion in March.

"We have not seen a decrease of production this year. In fact, we're up 120% of (the business) plan year-to-date. It looks good on the retail side," said Susan L. Currier, CEO and president of First of America Securities, Kalamazoo, Mich.

Still, brokers' work is not done.

Maryann Bruce, senior vice president and director of financial institutions at Oppenheimer Funds, New York, warned that while customers do know more than they used to they still need guidance.

"I do believe customers are more sophisticated," she said. "But if you dig a bit deeper, you find they might just know the phrases or the jargon. I'm just not sure they know what the jargon means."

Ms. Bruce said two out of five customers Oppenheimer surveyed last December persisted in a tendency to weight their portfolios too heavily with cash or bonds.

Smaller bank broker-dealers-particularly ones without proprietary funds- may be more reluctant to push trendy funds.

United Carolina Bancshares' securities arm, UCB Investor Services Inc., said it continues to direct customers to what may be the bull market's most reliable sector-funds that hold blue-chip stocks.

UCB, which has no proprietary funds, offers funds from AIM, Putnam, Federated, and American Families.

"We like the blue-chip domestics, as opposed to small-cap or international funds," said UCB's chief executive officer and president, Thomas H. Willis. "It's not that we don't recommend them when appropriate, but we tend toward the funds that include the Fords, the GMs, the IBMs."

Another banker-Mike Harkins, first vice president at People's Securities Inc., Bridgeport, Conn.-also stays with the old reliables, in his case Dreyfus, Putnam, AIM, and the Franklin-Templeton funds.

"We've always been big proponents of asset allocation," he said. "We don't push the 'hot sector of the month.' That'll come back and get you."

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER