Prepare for the bear. It's a phrase being heard at mutual fund companies and banks across the country.
Amid speculation that a market correction may be around the corner, mutual fund customers are naturally wondering what the impact might be on their investments.
In a series of interviews, five mutual fund executives agreed that their challenge is to educate investors about the ups and downs of the marketplace.
First Union Corp.
Dwight Moody, president of First Union Brokerage Services, observed that concern is always common among bank customers, but that the nature of their worries has changed over the years.
"People used to worry about whether inflation would eat up their income," Mr. Moody said. "Today they are concerned about whether they are going to have [adequate] income after reinvesting at lower interest rates."
Many customers of the Charlotte, N.C.-based bank are perplexed, and are asking whether they should be in equity or in fixed-income funds, Mr. Moody said. And many are choosing First Union's Balanced Fund which represents a mix of both kinds of instruments.
In addition, Mr. Moody said, customers are curious about international funds -- particularly in the fixed-income area.
But as First Union doesn't offer such instruments, Mr. Moody directs them to mutual fund providers that do.
At the same time, he advises caution. "International can make sense from an asset allocation point of view," he said.
"But there can, of course, be great risk in these markets."
BB&T Financial Corp.
At BB&T Financial Corp. in nearby Wilson, N.C., customers are taking a deliberate approach to investing.
"Customers are taking their time to make a decision," said Eugene "Trip" Purcell 3d, a BB&T vice president in trust services. "They've also become more astute," he added.
BB&T started a proprietary family of six funds last October, and currently has $350 million of assets under management.
Looking at Short Term
Mr. Purcell said that in recent weeks he has noted an increased interest in short-term bond funds.
"Customers realize the risk associated with long-term bonds, particularly in this environment," he said.
"They know that if rates go up, they will lose principal, so the shorter-term funds make sense."
Still, Mr. Purcell said, customer commitment to equities remains strong.
In addition, more BB&T customers have started using dollar-cost-averaging -- the practice of making regular periodic investments -- as a way to protect themselves against a market correction.
"The thinking here is, |I'm going to put money in the market in equal amounts over the next 12 to 18 months as a way to protect myself," said Mr. Purcell. "More dollar cost-averaging is indicative of how bank customers feel these days."
Dime Savings Bank
Like their counterparts in the South, customers at Brooklyn, N.Y.-based Dime Savings Bank are cautious.
"We're seeing mild sales resistance," said J. Edward Diamond, president of Dime Securities, the thrift's investment services unit. "Customers don't seem as eager to come in and buy funds."
Instead of leaving customers to worry about the market's vicissitudes, Dime is taking a proactive approach.
For one thing, the thrift recently began inviting customers to come back in and review their portfolios to ensure that they remain comfortable with their investment mix.
In addition, Dime Securities is promoting short-term and intermediate-term products. Three months ago, the thrift introduced its first proprietary mutual fund, called the DeKalb Short-duration Government Trust.
"We think our timing is right with a fund like this and we're very excited about the possibilities, " said Mr. Diamond. "It's not the kind of product you buy for 10 years, but it is something that makes sense now.
"There is a real awakening among customers that long-term bond funds are not the place to be," he added.
Based in Wayne, Pa., SEI Investment Services is in the business of providing mutual funds to banks and broker dealers.
These days, the SEI Corp. unit is working to create an awareness among banks about what products would be appropriate in a bear market, said Richard Lieb, the company's president.
He also said he is working to help SEI clients position themselves so that a bear market will not negatively impact sales.
"Our main suggestion is that the banks and broker dealers have a program in place so that customers know exactly why they're buying a particular fund and how that fund fits into a plan -- whether it be retirement or saving for college," Mr. Lieb said.
That, however, is easier said than done, he acknowledged. "It's a tough sell because many banks are focused on moving product through broker-dealers and they don't focus on program sales."
"Customers have to be educated about the basics of long-term investing -- that is, equities always outperform fixed income over the years. This way if there is a correction, customers will be less likely to go out and liquidate their funds."
SEI is unusual among mutual fund companies because in addition to selling funds, it also provides technology products and consulting services to banks. One of the tools more and more SEI bank clients are looking at is SEI's Retail Assist system, a software product that helps bank customers set goals and create a long-term asset allocation strategy.
At Oppenheimer Management Corp. in New York, sales through banks are at an all-time high. Oppenheimer runs 35 funds, with $25 billion of assets under management.
According to Maryann Bruce, Oppenheimer senior vice president, bank customers continue to invest heavily in tax-free funds, with some interest in conservative equity funds.
"We may have 35 funds, but in the bank channel only six are consistent sellers," Ms. Bruce said. "Bank customers continue to invest conservatively."
She said one of her primary challenges is to help wholesalers, investment representatives, and others with whom she works to get the message out to customers that that diversification lowers risk and that a long-term view is a key component to successful investing.
"People often ask, |When is the best time to invest?" and I say, |When you have the money,'" Ms. Bruce said. "History proves that if you stay in for the long term, it doesn't matter that much at what stage you purchased the fund."