Surprise! Mutual Fund Investors Are Still Upbeat

Don't sell the steak, sell the sizzle, says the old marketing maxim. But now that markets have soured, mutual-fund marketers are working to convince investors that they've got steak to sell--even though their performance looks more like hamburger.

Facing that challenge, the mutual-fund companies are revving up expensive new marketing campaigns. Fidelity Investments has even turned to late-night television to pump its products: On July 31, the company rolled out a 30-minute infomercial--believed to be the industry's first.

Fidelity's infomercial, and rivals' newsletters, direct mailings, and other tactics don't so much flog hot new funds as focus on education. Educational marketing could be critical in keeping investors from bailing out if the market tanks--as 40% of those surveyed in a new BUSINESS WEEK/Harris Poll think is "very" or "somewhat" likely in the next 12 months.

Some of the mutual funds' key markets, moreover, are getting saturated. Analyst Guy Moszkowski of Sanford C. Bernstein & Co. figures that nearly 90% of households with incomes of $50,000 and up already have invested in at least one mutual fund. "It's harder to find new customers, so you have to develop the relationship with those you already have," says Neal Litvack, an executive vice-president at Fidelity Investments Co.

QUICK HITS. That's why most fund companies have improved shareholder newsletters by adding substantive articles dealing with issues such as interest-rate risk and asset allocation. Fidelity's infomercial, which runs on such cable networks as Lifetime, the Family Channel, and the Discovery Channel, emphasizes the need to save, set investment goals, and diversify assets.

And many fundmeisters are using new tactics to get quick-hit messages across in a crunch. When the stock and bond markets went into a tailspin this spring, for instance, Dreyfus Corp. set up a special toll-free line with a market commentary by chief economist Richard B. Hoey. Others dashed off market-related letters and stuffed them into account statements.

Are the new tactics working? New cash flow to stock mutual funds slowed to $7.7 billion in June, from $18.4 billion in January. But it might have been much worse: Since March, investors have withdrawn $16 billion more from bond mutual funds than they put in. For updates, tune in to late-night TV.

SURPRISE! MUTUAL-FUND INVESTORS ARE STILL UPBEAT
      
         Mutual-fund investors seem to be shrugging off the market's ominous atmospherics. Fully 94% say they're somewhat or very confident that their investments are safe, and only 24% say they plan to shrink their holdings. They're a pretty savvy lot, too. For the most part, they know that investing comes with risks, and they don't expect the government or anyone else to make up losses. But investors may feel less sanguine after a peek at their next quarterly statements: 65% think they've made money in mutual funds so far this year--and the way things have been going, most of them are probably wrong.
      
      RANKING THE RISK
      How safe would you say each of the following investments is--that is, how much chance is there that each of these investments could lose a lot of money? Would you say very safe, somewhat safe, not very safe, or not at all safe?
                             Very Somewhat Not very  Not at   Not
                             safe    safe    safe    all safe sure
      Corporate stocks        7%      58%     24%     4%      7%
      Corporate bonds         9%      61%     15%     3%      12%
      Stock mutual funds      18%     64%     8%      1%      9%
      Bond mutual funds       20%     54%     9%      2%      15%
      Money-market funds      33%     49%     9%      2%      7%
      Bank CDs        61%     29%     5%      1%      4%
      U.S. Treasuries 66%     22%     5%      1%      6%
      
      EXPERIENCE
      For how many years have you been an investor in mutual funds?
      0-1 year  7%    2-5 years  29%  6-10 years  30% 11+ years  34%
      
      FUND PREFERENCE
                                                 Yes     No      Not sure
      Of the          Stock funds                55%     38%     7%
      following       Bond funds                 35%     58%     7%
      types of        Money-market funds         46%     49%     5%
      mutual funds,   Mixed stock-and-bond funds 47%     44%     9%
      do you own:     Other                      11%     82%     7%
      
      FAITH IN MUTUALS
      How confident are you that your         Very confident          35%
      investments in mutual funds are         Somewhat confident      59%
      reasonably safe--very confident,        Not very confident      5%
      somewhat confident, not very            Not at all confident    1%
      confident, or not at all confident?     Not sure                0%
      
      FUTURE PLANS
      Over the next six months, do you        Invest a lot more       3%
      think you will probably invest a lot    Invest somewhat more    29%
      more in mutual funds, invest somewhat   Reduce somewhat         18%
      more in mutual funds, reduce your       Reduce a lot            6%
      investment in mutual funds somewhat,    Stay the same           40%
      or reduce your investments a lot?       Not sure                4%
      
      PAST ACTIONS
      Have you switched from one fund to another or taken money out of a fund at any time over the last six months because you were concerned about the safety of your money?
      Yes     10%     No      90%     Not sure        0%
      
      CHANCES OF A CRASH
      Over the next 12 months, how            Very likely             6%
      would you rate the chance of            Somewhat likely         34%
      another big crash in the stock          Not very likely         48%
      market--very likely, somewhat likely,   Not likely at all       9%
      not very likely, or not likely at all?  Not sure                3%
      
      SKETCHY KNOWLEDGE
      How good an idea do you think           A good idea     25%
      you have of what kind of securities     A fair idea     49%
      your mutual fund can invest in?         No idea at all  25%
                                              Not sure        1%
      
      FIXING THE BLAME
      If a mutual     The mutual-fund portfolio manager               16%
      fund you've     The salesperson who sold you the fund           4%
      invested in     You, for selecting the fund                     17%
      loses money,    No one--that's one of the risks of investing    60%
      who is          Not sure                                        2%
      to blame?       Other                                           1%
      
      TAKING RESPONSIBILITY
      If your mutual fund loses money, do you think:
      The fund management company should make up losses       10%
      The person who sold you the fund should make up losses  2%
      The U.S. government should make up losses               6%
      No one should make up losses                            80%
      Not sure                                                2%
      
      REPORT CARD
      Looking at all your mutual-     Made money      65%
      fund holdings, have they made   Lost money      20%
      or lost money for you so far    About even      10%
      in 1994?                        Don't know      5%
      
      NEWS ABOUT DERIVATIVES
      Have you seen, heard, or read           Seen, heard, or
      anything about mutual funds that           read about           20%
      have lost money because of their        Not seen, heard,
      investments in sophisticated instru-       or read about        78%
      ments called derivatives, or not?       Not sure                2%
      
      LITTLE IMPACT
      (For respondents aware of derivatives) As far           Yes      22%
      as you know, do any of the funds you own invest         No       69%
      in futures, options, or other so-called derivatives?    Not sure 9%
      
      THE GOVERNMENT FACTOR
      (For respondents aware of derivatives) Do       Yes      22%
      you think that the government should prohibit   No       65%
      mutual funds from investing in derivatives?     Not sure 13%
      Edited by Mark N. Vamos and Michele Galen
      Survey of 529 mutual-fund investors conducted July 29-Aug. 1, 1994 for BUSINESS WEEK by Louis Harris & Associates Inc. Results should be accurate to within 4.3 percentage points.
      RAY VELLA/BW
      
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