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Stock Funds Pull Ahead

Sat., June 28, 1997, midnight

Less than four years ago, the competition between the two main types of long-term mutual funds was a neck-and-neck race. Today it’s a runaway.

That drastic change has had a big impact not only on the fund business, but on countless investors who try to maintain well-balanced, diversified portfolios, whether in conventional investment accounts or in tax-favored retirement savings plans.

At the end of 1993, statistics kept by the Investment Company Institute, the largest fund trade association, showed stock mutual funds with assets of $748.95 billion - a little bit less than the $761.09 billion that was invested in bond and income funds.

By the end of April 1997, stock fund assets had soared to $1.88 trillion, while bond funds had grown to just $903.1 billion.

In plain words, stock funds, which were slightly smaller than bond funds 3-1/2 years ago, are now more than twice as big.

While their cash flows of new money from investors have been impressive, stock funds also have gained a good part of that edge from simple increases in the value of the securities they own.

Since the end of ‘93, the average stock fund has achieved an investment return verging on 100 percent. Thus, without attracting any net new money at all, the stock funds as a group should have virtually doubled in size.

But bond funds turned in a decent performance too, even though they struggled through 1994. Over the last five years, various types of bond funds have posted returns approaching 50 percent.

Ever since suffering losses in ‘94, however, bond funds have had trouble attracting new money above what has flowed out in the normal course of redemptions by investors cashing in their shares.

All this has changed the shape of the fund business. “In the last three years, it’s been the stock fund industry,” says John Rekenthaler, editor of the Morningstar Investor newsletter in Chicago.

Even more importantly from the viewpoint of people who own fund shares, it has tilted the scales of investment portfolios. As a group, fund investors who decided that an even split between bonds and stocks was an appropriate allocation at the end of 1993 now have a 2-to-1 bias toward stocks.

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