Saver Or Investor? ‘94 Losses Forced Decision

America’s torrid love affair with mutual funds appears to be waning. That was the case in 1994, at least, and it has continued so far this year.

It was probably inevitable - mutual fund assets doubled to $2 trillion between 1989 and 1993. Still, the slackening interest in mutual funds coincides with a widespread malaise in an assortment of financial markets worldwide and leads to two questions:

Are most fund investors truly investors - or unsophisticated savers who flee at the first sign of trouble? And if many are savers, how much will that continue to hurt fund performance?

Mutual fund investors are a mix of savers and investors, experts say, but one rapidly shedding the savers. In the short term, this may be bad because savers who abandon mutual funds for CDs and money market funds sometimes force mutual fund managers to liquidate assets at bargain basement prices.

But long-term, the trend is a good one. Remaining shareholders will truly be investors, giving fund managers the leeway they need to manage their funds at peak performance levels.

“1994 was the year that woke up mutual fund investors,” says Catherine Voss Sanders, associate editor of Morningstar Mutual Funds. “They learned the hard way that you can’t get higher returns without taking substantially higher risks. Many of the shareholders who have been exiting mutual funds didn’t belong in them in the first place.”

Consider two recent trends:

Investors withdrew a net $43.5 billion from bond funds in 1994, compared to a net increase of $113.7 billion in 1993, according to the Investment Company Institute. Bonds got hit with the worst sell-off in decades, but most bond fund investors still should have stayed put, fixed-income experts say, because the bulk of long-term returns comes from interest payments. Bond prices also have been rallying this year. Nonetheless, bond funds suffered an additional net outflow of $8 billion in January, estimates Mutual Fund Trim Tabs.

A record $27.2 billion was put in mutual funds in 1994 that invest chiefly overseas, up from $26.2 billion in 1993. But net new sales shrank dramatically as the year wore on. Eleven billion dollars - or 40 percent of the total - was invested in the first two months of last year. By the last two months, international funds reaped net new sales of only $470 million. And Mutual Fund Trim Tabs estimates these funds suffered an outflow of $1 billion in January.

Especially telling of “investment” activity in 1994 is asset gains elsewhere. Taxable and tax-free money market fund assets rose $63 billion to more than $628 billion. Meanwhile, assets in bank and thrift CDs valued at under $100,000 were up $32.6 billion in 1994.

Fund investors who endured 1994 are finding out whether they are savers or investors.

“We’ve entered a wonderful testing period,” says Dan Wiener, a New York mutual fund adviser, “and it’s long overdue.”