Posted on: Wednesday, July 18, 2001

Number of new mutual funds declines

Associated Press

NEW YORK — The simple law of supply and demand can be seen at work in the mutual fund industry. Amid the economic slowdown, demand has shrunk, and so has supply.

Only 46 new funds opened from January through May, according to the most recent data available from Morningstar, a Chicago-based firm that researches the industry. That's nearly a third of the 133 that opened in the first half of 2000. For all of last year, more than 400 funds started up.

This marks the first time since 1991, when the fund universe was much smaller, that the number of new funds didn't reach triple digits during the first five months of the year, according to Morningstar.

The shrinkage in the industry is also apparent in the number of funds that have closed or merged. For every fund that has debuted this year, about 12, or a total of 565, have shut down or combined with other funds, Morningstar said.

"It is always more appealing to launch a new fund in a bull market when you want to make a lot of money, or even bring in a modest amount of assets," said Peter DiTeresa, senior fund analyst at Morningstar. "It's not like when you could launch an Internet fund and be virtually guaranteed of attracting assets."

As the economy slowed and the market turned bearish, mutual fund companies have had a bigger priority than starting funds — just holding on to money invested in their established offerings.

"There has been a greater effort in keeping assets rather than rolling out new funds," said Ramy Shaalan, a senior analyst at Wiesenberger Thomson Financial in Rockville, Md.

Investors needn't worry about a lack of choices among mutual funds, because there are about 8,300 in operation. But if they're inclined to buy into a new fund, investment experts advise caution.

"The past is rich with lessons about the hazards of investing in new funds," Eric Tyson, author of "Mutual Funds for Dummies," said, referring to the hundreds of Internet and tech funds that started in the late 1990s, soared mightily and then crashed.

In establishing hot, sector-specific funds, such as Internet or technology, Tyson said fund companies are trying to time the market — a practice that individual investors are repeatedly warned against. By the time a sector becomes popular and its stellar returns are noticed, it's usually time for investors to get out, not in, Tyson said.

"The greatest risk with new funds is that fund companies will bring out new funds at precisely the time the public interest and fascination with a particular style of investing is in vogue," he said.

"Eighteen or 20 months ago, tech and Internet stocks were zooming to the moon and everybody wanted a piece of the action. A lot of investors got severely burned putting their money into those funds."

By picking new funds, investors might also be violating another fundamental investing rule, the one that calls for diversification, Tyson said.

Investors have long been warned about putting too much money in one place — whether it's the stock market or bond market or any number of sectors from real estate to technology. It's the investment world's version of the warning against putting all your eggs in one basket.

The battered tech sector is the most recent reminder of the virtues of diversification and not trying to time the market.

Not surprisingly, tech funds, which on average dropped 30 percent last year, are still suffering, according to Lipper Inc., a New York firm that tracks the mutual fund industry. Tech mutual funds accounted for 15 of this year's 25 weakest funds to date, with negative returns for the year ranging from 65.4 percent to 47.3 percent, Lipper said.

The five weakest have varying growth-oriented strategies, which often means a heavier concentration in riskier tech stocks.

This year's new funds fall across a variety of sectors and investment styles, evidence that there's no real leader in the market. However, analysts expect future funds to focus on safer sectors and strategies, including energy and utility funds and value funds.

Fund buyers should also consider that new funds have no past performance to guide investors, Shaalan said.

Remember, he said, "the only parameter you have is the fund company's reputation and the soundness of the offering and the reputation of the manager."