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Price competition is creeping into industry

One in an occasional series on mutual funds

You can shop at a discount store or invest with a discount broker, but you can't buy anything that bills itself as a discount mutual fund.

At least that is how things stand right now in a business that has been able to attract hordes of customers without much internecine competition.

Yet that situation may change, depending on whether, when and how much the growth of the industry begins to slow at some point.

"Here's an industry that's going to have to learn what rivalry is all about," said Michael E. Porter, a professor at Harvard Business School, at a convention of fund executives this spring.

"Price competition is creeping in," said Roger Servison, a managing director at Fidelity Investments, the nation's largest fund sponsor.

For years now, funds have enjoyed dramatic growth almost entirely at the expense of other types of financial services firms, including banks, savings and loans, and brokerage firms.

The mutual fund format seems almost ideally suited to the temper of the times, while the banks, S&Ls and brokers each have endured a crisis of one sort or another since the mid-1980s.

So fund managers found themselves in a position "like getting a slow pitch down the middle of the plate," in Porter's words.

Certainly, mutual funds do compete in a variety of ways for investors' business. They spent more than $140-million on advertising last year, up from less than $100-million in 1991, according to the new publication Mutual Fund Market News in Boston.

But their marketing efforts tend to stress performance results, service and convenience rather than price.

No-load funds, of course, emphasize the absence of a sales charge for people who buy their shares. But with a few notable exceptions, industry promotions pay little attention to other charges, such as management fees and annual operating expenses.

Where there has been fee competition, it has tended to focus on efforts to keep yields high at money-market funds through such tactics as temporary waivers of management fees.

If price competition starts to spread in the business, it might show up first with similar fee-cutting in intermediate and long-term bond funds, where investors are also very yield-conscious.

In stock funds, however, most customers are expected to keep emphasizing performance.

At first glance, it might seem that the growing presence of banks selling fund shares would step up the competitive pressure. But many observers inside and outside the industry see a different impact.

"Our belief is that banks will help expand the fund market by putting their imprimatur on a product that remains foreign to some smaller savers," said Michael Blumstein, a financial services analyst at the investment firm of Morgan Stanley & Co.

Indeed, Blumstein cites several other factors that suggest the day of a fierce competitive squeeze in the fund industry is a ways off.

"The 27 percent of American households that own mutual funds is up from 6 percent in 1980," he said.

"But we don't see why this percentage can't double, given the individual investor's growing need for professional management in an increasingly complicated world."

Blumstein also sees a lot of growth potential left in the rapidly expanding market for "defined-contribution" retirement savings programs, such as employer-sponsored 401(k) plans. Funds are "the natural investment vehicle for defined-contribution plans," he says.

If Americans are going to step up their savings and investments as the population ages with the graying of the baby boomers born after World War II, they may create an expanded potential market for funds without the need for intense fighting over market share.

Still, would-be bargain hunters need not lose hope entirely, if Porter's expectations are borne out.

"The structural attractiveness of this industry is inevitably going to decline," he said. "Just being in the business is no longer enough."

Pitching the funds

Mutual fund advertising expenditures have increased sharply in recent years, but marketing efforts stress performance, not price.