Mergers? Liquidity Woes? It Could Be an Interesting Year

Albert Einstein once noted that he didn’t think about the future because “it comes soon enough.”

Most of us can’t regard the future with that kind of equanimity--especially when it’s our money that could be affected. With that in mind, then, here is an attempt at predicting the big stories for the new year.

In 1997, mutual fund investors are likely to see:

* Merger mania. Several money management firms are on the block, and we could see as many as a dozen big-time deals this year.

Among the companies that have said they are available for the right price are Montgomery Asset Management, Roger Engemann & Associates and Sierra Capital Management. Expect several “boutique” and smaller brand-names to sell too.

Likely buyers include Liberty Financial Cos., United Asset Management, New England Investment Cos. and Phoenix Duff & Phelps, all of which plan to get bigger through acquisitions.

* Funds leaving the distribution business. Expect some fund groups to decide to focus on money management and to gut their sales networks. The idea is to sell funds only through “funds supermarkets” run by brokerage firms or through fee-only financial advisors, thereby cutting costs and lowering expenses.

Loomis-Sayles Funds are going this route; others will follow.

* Funds-of-funds becoming the “in” thing. When the market sagged in 1994, everyone focused on avoiding bad funds. When the market boomed in 1995, investors focused on picking winners. Last year, with the market up but volatile, people zeroed in on developing asset allocation strategies.

No matter the market’s direction in 1997, the buzzword will be “simplicity.” The hope is that a one-size-portfolio truly will fit you; the sales pitch is that it’s no different from hiring a money manager to buy funds on your behalf.

Fidelity, Scudder and Charles Schwab recently joined the small pack offering multi-funds. By the end of 1997, the trend will be a boom, with most large fund groups opening funds that invest only in the house offerings. Several high-profile money managers and newsletter editors will create independent funds-of-funds too.

These new offerings will show up mostly in retirement plans, where ready-mix portfolios should be particularly popular.

* Liquidity woes. I have predicted this in each of the last two years only to be stampeded by the continuing bull market. If this is the year when we finally have a stock market correction, however, a few funds are in for a heap of trouble.

Mass redemptions are hard on any fund, but they could be particularly devastating to single-country and emerging-markets funds, or those loaded with derivatives and thinly held stocks. If the market melts down and speculators bail out, these funds could be forced to liquidate holdings into an uninterested market, which would send net asset values plummeting.

* A big international push. If the U.S. market falters or foreign markets become a better value, a lot of money managers will move big chunks of cash overseas. Many already have.

For individual investors, this poses an asset allocation problem. Say you want 15% of your assets in international markets and put that much of your money into a foreign stock fund. If your other funds invest abroad seeking better profits, you could wind up with more foreign exposure than you intended.

* The introduction of “inflation-proof” bond funds. With the new inflation-indexed Treasury bonds, someone will introduce a bond fund that never loses ground to inflation. Since there hasn’t been much inflation of late, this smells more like a marketing gimmick than a good investment choice. If you like the idea of inflation-proof Treasuries, buy them directly and not in a fund.

* Bear-market funds. These may be tempting now but will not be for the faint-of-heart. The few truly bearish funds out there today have been whipped during the last two years; bear-market offerings may do great in a downturn, but you won’t want to be around when the recovery starts.

* The end of the Steadman Funds. It pains me to think that everyone’s favorite punching bag might be taken down, but all bad things must come to an end. The Steadman Funds have ranked among the industry’s worst over the last 10 years. Only one Steadman made money over that time, whereas the average stock fund earned 235%.

Regulators are rumored to be circling and could make a move if Charles Steadman doesn’t pull the plug first. Either way, we’ll have to find someone new to kick around.