Leaner Times Coming for Mutual Fund Managers.

A lot of people in the mutual fund business will be sorry to see the 1990s go.

In these 10 years, the pot of money invested in U.S. funds swelled to $6 trillion from $1 trillion. Top fund managers got rich and famous, and the service they sell became a staple of U.S. financial life.

As the '90s draw to a close, though, it looks more and more as though this golden age may be ending, giving way to slower growth and leaner times for fund companies.

"It's a maturing industry, and the market-place has become much more competitive," said Howard Schneider, managing director at Scudder Kemper Investments Inc. in Boston and head of the board of governors at a trade association of no-load fund companies called the Mutual Fund Education Alliance.

Schneider was attending a conference in San Francisco sponsored by MFEA, a Kansas City-based group.

New money coming into funds this year has been concentrated in a few popular fund groups, most notably the Janus Funds in Denver and the Vanguard Funds in Valley Forge, Pa. "Close to half the fund families have had net outflows," Schneider said.

Overall, net new cash flow into stock funds declined 15 percent to $112 billion in the first eight months of 1999 from the comparable period of 1998, according to the Investment Company Institute in Washington, the funds' biggest trade group.

New money for bond funds has slowed to a trickle, as interest rates have risen and bond prices fallen. Even money-market funds, whose yields increase as interest rates rise, have seen a 42 percent drop in cash flows from their record pace in 1998, according to the ICI.

Fund executives take three big worries into 2000: A dwindling supply of potential new customers in the United States; questions about the durability of the long bull market for stocks and bonds; and the threat of new competition on the Internet.

The ICI estimates that 83 million Americans already own mutual fund shares. "Fifteen years ago, 10 percent to 15 percent of U.S. households owned mutual funds," said Schneider. "Now the percentage is in the high 30s to low 40s. To get much beyond the penetration that we have is going to be difficult."

In the stock and bond markets, nobody knows how much longer the great bull market that started in the 1980s and gathered momentum in the '90s can keep going.

Even if it merely slows, it will pose problems for fund companies. Management fees, their main source of revenue, are calculated as a percentage of assets. At funds where flows of new money from investors have dried up this year, rising security prices often have kept assets increasing. If stock and bond prices decline, that all changes.

The most ominous question, longer-term, is what new competition the funds might face on the Web. Internet brokers already offer investors the chance to buy and sell individual stocks directly at cut-rate commissions, tempting clients away from funds.

People in the fund industry figure it won't be long before Internet sites feature what in effect are mutual funds in which investors could buy shares with very low, or no, fees.

Just a decade ago, the funds were upstarts, stealing customers from the financial establishment, the banks and insurance companies. Now the funds are part of the establishment, having to defend their existing business and innovate at the same time.

Individual investors could benefit from the increasing competition. They might get better returns on their money as less of it goes to fund management fees. That would come in handy if the markets cool.

Tougher times for the funds could also lead to a shakeout in the business -- for instance, mergers among fund firms that have trouble adjusting to slower growth. That could take some getting used to for investors who, like the fund industry itself, are long accustomed to stability and prosperity.

Investing made simple

You take a big step toward becoming a knowledgeable mutual fund investor when you realize you don't need to know everything.

As newcomers to the game, people sometimes think their ignorance is showing when they are faced with the natural uncertainties of the financial world.

To invest in stock or bond funds, they presume they need to figure out what the next move in the stock market or in interest rates might be. Then they presume they need to choose a "top" fund from among the thousands available to carry out their chosen strategy. If they're not confident of their ability to do these things, they presume they have to find an adviser who can.

Reasonable as this thinking sounds, it is full of mischief. It might lead investors to be overconfident or intimidated.

Take the idea that you're going to analyze the financial environment and figure out what the markets are going to do next. Predicting the future with any consistent success is so difficult that many fund managers themselves make no attempt to do it.

In the words of David Blitzer, chief economist at Standard & Poor's Corp., "I don't know what the S&P 500 will return, and I am the chairman of the index committee which runs it."

In the absence of an ability to see the future, fund managers say they can still serve a valuable purpose if they focus successfully on issues where their knowledge can make a difference.

If you insist on buying "top-rated" funds, you don't need to pay anybody to find them for you. Just go to a public library and look up Morningstar Inc.'s five-star funds or some other advisory firm's selected list.

No matter where you look or whom you ask, though, there's no sure way of identifying tomorrow's best-performing funds. Past performance can only serve as a rough guide.

If you do consult a professional adviser, it's important to remember that he or she can't predict the future either. Advisers have a chance to earn their fees, and then some, if they guide you to good financial decisions and choices you couldn't make on your own.

There is a workable alternative to trying to guess the future, using a simple system of diversification.

You keep some money out of stock funds, parking it in an alternative vehicle such as money-market funds, just in case the stock market is headed for trouble. You keep some money in stock funds, just in case the stock market continues to rise.

You choose individual funds, guided by their managers' records, diversifying among at least two or three with different methods of picking investments.

Chet Currier is a columnist with Bloomberg News