WASHINGTON, D.C.-While the mutual fund industry continued its strong growth in 1999, the Internet has empowered individual investors and unforeseen competitors to challenge the industry's continued strength, said executives at the annual meeting of the Investment Company Institute here last week.

Mutual fund assets grew to $6.8 trillion in 1999, up 24 percent from the year before, said John Brennan, chairman and chief executive officer of The Vanguard Group of Malvern, Pa., and chairman of the ICI board of governors.

"This was the sixth consecutive year of 20-percent-plus growth for the industry," Brennan said.

However, "on-line technology, particularly the Internet, has led to customer empowerment and an unbundling of products within the financial services industry," said Judah Kraushaar, first vice president and a financial services equity analyst at Merrill Lynch of New York.

The mutual fund industry is facing a revolution, said Gary Hamel, chairman of Strategos of Menlo Park, Calif. and a business professor at Harvard University in Boston. The only firms that will survive this new revolution are those that come up with radically new methods of delivering product, combining products and improving service, said Hamel, who gave the opening address Wednesday afternoon.

With more than 8,000, barely distinguishable mutual funds on the market, index funds outperforming actively-managed funds, and the Internet driving down transaction costs and enabling "every individual to become their own financial planner, " there is no doubt that the fund business is in for a revolution, Hamel said.

The Internet has irrevocably eliminated investment management businesses' "knowledge arbitrage," Hamel said.

Capital flows across the globe, unprecedented volatility in the markets and slim operating margins at the companies in which funds are invested, are also posing serious threats to the investment industry, Hamel said.

The fund business is not going to overcome these obstacles by introducing the "8,001st mutual fund . . . but through innovation that creates new concepts or turns old concepts upside down," Hamel said.

"The question is, are you heretics?" he said. "What are the dogmas, conventions or orthodoxies that blind you to the beliefs you cannot change? Create new business concepts and imagine a radically different business model."

Fund companies should ask customers what it is they would never expect from them and then deliver some of those very services, Hamel said. Provocative ideas can also be culled from fund companies' own employees, he said.

Other innovative paths fund companies could consider include cross-selling various investment products or even co-branding with competitors, said Blake Darcy, chief executive officer of DLJdirect of Newark, N.J. Clients are also looking for more personal advice as well as flexible advice/fee arrangements, said James Higgins, president and chief operating officer of the private client group at Morgan Stanley Dean Witter of New York.

While change in the fund industry is inevitable, the industry must remember to uphold the standards of the Investment Company Act that protect shareholders, said Matthew Fink, president of the ICI.

"We welcome innovations that would benefit investors but we must always be alert to proposals that would put the Act at risk," Fink said.

In light of heated competition and more volatile capital markets, the fund industry must temper shareholder expectations, Brennan said.

"Polls show that people expect annual 20 percent returns, but that's counter-intuitive because of the run that we have had and the risks inherent in the market," Brennan said.

Brennan said that the industry had done an outstanding job of allaying Y2K fears and preventing the public from pulling its money out of funds on Jan. 1, 2000. He encouraged the industry to marshall that same know-how to execute a similarly-effective education campaign on returns.

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