As U.S. warplanes roared off aircraft carriers in the Arabian Sea on Oct. 7, the fund industry waded yet deeper into an unprecedented economic territory.

Fund companies, with many of their brightest quartered in New York City's financial district, had already seemed particularly hard-hit by the terrorist attacks of Sept. 11. In the month since, a process of rebuilding businesses as well as working to retain assets and calm nervous investors has become the norm.

But now that the U.S. has taken its first dramatic step in what will likely be a protracted military operation, no one seems sure what lies ahead for an industry that has changed so much during the past 25 years. "That's the tricky part," said Charlie Bevis, a chief editor at Financial Research Corp. who recently wrote a white paper about wartime economies' effects on the fund industry. "How do you run a fund company [during] a sustained military action period? How do you keep the business going?"

Logic, of course, points to the question of how the industry fared during past military conflicts. But the fund business has changed markedly since the days of even Vietnam, analysts say. It has never been so large. It has never offered so many products. It has never attracted so many investors--50% of U.S. households by most estimates. And it has never seen so much competition from alternative vehicles such as wrap accounts and stock baskets.

Consulting History

There are cultural differences as well. "The investors are a much more democratized battery of people than during Korea or World War II when it was a high-end investor who was investing in stocks and mutual funds were a small piece of the marketplace," Bevis said.

What about the Gulf War or Kosovo? Analysts point out that, with the current Bush Administration all but promising military action lasting several years, those conflicts do not provide an accurate comparison because they lasted only months. And, while the Gulf War and Kosovo conflicts may provide some perspective of how a contemporary fund industry operates during wartime economies, the military action was so short in duration, those conflicts may not provide much of an accurate picture at all. "I have no clue what happened during Kosovo," said Chip Roame, a fund industry consultant based near San Francisco. "No one can tell you that. You'd have to be tracking weekly data."

So, there is no historical benchmark that can accurately point to any solid conclusions about what a fund industry of this size and complexity will experience in the coming months, analysts say.

Industry observers, meanwhile, are watching for several scenarios that may take shape.

"It's really hard to get a consensus about where things are going," said Tif Joyce, who runs a financial advisory firm in Sonoma County, Calif. "Everybody is just so darned busy trying to figure out what's happening. How would you tell the people what your earnings are going to be in the next few months?"

Equities and fund flows have typically surged during times of U.S. military conflict, analysts say. Figures gathered by FRC show that both large-cap and small-cap equity stocks yielded double-digit returns during the four years of World War II. At that time, though, the industry held only $1 billion in assets.

Taking Their Best Guesses

During the Korean conflict of the early 1950s, large-cap stocks yielded 24.6% annualized returns with flows of $1.2 billion.

Vietnam was another story. During the turbulent years of that conflict, large-cap stocks did horribly, the worst of any conflict following World War II. Fund flows, however, sky-rocketed during the Vietnam years with $2.2 billion in inflows alone during 1966. The industry at the time was comprised of $30 billion in assets. During the entire Vietnam conflict, funds garnered $7.4 billion in flows, according to FRC.

Pundits are blindly mapping a handful of scenarios and offering tentative advice on how firms can weather the protracted military action.

Investors will likely continue investing in equities, but they will seek more conservative investment strategies, Bevis said. That may be because low interest rates have fixed-income products offering paltry returns, he said. Equities, in contrast, may shine as the best option.

Roame, meanwhile, is watching for investors who are relatively new to mutual funds to redeem their assets if markets become even more volatile. For decades investors have continued to trickle out of traditional bank-driven vehicles such as CDs and into mutual funds, he said. These relative newcomers are, in theory, the first to run for the exits when times get tough. Analysts will be keeping their eyes on them, he said. So far, investors haven't bailed out of mutual funds en masse.

Cautiously Optimistic

Joyce suggests that may be partly because the press has had a cautiously optimistic outlook on the markets' condition. When markets have turned sour in the past, the press has sometimes issued a gloom-and-doom scenario. But not this time, he said.

"It makes a huge difference," Joyce said. "That's one of the biggest changes I've seen in the past 10 to 15 years. People have ammunition to stay the course instead of just be paranoid."

Meanwhile, the success of the military operations and the rhetoric that comes from both sides of the conflict will likely play a factor in investor confidence, he said.

"There were periods of time during the Gulf War when there was a serious fear there," Joyce said, recalling a Taliban-like vow by Saddam Hussein to send U.S. soldiers home in body bags. But the U.S. "basically managed the war so efficiently, and I think people really got a lot of confidence out of it. There was a fear and it kind of dampened things for a while; then there was great confidence."

Regardless, observers, such as Bevis and Roame, hope fund companies will do two things: Think up new, creative products and marketing campaigns that keep people interested in investing, and communicate closely with investors.

"This is really going to test the mettle of executives to lead their companies through some interesting times," Bevis said.

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