Despite erratic stock market performance in the second half of 1998, last year proved to be a good one for the sale of mutual funds in general and of Vanguard Group's funds in particular.
Long-term mutual funds had net sales of approximately $221 billion in 1998, according to Financial Research Corp. a Boston fund data tracking firm. Sales for the second half of the year were less than half the total for the first six months of 1998. Nevertheless, year-end sales still represented the fourth highest level in fund history, according to Financial Research's estimates.
The Investment Company Institute (ICI) also reported strong net sales, totaling nearly $244 billion for long-term funds. According to both ICI and Financial Research, however, higher-margin equity fund sales were off dramatically from one year ago. ICI's figures are based on a survey of its members which do not include all mutual fund companies.
The ICI reported equity sales of $158.8 billion, 30.1 percent lower than the $227.1 billion in sales for 1997. In August, as the market dropped, stock funds recorded their first monthly net outflow since 1990. The sale of hybrid funds, which combine equity and fixed-income investments, dropped to $10.5 billion last year, down from $16.5 billion in 1997. Among pure fixed-income products, net sales of taxable bond funds rose to $59.2 billion from $27.6 billion in 1997, the ICI reported. And municipal bond fund sales last year totaled $15.2 billion, up from $872 million in 1997.
The ICI does not report sales by fund group. Financial Research, however, tracks sales on a company-by-company basis. It reported that the top seller of funds last year was Vanguard, which had sales of approximately $48.9 billion. Putnam Investments, the second-highest selling firm, had net sales of roughly $12.8 billion. Other top-selling firms included Fidelity Investments -- $11.3 billion; Massachusetts Financial Services -- $11.1 billion; and American Fund Distributors -- $10.9 billion, according to Financial Research.
Vanguard's sales total exceeded the previous one-year record of $45.2 billion, according to Financial Research. Fidelity set that record in 1993, said Michael Evans, an analyst at Financial Research.
Vanguard's brand name, low expense ratio and the performance of several of its top funds all contributed to the popularity of the firm's funds, said Evans. Although industry-wide sales for the year were strong, Evans said that sales slowed "dramatically" in the second half of 1998.
Net sales dropped from $86 billion and $84 billion in the first and second quarter, respectively, to $23 billion and $27 billion for the final two quarters of the year, Evans said.
Louis Harvey, president of the fund research firm Dalbar, said the message in the year-end figures was that net sales continued through the second half of the year despite substantial market volatility. By comparison, the impact of the stock market's setback in 1987 was far more dramatic, Harvey said. In fact, the market plunge of Oct., 1987 led to the drying up of fund sales and net redemptions over a sustained period. Last year, there were only net redemptions in stock funds for one month, August.
The 1998 sales figures are consistent with a report Dalbar issued last month. The report -- based on a survey of 1,100 households with incomes of $50,000 or more conducted in December -- concluded that fears that investors would sell their funds in the face of market volatility were unwarranted.
Of those households Dalbar surveyed, 79 percent said they intended to continue to invest in the stock market. Only four percent said they definitely would stop investing in the market. Dalbar said that group included retirees and lower- and high-income wage earners. Harvey attributed investors' willingness to continue investing largely to marketing and educational efforts by mutual fund companies.
"It has been drilled into (investors') heads that they are investing for the long term," Harvey said. "I think that message has gotten through."
The results of the Dalbar survey are consistent with reports which the ICI has issued in recent years. In a report last year, the ICI said that investors in emerging markets funds reacted "calmly" to losses and volatility in the Asian markets in 1996 and 1997. Despite losses in Asian and Latin American emerging market funds, net redemptions were "relatively modest," the ICI reported.
Investors also did not panic when the Dow Jones Industrial Average dropped 554 points on Oct. 27, 1997. There were slight net redemptions for that day. But, by the next day, shareholders had become net buyers. A broader ICI survey of 14 major stock market contractions between 1945 and 1995 found no evidence of extended runs on funds.
Shareholders have been "muted and reasoned in their response to volatility," said Chris Wloszczyna, an ICI spokesperson. Fund investors "have a long-term outlook."
For Vanguard, 1998 marked the third year in a row in which its Index 500 fund was the top-selling fund. The fund's $9.4 billion in sales were the most ever recorded by a single fund, according to Financial Research. Other top selling funds included: PIMCO Total Return -- $6.6 billion; Washington Mutual Investors -- $6 billion; MFS Investors Trust -- $4.3 billion and Janus Twenty -- $4.2 billion.