As we look forward at the beginning of a new year, the terrorist attacks of last Sept. 11 have put the challenges facing the mutual fund industry in perspective. Especially at this time of year, most of us are thankful for more basic gifts: family, friends and life itself.

But as our concerns turn back to business in the new year, fund executives need to wake up to a sobering message. In sharp contrast to 2000, which saw unprecedented fund flows, 2001 could wind up being one of the worst years for net flows in nearly a decade. With just $103.5 billion in net new assets flowing into stock funds through last October, it is not looking pretty.

The situation now is oddly reminiscent of 1991. Then, the country was at war in the Middle East. The economy had also slipped into recession. And flows that year into stock funds totaled just $39.4 billion. Fast forward to 2001. The country is once again at war. In November we were officially declared to be in a recession. Fund flows are off.

But there are key differences between 1991 and now that make the prospect for the fund industry going forward very different. For one, we are unlikely to see the seemingly unlimited fund growth of the 1990s replay itself. And any growth there is certainly won't be aided by the outrageous returns offered investors in Internet and technology funds.

Fund companies can no longer launch a product and expect assets to flow in by virtue of a hot sector and good performance. Even if a fund has decent performance by which to be marketed, investors are wary. Stability, wealth preservation and income stream are the new watchwords. Many firms are belatedly coming to the realization that slapping together the latest fund-of-the-month flavor is not a viable business strategy.

Moreover, in an industry that has known nothing but growth for the better part of 15 years--almost a generation--the bottom line is dictating business strategy, in some cases for the very first time. Look no further than scaled back e-commerce initiatives and massive layoffs to see evidence of this.

Besides a sour economy, the industry is also facing new competition from outside in the form of hedge funds, exchange-traded funds and managed accounts.

The past year also saw the entrenchment of the adviser-sold distribution model, with several no-load stalwarts giving up on the direct channel. Adviser-sold funds may be the channel of choice for investors of the future, but it is also an expensive one for funds to target and many will be forced to find creative, cost effective means of gaining shrinking shelf space.

Many of these changes have been slowly taking shape for the last couple years. But in a year like the one that's just passed, these changes stand out more clearly than ever--even to the level where consensus is taking shape: a sense that the industry has embarked on its next stage of evolution. While challenges in business as in life are not always welcome, in the end, they may make us stronger and better for them.

This is the first issue of 2002 and we look forward to serving you in the year ahead. We wish you a happy and prosperous New Year.

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