Investors shying away from mutual funds

CDs, annuities, ETFs gain ground in battle for investor assets, study finds

Nov 16, 2008 @ 12:01 am

By Sue Asci

Investors are shifting away from mutual funds toward certificates of deposit, variable annuities and exchange traded funds, according to a study that will be released next month.

In fact, the percentage of investors who don't have any assets invested in mutual funds increased to 16%, from 6% two years ago, according to the study by Cambridge, Mass.-based Cogent Research LLC.

The study also found that investors in mutual funds had an average 40% of their assets in those funds, down from 53% in 2006.

The economic downturn is accelerating a continuing move from mutual funds to alternative products, said Christy White, a principal at Cogent.

"I think there is a perfect storm going on. Advisers told us a year ago, prior to the market downturn, that they were starting to migrate assets away from mutual funds and into alternative products," Ms. White said.

"They are trying to add more value," she said.

Mutual fund assets totaled $10.6 trillion on Sept. 30, down 8.7% from $11.6 trillion at the end of August, according to the Investment Company Institute in Washington. Stock and bond funds posted net outflows of $63.5 billion in September, up dramatically from $12.1 billion in August.

Cogent's study was based on a survey last month of 4,000 investors with $100,000 or more in investible assets.

The survey found that 37% of respondents had assets invested in bonds, up from 32% in 2006. The percentage of investors invested in CDs climbed to 44%, from 39%.

"The economic downturn has caused a flight to safety," said Jeff Keil, president of Keil Fiduciary Strategies LLC, an industry consulting firm based in Littleton, Colo. "In that respect, annuities and CDs are going to shine. It perhaps is a short-term mentality to ride out the storm."

Morningstar's Ms. White agreed, "I think safety and low cost are at play here more so than before."

Meanwhile, 25% of respondents had assets in variable annuities, up from 19% two years earlier, and 9% had assets in ETFs, from 7%.

"We've steered away from mutual funds, beginning two years ago," said Scott Toms, chief investment officer at Cornerstone Wealth Management Group in Hagerstown, Md., which manages $140 million in assets.

Instead, he said, he favors ETFs.

"ETFs are very tax-efficient and you know what the holdings are day after day," Mr. Toms said. "You don't have to worry about some fund manager in there taking extra risk."

That said, he still uses mutual funds for alternative investment strategies or for a specialized asset class.

Daniel Traub, president of Tempo Financial Advisors LLC of Natick, Mass., which manages $20 million in assets, has also moved more of his clients' assets to ETFs in recent years.

"It has to do with having good products that are tax-efficient and cheap," he said.

"There are no short-term trading fees to worry about, if you have to get out," Mr. Traub said. "In the aftermath of the market timing scandal of 2003, most mutual funds have fees if you sell within a short period of time."

And more investors have been asking about CDs in the past couple of months, Mr. Traub said. "As clients have gotten more worried, they may call and say, 'I cannot take it anymore,'" he said.

For mutual fund companies, the shift toward ETFs and other alternative investments has translated into a drop in their household penetration.

The study found that 9% of investors surveyed in October used funds from Franklin Resources Inc. of San Mateo, Calif., down from 12% in 2006. And the percentage of investors using funds from Calamos Investments of Naperville, Ill., declined to 2% in October, from 4% in 2006, the survey found.

Franklin declined to comment on the survey results. Calamos, meanwhile, did not return telephone calls by press time.

Of course, advisers still say mutual funds play a role in diversified investing, regardless of investor movements.

"I favor adequate equity exposure by professionals who are making the day-to-day decisions of what to buy in the product," said Jeff Bernier, chief executive and chief investment officer at Roswell, Ga.-based TandemGrowth Financial Advisors LLC, which manages $60 million in assets.

"I have a fear that we have a public that is relatively unprepared for retirement," Mr. Bernier said.

"A lot of people are spooked away from equities and may be swearing off them at the wrong time for the wrong reasons" he added.

E-mail Sue Asci at


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