BOSTON: LAND OF THE BEAN AND THE BUCK: BOOM PROPELLED BY FUNDS COULD FAST BECOME A BUST

As the Dow Jones industrial average marches toward 10,000 and a torrent of cash continues to gush into the mutual-fund industry, Boston’s economic well-being grows dangerously tied to the wavering fortunes of the securities industry.

Since 1990, the number of jobs in Boston’s mutual fund industry has climbed nearly 70%, far outpacing job growth in any other part of the local economy. Those jobs now account for 13.4% of the inflation-adjusted wages in the city, compared to 7.5% eight years ago, according to the Massachusetts Division of Employment and Training.

Those salaries, which average close to $100,000 a year, are helping fuel an economic boom — the likes of which some are calling the return of the Gilded Age, the 30-year period after the Civil War marked by technological growth and extravagant displays of wealth.

“I’m serving a lot of champagne and caviar these days,” says Christopher Spann, the owner of Restaurant Zinc, a trendy French restaurant in Boston’s South End. “People are treating themselves well.”

At Lee Jaguar near Boston, demand has so far outstripped supply that buyers may have to wait up to two months for a Jaguar convertible, which sells for a cool $75,000. Dan Foley, a sales manager, says a good portion of Lee’s customers are in the money management business. “They’re the ones making all the money,” he says. “And they’re willing to spend it.”

Prosperity, it seems, is everywhere. Sales of single-family homes in the Greater Boston area jumped 11.7% last year from 1996, while the average selling price rose 3.8% to top $200,000 for the first time, according to the Massachusetts Association of Realtors. The state’s jobless rate averaged 3.4% for the three months ended May, nearly a full percentage point below the national average.

“It’s an extra-healthy economy,” says David Kelly, senior economist at Primark Decision Economics in Lexington, Mass. “It just continually outshines itself.”

The economic surge is especially stunning because Boston trailed most other major cities in its recovery from the last recession, which hit hard in the late 1980s and early 1990s.

The mutual fund business is partly responsible for the current turnaround. Investors poured a record $256 billion into the 9,000 or so U.S. stock and bond mutual funds in 1997, topping the previous year’s record. Fidelity Investments, Putnam Investments and State Street Corp. — the city’s three biggest money managers — last year collectively saw their assets under management climb by more than $200 billion.

In some cases, that money is changing the landscape of the city — literally. Fidelity, for example, co-developed a 16-story hotel in South Boston that some have dubbed “Ned’s Beds” in reference to chairman, Edward “Ned” Johnson. The 427-room hotel, which employs 260, opened in May and charges rates as high as $1,500 a night. The mutual-fund giant is also co-developing a $100 million, 500,000-square-foot office tower in South Boston.

But all is not as gilded as it seems. Some financial experts worry that the city’s riches are too closely linked to an industry whose fortunes can turn suddenly on a spike in interest rates or on signs of trouble in foreign markets, such as Japan or elsewhere in Asia.

Regional Financial Associates, an economic consulting and research firm in West Chester, Pa., completed a study late last year which concluded that Boston would suffer more than any other U.S. city — even New York — if the stock market takes a tumble.

“Boston’s economy has been one of the principal beneficiaries in the current runup in stock values,” says Mark Zandi, the chief economist at Regional Financial Associates. “When those stock values come down, it also stands to be one of the regions hardest hit.”

Contributing to the city’s vulnerability, says Mr. Zandi, is the high level of equity investment ownership among households in the Boston region. The average household in New England has equity holdings of $20,539, vs. the national average of $13,180.

“In part that’s because so many residents work in financial services and are more willing and able to invest in stock and have done so traditionally,” he adds.

The city’s exposure to the stock market is accentuated by its high concentration of high-tech companies — which tend to rely heavily on the capital markets for financing. Boston has the second most high-tech jobs of any metro area in the nation — after San Jose, Calif. — says Mr. Zandi.

James Klocke, director of Government Affairs at the Greater Boston Chamber of Commerce, plays down the city’s increasing reliance on the mutual fund business. “We have a pretty diversified economy,” he says. “There are five industries that are the drivers of this economy, not just one.”

no. 1 wage engine

But none of the other four — health care, high technology, education and tourism — is pushing as hard as financial services, and the mutual fund industry in particular. A recent report by the Chamber of Commerce shows that financial services was the only one of the five in which job growth outpaced the national average between 1993 and 1996. That growth came exclusively from the mutual fund business, the report showed.

Today, the securities industry, which is dominated by mutual funds, is the No. 1 contributor to total wages paid to Boston employees. Six years ago, that distinction belonged to the health care business. The exact extent of the city’s reliance on Wall Street could be tested soon. While no one is predicting a meltdown, many economists and money managers are forecasting a correction in the market.

“If there’s any sanity in the current market environment, and I’m not sure there is at this point, investors have to be looking at a lower rate of returns,” says Benjamin Thorndike, a portfolio manager in Boston for New York-based Scudder Kemper Investments.

If the market really tumbles “you’re going to see more unemployment and a lot more cutbacks on discretionary services,” says Bernard Horn, president of Polaris Capital Management, a Boston-based money manager with about $60 billion under management.

goodbye to 6-figure bonuses

Indeed, anything more than a minor downturn would likely prove disastrous. It would put a squeeze on nearly every facet of the local economy, from the law firms that provide money managers with millions of dollars of legal services to the caterers that keep the boardrooms filled with croissants and coffee.

A decline in stock prices would put the brakes on wage increases, hiring and the six-figure bonuses being given to star money managers at many mutual fund companies.

It would also jolt the city’s many cultural institutions, such as the Boston Symphony Orchestra, which rely on the generosity of money managers. Putnam, for example, recently sponsored an exhibit of painter David Hockney’s new work at the Museum of Fine Arts.

For many profiting from the boom, it’s not a question of if there will be a downturn, but when. “It can’t last forever” says Barbara Fischer, owner of Eugene Galleries, where an 18th-century map of the city sells for $3,000. “People are spending so much money that it just has to end.”

Still, Boston’s mutual fund industry is no shrinking violet. The industry is, after all, fairly versatile. Mutual fund companies, though leaner, can peddle conservative bond funds just as easily as riskier growth ones. With baby boomers in a savings mode that is likely to last another 20 years, the industry also has a demographic tailwind in its favor.