FIRST-QUARTER NET SALES OFF 45%: INVESTORS BUYING ANYTHING BUT FUNDS

If you can’t beat ’em, join ’em.

With that philosophy in mind, Louis P. Stanasolovich, president of Legend Financial Advisors Inc. in Pittsburgh, mailed letters to most of his 115 clients last week informing them that he is selling individual stocks as well as his usual mutual funds. Legend, which oversees $69 million, offers clients a choice of three stock portfolios, each investing in shares of 10 to 25 companies.

“It may stop clients from leaving,” figures Mr. Stanasolovich. “I’ve also lost good potential clients in the last two years because they’ve wanted a stock portfolio and I haven’t been able to accommodate them.”

It may prove to be a smart move. While stock mutual funds have long been the

ticket that admitted many investors to Wall Street, the demand for those tickets is shrinking as most funds fail to even match the benchmark Standard & Poor’s 500 stock index. Many investors are shunning tried-and-true stock funds in favor of what they hope will turn out to be the next Microsoft or AOL. Others are seeking refuge from the topsy-turvy market and putting their money into low-risk bond and money-market funds.

Net sales of domestic stock funds — mutual fund companies’ most profitable product — totaled $32.1 billion during this year’s first quarter, a 45% drop from a year earlier. That’s on top of a 24% drop in net equity sales during all of 1998, according to Financial Research Corp., a data gatherer in Boston.

The effect is being felt far and wide by fund groups. Nearly half of the nation’s 636 mutual fund companies saw overall net redemptions during the first quarter, vs. 26% in the year-earlier period. Net sales of stock and bond funds totaled $42.1 billion, according to FRC, a 51% drop from 1998’s first quarter — thanks in large part to the decline in stock fund sales.

Boston’s Putnam Investments posted net stock fund sales of $1.6 billion for the first quarter, down more than 50% from a year earlier. T. Rowe Price Associates Inc. in Baltimore experienced an astonishing 81.6% drop in sales to $331.7 million over the same period. New York’s Merrill Lynch & Co. saw net sales go from $956.4 million in the first quarter of 1998 to minus-$1.3 billion during the first three months of 1999, according to FRC.

“Investors are spooked,” says C. Troy Shaver, an executive vice president and head of mutual fund marketing at State Street Research and Management Co. in Boston, which saw outflows of $88 million last quarter. “Instead of putting money into the broad market, they are going for the sidelines.”

Not all fund groups are seeing equity sales fly out the window. Janus Capital Corp., a unit of Kansas City Southern Industries Inc., had net equity sales of $8.2 billion during the first quarter, a jaw-dropping 1,677% increase from the $465.8 million it had a year earlier. But more than half of those sales, or $4.7 billion, went directly into Janus Twenty — a recently closed mutual fund that invests in only 20 to 30 growth stocks.

Not surprisingly, companies that specialize in index funds — that is, funds that attempt to mirror such market barometers as the S&P 500 — are also raking in the bucks. Vanguard Group, which made its name on index funds, had net sales of $12.6 billion during the first quarter, up nearly 18% from a year earlier.

“It’s becoming much more of a market share-game out there,” says Neil Epstein, a vice president at Putnam Lovell de Guardiola & Thornton, an investment bank in San Francisco. It published a report in February that predicted a 27.2% decline in equity fund sales this year. “You have all these companies chasing fewer and fewer dollars.”

Mr. Epstein, along with other industry experts, say investors are showing a strong preference for individual securities. After months of reading headlines trumpeting Internet stocks that climb 20 or 30 points in a single day, investors are growing impatient with their slower-moving mutual funds.

“Mutual funds seem boring in today’s hot market,” laments Jeremiah M. Potts, a senior vice president and director of marketing at Boston’s MFS Investment Management.

Beth Gamel, a financial adviser in Lexington, Mass., agrees. One client, she says, recently insisted on upping the allocation of stocks (picked by the client) in her children’s account to 50%, from 35%. “Clients are beginning to say “What am I doing in this fund? I would have been better off buying Dell or Microsoft.’”

In addition, a considerable amount of money has been going into bond and money-market funds. Bond funds racked up $74 billion in net sales last year, a 140% increase from 1997’s $31 billion. Money-market funds jumped 130% to $235 billion — the biggest annual increase ever, according to FRC.

That particular trend may be short-lived, however. Bond funds had net sales of $18.4 billion during the first quarter, down 15.2% from the year-earlier period’s $21.7 billion. Meantime, money-market funds pulled in $66 billion, compared to $75 billion.

Fund companies aren’t twiddling their thumbs as net sales of stock funds plummet. But their responses vary.

Federated Investors, which posted net equity sales of $362 million in the first quarter, a 52% decline from a year earlier, recently unveiled a mutual fund aimed at large growth companies — not coincidentally, the hottest part of today’s stock market.

“When it rains money you want to put buckets out to collect as much of it as you can,” explains Richard W. Boyd, a senior vice president and national sales manager at the Pittsburgh company.

MFS, among the few that saw net equity sales increase during the first quarter, isn’t taking any chances. Last month, the company launched a $5 million advertising campaign aimed at reminding investors of the role mutual funds have played in their lives. The campaign, which features the tag line “Imagine A World Without Mutual Funds,” has appeared or will appear in such publications as the Wall Street Journal, Time and Newsweek.

Others are simply waiting it out. Putnam Investments, for example, says its only plan is to “stick to its knitting,” says Richard A. Monaghan, the new chief of the firm’s mutual fund division.

“Just wait until six months down the road when all these dot-coms turn out to be dot-flats or dot-downs,” adds MFS’s Mr. Potts. “All of a sudden mutual funds are going to look pretty good again.”