What the Funds Do And Why They Do It

When will the stock market march back to its old highs? A possible answer: when the men who control the nation's 300 mighty mutual funds begin to buy in earnest.

The funds do close to 7% of all the trading on the New York Stock Exchange, are the most active institutional investors, and their power is growing. In times of tough markets, small investors habitually dump their own shares and shift into funds, figuring that the professional money managers know best. This year investors have bought a net of $2.4 billion in fund shares, but the fund managers have put relatively little of this new money into the stock market. They turned bearish late last year, pared their purchasing in the first half of 1966, and in the third quarter actually sold $300 million more of common stocks than they bought--helping lead the Dow-Jones industrial average to a loss of almost 100 points.

Since April, the funds have cut the share of their assets held in stocks and corporate bonds from 94.3% to an all-time low of 90.3%. They now have a phenomenal $3.2 billion of their $33.5 billion assets in cash and Government securities--which could be quickly converted into shares.

Gush of Oil. For the funds, this has been the year of the big switch. Many have selectively sold off glamour stocks and cyclical shares (autos, steels, non-ferrous metals), which swing along with the ups and downs of the economy. They have gone into more solid, less spectacular "defense" shares that stand to grow with the U.S. population, such as food manufacturers, electric utilities, oils and insurance companies.

The largest mutual-fund-management group, Minneapolis-based Investors Diversified Services (assets: $6 billion), this year has reduced its auto and steel shares while increasing its investments in noncyclical and service businesses. Among them: oil and gas companies, utilities, banks, personal-loan companies, food chains and some other retailers. Massachusetts Investors Trust, whose assets in 1966's first nine months declined 15%, to $1.9 billion, has bought some food companies, electrical companies and airlines. Sales by the funds lately have caused sharp drops in such stocks as Xerox, General Motors, Fairchiki Camera and Montgomery Ward, which early last week fell briefly to a 23-year low, mostly because of a 344,900-share sale by funds.

Sunlight & Shadow. From an overall viewpoint, the funds have done well by their 3,500,000 investors this year. From January through September, the Dow-Jones industrial average dropped 20.1%, but the funds' assets--not counting new money pumped in by investors--declined only 14%. All funds are still spectacularly above levels of the 1950s. For example, $10,000 invested in the Dreyfus Fund in December 1955 grew to $35,199 at year-end 1965, and diminished only to $32,007 on Sept. 30. A $10,000 stake in Fidelity Trend Fund at its initial offering in June 1958 spurted to $93,421 at the end of last year, and was only off to $87,666 on Sept. 30.

This, according to Arthur Wiesenberger & Co., is how some of the best performers among the larger mutual funds have fared in this year's first nine months.

Growth Funds

Fidelity Capital Down 2.1%

Diversified Growth Stock 4.2% Delaware Fund 4.3%

Fidelity Trend 6.2%

Dreyfus 7.7%

Channing Growth 7.8%

T. Rowe Price Growth Stock 9.9%

Mass. Investors Growth Stock 10.1%

Income Funds

Keystone (K-l) Income Down 8.4%

Puritan 11.4%

Putnam Income 11.6%

Growth-and-Income Funds

American Mutual Down 8.4%

Fidelity Fund 9.3%

State Street Investment 9.3%

Investment Co. of America 9.5%

George Putnam Fund of Boston 10.2%

Putnam Investors 11.1%

Affiliated 11.7%

Investors Mutual 12.0%

One William Street Fund 12.0%

Wellington 12.3%

Though the market as a whole has gone down even more, the summary does not seem too sunny to some critics. Indeed, Securities and Exchange Commission Chairman Manuel Cohen still talks about "the long shadows" that the funds cast over the market. Some time soon, the SEC will issue its long-awaited report on the funds, and nobody would be surprised if it called for closer Government supervision.

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