Mutual Benefits
Almost $1 of every $5 in financial assets owned by US households is invested in mutual funds. Comprised of equities, bonds, or a hybrid, these funds are a growing component of Americans’ savings. Whether earmarked for specific future needs (such as college or retirement) or just serving as a vehicle for increasing wealth, mutual funds are one of the most important and widely used of all investment mechanisms.
Mutual fund assets have grown by almost 700% since 1990 according to the Investment Company Institute, the national association for the investment company industry. From a level of approximately $1.07 trillion in 1990, they skyrocketed to reach $7.41 trillion in 2003. This remarkable growth has two components: net new investment volume and gains in the value of the underlying equities and bonds.
Net new investments (cash inflow less cash outflow) over the 1990-2003 period totaled more than $3.29 trillion. Last year (2003) was the first net cash outflow since 1988, driven primarily by a shift from money market funds to bank and savings deposits and other investment instruments. Even with 2003’s $43 billion net outflow, fund asset values approached record highs.
Growth in the value of underlying investments accounted for the remaining $3.05 trillion in mutual fund asset value expansion. Clearly, many Americans are reaping the rewards of ownership. These funds have the unique ability to provide much-needed portfolio diversification and insulation from the volatility of individual stocks. In addition, some funds have historically been able to outperform broader market measures thanks to the expertise of their managers. (Of course, there are also many funds that compare poorly to the S&P 500 and other widely used market indicators, and past results are no indicator of future success.)
While finance purists might debate the merits of various types of funds, the bottom line is that people in the US are buying them and relying on them as never before. Without a doubt, the bursting of the Internet/technology stock bubble and the other trouble the market experienced in the wake of an economic slowdown and the terrorists’ attacks of 2001 scared some people away. However, as the market recovers and portfolios are realigned, it is likely that the money flowing into mutual funds will continue its rapid upward trend.
Owners of mutual funds are a diverse group. About 91 million people in 53.3 million households owned mutual funds in 2003. Almost half of all US households currently hold such assets, down slightly over the past few years in the wake of the 2000-2002 bear market.
The average age of owners was 48 (as of 2004) and baby boomers made up almost half of the mutual fund investors. About one-fourth of mutual holders were older; another one-fourth were younger. In general, owners had college or post-graduate degrees and household income of $68,700.
It is important to note that this household income level is a median level, meaning that half of all mutual fund owner households had incomes of less than that amount. In addition, super-wealthy households do not skew the figure upward; Bill Gates is counted exactly the same as a 2-income household earning $70,000.
There are several specific reasons Americans invest in mutual funds. About a third of year-end 2003 mutual fund assets were earmarked for retirement use; funds make up an estimated 22% of all investments for retirement. In fact, some 63% of those who own such investments purchased them through a defined contribution retirement plan. As a substantial segment of the baby boomer generation enters its peak earning years and faces retirement, the level of these funds is expected to expand. IRAs are an important component of this investment tool.
The vast majority of households with children point to their education as a key reason for saving and investing. About a third of those who own mutual funds cite paying for college as a major goal for their investment. As legislation renders education savings plans increasingly attractive, that segment of the market will undoubtedly continue its strong growth curve.
In short, there are as many reasons for saving and investing as there are people in America. Each of us is pursuing our own goals and desires; enhancing our financial assets is important to achieving them. Whether a baby boomer nearing retirement or a household with young children, mutual funds represent one of the most widely used vehicles to reach financial goals and independence.
posted @ 10:28 AM CST [link]
Friday, September 17, 2004
Measurement Error
The recent spate of hurricanes has caused substantial costs to persons and property across several states. The losses are tragic by any reasonable standard and run into the billions of dollars in physical damages alone. Nonetheless, don’t look for them to decrease our standard measure of economic well-being in the US and across the globe, Gross Domestic Product (GDP). They will not show up as a setback to this widely watched benchmark—just the opposite, in fact!!
It is engrained in us to look at the GDP to determine how we are doing in the economy. Its quarterly release is inevitably the lead story of the day and the occasion for political leaders of all persuasions to give their particular spin to the numbers. Two consecutive quarters of decline in this measure is an almost universally accepted definition of a recession. Even a minor revision in a past number is a subject of considerable buzz in the financial markets, and stock prices rise and fall with its every wiggle. So, what does GDP have to say about a hurricane, tornado, flood, earthquake or other natural disaster? The answer may surprise you, but I’m not going to give it just yet.
Initially, let’s explore exactly what the GDP is—and what it is not! The textbook explanation is that it is the final value of all goods and services produced in the economy in a given period of time (usually a quarter or a year). The key words are “final value” and “produced.” You can get to this number in several ways. You can add up the value added (sales minus the costs of purchased items) by every industry. You can add up all of the payments made to generate the output (wages, rents, profits, interest, etc.). Or, you can add up the categories of spending (consumption, investment, governmental outlays, and net exports). Theoretically, any of these approaches will give you the same answer. In practice, they come remarkably close, particularly given the fact that our GDP is now well in excess of $10 trillion (a fourteen-digit number). With the exception of a relatively insignificant fudge factor to account for the inherent messiness in trying to determine all of these things (known formally as a “statistical discrepancy”), the various techniques for computing GDP are indeed consistent.
Now, what happens when a storm hits the coast? If you stop and think about it, the storm itself does not directly affect “production” in the economy to any significant degree. Thus, it doesn’t show up in the GDP amounts at all. On the other hand, the extra plywood, bottled water, gasoline, and other items that are purchased in anticipation of the hurricane’s arrival actually increase GDP. Similarly, the months and years following a major disaster typically bring a spurt of new construction activity which also adds to the economy. Thus, we find ourselves confronted with the notable irony that something that is unambiguously bad for our well-being has the effect of increasing the GDP.
The answer to this enigma is simply the fact that GDP is a measure of production, not welfare. It doesn’t pretend to be anything else, but we often lose sight of that fact. If your home and possessions are destroyed and you rebuild the structure and replace the lost items, you are certainly going to wish the devastation had never occurred in the first place. In terms of production, however, you clearly caused things to occur that wouldn’t have happened otherwise.
There is nothing new in this phenomenon. Folks have been working for decades to devise measures that better capture our overall progress as an economy (a subject for another day). Additionally, the seemingly ceaseless string of major storms this year is but one of many manifestations of the shortcomings of GDP as a “true” measure of how we are doing. It is just the most observed at the moment. The key to seeing through this fog is simply to remember that GDP only purports to tell us what we produced—nothing more, nothing less! It never was and never will be an indication of how we feel.
posted @ 10:28 AM CST [link]
Friday, September 10, 2004
The Competitive Edge
Buzz in the sports world early this week related to golf. As a result of his inability to win the Deutsche Bank Championship, Tiger Woods lost the prestigious number one ranking as the world’s best professional golfer. Vijay Singh took the title from Woods who had held the honor for 264 consecutive weeks, longer than anyone in the 18-year history of the rankings.
Buzz in the retail industry this week also pertains to a record holder, Wal-Mart, which has been the nation’s number one retailer since 1990. In this case, however, it’s not a replacement at the top spot; it’s the announcement that Wal-Mart will soon be increasing the electronics offerings available in its nearly 2,900 stores across the US.
Expansion of these products is being made possible by the desire of Sony Corporation to put more of its wares on store shelves in America in an effort to fend off the stiff competition it is facing from South Korean and Chinese rivals. Wal-Mart Stores, Inc., and Costco Wholesale Corporation are the two main avenues along which Sony hopes to travel in order to achieve that objective.
In the past, Sony primarily focused its efforts on marketing high-end items through consumer electronic stores. At the same time, major discounters were instrumental in achieving higher levels of sales for Sony’s competitors. Now Sony wants to stem the flow. To boost sales and gain greater market share, Sony plans to sell a wider range of products at Wal-Mart stores.
Wal-Mart and Sony already have at least two things in common. Both began their American operations in the early 1960s and have similar corporate cultures. Each company seeks to be innovative, pursue infinite possibilities, and provide customers with quality products at the most economical prices.
Sony created its name by combining two words. One is Latin, sonus, referring to sound, and the other is an English term, sonny, meaning “little son.” The words were combined when the company was founded in 1946 to show that Sony was a group of young people who had energy and passion regarding unlimited possibilities. The company established the Sony Corporation of America in 1960.
Wal-Mart is also a combination of two words. The first is part of the last name of Sam Walton, the founder, and the second pertains to markets where products are sold. In 1962, as Walton was opening his first store in Rogers, Arkansas, Kmart, Target, and Woolco were starting their operations. Over the next three decades, Wal-Mart surpassed them all to become the leading retail discounter. Using the nationwide customer base of Wal-Mart, Sony hopes to achieve the same success by breaking away from its traditional marketing approaches.
With Wal-Mart’s buying power and ability to pressure manufacturers to keep prices at certain levels, Sony might well be able to enhance sales, yet the possibility remains that the corporation could see lower profits. Sony faces an intricate balancing act between increasing market share and decreasing its prices, which has the potential in some cases to damage brand images. One thing is certain: retailers in the electronics industry are going to confront a set of challenges much like those faced by many others as the discount giants have expanded.
But, as Sony’s vision statement proclaims, “We invite new thinking, so even more fantastic ideas can evolve. We take chances. We exceed expectations. We help dreamers dream.”
Whatever the final outcome is for Sony’s ranking in the electronic industry, consumers stand to benefit from lower prices because of the new partnerships. And that’s good news with just over three months left until Christmas.
posted @ 10:26 AM CST [link]
Friday, September 3, 2004
Toys ‘R’ Who?
A few years ago, I used to joke that one of the fastest growing jobs was that of sign makers, particularly with regard to the frequent revisions in the names of banks and other financial institutions that had resulted from purchases or consolidations. It was a clear indication of the changing times. (A few years before that it was arsonists, but we don’t want to go there.)
The recent announcement by Toys ‘R’ Us relating to the selling of its global toy division and spinning off of its Babies ‘R’ Us unit as a separate business beginning next year shows that shifts in today’s markets are still demanding redefining and rethinking of products, images, and strategies.
Founded in 1957 with a single toy supermarket, Toys ‘R’ Us went public in 1978. Since that time, the novel-named company has become a household word while revolutionizing the toy industry. It gradually has evolved into a powerful international toy vendor. As my kids (born from 1982 to 1988) grew up, a weekly visit (at least) was a treasured family ritual. The name, the jingle, and the giraffe became a part of our culture.
Babies ‘R’ Us was added in early 1996 with the opening of a store in Westbury, New York. By 2002, the number of these types of stores approached 200 and locations were spread across the country. During the past five years, Toys ‘R’ Us launched its Internet operations with the creation of Toysrus.com and Babiesrus.com. It now has approximately 700 stores in the US and almost 580 internationally.
Over the years, Toys ‘R’ Us has entreated parents and children into its stores with a wide merchandise selection displayed for one-stop toy shopping and convenient purchases of infant needs. However, fierce competition from major discount merchants has chipped away at Toys ‘R’ Us market share. It now occupies second place in toy sales. As a sign of the times, Wal-Mart is first.
Today, Babies ‘R’ Us is the largest baby products chain in the nation and has been considered for some time to be the crown jewel of Toys ‘R’ Us. Sales of the babies division have been steadily climbing, while revenue from the mother company (no pun intended) saw a slight revenue drop last quarter.
Although large discounters are heightening their pace to bid for infant clothing and furniture customers, Babies ‘R’ Us offers amenities not currently provided by its mass merchant rivals. Among them are close-in parking for expectant mothers, special nursing rooms, and vast quantities and varied selections of items and styles.
Even so, discounters are expanding their baby sections in an effort to obtain greater shares of the $6 billion baby business, which some estimate to be expanding upwards of 6% annually. As a result, the logistical advantages of Babies ‘R’ Us could be offset to some degree over time as shoppers search out the most economical prices.
Although major discounters could affect Babies ‘R’ Us sales, the company will probably have an easier time in fending off competition than has Toys ‘R’ Us, since the desire for baby merchandise is year around, while most purchases of toys occur during the fourth quarter of the year.
The example of Toys ‘R’ Us’ restructuring is being mirrored by numerous industries across America. Such movements have frequently been necessitated by rising costs and fierce competition within the US, as well as globally.
There is an expression that I have always liked: “When the going gets tough, the tough get going.” In today’s changing marketplace, businesses often must rethink and redefine themselves, because in tomorrow’s world, only the tough will succeed.
Change is inevitable and often times necessary to remain viable and profitable. Realignment and focus can provide new opportunities for success in spite of the dangers of emerging competition. How a company or organization handles such changes may well determine its future. Still, it seems really weird for Toys ‘R’ Us to become Toys ‘R’ Somebody Else.
posted @ 10:25 AM CST [link]