(5 of 6)
What alarms such financial policemen as William McC. Martin is not the massive size of institutional investing; rather it is a new look among the mutual funds. Because of the Depression, Wall Street suffers from a curious age gap; its brokers and bankers and analysts are either conservative older men or bright young business-school graduates; the 40-to 55-year group is largely lacking because there was scant opportunity in the market when it emerged from college. Discontented with conservatism, the young men—gun slingers is one term for them on the Street—use computers to plot the market and spot promising growth stocks quickly, move in and out of likely companies on a short-term basis that appalls their elders. The combined turnover rate of the mutual funds is now 36%, and a dozen of the fastest gun slingers have a 100% annual turnover. When they turn over a stock in unison, especially one in which funds hold a major position, the result can be devastating.
Xerox, a former favorite among these go-go funds, dropped 30 points in three days when second-quarter earnings this year were lower than expected and some performance funds sold out. Fairchild Camera fell from 123⅜ to 82⅛ after a similar fall from go-go grace, and KLM airlines declined from 117⅝ to 77⅞ for the same reason. After the Chicago & Northwestern Railroad, with one-third of its stock held by funds, announced that a planned merger had been called off, the funds dropped out and C.N.W. stock dropped from 175 to 115. One day in 1966, Motorola Chairman Robert W. Galvin told New York security analysts that earnings would be good but lower than anticipated. In the ensuing scramble by the performance funds to unload Motorola, the stock fell nearly 20 points and the paper loss reached $114 million.
There is nothing illegal, as far as can be determined, in the way the performance funds perform. "The SEC," says one broker, "is trying to catch them using insider information, and the SEC is right. But we all do that. When you have a man on the board, that's what he's for." Moreover, the go-gos constantly outperform everyone else. According to Arthur Wiesenberger & Co., which keeps track of mutual-fund assets and earnings, the performance funds jointly showed a 35.1% gain during the first half of 1967 compared with 9.5% for the Dow-Jones industrials and 15% for all 1,260 stocks on the New York Stock Exchange Index. The principal complaint is rather that, whatever their intent, the go-go funds are having almost the same effect as the outlawed pools of the '20s. Smaller speculators try to follow their moves by watching the market's most active list (since block transactions make for most active stocks) but with little more information than that the hangers-on more often than not take a beating when the funds suddenly sell out. Corporate executives who once were flattered by mutual-fund purchases in their company are now alarmed at the thought of having half their capitalization turned over on the market within a week.
2+2= 4