Investment Companies Put New Emphasis on Bond Funds

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BOSTON -- U.S. fund companies, whose bond funds have sat on the back burner of investment choices ever since the bond market tumbled in 1994, are working to pump some equity juice into their slumping businesses.

Once upon a time bond funds were more popular than equity funds. From 1990-93, a net $283.2 billion poured into bond funds, exceeding the $261 billion that went into stock funds, according to the Investment Company Institute, which tracks net inflows.

Then, in 1994, the U.S. bond market had one of its worst years ever, as the Federal Reserve raised interest rates six times to combat inflation. Almost $50 billion was withdrawn from bond funds in 1994-95 after investors discovered bond funds weren't the low risk funds they thought they were. By contrast, almost $250 billion went into equity funds in the two-year period. "The market for bond funds, especially muni bond funds, has been dead since 1994," said Don G. Powell, president and chief executive of Van Kampen American Capital Inc. As a result, fund companies such as Van Kampen American Capital, Dreyfus Corp. and Franklin Resources Inc. lost business as consumer demand for bond funds slumped. Now they've decided that if they can't compete with stock funds, they might as well join them by adding to their menu of equity funds. Franklin, for instance, agreed in June to buy the mutual fund company of famed stock picker Michael Price. Van Kampen American Capital has switched gears in the past two years to focus on marketing its equity funds as well as its flagship bond fund, the $5.1 billion Prime Rate Income Trust, Powell said. And Dreyfus, the New York-based subsidiary of Mellon Bank Corp., is trying to shake its stodgy image as a manager of fixed-income funds by introducing a series of stock funds, including an Aggressive Growth fund. Today, about 18 percent of Dreyfus' more than $83 billion in assets are in equity funds. That's up from 12 percent a year ago, the company said. "We're emphasizing our equities business, but we're not ignoring our bond funds," said Patrice Kozlowski, Dreyfus' spokeswoman. The company, for instance, has hired several bond fund managers and increased its offerings by introducing two junk bond funds in the past year, she said. …