Amid the Money Muddle

By Charles Alexander

Investors are swamped by a deluge of financial choices

When billions of dollars are at stake, even the most reserved of bankers and brokers start chasing after customers. Last week marked the first anniversary of the beginning of the much ballyhooed All Savers program. Thus as some $31 billion worth of the one-year, tax-exempt savings certificates began to come due this month in banks and savings and loan associations around the country, it was no surprise that moneymen were in hot pursuit of all that cash.

The All Savers program was authorized by Congress in the summer of 1981 as a 15-month stopgap measure to help banks and S and Ls attract funds. By last week, as the certificates started to mature, the biggest question in the industry was: Where would investors stash their money next? Courted by bankers who are anxious to roll over the All Savers deposits into other bank investments, and cajoled by brokers and other financial advisers who are eager to snatch the funds away, some 4 million All Savers depositors across the U.S. were bombarded through the week by telephone calls, mailgrams, letters containing glossy brochures, and full-page newspaper ads. Proclaimed the headline of an ad from New York's Manufacturers Hanover Trust: "Last year, an All Savers was your smartest investment. This year, it's our Market Plus Accounts."

The week-long All Savers free-for-all was hardly unique. These days millions of investors are being badgered by conflicting advice from bankers and brokers. That is because sliding interest rates are shaking up the entire investment industry. As the luster has faded from such multi-billion-dollar investment lures as money-market mutual funds and six-month bank certificates of deposit, investment experts have been scrambling to come up with new high-yield alternatives that will appeal to safety-conscious investors.

Besides the standard choices of savings deposits, stocks, bonds and mutual funds, financial advisers are now nudging clients toward such exotic new fare as zero-coupon bonds, seven-day bank C.D.s, and brokerage-house deposit certificates. With such a variety to choose from, even professionals are befuddled. Says Gary Strum, a vice president at the E.F. Mutton investment firm: "You need an M.B.A. degree to understand what the banks and institutions are offering nowadays."

The confusion is compounded by the uncertainty of the economy itself. Since last spring, short-term interest rates have dropped dramatically, dragging down the yields on everything from money-market funds, which have slipped from 13.7% to a mere 9.7%, to six-month bank certificates, which have slumped even more, from 14.6% to 9.7%. But no one can be sure whether the trend will continue and, if so, for how long.

Many economists cautiously predict that rates will keep dropping on into 1983. Yet other experts, like Richard Zambell, chief economist of the BancOhio National Bank in Columbus, expect that the current rapid growth of the U.S. money supply (an annual rate of 14.8% in the past month) will force the Federal Reserve Board to tighten credit. Argues Zambell: "To prevent a return to double-digit inflation, the Fed will have to push interest rates sharply higher by year's end."

If interest rates do keep falling, investors will almost certainly start drawing down the $224 billion now on deposit in money-market funds. Operated by brokerage houses and mutual fund companies, these huge pools of capital invest their shareholders' dollars in such short-term securities as bank certificates of deposit and commercial paper, a type of IOU issued by corporations.

By offering high returns, unlimited withdrawals and check-writing privileges, the funds have become the fastest growing form of investment in the U.S. Soon a whole new group of financial players will enter the game. The Government has already given banks and S and Ls permission to enter the discount stockbrokerage business, and last week Congress passed a bill that will allow the industry to sell money fund-type investments.

Yet even as the banks are gearing up to move into the business, the plunge in interest rates threatens the growth of the entire money-market fund industry. Last month total assets in the funds declined, by some $2.2 billion. Alarmed by the rising tide of corporate bankruptcies and bank failures, some investors are even beginning to worry about the safety of the funds themselves. Unlike bank and S and L deposits of $100,000 or less, investments in money-market funds are not federally insured. Besides being heavily invested in unsecured corporate commercial paper, the funds have also bought billions of dollars' worth of so-called jumbo bank certificates of deposit, which often come in denominations of $1 million or more and thus are not federally insured either.

Dean Bender, a Beverly Hills public relations executive, expresses a sentiment shared by many a fund investor. Says he: "The image of the money funds has been tarnished in my eyes. Because they carry no insurance and interest rates are going down fast, I'm concerned." Two weeks ago Bender transferred $4,200 of the $26,000 he held in money funds to U.S. Government securities. He plans to continue switching cash as he decides among the myriad investment alternatives.

Brokerage firms, concerned that deposits will soon begin flowing out of their own money funds, are teaming up with banks and S and Ls to offer new investments featuring federal deposit insurance, easy resale by individual investors, and steady interest rates. Dean Witter Reynolds has begun selling so-called EasyCash certificates of deposit, which are federally insured accounts indirectly on deposit at the City Federal Savings and Loan Association in Elizabeth, N.J. By putting a minimum of $5,000 into an EasyCash C.D. last week, a saver could lock up an interest rate of 12.25% over the next four years. The real advantage, however, is that unlike a normal four-year bank deposit, an EasyCash certificate can be resold to Dean Witter at any time. The investor does not incur the customary six-month interest penalty he would suf fer for a premature withdrawal if he had placed his funds directly on deposit at the bank.

As interest rates have plummeted on bank accounts and money funds, the long-depressed stock and bond markets have begun to look more attractive. In August and early September, heavy buying from such institutional investors as pension funds and insurance companies fueled the most spectacular short-term stock rally in Wall Street history. The Dow Jones industrial average rose 148 points, to 925, in three weeks.

One reason for all the buying is that bargains abound in the market. In recent weeks, such blue-chip stocks as Exxon Corp. and AT&T have been offering virtually risk-free dividend yields comparable to the interest rates available from the money-market funds themselves. But small investors, burned by many false stock rallies in the past, have by and large stayed on the sidelines.

Individual investors have also been hesitant to buy long-term corporate bonds because they are reluctant to tie up their money for anywhere from ten to 30 years. If they needed to unload such bonds at a time of high interest rates and surging inflation, they could do so only by selling at a steep discount from the purchase price.

Brokerage houses have been working overtime to devise short-term investments of, say, one to five years, that can match the high double-digit yields available on corporate bonds. Last week Merrill Lynch unveiled its own candidate: High Income Capital Notes. These are securities, backed by corporate bonds, which mature in one, two or three years. The interest rates last week ranged up to 12% for a three-year note. Says Merrill Lynch Sales Director Edwin Hall: "We think this is what people are looking for as rates on money-market funds decline."

In fact, most people are so confused that they are not at all sure what they want. Investments that look terrific in a period of declining interest rates could turn sour within a few weeks if rates do an about-face and start rocketing upward again. On the other hand, the paralyzed investor could wind up losing as badly if he stands aside and watches in indecision while rates drop, stock prices climb, and one attractive opportunity after another leaves him behind. In investing as in most things, deciding not to decide is itself a decision, and sometimes the wrong one at that.

*By Charles Alexander. Reported by Kenneth W. Banta/Chicago and Frederick Ungeheuer/New York.

With reporting by Kenneth W. Banta/Chicago and Frederick Ungeheuer/New York

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