Investing in the Internet

As the Age of the Individual Investor rolls on, fueled by a seemingly bulletproof economy and fears that Social Security is now a misnomer, money keeps pouring into mutual funds. To monitor their portfolios and seek out other investment vehicles, many mutual fund shareholders - especially fans of no-load funds, who tend to be a self-sufficient lot - are turning to the Internet.

Mutual fund companies have been quick to pick up on this, adding a host of services to their Web sites, from on-line prospectuses to portfolio tracking. But will the mutual fund companies see a payoff from their investment in on-line information provision?

Having launched its own Web site in August 1996, American Century Investments, a Kansas City, Mo., mutual fund company (which includes the Twentieth Century Group, American Century Group and Benham Group of mutual funds), conducted the Investor Internet Adoption Study in the fall of 1996. The objectives of the study were to:

  • gauge mutual fund investor access to the Internet and on-line services;
  • understand mutual fund Web site usage;
  • identify desired mutual fund services on the Internet;
  • capture concerns related to Internet investment activity.

With the help of Elrick and Lavidge, an Atlanta-based research firm, American Century contacted almost 1,400 mutual fund owners by telephone to identify 250 respondents (18 percent) who currently access the Internet. "We wanted to get an idea of how quickly the technology was being adopted by investors," says Angela Murray, senior marketing research analyst, American Century Investments. "Beyond that, what types of things are they doing on-line? Are they making transactions? Are they interested in having account access on the Internet?"

"All of this information was used to design a Web site that was customer-centered. Knowing our customers enables us to focus our efforts," adds Karen Seratti, senior marketing research analyst, American Century Investments, who, along with Elrick and Lavidge Account Director Elizabeth Oldweiler, also worked on the project.

The study found that mutual fund investors are in the early stages of discovering and using mutual fund Web sites. The most frequently mentioned reasons for using the Internet are for research/information or E-mail. Financial services ranks fifth at 32 percent of respondents. This is comparable to the 28 percent who reported having ever visited a mutual fund Web site.

Reasons for Using the Internet

 Research/Information 79%
E-Mail 60% 
Entertainment 45%
News 43%
Financial Services 32%
Bulletin Boards 28%
While the research suggests that fund investors have been slow to embrace the Internet, American Century found that its Twentieth Century Group shareholders are much more comfortable with Web-based services. The Twentieth Century Group includes aggressive equity funds usually favored by younger investors, whose longer time horizons allow them to ride out aggressive funds' ups and downs. "We do tend to have a younger shareholder base and they're the same people who are seeking out the cutting-edge technologies," Murray says.

"We acknowledged that our shareholders are the early adopters of technology. The more we understand them, the more we're ahead of the technology curve," Seratti says.

Compared to the general investing population, more than half of Twentieth Century investors (51 percent) use the Internet for financial services purposes. And although only 18 percent of mutual fund investors access the Web, 33 percent of the Twentieth Century fund group investors do so.

Can do vs. want to do

The research suggests that there is still a large gap between what investors can do and what they want to do on the Internet. The most common actions taken at a mutual fund Web site are checking fund share prices and reading/ downloading prospectuses. Other Web site activities occur at much lower rates. In fact, 13 percent of investors who have visited a fund site have done so to check account balances, an action not readily available on many fund Web sites.

About one-third (32 percent) of respondents indicated that they would check their balances more frequently if they could get balance information on-line. The remaining individuals said they would check their balances at about the same frequency or even less frequently with an Internet option.

Mutual fund Web site proliferation may be slightly ahead of shareholder demand for on-line services. But as investors become more familiar with the technology, usage should increase. Those who have been on the Internet for at least two years are almost twice as likely to have visited a mutual fund Web site, compared to those with less than six months of experience on-line. "The effect that tenure has on Web site mutual find usage is interesting," Murray says. "There really does seem to be a learning curve."

Likelihood to use fund company on-line service features in the next 12 months is related to past experience with fund company Web sites. Those who have visited mutual fund companies on the Internet are more likely to use their services in the future. For example, while 43 percent of fund investors with Internet access said they were likely to check fund prices in the next year, 63 percent of investors who have visited a fund Web site said likewise.

Those who primarily invest directly with mutual fund companies (instead of using a broker) are the most likely to have visited a mutual fund Web site (47 percent). In addition, of those who invest with more than three fund companies, 45 percent have visited a mutual fund Web site, compared with only 32 percent of those who invest with two or three firms and 18 percent of those who invest with a single firm.

Transaction activity limited

Even among experienced Internet users, including those who make other types of purchases on-line, anticipated mutual fund transaction activity over the Internet is very limited. "As the mutual fund industry moves toward allowing account access on the Internet, we were interested in finding out about the concerns people would have in using the Internet to make transactions so that we could address them," Murray says.

Only 10 to 11 percent indicated being likely to buy shares, move shares or sell shares on-line. However, the likelihood of using transaction services on the Internet is double for those who have already made some type of purchase on-line. "We're really early in the process of on-line transactions. People are still skeptical about making them. There seems to be much more comfort with gathering information than there is with actually sending money over the wire, so to speak. We feel that skepticism will diminish, but there is a plateau beyond which it will be hard for more than that amount of people to be comfortable doing it," Murray says.

When asked "What concerns, if any, would you have making transactions with your mutual funds on the Internet?" privacy, security and theft fears were mentioned on an unaided basis by 68 percent of respondents. No other concerns were reported by more than 6 percent of study participants. When asked to rate potential problems with on-line mutual fund access, nearly two-thirds of respondents (63 percent) said they would be extremely concerned that someone would be able to access their account information. This is four times as many as other potential concerns.

Overcome hurdles

Murray says American Century is considering conducting the study on a regular basis, perhaps every two years. "The study brought to light the hurdles we're going to have to overcome as we continue to develop our Web site. And it also tempered some of the expectations that we had."

"A study of this magnitude will allow us to understand the changes in behavior over time," Seratti says. "Although the number of shareholders using the Internet is still relatively small, we expect a significant increase in the percentage of shareholders who will transact on-line by the year 2000."