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A Letter From ICI’s Chief
Economist

2005 Facts at a Glance

ICI Research: Staff and
Publications

SECTION ONE:
Overview of U.S.-Registered
Investment Companies

SECTION TWO:
Recent Mutual Fund
Trends

SECTION THREE:
Exchange-Traded Funds

SECTION FOUR:
Closed-End Funds

SECTION FIVE:
Mutual Fund Fees and
Expenses

SECTION SIX:
Mutual Fund Owners:
Who Are They and
Where Do They
Purchase Fund Shares?

SECTION SEVEN:
The Role of Mutual Funds
in Retirement and
Education Savings

DATA TABLES

APPENDIX A:
How Mutual Funds and
Investment Companies
Operate

APPENDIX B:
ICI Statistical Releases
and Research

GLOSSARY OF TERMS

FACT BOOK ARCHIVE

Ownership of mutual funds has grown significantly over the past 25 years. Nearly half of all U.S. households owned mutual funds in 2005, compared with less than 6 percent in 1980. The 91 million individuals who own mutual funds include many different types of people with a variety of financial goals. Fund investors purchase and sell funds through four principal sources: professional financial advisers, such as full-service brokers and independent financial planners; directly from fund companies; retirement plan sponsors; and fund supermarkets.

Individual and Household Ownership

Individual Americans hold about 90 percent of total mutual fund assets. In 2005, nearly 54 million households, or about half of all U.S. households, owned funds. Mutual funds represent a significant component of many households’ financial holdings. Excluding real estate and other property, households hold about 20 percent of their assets in mutual funds. Among households that own mutual funds, an average of $48,000 is invested in mutual funds, representing nearly half of total household financial assets.

Characteristics of Individuals and Households Owning Mutual Funds

An estimated 91 million individual investors own funds. The majority of mutual fund shareholders are married or living with a partner, and most are college graduates. More than three-quarters of all fund investors work full- or part-time.

About Half of U.S. Households Own Mutual Funds

(millions of U.S. households owning mutual funds, selected years)*

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*Households owning mutual funds in 1980 and 1984 were estimated from data on the number of accounts held by individual shareholders and the number of funds owned by fund-owning households; data for 1980 through 1992 exclude households owning mutual funds only through employer-sponsored retirement plans; data for 1994 through 2005 include households owning mutual funds only through employer-sponsored retirement plans. The data for 1998 through 2005 include fund ownership through variable annuities.
Source: Fundamentals, “U.S. Household Ownership of Mutual Funds in 2005”

Many of today’s mutual fund owners were introduced to mutual fund investing through retirement plans at work. Nearly 60 percent of shareholders indicate they purchased their first fund from a defined contribution retirement plan, compared with 47 percent in 1998.

Mutual Funds’ Share of Household Financial Assets Has Grown Steadily
Since 1990

(percent, 1990–2005)

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Note: Household financial assets include mutual funds held through employer-sponsored retirement plans, bank personal trusts, and variable annuities.
Sources: Investment Company Institute and Federal Reserve Board

Most shareholders have invested in mutual funds for many years; 70 percent have owned funds for at least 10 years. Shareholders’ fund portfolios usually include several mutual funds, and the majority own at least one equity fund.

Fund owners generally have long-term investment horizons and are investing in mutual funds to achieve a range of financial goals, which usually include saving for retirement or paying for education. A majority of shareholders rely on professional financial advice when making fund investment decisions.

Fund Ownership by Age and Income

Individuals of all ages and household incomes own funds. Ownership of funds is the greatest among households headed by individuals age 35 to 64 years—the group considered to be in their peak earning and saving years. About half of all shareholders are members of the Baby Boom Generation, and nearly one-quarter are members of Generation X. The median age of all U.S. mutual fund shareholders is 48.

Mutual Fund Ownership Greatest Among 35- to 64-Year-Olds

(percent of U.S. households within each age group* owning mutual funds, 2005)

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*Age ranges are based on the age of the individual heading the household.
Source: Fundamentals, “U.S. Household Ownership of Mutual Funds in 2005”

Mutual fund ownership increases with household income, although most mutual fund investors are of moderate financial means. More than 60 percent of fund investors have household incomes between $35,000 and $100,000. Shareholders’ median household income is $68,700.

Ownership of Mutual Funds Increases With Household Income

(percent of U.S. households within each income group* owning mutual funds, 2005)

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*Income ranges are based upon previous year’s pretax household income.
Source: Fundamentals, “U.S. Household Ownership of Mutual Funds in 2005”

Where Individuals Own Mutual Funds

Inside Defined Contribution Retirement Plans

With the growth of 401(k) plans since 1990, retirement plans at work have become a common source through which individuals invest in mutual funds. More than 60 percent of all shareholders own funds through these plans. On average, 23 percent of individuals’ mutual fund holdings are held in employer-sponsored retirement plan accounts.

Where Do Shareholders Own Mutual Funds?

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¹Professional financial advisers include full-service brokers, independent financial planners, bank and savings institution representatives, insurance agents, and accountants.
²Other sources include fund companies directly, fund supermarkets, and discount brokers.
Source: Fundamentals, “Ownership of Mutual Funds Through Professional Financial Advisers”

A large number of shareholders consider defined contribution retirement plans their primary source for purchasing mutual funds. Nearly 60 percent of all shareholders currently view these plans as their main fund purchase source, up from about half of all shareholders in 1998.

Outside Defined Contribution Retirement Plans

Although defined contribution retirement plans are the primary source of mutual funds for most shareholders, about two-thirds of all mutual fund investors own funds outside these plans. Shareholders who own funds outside defined contribution retirement plans typically hold these funds in their investment portfolios for several years. On average, mutual fund accounts held outside retirement plans at work have been open for five years.

Financial advisers traditionally have helped many investors select funds outside retirement plans at work. Professional financial advisers typically identify investors’ financial goals and risk tolerance, and then help investors select mutual funds that balance their investment goals with their willingness to accept investment risk. Advisers also provide investors with a range of services after the initial sale of fund shares, including conducting transactions, maintaining financial records, and coordinating the distribution of prospectuses, financial reports, and proxy statements.

The Average Mutual Fund Account Has Been Open for Five Years

(percent of mutual fund accounts held outside employer-sponsored retirement plans, by age of account, 2004)

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Among investors owning fund shares outside defined contribution retirement plans, more than 80 percent currently own fund shares through professional financial advisers, including full-service brokers, independent financial planners, insurance agents, bank or savings institution representatives, and accountants. Nearly half own funds solely through advisers, while another third own funds purchased from advisers as well as directly from fund companies, fund supermarkets, or discount brokers. Fourteen percent solely own funds purchased directly from fund companies.

Institutional Ownership

Businesses, financial institutions, nonprofit organizations, and other institutional investors hold about 12 percent of mutual fund assets. Institutional investor data exclude mutual fund holdings by fiduciaries, retirement plans, and variable annuities, which are primarily attributable to individual investors.

Businesses are the largest segment of institutional investors in mutual funds. At year-end 2005, businesses’ mutual fund assets totaled $511 billion, the majority of which was invested in money market funds. Financial institutions are the second-largest component of institutional investors in mutual funds. Their mutual fund assets at year-end 2005 were $339 billion, of which 61 percent was invested in money market funds. Nonprofit organizations held $131 billion in mutual fund accounts at year-end 2005. Unlike businesses and financial institutions, nonprofit organizations allocated the majority of their mutual fund assets to stock, bond, or hybrid funds. In 2005, other institutional investors, including state and local governments and funds holding mutual fund shares, held $128 billion in mutual funds, most of which was invested in stock, bond, or hybrid funds.

Businesses Are the Largest Type of Institutional Investor

(assets in long-term and money market funds, by type of institution, billions of dollars, 2005)

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*Other institutional investors include assets of state and local governments, funds holding mutual fund shares, and other institutional accounts not classified.

Fund sponsors often create special share classes or funds expressly for institutional investors. Institutional investors often purchase fund shares directly from fund companies. In addition, brokers, banks, and other third parties create “platforms” through which many institutional investors can buy mutual fund shares. These arrangements enable institutional investors, which are often restricted as to the portion of their assets that can be held in any particular mutual fund, to easily diversify their holdings across funds.

Ownership of Equities Influenced by Age of Investor

There are distinct generational differences in the types of equities owned by older and younger investors. In general, older investors are more likely to own individual stock. In fact, one-fifth of equity investors age 65 or older solely own individual stock, compared with only 7 percent of equity investors under age 35. Younger investors tend to solely own stock mutual funds.

The differences among investors in the types of equities owned is in part due to how individuals were initially introduced to equity investing. Nearly half of all equity investors in 2005 made their initial equity investment in stock mutual funds through retirement plans at work. Because many older investors were in the workforce prior to the creation and introduction of defined contribution plans, only 21 percent of those age 65 or older made their first equity purchase through mutual funds inside employer-sponsored retirement plans. In contrast, 61 percent of equity investors under age 35 say their initial equity investments were through mutual funds inside retirement plans at work.

Employer-Sponsored Retirement Plans, Mutual Funds Introduce Investors
to Equities

(percent of equity investors whose initial equity purchases were stock mutual funds through employer plans, by age, 2005)

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Source: Investment Company Institute and Securities Industry Association, Equity Ownership in America, 2005

Investors who buy mutual funds directly from fund companies or through discount brokers generally conduct their own research when making fund investment decisions. Discount brokers and fund companies that sell directly to investors typically provide a variety of products and tools to assist in decisionmaking, and some offer investment advice for an additional charge. The ongoing services available from discount brokers and fund companies that sell directly to investors include quarterly statements, recordkeeping, and transaction processing.

Many discount brokers offer mutual fund supermarkets. Mutual fund supermarkets enable investors to purchase from a single source funds offered by many different fund families.

See Equity Ownership in America, 2005 for more information on investors who own stock directly or through mutual funds.

Shareholder Opinion of Mutual Funds Improves in 2005

Shareholders’ impressions of mutual funds improved for the second year in a row in 2005. After reaching a low of 71 percent in 2003, the favorability rating rose to 72 percent in 2004 and 75 percent in 2005. Favorability is influenced by a variety of factors, with investment performance having the greatest impact on investor opinion. Nearly three-quarters of all mutual fund shareholders indicate fund performance is a “very” important factor in shaping their views of the industry, and about half cite fund performance as the most important factor.

Reflecting the importance of performance in shaping shareholder opinion, mutual fund favorability rises and falls with stock market performance. Shareholders’ opinion was lowest in 2003—the year in which the recent stock market decline bottomed out—but improved as the market recovered in 2004 and 2005. In addition to fund performance, shareholders indicate their impressions of the fund industry are primarily shaped by personal experience with a fund company, current events in financial markets, and the opinions of professional financial advisers.

See the December 2005 Fundamentals for more research on fund shareholders’ opinions of mutual funds.

Mutual Fund Favorability Correlates With Market Performance

(mutual fund company favorability rating and S&P 500 index, 1997–2005)

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Note: The mutual fund company favorability rating is the percent of shareholders familiar with fund companies who have a “very” or “somewhat” favorable impression of fund companies.
Source: Fundamentals, “Shareholder Sentiment About the Mutual Fund Industry, 2005”