 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
Financial services—like all industries—from time to time undergo periods of rapid evolution. From the economist's view, it is particularly intriguing how and why products and markets change over time. The fund industry and the markets in which it operates certainly provide an excellent case study to observe such developments.
Modern evolutionary biology has a theory with parallels in economics that may help to explain how products and markets change. Punctuated equilibrium theory hypothesizes that environmental changes can set off a rapid genetic response in organisms, even after a long period of ecological steady state. These pressures cause species to evolve in unexpected ways, and some of the new organisms prosper in the changed world.
Financial markets have experienced a variety of pressures in the past several decades. Some of these pressures—historically large fluctuations in interest rates, two long-running bull markets in stocks, the introduction and growth of IRAs and 401(k) plans, the globalization of financial markets, and the introduction and expansion of the Internet—have helped give rise to the modern-day fund industry. These environmental changes have caused the fund industry to evolve far from the structures of its first four decades, when the industry was largely populated by actively managed domestic equity funds available primarily through brokers and other financial advisers.
In this new environment, many funds that previously had not attracted much investor interest have prospered, including money market, index, tax-exempt, bond, balanced, and international funds. Products, such as lifecycle and exchange-traded funds, have more recently entered the scene. Together, these new and evolving funds now manage nearly $7 trillion, three-fifths of fund industry assets. A parallel evolution in services arose in the wake of the Internet, making access to and comparison of funds and competing products as easy as a click of a mouse.
The Share of Household Financial Assets held in investment companies Has Grown Steadily Since 1980
(percent)
Download an Excel file of this data.
Sources: Investment Company Institute and Federal Reserve Board
The 2007 Investment Company Fact Book provides considerable detail about these and other characteristics of the modern fund industry, and helps advance understanding of how the industry has arrived at this point. Among the themes observed:
- Funds remain an integral, growing part of household portfolios. Registered investment companies—mutual funds, exchange-traded funds, closed-end funds, and unit investment trusts—managed a record $11.2 trillion by year-end 2006, compared with less than $200 billion under management before 1980. Funds account for nearly one-quarter of U.S. household portfolios, the single largest component of household assets.
- Funds serve as an important source of capital in the equity and fixed-income markets. Investment companies are among the largest investors in U.S. stocks, commercial paper, and state and local government debt. A little more than a generation ago, funds' share of these markets was less than 5 percent.
- Investors use funds to manage a significant portion of their self-directed retirement accounts. Mutual funds managed $4.1 trillion in IRAs and defined contribution pension plan assets in 2006, just under half of all the money invested in these accounts. Investors held about $15 billion in mutual funds in such accounts in 1980.
Economists have one advantage over biologists: we can watch economic evolution occur within mere decades. Still, our training does not provide the skills to predict the unexpected, let alone the ability to divine the direction that markets and products will travel in response. Those responses will be determined by the undirected, collective wisdom of investors and risk-taking entrepreneurs, who independently make millions of decisions with varying degrees of success. As economists, our role is to help legislators and regulators understand how markets work. We can provide the hard data and analysis that assist policymakers in designing rules to achieve their intended goals while avoiding excessive burdens that stifle the innovation and competition that serve investors' needs. That is a primary goal of the analysis and work that we at ICI perform daily.
In that spirit, we hope that the archive of data and analysis provided here by ICI's research staff serves as an entryway to a greater public understanding of funds and of their role in the financial services marketplace.
Brian Reid
Investment Company Institute
May 2007
As Chief Economist, Brian Reid leads the Institute's Research Department and is a member of the Institute's senior management team.
