U.S.-registered investment companies play a significant role in the U.S. economy and world financial markets, managing the assets of millions of U.S. investors, supplying investment capital in securities markets around the world, and employing thousands of U.S. workers.

Sources of Investment Company Growth in 2006

Registered investment companies managed a record $11.2 trillion at year-end 2006 (Figure 1.1), about a $1.7 trillion increase from 2005. Mutual funds, accounting for 93 percent of total investment company assets, held $10.4 trillion. By year-end 2006, closed-end fund assets totaled $298 billion; exchange-traded funds (ETFs), $423 billion; and unit investment trusts (UITs), $50 billion.

Investment performance fueled much of the growth in fund assets during 2006. Broad U.S. stock price indexes rose about 14 percent, leading to positive investment performance for funds investing in U.S. stocks. Rising stock prices abroad also boosted the returns on funds investing in foreign stocks, with broad foreign stock indexes rising about 24 percent.

Shareholders added $474 billion of net new cash to their mutual funds—just shy of the record for investor inflows to these funds set in 2001—and reinvested $181 billion in dividends in these funds. Continued demand for mutual funds in retirement accounts and strong stock market returns supported flows into stock, bond, and hybrid mutual funds. Rising short-term interest rates also helped to spur household and business demand for money market funds in 2006.

Net issuance of ETF shares, which includes reinvested dividends, totaled a record $74 billion in 2006. Excluding share buybacks, closed-end funds issued $12 billion in new shares during 2006, and UITs had gross issuance of $29 billion, which also excludes any liquidation of UITs.

For more statistics on investment companies, see the Data Tables in this book.

Figure 1.1

Investment Company Assets

(billions of dollars, 1995–2006)

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¹Mutual fund data exclude mutual funds that primarily invest in other mutual funds.
²ETF data prior to 2001 were provided by Strategic Insight Simfund; ETF data include investment companies not registered under the
Investment Company Act of 1940.
³Total investment company assets include mutual fund holdings of closed-end funds and ETFs.
Sources: Investment Company Institute and Strategic Insight Simfund

Number of Investment Companies and Types of Intermediaries

There were approximately 500 financial firms from around the world that competed in the U.S. market to provide investment management services to fund investors at the end of 2006. Nearly 60 percent of U.S. fund and trust sponsors are independent investment advisers, and these sponsors manage more than half of investment company assets (Figure 1.2). Banks, insurance companies, securities broker-dealers, and non-U.S. sponsors are other major fund and trust sponsors in the U.S. marketplace.

Historically, low barriers to entry have attracted a large number of investment company sponsors to the fund marketplace in the United States, and active competition among these sponsors has helped to keep asset concentration low for many years.

These low barriers to entry led to a rapid increase in the number of fund sponsors in the 1980s and 1990s. This trend began to reverse itself in 2000. About 280 fund advisers left the fund business from 2000 through 2006 while, at the same time, about 140 new firms entered. The overall effect has been a net reduction of approximately 20 percent in the number of industry firms serving investors. The reduction in the number of advisers has occurred with larger fund sponsors acquiring some smaller fund families and with some fund advisers liquidating funds. In addition, several other large sponsors of funds have recently sold their fund advisory businesses. Investor demand and other competitive pressures affect the profitability of fund sponsors. These market forces along with increased costs associated with new regulations have likely contributed to the decline in fund sponsors.

The decline in the number of fund sponsors has been concentrated primarily among those advising mutual funds, and their exit from the industry has caused the growth in the number of mutual funds to slow. Competitive dynamics also affect the number of funds offered in any given year by fund advisers that remain. In particular, fund sponsors create new funds to meet investor demand, and merge or liquidate funds that do not attract sufficient investor interest. Mutual fund sponsors opened about 270 more funds than they closed.

Figure 1.2

Nearly 60 Percent of Fund Sponsors Are Independent Investment Advisers

(percent of investment company complexes by type of intermediary, December 2006)

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The total number of other investment companies has fallen considerably since 2000 due to the decline in the number of UITs, as sponsors of UITs have been creating fewer new trusts. Because these investment companies often have preset termination dates, the slower pace of creation has caused the number of UITs to decline substantially. At the same time, sponsors of ETFs and closed-end funds, on net, created 168 new funds in 2006.

As of year-end 2006, there were 15,638 investment companies (Figure 1.3): 8,726 mutual funds (including funds that invest in other funds), 5,907 unit investment trusts, 646 closed-end funds, and 359 exchange-traded funds.

Figure 1.3

Number of Investment Companies

(number of each type of investment company, 1995–2006)

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¹Mutual fund data include mutual funds that invest primarily in other mutual funds.
²ETF data prior to 2001 were provided by Strategic Insight Simfund; ETF data include investment companies not registered under the Investment Company Act of 1940.
Sources: Investment Company Institute and Strategic Insight Simfund

Role of U.S. Investment Companies in Financial Markets

Investment companies channel U.S. household and business investment into stock, bond, and money markets around the world. In 2006, U.S. investment companies purchased approximately 55 percent of the $290 billion in foreign stocks and bonds that U.S. residents acquired, and funds were among the largest buyers of U.S. commercial paper, U.S. corporate equities, and state and local government bonds.

Investment companies have been among the largest investors in the domestic financial markets for much of the past 15 years, and now hold a significant portion of the outstanding shares of U.S.-issued stocks, bonds, and money market securities. Investment companies as a whole are the largest investor in U.S. corporate stock, holding 25 percent of the outstanding stock of U.S. companies at the end of 2006 (Figure 1.4).

Figure 1.4

Investment Companies Channel Investment to Stock, Bond, and Money Markets

(percent of total market securities held by investment companies, 2006)

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Note: Components may not add to the total because of rounding.
Sources: Investment Company Institute, Federal Reserve Board, and World Federation of Exchanges

Investment companies also hold the largest share of U.S. commercial paper—an important source of short-term funding for major U.S. corporations. As a group, investment companies are the second largest holders of tax-exempt debt in the United States, second to direct household ownership, and they play a significant role in the taxable debt markets.

The growing role of investment companies in channeling money to the financial markets reflect several important trends observed during the past quarter century. First, businesses and other issuers of securities have decreased their reliance on banks and savings institutions as a source of funding during the past several decades. Second, banks no longer simply take deposits and issue loans, rather they often "securitize" loans that they make by bundling them together and selling them to investors, including mutual funds.

This shift away from direct bank financing has occurred as households have reduced their reliance on bank deposits and direct holdings of stocks and bonds. Investment companies now manage 23 percent of households' financial assets, up from 8 percent in 1990 (Figure 1.5). As households have increased their reliance on mutual funds, they have decreased the share of their assets held directly in stock, bond, bank, and insurance company investments.

The growth of 401(k) and other defined contribution plans and the increasing role that mutual funds play in these plans explains some of households' heavier reliance on investment companies. Yet households have also invested in mutual funds outside of defined contribution plans. Individual Retirement Accounts (IRAs), about 45 percent of which are assets rolled over from 401(k) and other pension plans, now account for 10 percent of household financial assets, and mutual funds manage 47 percent of IRA assets. Households also hold about a quarter of their nonretirement assets in investment companies, up from 9 percent in 1990.

As individuals have increased their reliance on mutual funds, so have businesses and other institutional investors. Institutions invest heavily in money market mutual funds and rely on them to manage their short-term assets. For example, nonfinancial businesses hold about a quarter of their cash in money market funds. Institutional investors have also contributed to the growing demand for ETFs. For example, investment managers, including mutual funds, use ETFs to manage liquidity, a strategy which allows them to keep fully invested in the market while holding a highly liquid asset to manage their investor flows.

Figure 1.5

investment company Share of Household Financial Assets Has Grown Steadily Since 1990

(mutual funds' share of household financial assets, percent, 1990–2006)

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Sources: Investment Company Institute and Federal Reserve Board

Investment Company Employment

Besides investment advisory functions, fund sponsors provide a range of recordkeeping, administrative, and other services needed to coordinate the investments of the millions of shareholders who own funds. These services include tracking the assets held in investor accounts, handling investor calls, holding the assets in safe custody, complying with federal and state laws, as well as the overall administration of the fund. To provide these services, an ICI survey found that fund advisers, transfer agents, custodians, and other fund service providers employed more than 146,000 individuals in 2005 (Figure 1.6).

Approximately one-third of fund employees were involved in helping to service investor accounts. Workers employed by the fund's investment adviser or in support of portfolio management functions such as investment research, trading and security settlement, information systems and technology, and other corporate management functions account for nearly another third of the industry's workforce. Jobs related to fund administration, including financial and portfolio accounting and regulatory compliance duties, account for 14 percent of industry employment. Personnel involved with distribution services, such as marketing, product development and design, and investor communications, account for 9 percent of the employees. Sales-force employees, including registered representatives and sales support staff where at least 50 percent of the employee's revenue is derived from mutual fund sales, and mutual fund supermarket representatives, represent 14 percent of fund industry jobs.

Figure 1.6

investment company industry employment by job function

(percent of jobs in registered investment company operations areas, 2006)

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For many industries, employment tends to be concentrated in locations of the industry's origins, and investment companies are no exception. Massachusetts and New York served as early hubs of investment company operations. As the industry grew, other states became significant centers of fund employment, such as California, Maryland, New Jersey, and Pennsylvania. Firms providing a variety of services to investment companies also expanded their operations to such states as Florida, Missouri, and Texas
(Figure 1.7).

Figure 1.7

Industry Employment by State

(estimated number of employees of registered investment companies by state, 2006)