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This chapter provides a broad overview of U.S.-registered investment companies—mutual funds, closed-end funds, exchange-traded funds, and unit investment trusts—and their sponsors.

U.S.-registered investment companies play a significant role in the U.S. economy and world financial markets. These funds managed $14.7 trillion in assets at the end of 2012 for nearly 94 million U.S. investors. Funds supplied investment capital in securities markets around the world and were among the largest groups of investors in the U.S. stock, commercial paper, and municipal securities markets.

Investment Company Assets in 2012

U.S.-registered investment companies managed $14.7 trillion at year-end 2012 (Figure 1.1), a $1.7 trillion increase from year-end 2011. Major U.S. stock indexes rose more than 10 percent over the year, contributing to the increase in total net assets of funds invested in domestic equity markets. Double-digit increases in stock prices also were recorded abroad, and had a corresponding effect on funds invested in international equities. In addition, a weaker U.S. dollar—and the resulting increase in the dollar value of nondomestic securities—led to an increase in the value of equity and bond funds that held international assets.

Overall, mutual funds reported $196 billion of net inflows in 2012, the first annual net inflow since 2008; other registered investment companies also recorded positive inflows. Investors added $196 billion to long-term mutual funds. Money market funds saw little change in assets during 2012 after three years of outflows, relieving downward pressure on the total level of U.S. fund assets. In addition, mutual fund shareholders reinvested $194 billion of income dividends and $93 billion of capital gains distributions that mutual funds paid out during the year. Investor demand for exchange-traded funds (ETFs) strengthened relative to recent years, with a record-high net share issuance (including reinvested dividends) of $185 billion in 2012. Unit investment trusts (UITs) had new deposits of $43 billion, up from 2011, and closed-end funds issued $15 billion in new shares during 2012.

Americans’ Continued Reliance on Investment Companies

Households are the largest group of investors in funds, and registered investment companies managed 23 percent of households’ financial assets at year-end 2012, up slightly from 2011 (Figure 1.2). As households have increased their reliance on funds over the past decade, their demand for directly held equities has decreased (Figure 1.3). Household demand for directly held bonds has been weak since the financial crisis, and household assets in directly held bonds fell by $51 billion in 2012. In contrast, households made net investments in registered investment companies in 10 of the past 11 years. Households invested an average of $349 billion each year, on net, in long-term registered investment companies versus average annual sales, on net, of $230 billion in directly held equities and bonds.

Figure 1.1

Investment Company Total Net Assets by Type

Billions of dollars, year-end, 1995–2012

  Mutual funds1 Closed-end funds ETFs2 UITs Total3
1995 $2,811 $143 $1 $73 $3,028
1996 3,526 147 2 72 3,747
1997 4,468 152 7 85 4,712
1998 5,525 156 16 94 5,790
1999 6,846 147 34 92 7,119
2000 6,965 143 66 74 7,247
2001 6,975 141 83 49 7,248
2002 6,383 159 102 36 6,680
2003 7,402 214 151 36 7,803
2004 8,095 253 228 37 8,613
2005 8,891 276 301 41 9,509
2006 10,398 297 423 50 11,167
2007 12,001 312 608 53 12,975
2008 9,604 184 531 29 10,348
2009 11,113 224 777 38 12,152
2010 11,832 238 992 51 13,113
2011 11,627 243 1,048 60 12,979
2012 13,045 265 1,337 72 14,719

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1Mutual fund data include only mutual funds that report statistical information to the Investment Company Institute. The data do not 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 and exclude ETFs that invest primarily in other ETFs.
3Total investment company assets include mutual fund holdings of closed-end funds and ETFs.
Note: Components may not add to the total because of rounding.
Sources: Investment Company Institute and Strategic Insight Simfund

The growth of individual retirement accounts (IRAs) and defined contribution (DC) plans, particularly 401(k) plans, explains some of households’ increased reliance on investment companies during the past two decades. At year-end 2012, 9 percent of household financial assets were invested in 401(k) and other DC retirement plans, up from 7 percent in 1992. Mutual funds managed 57 percent of the assets in these plans in 2012, up from 16 percent in 1992 (Figure 1.4). IRAs made up 10 percent of household financial assets, and mutual funds managed 46 percent of IRA assets in 2012. Additionally, mutual funds managed $1.1 trillion in variable annuities outside of retirement accounts, as well as $4.4 trillion of assets in taxable household accounts.

Figure 1.2

Share of Household Financial Assets Held in Investment Companies

Percentage of household financial assets, year-end, 1980–2012

Figure 1.2

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Note: Household financial assets held in registered investment companies include household holdings of ETFs, closed-end funds, UITs, and mutual funds. Mutual funds held in employer-sponsored DC plans, IRAs, and variable annuities are included.
Sources: Investment Company Institute and Federal Reserve Board


Figure 1.3

Household Net Investments1 in Funds,2 Bonds, and Equities

Billions of dollars, 2002–2012

Figure 1.3

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1Net new cash flow and reinvested interest and dividends are included.
2Data for funds include mutual funds, variable annuities, ETFs, and closed-end funds.
Sources: Investment Company Institute and Federal Reserve Board

Businesses and other institutional investors also rely on funds. Many institutions use money market funds to manage a portion of their cash and short-term assets. Nonfinancial businesses held 21 percent of their cash in money market funds at year-end 2012. Institutional investors also have contributed to the growing demand for ETFs. Investment managers, including mutual funds and pension funds, use ETFs to manage liquidity. This strategy allows them to help manage their investor flows and remain fully invested in the market. Asset managers also use ETFs as part of their investment strategies, including as a hedge for their exposure to equity markets.

Figure 1.4

Mutual Funds in Household Retirement Accounts

Mutual fund percentage of retirement assets by type of retirement vehicle, 1992–2012

Figure 1.4

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* DC plans include 401(k) plans, 403(b) plans, 457 plans, Keoghs, and other DC plans without 401(k) features.
Sources: Investment Company Institute, Federal Reserve Board, Department of Labor, National Association of Government Defined Contribution Administrators, American Council of Life Insurers, and Internal Revenue Service Statistics of Income Division

Role of Investment Companies in Financial Markets

Investment companies have been among the largest investors in the domestic financial markets for much of the past 20 years. They held a significant portion of the outstanding shares of U.S.-issued equities and money market securities at year-end 2012. Investment companies as a whole were one of the largest groups of investors in U.S. companies, holding 28 percent of their outstanding stock at year-end 2012 (Figure 1.5).

Investment companies continued to be the largest investors in the U.S. commercial paper market—an important source of short-term funding for major U.S. and international corporations. Mutual funds’ share of the commercial paper market slightly decreased to 42 percent of outstanding commercial paper at year-end 2012 from 43 percent at year-end 2011. Money market funds accounted for the majority of funds’ commercial paper holdings, and the share of outstanding commercial paper these funds held tended to fluctuate with investor demand for prime money market funds and the overall supply of commercial paper. While 2012 marked the sixth year in a row that the total dollar amount of outstanding commercial paper contracted, mutual funds saw only moderate declines in prime money market fund holdings and in other mutual fund holdings.

Figure 1.5

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

Percentage of total market securities held by investment companies, year-end 2012

Figure 1.5

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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

At year-end 2012, investment companies held 28 percent of tax-exempt debt issued by U.S. municipalities (Figure 1.5). Funds’ share of the tax-exempt market has remained fairly stable in the past several years despite changes in the demand for tax-exempt funds and the overall supply of tax-exempt debt. Funds held 12 percent of U.S. Treasury and government agency securities at year-end 2012. Funds’ role in the corporate bond market continued to expand in 2012, holding 16 percent of the outstanding debt securities in this market compared with 15 percent at year-end 2011.

Types of Intermediaries and Number of Investment Companies

A variety of financial service companies offer registered funds in the United States. At year- end 2012, 76 percent of fund complexes were independent fund advisers (Figure 1.6), and these firms managed 63 percent of investment company assets. Non-U.S. fund advisers, banks, thrifts, insurance companies, and brokerage firms are other types of fund complexes in the U.S. marketplace.

Figure 1.6

About Three-Quarters of Fund Complexes Were Independent Fund Advisers

Percentage of investment company complexes by type of intermediary, year-end 2012

Figure 1.6

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Note: Components do not add to the total because of rounding.

In 2012, 776 financial firms from around the world competed in the U.S. market to provide investment management services to fund investors (Figure 1.7). Historically, low barriers to entry have attracted a large number of investment company sponsors to the fund marketplace in the United States. These low barriers to entry led to a rapid increase in the number of fund sponsors in the 1980s and 1990s. However, competition among these sponsors and pressure from other financial products reversed this trend in the early 2000s. From year-end 2002 to year-end 2009, 347 fund sponsors left the business while 304 new firms entered, for a net reduction of 43 sponsors. The decline in the number of sponsors is due to larger fund sponsors acquiring some smaller fund families, some fund sponsors liquidating funds and leaving the business, and several large sponsors selling their fund advisory businesses. The number of fund companies able to retain assets and attract new investments generally has been lower since 2000 than during the 1990s (Figure 1.8).

In recent years, there has been renewed growth in the number of sponsors. From year-end 2009 to year-end 2012, the number of fund sponsors increased, on net, by 95, with 224 new fund sponsors entering the business and 129 firms leaving (Figure 1.7). Many of the firms entering the business took advantage of a cost-effective model: the series trust. The series trust model offers a management solution in which the fund’s sponsor arranges for a third party to provide certain services (e.g., audit, trustee, some legal) through a turnkey setup. This allows the sponsor to focus on portfolio management and asset gathering. The overall cost of operating the series trust is spread among the various funds within the trust.

Figure 1.7

Number of Fund Sponsors

2002–2012

Figure 1.7

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Figure 1.8

Fund Complexes with Positive Net New Cash Flow to Equity, Bond, and Hybrid Funds

Percentage of fund complexes, selected years

Figure 1.8

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Competitive dynamics also affect the number of funds offered in any given year. In particular, fund sponsors create new funds to meet investor demand, and they merge or liquidate funds that do not attract sufficient investor interest. The pace of newly opened funds decreased slightly to 628 funds in 2012, which, although below the recent peak of 725 in 2007, is close to the average over the previous 10 years (Figure 1.9). The rate of fund mergers and liquidations declined slightly to 493 in 2012 from 510 in 2011.

Figure 1.9

Number of Mutual Funds Leaving and Entering the Industry*

2002–2012

Figure 1.9

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* Data include mutual funds that do not report statistical information to the Investment Company Institute. Data also include mutual funds that invest primarily in other mutual funds.

Unit Investment Trusts

Unit investment trusts (UITs) are registered investment companies with some characteristics of both mutual funds and closed-end funds. Like mutual funds, UITs issue redeemable shares (called units). Like closed-end funds, UITs typically issue only a specific, fixed number of shares. In contrast to both open-end and closed-end funds, however, UITs have a predetermined termination date that varies according to the investments held in the portfolio. UITs investing in long-term bonds may remain outstanding for 20 to 30 years. UITs that invest in stocks may seek to capture capital appreciation over a period of a year or a few years. When these trusts are dissolved, proceeds from the securities are either paid to unit holders or reinvested in another trust.

UITs fall into two main categories: bond trusts and equity trusts. Bond trusts are divided into taxable and tax-free trusts. Equity trusts are divided into domestic or international/global trusts. The first UIT, which was offered in 1961, held tax-free bonds and, historically, the majority of UIT assets have been invested in bonds. However, beginning in the late 1990s, assets in equity UITs generally have exceeded assets in both taxable and tax-free bond trusts (Figure 1.10). The number of trusts outstanding decreased from the mid-1990s through the mid-2000s due to a slowdown in the number of trusts created by sponsors combined with existing trusts reaching their preset termination dates.

UITs employ a buy-and-hold investment strategy; once the trust’s portfolio is selected, its securities typically are not traded. However, UITs may sell or replace a security if questions arise concerning the financial viability of the issuer or the security’s creditworthiness. Most UITs hold a diversified portfolio of securities, with the extent of each trust’s diversification described in its prospectus. The securities in a UIT, which are listed in its prospectus, are professionally selected to meet a stated investment objective such as growth, income, or capital appreciation.

Investors can obtain UIT price quotes from brokerage or investment firms, and some but not all UITs list their prices on NASDAQ’s Mutual Fund Quotation Service. Some broker-dealers offer their own trusts or sell trusts offered by nationally recognized independent sponsors. Units of these trusts may be purchased through their registered representatives. Investors also may purchase units from the representatives of smaller investment firms that sell trusts sponsored by third-party bond and brokerage firms.

While only a specific number of units of a UIT is sold in an initial public offering, many trust sponsors voluntarily maintain a secondary market in which outstanding units are repurchased from initial investors and subsequently resold to other investors. Even in the absence of a secondary market for UITs, trusts are required by law to redeem outstanding units at their net asset value (NAV), which is based upon the current market value of the underlying securities.

Figure 1.10

Total Net Assets and Number of UITs

Year-end, 1997–2012

Figure 1.10

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Note: Components may not add to the total because of rounding.

The total number of investment companies has increased since 2005 (the recent low point), but still remains well below the recent peak at year-end 2000 (Figure 1.11). This overall decline is attributable to sponsors of UITs creating significantly fewer new trusts between 2000 and 2005, and the effect of preset termination dates of UITs, which naturally leads to some attrition each year. From 2005 to 2011, the number of UITs hovered around 6,000; however, this number declined to well below 6,000 in 2012 with the closing of 256 trusts, on net. The total number of closed-end funds has changed little since 2004, remaining above 600 funds. This level was sustained in 2012, despite a net reduction of 30 funds. New ETFs have continued to open at a fair pace with 73 new funds opened, on net, in 2012. There were 1,239 ETFs at year-end 2012, more than 15 times the number of ETFs at year-end 2000.

Figure 1.11

Number of Investment Companies by Type

Year-end, 1995–2012

  Mutual funds1 Closed-end funds ETFs2 UITs Total3
1995 5,761 499 2 12,979 19,241
1996 6,293 496 19 11,764 18,572
1997 6,788 486 19 11,593 18,876
1998 7,489 491 29 10,966 18,975
1999 8,003 511 30 10,414 18,958
2000 8,370 481 80 10,072 19,003
2001 8,518 491 102 9,295 18,406
2002 8,511 544 113 8,303 17,471
2003 8,426 583 119 7,233 16,361
2004 8,415 618 152 6,499 15,685
2005 8,449 634 204 6,019 15,307
2006 8,721 646 359 5,907 15,633
2007 8,746 663 629 6,030 16,068
2008 8,880 642 743 5,984 16,249
2009 8,612 627 820 6,049 16,108
2010 8,540 624 950 5,971 16,085
2011 8,678 632 1,166 6,043 16,519
2012 8,752 602 1,239 5,787 16,380

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1Data 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 and ETFs that invest primarily in other ETFs.
Note: Investment company data include only investment companies that report statistical information to the Investment Company Institute.
Sources: Investment Company Institute and Strategic Insight Simfund

Investment Company Employment

Fund sponsors and third-party service providers offer advisory, recordkeeping, administrative, custody, and other services to a growing number of funds and their investors. From 1997 to 2011, fund industry employment in the United States grew 39 percent, from 114,000 workers to 159,000 workers (Figure 1.12). Based on results of an ICI biennial survey, employment peaked in 2007 at 168,000.

Figure 1.12

Investment Company Industry Employment

Estimated number of employees of fund sponsors and their service providers, selected years*

Figure 1.12

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* These are the years in which the ICI employment survey was conducted.

The largest group of workers provides services to fund investors and their accounts, with 34 percent of fund employees involved in these activities in March 2011 (Figure 1.13). Shareholder account servicing encompasses a wide range of activities to help investors monitor and update their accounts. These employees work in call centers and help shareholders and their financial advisers with questions about investor accounts. They also process applications for account openings and closings. Other services include retirement plan transaction processing, retirement plan participant education, participant enrollment, and plan compliance.

At the same time, 32 percent of the industry’s workforce was employed by a fund’s investment adviser or a third-party service provider in support of portfolio management functions such as investment research, trading and security settlement, information systems and technology, and other corporate management functions. Jobs related to fund administration, including financial and portfolio accounting and regulatory compliance duties, accounted for 10 percent of industry employment. In 2011, distribution and sales force personnel together accounted for 24 percent of the workforce. Employees in these areas may be involved in marketing, product development and design, or investor communications and may include sales support staff, registered representatives, and supermarket representatives.

Figure 1.13

Investment Company Industry Employment by Job Function

Percentage of employees of fund sponsors and their service providers, March 2011

Figure 1.13

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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, and remained so in March 2011 (Figure 1.14), employing 30 percent of the workers in the fund industry. As the industry has grown from its early roots, other states have become significant centers of fund employment—including California, Pennsylvania, and Texas. Fund companies in these states employed about one-quarter of all fund industry employees as of March 2011.

Figure 1.14

Investment Company Industry Employment by State

Estimated number of employees of fund sponsors and their service providers by state, March 2011

Figure 1.14

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Copyright © 2013 by the Investment Company Institute. All rights reserved.