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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.

The largest segment of the asset management business in the United States is made up of registered investment companies. U.S.-registered investment companies play a major role in the U.S. economy and financial markets, and a growing role in global financial markets. These funds managed $18.2 trillion in assets at year-end 2014, largely on behalf of more than 90 million U.S. retail investors. The industry has experienced strong growth over the past quarter century from asset appreciation and strong demand from households due to rising household wealth, the aging U.S. population, and the evolution of employer-based retirement systems. 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 2014

U.S.-registered investment companies* managed $18.2 trillion in assets at year-end 2014 (Figure 1.1), $1.1 trillion more than at year-end 2013. U.S. stocks returned more than 10 percent in 2014, contributing to the increase in total net assets of funds invested in domestic equity markets. International stock markets, by contrast, fell on average, putting downward pressure on the assets of funds invested in international equities. The strengthening of the U.S. dollar against the euro also lowered the dollar value of euro-denominated securities, and thus the value of equity and bond funds holding euro-denominated assets.

* The term investment companies or U.S. investment companies will be used at times throughout this book in place of U.S.-registered investment companies. U.S.-registered investment companies are open-end mutual funds, closed-end funds, exchange-traded funds, and unit investment trusts.

Figure 1.1

Investment Company Total Net Assets by Type

Billions of dollars; year-end, 1997–2014

Year Mutual funds1 Closed-end funds2 ETFs3 UITs Total4
1997 $4,468 $152 $7 $85 $4,711
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 8,096 253 228 37 8,614
2005 8,891 276 301 41 9,509
2006 10,398 297 423 50 11,168
2007 12,000 312 608 53 12,974
2008 9,603 184 531 29 10,347
2009 11,113 223 777 38 12,151
2010 11,833 238 992 51 13,113
2011 11,632 242 1,048 60 12,982
2012 13,052 264 1,337 72 14,725
2013 15,035 279 1,675 87 17,075
2014 15,852 289 1,974 101 18,217

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1Mutual fund data include only mutual funds that report statistical information to the Investment Company Institute, and do not include mutual funds that invest primarily in other mutual funds.
2Closed-end fund data include preferred share classes.
3ETF 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 primarily invest in other ETFs.
4Total investment company assets include mutual fund holdings of closed-end funds and ETFs.
Note: Data are for investment companies that report statistical information to the Investment Company Institute. Assets of these companies are 98 percent of investor assets. Components may not add to the total because of rounding.
Sources: Investment Company Institute and Strategic Insight Simfund

The U.S. mutual fund and exchange-traded fund (ETF) markets—with $17.8 trillion in assets under management at year-end 2014—remained the largest in the world, accounting for 53 percent of the $33.4 trillion in mutual fund and ETF assets worldwide (Figure 1.2).

The majority of U.S. mutual fund and ETF assets at year-end 2014 were in long-term funds, with equity funds comprising 56 percent (Figure 1.2). Within equity funds, domestic funds (those that invest primarily in shares of U.S. corporations) held 42 percent of total assets and world funds (those that invest primarily in shares of non-U.S. corporations) accounted for 14 percent. Bond funds held 21 percent of U.S. mutual fund and ETF assets. Money market funds, hybrid funds, and other funds—such as those that invest primarily in commodities—held the remainder (23 percent).

Mutual funds reported $102 billion in net inflows in 2014, while other registered investment companies also recorded positive net inflows. On net, investors added $96 billion to long-term mutual funds. Money market funds accounted for the other $6 billion. Mutual fund shareholders reinvested $216 billion in income dividends and $381 billion in capital gains distributions that mutual funds paid out during the year. Investor demand for ETFs continued to thrive with net share issuance (including reinvested dividends) totaling $241 billion in 2014. Unit investment trusts (UITs) had new deposits of $66 billion, up 18 percent from 2013, and closed-end funds issued $5 billion in new shares, on net.

Figure 1.2

The United States Has the World’s Largest Mutual Fund and ETF Markets

Percentage of total net assets, year-end 2014

Figure 1.2

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* Includes ETFs—both registered and not registered under the Investment Company Act of 1940—that invest primarily in commodities, currencies, and futures.
Note: Components may not add to 100 percent because of rounding.
Sources: Investment Company Institute and International Investment Funds Association

Americans’ Continued Reliance on Investment Companies

Households make up the largest group of investors in funds, and registered investment companies managed 24 percent of household financial assets at year-end 2014 (Figure 1.3). As households have come to rely more on funds over the past decade, their demand for directly held equities and bonds has fallen (Figure 1.4). Household demand for directly held bonds (which had outflows of $455 billion in 2014) has been weak since the financial crisis. Bond funds recorded moderate inflows in 2014, with investors injecting $44 billion. Overall, households invested an additional $416 billion in long-term registered investment companies in 2014. From 2005 to 2014, households invested an annual average of $379 billion, on net, in long-term registered investment companies, with net investments each year except 2008. In contrast, directly held equities and bonds had average annual net sales of $433 billion.

Figure 1.3

Share of Household Financial Assets Held in Investment Companies

Percentage of household financial assets; year-end, 1980–2014

Figure 1.3

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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 1.4

Household Net Investments in Funds, Bonds, and Equities

Billions of dollars, 2005–2014

Figure 1.4

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* Data for long-term registered investment companies include mutual funds, variable annuities, ETFs, and closed-end funds.
Note: Household net investments include net new cash flow and reinvested dividends.
Sources: Investment Company Institute and Federal Reserve Board

The growth of individual retirement accounts (IRAs) and defined contribution (DC) plans, particularly 401(k) plans, explains some of the increased household reliance on investment companies during the past two decades. At year-end 2014, households had 9.9 percent of their financial assets in 401(k) and other DC retirement plans, up from 7.0 percent in 1994. Mutual funds managed 55 percent of the assets in these plans in 2014, more than double the 22 percent in 1994 (Figure 1.5). IRAs made up 10.9 percent of household financial assets at year-end 2014, with mutual funds managing 48 percent of IRA assets that year. Mutual funds also managed $1.2 trillion in variable annuities outside retirement accounts, as well as $5.7 trillion of assets in taxable household accounts.

Businesses and other institutional investors also rely on funds. Many institutions use money market funds to manage some of their cash and short-term assets. Nonfinancial businesses held 23 percent of their cash in money market funds at year-end 2014. Institutional investors also have contributed to growing demand for ETFs. Investment managers, including mutual funds and pension funds, use ETFs to manage liquidity—helping them 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 against their exposure to equity markets.

Figure 1.5

Mutual Funds in Household Retirement Accounts

Percentage of retirement assets in mutual funds by type of retirement vehicle, 1994–2014

Figure 1.5

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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 large portion of the outstanding shares of U.S.-issued equities and money market securities at year-end 2014. Investment companies as a whole were one of the largest groups of investors in U.S. companies that year, holding 30 percent of their outstanding stock at year-end 2014 (Figure 1.6).

Mutual funds remained the largest investors in the U.S. commercial paper market—an important source of short-term funding for major corporations around the world. From year-end 2013 to year-end 2014, mutual funds’ share of outstanding commercial paper remained steady at 46 percent. Money market funds accounted for most of mutual fund commercial paper holdings, and mutual fund holdings of commercial paper tend to fluctuate with investor demand for prime money market funds and the supply of commercial paper.

Figure 1.6

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

Percentage of total market securities held by investment companies, year-end 2014

Figure 1.6

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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 2014, investment companies held 26 percent of tax-exempt debt issued by U.S. municipalities (Figure 1.6), a fairly stable share despite the increased supply of tax-exempt debt since 2007. Funds held 11 percent of U.S. Treasury and government agency securities at year-end 2014. In the corporate bond market at year-end 2014, funds’ share of outstanding corporate debt securities remained at the same level (19 percent) as at year-end 2013.

Types of Intermediaries and Number of Investment Companies

A variety of financial services companies offer registered funds in the United States. At year-end 2014, 80 percent of fund complexes were independent fund advisers (Figure 1.7), and these firms managed 66 percent of investment company assets. Other types of fund complexes in the U.S. market include non-U.S. fund advisers, insurance companies, banks, thrifts, and brokerage firms.

Figure 1.7

80 Percent of Fund Complexes Were Independent Fund Advisers

Percentage of investment company complexes by type of intermediary, year-end 2014

Figure 1.7

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In 2014, 867 financial firms from around the world competed in the U.S. market to provide investment management services to fund investors (Figure 1.8). In the 1980s and 1990s, low barriers to entry attracted many new fund sponsors. But in the early 2000s, increased competition among these sponsors and pressure from other financial products reversed those gains. From year-end 2004 to year-end 2009, 248 fund sponsors left the business but just 238 entered, for a net loss of 10 sponsors. Larger fund sponsors acquiring smaller ones, fund sponsors liquidating funds and leaving the business, and several large sponsors selling their fund advisory businesses played a major role in the decline. The number of fund companies retaining assets and attracting new investments generally has been lower since 2000 than in the 1990s (Figure 1.9).

Figure 1.8

Number of Fund Sponsors

2004–2014

Figure 1.8

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Figure 1.9

Fund Complexes with Positive Net New Cash Flow to Long-Term Mutual Funds

Percentage of fund complexes, selected years

Figure 1.9

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This steady turnover and merger activity has contributed to somewhat greater concentration of regulated fund assets managed by the largest fund complexes. The share of assets managed by the five largest firms rose from 32 percent in 2000 to 43 percent in 2014, and the share managed by the 10 largest firms increased from 44 to 55 percent (Figure 1.10). Most of the increase in market share occurred at the expense of the middle tier of firms—those ranked from 11 to 25 whose market share fell from 25 percent in 2000 to 19 percent in 2014.

Figure 1.10

Share of Mutual Fund and ETF Assets at the Largest Complexes

Percentage of total net assets of mutual funds and ETFs; year-end, selected years

2000 2005 2010 2014
Largest 5 complexes 32 36 42 43
Largest 10 complexes 44 47 55 55
Largest 25 complexes 69 69 74 74

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Note: Data include only mutual funds and ETFs registered under the Investment Company Act of 1940. ETFs registered as UITs are excluded.

Two other factors also contributed to rising industry concentration. First, the growing popularity of index funds increased concentration, because the 10 largest fund complexes manage most of the assets in index mutual funds. Actively managed domestic equity mutual funds incurred outflows for nine consecutive years, thus reducing market share for middle-tier firms, while index domestic equity funds had inflows in each of these years. Second, strong inflows over the past decade to bond funds, which are fewer in number and have fewer fund sponsors than equity mutual funds, helped boost the share of assets managed by large fund complexes that offer bond funds.

Nevertheless, in recent years, the number of sponsors has risen once again as the economy and financial markets have recovered, with a net increase of 185 from year-end 2009 to year-end 2014 (394 entering and 209 leaving) (Figure 1.8). Many of the entering firms took advantage of the series trust—a cost-effective 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. The series trust allows the sponsor to focus more on managing portfolios and gathering assets, and its operating costs are spread across the funds in the trust.

Macroeconomic conditions and competitive dynamics also affect the number of funds offered in any given year. Fund sponsors create new funds to meet investor demand, and they merge or liquidate those that do not attract sufficient investor interest. A total of 654 funds opened in 2014, a slight fall from the year before and below the 2007 peak of 726, but near the 2004–2014 average (Figure 1.11). The rate of fund mergers and liquidations declined significantly from 428 in 2013 to 362 in 2014, which led to the largest annual net increase in the number of mutual funds in more than 10 years.

Figure 1.11

Number of Mutual Funds Entering and Leaving the Industry

2004–2014

Figure 1.11

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

Unit Investment Trusts

Unit investment trusts (UITs) are registered investment companies with characteristics of both mutual funds and closed-end funds. Like mutual funds, UITs issue redeemable shares (called units), and like closed-end funds, they typically issue a specific, fixed number of shares. But unlike either mutual funds or closed-end funds, UITs have a preset termination date based on the portfolio’s investments and the UIT’s investment goals. UITs investing in long-term bonds might remain outstanding for 20 to 30 years. UITs investing in stocks might seek to capture capital appreciation in a few years or less. When a UIT is dissolved, proceeds from the securities are paid to unit holders or, at a unit holder’s election, reinvested in another trust.

UITs fall into two main categories: bond trusts and equity trusts. Bond trusts are either taxable or tax-free; equity trusts are either domestic or international/global. The first UIT, introduced in 1961, held tax-free bonds, and historically, most UIT assets were invested in bonds. However, equity UITs have grown in popularity over the past two decades. Since 1998, the assets in equity UITs have exceeded the assets in taxable and tax-free bond UITs combined each year except 2002, and constituted 85 percent of the assets in UITs in 2014, the highest share ever recorded (Figure 1.12). The number of trusts outstanding fell in the late 1990s through the mid-2000s, as sponsors created fewer trusts and existing trusts reached their preset termination dates.

Federal law requires that UITs have a largely fixed portfolio—that is, not actively managed or traded. Once the trust’s portfolio has been selected, its composition may change only in very limited circumstances. Most UITs hold a diversified portfolio, described in detail in the prospectus, with securities professionally selected to meet a stated investment goal, such as growth, income, or capital appreciation.

Investors can obtain UIT price quotes from brokerage or investment firms and investment company websites, 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 can be bought through their registered representatives. Units can also be bought from the representatives of smaller investment firms that sell trusts sponsored by third-party bond and brokerage firms.

While only some units of a UIT are sold in a public offering, a trust sponsor is likely to maintain a secondary market, in which investors can sell their units back to the sponsor and other investors can buy those units. Even absent a secondary market, UITs are required by law to redeem outstanding units at their net asset value (NAV), which is based on the underlying securities’ current market value.

Figure 1.12

Total Net Assets and Number of UITs

Year-end, 1999–2014

Figure 1.12

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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 it remains well below the year-end 2000 peak (Figure 1.13). Many attribute this decline to UIT sponsors creating far fewer new trusts between 2000 and 2005, and UITs reaching their preset termination dates. The number of UITs continued to decline, falling to 5,381 at year-end 2014 from 5,552 at year-end 2013. The total number of closed-end funds fell to 568 at year-end 2014, the lowest level since 2002. The number of ETFs grew by 9 percent in 2014, with 119 new ones on net. There were 1,451 ETFs at year-end 2014, nearly double the total number of ETFs at year-end 2008.

Figure 1.13

Number of Investment Companies by Type

Year-end, 1997–2014

Year Mutual funds* Closed-end funds ETFs UITs Total
1997 6,778 485 19 11,593 18,875
1998 7,489 491 29 10,966 18,975
1999 8,003 510 30 10,414 18,957
2000 8,370 481 80 10,072 19,003
2001 8,518 489 102 9,295 18,404
2002 8,511 543 113 8,303 17,470
2003 8,426 581 119 7,233 16,359
2004 8,417 618 152 6,499 15,686
2005 8,449 634 204 6,019 15,306
2006 8,721 645 359 5,907 15,632
2007 8,745 662 629 6,030 16,066
2008 8,879 642 743 5,984 16,248
2009 8,611 627 820 6,049 16,107
2010 8,535 624 950 5,971 16,080
2011 8,673 632 1,166 6,043 16,514
2012 8,744 602 1,239 5,787 16,372
2013 8,974 599 1,332 5,552 16,457
2014 9,260 568 1,451 5,381 16,660

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* Data include mutual funds that invest primarily in other mutual funds.
Note: Data are for investment companies that report statistical information to the Investment Company Institute. Assets of these companies are 98 percent of investor assets. ETF 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.
Sources: Investment Company Institute and Strategic Insight SimFund.

Investment Company Employment

Registered investment companies typically do not have employees— instead, they contract with other businesses to provide services to the fund. Except for UITs, funds in the United States have fund boards that oversee the management of the fund and represent the interests of the fund shareholders. The fund boards must approve all major contracts between the fund and its service providers including the advisory contract with a fund’s investment adviser.

Fund sponsors and third-party service providers offer advisory, recordkeeping, administrative, custody, and other services to a growing number of funds and their investors. Fund industry employment in the United States has grown 46 percent since 1997, from 114,000 workers to 166,000 in 2013 (Figure 1.14).

Figure 1.14

Investment Company Industry Employment

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

Figure 1.14

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* Years are those in which ICI conducted its employment survey.

One of the prominent providers of services to funds are fund investment advisers. This group of service providers is responsible for directing funds’ investments by undertaking investment research and determining which securities to buy and sell. The adviser will often undertake trading and security settlement for the fund. In March 2013, 34 percent of the industry worked in support of fund management functions such as investment research, trading and security settlement, information systems and technology, and other corporate management functions (Figure 1.15).

The second-largest group of workers (30 percent) provides services to fund investors and their accounts. 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.

Fund administration, which includes financial and portfolio accounting and regulatory compliance duties, accounted for 10 percent of industry employment. Employees performing those services are often affiliated with a fund’s investment adviser.

Fund administration encompasses the middle- and back-office functions necessary to operate the fund and includes clerical and fund accounting services, data processing, recordkeeping, internal audits, and compliance and risk management functions. Typically, employees with administration duties are responsible for regulatory and compliance requirements, such as preparing and filing regulatory reports, overseeing fund service providers, preparing and submitting reports to regulators and tax authorities, and producing shareholder reports such as prospectuses and financial statements of the funds. Administration services also help to maintain compliance procedures and internal controls, subject to approval by a fund’s board and chief compliance officer.

Distribution and sales force personnel together accounted for 26 percent of the workforce. Employees in these areas may work in marketing, product development and design, or investor communications, and can include sales support staff, registered representatives, and supermarket representatives.

Figure 1.15

Investment Company Industry Employment by Job Function

Percentage of employees of fund sponsors and their service providers, March 2013

Figure 1.15

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For many industries, employment tends to be concentrated in locations where the industry began. The same is true for investment companies: those located in Massachusetts and New York, early hubs of investment company operations (Figure 1.16), employ 27 percent of fund industry workers. As the industry has grown, other states—including California, Pennsylvania, and Texas—have become major centers of fund employment. Fund companies in these three states employed one-quarter of U.S. fund industry employees as of March 2013.

Figure 1.16

Investment Company Industry Employment by State

Estimated number of employees of fund sponsors and their service providers by state, March 2013

Figure 1.16

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