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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 major role in the U.S. economy and world financial markets, managing more than $17 trillion in assets at year-end 2013 for nearly 98 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 2013

U.S.-registered investment companies* managed $17.1 trillion in assets at year-end 2013 (Figure 1.1), $2.3 trillion more than at year-end 2012. Major U.S. stock indexes rose 30 percent or more over the year, contributing to the growth in total net assets of funds invested in domestic equity markets. International stock markets also rallied, gaining nearly 20 percent on average and increasing the assets of funds invested in international equities. In addition, the U.S. dollar weakened against the euro—raising the dollar value of euro-denominated securities and thus the dollar 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.

Mutual funds reported $167 billion in net inflows in 2013; other registered investment companies also recorded positive net inflows. On net, investors added $152 billion to long-term mutual funds. Money market funds accounted for the other $15 billion. Mutual fund shareholders reinvested $189 billion in income dividends and $228 billion in capital gains distributions that mutual funds paid out during the year. Investor demand for exchange-traded funds (ETFs) continued to thrive, with net share issuance (including reinvested dividends) totaling $180 billion. Unit investment trusts (UITs) had new deposits of $56 billion, up 28 percent from 2012, and closed-end funds issued $10 billion in new shares.

Americans’ Continued Reliance on Investment Companies

The greatest share of registered investment company assets is held by households, and registered investment companies managed 22 percent of household financial assets at year-end 2013 (Figure 1.2). As households have come to rely more on funds over the past decade, their demand for directly held equities has fallen (Figure 1.3). Household demand for directly held bonds has been weak since the financial crisis. Directly held bonds experienced a record outflow of $239 billion in 2013. Recent strong inflows to bond funds reversed somewhat in 2013, with investors withdrawing $80 billion. Overall, households invested an additional $430 billion in long-term registered investment companies in 2013. From 2003 to 2013, households invested an annual average of $368 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 $323 billion.

Figure 1.1

Investment Company Total Net Assets by Type

Billions of dollars; year-end, 1996–2013

Year Mutual funds1 Closed-end funds ETFs2 UITs Total3
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 12,000 312 608 53 12,974
2008 9,603 184 531 29 10,347
2009 11,113 223 777 38 12,152
2010 11,831 238 992 51 13,112
2011 11,626 243 1,048 60 12,978
2012 13,044 264 1,337 72 14,717
2013 15,018 279 1,675 87 17,058

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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.
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: 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 2013, households had 8.8 percent of their financial assets in 401(k) and other DC retirement plans, up from 6.7 percent in 1993. Mutual funds managed 60 percent of the assets in these plans in 2013, triple the 20 percent in 1993 (Figure 1.4). IRAs made up 9.7 percent of household financial assets at year-end 2013, with mutual funds managing 45 percent of IRA assets that year. Mutual funds also managed $1.2 trillion in variable annuities outside retirement accounts, as well as $5.1 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, 1980–2013

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 Investments in Funds, Bonds, and Equities

Billions of dollars, 2003–2013

Figure 1.3

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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 interest and dividends.
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 some of their cash and short-term assets. Nonfinancial businesses held 20 percent of their cash in money market funds at year-end 2013. Institutional investors also have contributed to the 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 1.4

Mutual Funds in Household Retirement Accounts

Percentage of retirement assets in mutual funds by type of retirement vehicle, 1993–2013

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 large portion of the outstanding shares of U.S.-issued equities and money market securities at year-end 2013. Investment companies as a whole were one of the largest groups of investors in U.S. companies that year, holding 29 percent of their outstanding stock at year-end (Figure 1.5).

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. Mutual funds’ share of outstanding commercial paper increased slightly, from 42 percent at year-end 2012 to 45 percent at year-end 2013. Money market funds accounted for most of mutual funds’ commercial paper holdings, and the share of outstanding commercial paper that mutual funds held fluctuated with investor demand for prime money market funds and the supply of commercial paper. Mutual funds saw an increase in prime money market fund holdings and in other mutual fund holdings of commercial paper, even though 2013 marked the seventh straight year that outstanding commercial paper contracted in dollar terms.

Figure 1.5

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

Percentage of total market securities held by investment companies, year-end 2013

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 2013, investment companies held 25 percent of tax-exempt debt issued by U.S. municipalities (Figure 1.5), a fairly stable share over the past few years. Funds held 11 percent of U.S. Treasury and government agency securities at year-end 2013, and their role in the corporate bond market shrunk by a small amount in 2013. Indeed, investment companies held 15 percent of outstanding corporate debt securities at year-end 2013, down from 16 percent at year-end 2012.

Types of Intermediaries and Number of Investment Companies

A variety of financial services companies offer registered funds in the United States. At year-end 2013, 79 percent of fund complexes were independent fund advisers (Figure 1.6), and these firms managed 64 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. market.

Figure 1.6

More Than Three-Quarters of Fund Complexes Were Independent Fund Advisers

Percentage of investment company complexes by type of intermediary, year-end 2013

Figure 1.6

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Note: Components do not add to 100 percent because of rounding.

In 2013, 801 financial firms from around the world competed in the U.S. market to provide investment management services to fund investors (Figure 1.7). 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 these gains. From year-end 2003 to year-end 2009, 292 fund sponsors left the business but just 267 entered, for a net loss of 25 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 1.8).

Figure 1.7

Number of Fund Sponsors

2003–2013

Figure 1.7

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But in recent years, the number of sponsors has risen once again, with a net increase of 119 from year-end 2009 to year-end 2013 (300 entering and 181 leaving) (Figure 1.7). 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 allows the operating costs to be spread across the funds in the trust.

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 660 funds opened in 2013, slightly fewer than the year before and below the 2007 peak of 726—but near the 2003–2013 average (Figure 1.9). The rate of fund mergers and liquidations declined a significant amount to 424 in 2013 from 501 in 2012.

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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Figure 1.9

Number of Mutual Funds Leaving and Entering the Industry

2003–2013

Figure 1.9

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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, while 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. Since 1998, assets in equity UITs have exceeded the combined assets in taxable and tax-free bond UITs for each year except 2002 (Figure 1.10). 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, the portfolio cannot be actively managed or traded. Therefore, 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 also can 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 current market value of the underlying securities.

Figure 1.10

Total Net Assets and Number of UITs

Year-end, 1998–2013

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 it remains well below the peak at year-end 2000 (Figure 1.11). 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 5,552 at year-end 2013 from 5,787 at year-end 2012. The total number of closed-end funds dipped below 600 for the first time since 2004, with 599 at year-end 2013. ETFs have continued to open at a fair pace, with 93 new funds on net in 2013. There were 1,332 ETFs at year-end 2013, more than 16 times the year-end 2000 total.

Figure 1.11

Number of Investment Companies by Type

Year-end, 1996–2013

Year Mutual funds1 Closed-end funds ETFs2 UITs Total3
1995 5,761 500 2 12,979 19,242
1996 6,293 497 19 11,764 18,573
1997 6,778 487 19 11,593 18,877
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 15,684
2005 8,449 634 204 6,019 15,306
2006 8,721 646 359 5,907 15,633
2007 8,745 663 629 6,030 16,067
2008 8,879 642 743 5,984 16,248
2009 8,612 627 820 6,049 16,108
2010 8,536 624 950 5,971 16,081
2011 8,674 632 1,166 6,043 16,515
2012 8,745 602 1,239 5,787 16,373
2013 8,974 599 1,332 5,552 16,457

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1Data include mutual funds that invest primarily in other mutual funds.
2 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.
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. Fund industry employment in the United States has grown 46 percent since 1997, from 114,000 workers to 166,000 in 2013 (Figure 1.12).

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

In March 2013, the largest group of workers, 34 percent of the industry, worked in support of fund management functions like investment research, trading and security settlement, information systems and technology, and other corporate management functions (Figure 1.13). Fund administration, including financial and portfolio accounting and regulatory compliance duties, accounted for 10 percent of industry employment. 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.

The second-largest group of workers (30 percent of the workforce) 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.

Figure 1.13

Investment Company Industry Employment by Job Function

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

Figure 1.13

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For many industries, employment tends to be concentrated in places where the industry originally began, and investment companies are no exception. Massachusetts and New York were early hubs of investment company operations and remain so today (Figure 1.14), employing 27 percent of fund industry workers. As the industry has grown, other states have become major centers of fund employment—including California, Pennsylvania, and Texas. Fund companies in these three states employed one-quarter of U.S. fund industry employees as of March 2013.

Figure 1.14

Investment Company Industry Employment by State

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

Figure 1.14

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