|
Letter from the ICI Research: Chapter 1: Chapter 2: Chapter 3: Chapter 5: Chapter 6: Chapter 7: |
U.S. Mutual Fund AssetsInvestor demand for mutual funds is influenced by a variety of factors, not least of which is funds’ ability to assist investors in achieving their investment objectives. For example, U.S. households rely on equity, bond, and hybrid mutual funds to meet long-term personal financial objectives such as preparing for retirement. U.S. households, businesses, and other institutional investors use money market funds as cash management tools because they provide a high degree of liquidity and competitive, short-term yields. Investors’ reactions to changes in U.S. and worldwide economic and financial conditions play an important role in determining how demand for specific types of mutual funds and for mutual funds in general evolves over time. The U.S. mutual fund market—with $11.8 trillion in assets under management at year-end 2010—remained the largest in the world, accounting for 48 percent of the $24.7 trillion in mutual fund assets worldwide (Figure 2.1). The U.S. Had the World’s Largest Mutual Fund Market Percentage of total net assets, year-end 2010
Download an Excel file of this data. Sources: Investment Company Institute, European Fund and Asset Management Association, and other national mutual fund associations
Equity funds made up 48 percent of U.S. mutual fund assets at year-end 2010 (Figure 2.1). Domestic equity funds (those that invest primarily in shares of U.S. corporations) held 35 percent of total industry assets. World equity funds (those that invest primarily in foreign corporations) accounted for another 13 percent. Money market funds accounted for 24 percent of U.S. mutual fund assets. Bond funds (22 percent) and hybrid funds (6 percent) held the remainder of total U.S. mutual fund assets. Approximately 600 sponsors managed mutual fund assets in the United States in 2010. Long-run competitive dynamics have prevented any single firm or group of firms from dominating the market. For example, of the largest 25 fund complexes in 1985, 13 remained in this top group in 2010. Another measure of market concentration is the Herfindahl-Hirschman Index, which weighs both the number and relative size of firms in the industry. Index numbers below 1,000 indicate that an industry is unconcentrated. The mutual fund industry had a Herfindahl-Hirschman Index number of 465 as of December 2010. In this past decade, however, the percentage of industry assets at larger fund complexes has increased. The share of assets managed by the largest 25 firms increased to 74 percent in 2010 from 68 percent in 2000 (Figure 2.2). In addition, the share of assets managed by the largest 10 firms in 2010 was 53 percent, up from the 44 percent share managed by the largest 10 firms in 2000. Share of Assets at the Largest Mutual Fund Complexes Percentage of industry total net assets, year-end, selected years
Download an Excel file of this data.
Several factors likely contributed to this development. One factor is the acquisition of smaller fund complexes by larger ones. Second, total returns on U.S. stocks averaged only a little over 1 percent annually from year-end 1999 to year-end 2010 and likely held down assets managed by fund complexes that concentrate their offerings primarily in domestic equity funds—many of which tend to be smaller fund complexes. Third, in contrast, total returns on bonds averaged over 6 percent annually in the past 11 years. Finally, strong inflows over the 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 those large fund complexes that offer bond funds. Developments in Mutual Fund FlowsInvestor demand for mutual funds as measured by net new cash flow—the dollar value of new fund sales less redemptions combined with net exchanges—declined further in 2010. Overall, the industry had a net cash outflow of $297 billion (Figure 2.3). Investors pulled $525 billion from money market funds, particularly institutional funds. Investors, however, added $228 billion, on net, to long-term funds. The $297 billion total net outflow in 2010 was the largest on record in dollar terms. As a percentage of the average market value of assets, it amounted to 2.7 percent. On this basis, the outflow was about the same as the $23 billion outflow in 1988, which measured 2.8 percent of average assets. Net Flows to Mutual Funds Billions of dollars, 1996–2010
Download an Excel file of this data.
Conditions in financial markets continued to improve in 2010. The Federal Reserve closed several special credit and liquidity programs that had been instituted during the financial crisis in 2008. U.S. stock prices, as measured by the Wilshire 5000 Total Market Index, rose over 15 percent, putting the index almost back to its August 2008 level. Credit spreads on corporate bonds—the difference in yields between investment-grade corporate bonds and Treasury securities—remained fairly stable over the year, hovering around 200 basis points. Nevertheless, the pace of economic activity was fairly modest during 2010—held down by persistently high unemployment, modest income growth, lower housing wealth, and tight credit conditions for households. Consequently, the Federal Reserve kept the federal funds rate in a target range of 0 percent to 0.25 percent. Abroad, many developed European countries experienced slower economic growth and weaker stock prices than that of the United States in 2010. Emerging markets experienced gains in stock prices that were about on par with the United States. Demand for Long-Term Mutual FundsInvestors added $228 billion in net new cash to equity, bond, and hybrid funds in 2010, down from the record pace of $390 billion in 2009. Bond and hybrid funds remained popular investment choices by investors, while domestic equity funds continued to experience outflows in 2010. Equity Mutual FundsInvestors withdrew cash from equity funds—particularly domestic equity funds—in 2010 at a faster pace than in 2009. In 2010, withdrawals from all equity funds amounted to $37 billion for the year, more than the $9 billion investors withdrew, on net, the previous year. Generally, demand for equity funds is strongly related to performance in the stock markets (Figure 2.4). Net flows to equity funds tend to rise with stock prices and the opposite tends to occur when stock prices fall. In the past two years, one would have expected sizable inflows to equity funds given the strong rally in stock prices worldwide. Since year-end 2008, major U.S. stock price indexes rose between 45 and 50 percent including any dividends that were paid. The technology-heavy NASDAQ Composite Index rose 68 percent. Despite these gains, domestic equity funds experienced a net outflow of $39 billion in 2009 and $96 billion in 2010. Indeed, domestic equity funds have had four consecutive years of withdrawals totaling $335 billion. Net Flows to Equity Funds Related to Global Stock Price Performance 1996–2010
Download an Excel file of this data. 1Net new cash flow to equity funds is plotted as a six-month moving average.
Funds investing in foreign companies fared somewhat better than domestic equity funds. International equity funds garnered $31 billion in net new cash in 2009 and $59 billion in 2010. These inflows, however, were still modest when compared with past inflows and total returns on stocks traded on many foreign stock markets. The MSCI All Country World Daily Total Return Index (excluding U.S. stocks) increased 25 percent annually over the two-year period from year-end 2008 to year-end 2010; the MSCI Daily Total Return Emerging Markets Index rose 46 percent annually. To put this development in perspective with past experience, from 2004 to 2007, the MSCI All Country World Daily Total Return Stock Index increased at an average annual rate of 20 percent, and shareholders invested over $100 billion on average annually into international equity funds. One factor that may partly explain investors’ reduced demand for equity funds is a lower tolerance for risk. In the past decade, households have endured two of the worst bear markets in stocks since the Great Depression. U.S. household surveys show that even within specified age groups, willingness to take investment risk has dropped since the late 1990s and early 2000s (Figure 2.5). For example, only 22 percent of households headed by someone younger than 35 in 2010 were willing to take above-average or substantial investment risk, compared with 30 percent of such households in 1998. The aging of the population also likely has played a role in reducing demand for equity funds. As investors grow older, their willingness to take investment risk tends to decline. In 2010, only 10 percent of households headed by someone 65 or older were willing to take above-average or substantial investment risk, versus 26 percent of households headed by someone between 35 and 49 years old. Willingness to Take Above-Average or Substantial Investment Risk by Age Percentage of U.S. households by age of head of household,* selected years
Download an Excel file of this data. *Age is based on the age of the sole or co-decisionmaker for household saving and investing.
Bond and Hybrid Mutual FundsSecular and demographic factors that appear to have tempered inflows into equity funds likely have served to boost flows into bond funds. In 2010, investors added $241 billion to their bond fund holdings—a strong rate, albeit down from the record $376 billion pace of net investment in the previous year. Traditionally, cash flow into bond funds is highly correlated with the performance of bonds (Figure 2.7). The U.S. interest rate environment typically has played a prominent role in the demand for bond funds. Movements in short- and long-term interest rates can significantly impact the returns offered by these types of funds and, in turn, influence retail and institutional investor demand for bond funds. Low short-term interest rates and the relatively steep yield curve likely continued to entice some investors to shift out of money market funds and into bond funds in 2010. Net Flows to Bond Funds Related to Bond Returns 1996–2010
Download an Excel file of this data. 1Net new cash flow to bond funds is plotted as three-month moving average of net new cash flow as a percentage of previous month-end assets. The data exclude flows to high-yield bond funds.
The pace of inflows into bond funds was quite strong through the first nine months of 2010, but slowed appreciably—particularly for tax-exempt bond funds—in the fourth quarter and turned negative in the last couple of months of the year. This pattern likely was the result of market conditions. From year-end 2009 through September 2010, returns on investment-grade corporate bonds were about 6 percent and those of municipal securities at over 4 percent. Returns on these securities turned negative in the fourth quarter of 2010. One contributing factor to the decline in bond returns likely was the glut of bond issuance by municipalities before the expiration of the Build America Bonds program at the end of the year. The outsized supply helped drive up interest rates for municipal securities and reportedly enticed buyers that normally would purchase corporate securities to cross over and buy securities in the municipal market. In addition, investor concerns about inflationary pressure from the Federal Reserve’s second round of quantitative easing, the ability of the federal government to finance growing budget deficits at attractive interest rates, and the deterioration in the outlook for state and local governments’ fiscal positions were cited as possible reasons for the downturn in the bond market at the end of 2010. Despite the relative weakness in bond flows in the fourth quarter of 2010, inflows to bond funds since 2004 have been stronger than what would have been expected based on the historical relationship between bond returns and demand for bond funds. A few secular and demographic factors may have contributed to this development: the aging of the U.S. population, the reduced appetite for investment risk by investors of all ages, and the increasing use of target date and other asset allocation funds, many of which are offered in a funds of funds structure. First, the leading edge of the Baby Boom Generation has just started to retire, and because investors’ willingness to take investment risk tends to decline as they age (Figure 2.5), it is natural for them to allocate their investments increasingly toward fixed-income securities. Second, the decline in risk tolerance across all age groups (Figure 2.5) likely boosted flows into bond funds over the past couple of years. Last, funds of funds remained a popular choice with investors and a portion of the flows into these funds was directed to underlying bond funds. Funds of funds garnered $134 billion in net new cash flow in 2010 (Figure 2.8). Investor demand for hybrid funds, which invest in a combination of stocks and bonds, remained steady in 2010, with investors adding $23 billion, on net, to these funds—about the same pace as in 2009. Over the six-year period of 2005 to 2010, hybrid funds attracted a total of $84 billion in net new cash.
Index Mutual FundsIndex funds continued to remain popular with investors. Of households that owned mutual funds, 31 percent owned at least one index mutual fund in 2010. As of year-end 2010, 365 index funds managed total net assets of $1 trillion. Similar to funds of funds, demand for index funds remained strong in 2010 with investors adding $58 billion in net new cash flow to these funds (Figure 2.9). About 40 percent of the new money that flowed to index funds was invested in funds indexed to bond indexes, while one-third was directed toward funds indexed to global and international stock indexes and one-quarter went to funds indexed to domestic stock indexes. Demand for global and international equity index funds picked up in 2010, with these funds experiencing an aggregate inflow of $19 billion. Net Flows to Index Funds Billions of dollars, 1996–2010
Download an Excel file of this data. Note: Components may not add to the total because of rounding.
Equity index funds accounted for the bulk of index mutual fund assets at year-end 2010. Eighty-one percent of index mutual fund assets were invested in index funds that track either the S&P 500 or other domestic and international stock indexes (Figure 2.10). Funds indexed to the S&P 500 managed 37 percent of all assets invested in index mutual funds. The share of assets invested in equity index funds relative to all equity mutual funds assets moved up to 14.5 percent in 2010 (Figure 2.11). 37 Percent of Index Fund Assets Were Invested in S&P 500 Index Funds Percent, year-end 2010
Download an Excel file of this data. Equity Index Funds’ Share Continued to Rise Percentage of equity mutual fund total net assets, 1996–2010
Download an Excel file of this data. Demand for Money Market FundsMoney market funds continued to experience substantial outflows in 2010. This trend likely reflects the search by investors for higher yields in an environment of low short-term interest rates accompanied by a steep yield curve and a continued unwinding of the flight to safety in response to the financial crisis of 2007 and 2008. Retail Money Market FundsRetail money market funds, which are principally sold to individual investors, saw a total outflow of $125 billion in 2010, following an outflow of $309 billion in 2009 (Figure 2.12). Money market fund yields continued to follow the pattern of short-term interest rates in 2010, hovering between 0 and 25 basis points. In addition, yields on money market funds remained consistently below those on bank deposits for the past two years (Figure 2.13)—an unprecedented occurrence since the inception of money market funds in the early 1970s. In general, retail investors tend to withdraw cash from money market funds when the difference in interest rates between bank deposits and money market funds narrows. The sizable outflows from retail money market funds in 2009 and 2010 do not appear to be atypical considering the negative interest rate spread. Net Flows to Money Market Funds Billions of dollars, 1996–2010
Download an Excel file of this data. Net Flows to Taxable Retail Money Market Funds Related to Interest Rate Spread 1996–2010
Download an Excel file of this data. 1Net new cash flow is a percentage of previous month-end taxable retail money market fund assets and is shown as a six-month moving average.
Institutional Money Market FundsInstitutional money market funds—used by businesses, pension funds, state and local governments, and other large-account investors—had outflows of $399 billion in 2010, following outflows of $230 billion during the previous year (Figure 2.12). Outflows from institutional money market funds likely reflected the low interest rate environment and the continued unwinding of the flight to quality by these investors in 2007 and 2008. The tumult in financial markets around the world that started in August 2007 and continued through early 2009 led many institutional investors to seek the liquidity and safety of money market funds that invest primarily in U.S. government securities. These funds, which can invest in U.S. Treasury debt solely or a combination of U.S. Treasury debt and obligations of U.S. government agencies, received $881 billion in net new cash flow from institutional investors in 2007 and 2008 (Figure 2.14). As financial markets stabilized in 2009 and 2010, institutional investors shifted away from U.S. government money market funds, withdrawing $537 billion, on net, from these funds over the past two years. Nevertheless, U.S. government money market funds comprised nearly 39 percent of institutional taxable money market assets at year-end 2010, up from only 24 percent at year-end 2006, prior to the start of the financial crisis. Total Net Assets and Net Flows to Taxable U.S. Government and Non-Government Institutional Money Market Funds Billions of dollars, 2001–2010
Download an Excel file of this data.
U.S. nonfinancial businesses continued to reduce their holdings of money market funds in 2010. During the financial crisis, corporate treasurers made extensive use of institutional money market funds; at year-end 2008, 36 percent of their short-term assets were in money market funds (Figure 2.15). By year-end 2010, nonfinancial businesses held 25 percent of their short-term assets in money market funds, back to approximately the same proportion measured at year-end 2006, prior to the start of the financial crisis. Money Market Funds Managed 25 Percent of U.S. Businesses’ Short-Term Assets* in 2010 Percent, year-end, 1996–2010
Download an Excel file of this data. *U.S. nonfinancial businesses’ short-term assets consist of foreign deposits, checkable deposits, time and savings deposits, money market funds, repurchase agreements, and commercial paper.
For more complete data on money market funds, see section 4 in the data tables. For More Information
Available at www.ici.org. |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
