HOME

PDF VERSION

A LETTER FROM ICI'S
CHIEF ECONOMIST

ICI RESEARCH:
STAFF AND PUBLICATIONS

SECTION 1:
OVERVIEW OF
U.S.-REGISTERED INVESTMENT COMPANIES

SECTION 2:
RECENT MUTUAL FUND TRENDS

SECTION 3:
EXCHANGE-TRADED FUNDS AND INDEX MUTUAL FUNDS

SECTION 4:
CLOSED-END FUNDS

SECTION 5:
MUTUAL FUND FEES AND EXPENSES

SECTION 6:
CHARACTERISTICS OF MUTUAL FUND OWNERS

SECTION 7:
THE ROLE OF MUTUAL FUNDS IN RETIREMENT AND EDUCATION SAVINGS

DATA TABLES

APPENDIX A:
HOW MUTUAL FUNDS AND INVESTMENT COMPANIES OPERATE

APPENDIX B:
ICI STATISTICAL RELEASES AND RESEARCH PUBLICATIONS

TIMELINE:
SIGNIFICANT EVENTS IN FUND HISTORY

FACT BOOK ARCHIVE

U.S.-registered investment companies play a significant role in the U.S. economy and world financial markets. These funds managed $13 trillion in assets at the end of 2007 for 90 million U.S. investors. Funds supplied investment capital in securities markets around the world, and were among the largest group of investors in the U.S. stock, commercial paper, and municipal securities markets. Employment among fund service providers reached 168,000 U.S. workers. Worldwide, mutual fund assets reached $26 trillion.

Sources of Investment Company Growth in 2007

Registered investment companies managed a record $13 trillion at year-end 2007 (Figure 1.1), a $1.8 trillion increase from 2006. About 40 percent of this growth is due to fund performance. Major U.S. stock price indexes rose about 4 percent during the year, lifting assets of funds invested in domestic equity markets. Similarly, rising stock prices abroad boosted the returns on funds invested in foreign stocks. International stock and bond funds benefited further from a decline in the U.S. dollar and the resulting increase in the dollar value of foreign securities. In addition to these price gains, investors reinvested $234 billion in income dividends that mutual funds distributed during the year.

Fund assets also increased because of new investments. Shareholders added a record $883 billion to mutual funds in 2007. Continued demand for mutual funds in retirement accounts and strong stock market returns supported flows into stock, bond, and hybrid mutual funds. Relatively high yields on money market mutual funds and investor concerns about credit markets boosted flows into money market mutual funds. Other types of registered investment companies also experienced significant increases in investor demand. Flows into ETFs expanded considerably, with net share issuance (including reinvested dividends) reaching a record $151 billion. Excluding share buybacks, closed-end funds issued $31 billion in new shares during 2007, and UITs had gross issuance of $36 billion.

Figure 1.1

Investment Company Assets

(billions of dollars, 1995–2007)

Download an Excel file of this data.

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

Americans' Reliance on Investment Companies Continues to Grow

Households are the largest group of investors in funds, and registered investment companies now manage 23 percent of households' financial assets, up from 8 percent in 1990 and less than 3 percent in 1980 (Figure 1.2). As households have increased their reliance on funds, their demand for directly held stocks and bonds has grown more slowly. For example, between 2003 through 2007, households purchased, on net, a total of $2.2 trillion in mutual funds (including through variable annuities), ETFs, and closed-end funds, while they sold nearly $3 trillion of directly held stock (Figure 1.3).

Figure 1.2

Share of household financial assets held in investment companies has grown Steadily Since 1980

(share of household financial assets, percent, 1980–2007)

Download an Excel file of this data.

Sources: Investment Company Institute and Federal Reserve Board

The growth of 401(k) and other defined contribution plans and the important role that mutual funds play in these plans explain some of households' heavier reliance on investment companies during the past two decades. Ten percent of household financial assets are invested in 401(k) and other defined contribution retirement plans, up from 6 percent in 1990. Mutual funds manage about half of the assets in these plans. Households also have invested in mutual funds outside of defined contribution plans. Individual Retirement Accounts (IRAs) make up 10 percent of household financial assets, and mutual funds manage 47 percent of IRA assets. Mutual funds also manage $4.4 trillion of assets that households hold in taxable accounts.

Figure 1.3

Household Net Purchases of Financial Assets¹

(billions of dollars, 2003–2007)

Download an Excel file of this data.

¹New cash and reinvested dividends are included.
²Commercial paper and self-financed mortgages are included.
³Equity in non-corporate business, defined benefit plans, foreign deposits, security credit, reserves for certain life insurance policies, and other miscellaneous assets are included.
Sources: Investment Company Institute and Federal Reserve Board.

As individuals have increased their reliance on funds, so have businesses and other institutional investors such as pension and hedge funds. Institutions rely on mutual funds to manage a portion of their cash and other short-term assets. Money market funds targeting institutional investors attracted $488 billion in new cash during 2007. Some of this demand was attributable to the relative attractiveness of yields on money market mutual funds, which began the year at their highest level since 2001, prompting investors to direct a larger share of their cash holdings into money market funds. Then in mid-summer, credit markets began to experience a series of stresses emanating from rising default rates on securities backed by home mortgages. Institutional investors shifted a larger share of their cash holdings into money market mutual funds and out of direct investments in money market instruments. By the end of the year, for example, businesses held a record 31 percent of their cash in money market mutual funds.

Institutional investors have also contributed to the growing demand for ETFs. For example, investment managers, including mutual funds and pension funds, use ETFs to manage liquidity, a strategy that allows them to keep fully invested in the market while holding a highly liquid asset to manage their investor flows. And because ETFs can be shorted, asset managers can use them as part of their investment strategies, hedging their exposure to equity markets.

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

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 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 group of investors in U.S. companies, holding 27 percent of their outstanding stock (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, 2007)

Download an Excel file of this data.

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. and foreign corporations. Money market mutual funds account for a large portion of funds' commercial paper holdings, and the share of outstanding commercial paper these funds hold fluctuates with investor demand for money market funds and the overall supply of commercial paper. During periods of strong cash inflows, such as the second half of 2007, money market funds boost their holdings of commercial paper, along with their holdings of Treasury and agency securities, certificates of deposit, and other money market instruments. As money market mutual fund demand for high-grade commercial paper rose in 2007, issuers of certain types of asset-backed commercial paper were facing a decline in investor demand, especially for commercial paper financing investment pools holding mortgage-related debt. Consequently, outstanding commercial paper contracted by 15 percent during the second half of the year. The combination of increased money market mutual fund demand for high-grade commercial paper and a decline in the overall supply of commercial paper resulted in mutual funds' share of the market rising to 47 percent by the end of 2007, just shy of the record share of 50 percent reached in 2002.

Investment companies hold just over one-third of tax-exempt debt issued by U.S. municipalities, on par with direct household ownership (Figure 1.4). Funds' share of the tax-exempt market has risen only slightly in the past several years despite the strong flows into these funds, as the overall supply of tax-exempt debt has grown nearly as fast. Funds play a more modest role in the corporate and government bond markets, but still hold approximately 10 percent of the outstanding debt securities in these markets.

U.S. investor demand for foreign stocks and bonds has increased during the past several years, and investment companies have been one of the primary means for investing abroad because they provide an economical means of accessing these markets. In 2007, U.S. residents purchased $252 billion in foreign stocks and bonds, and mutual funds and ETFs accounted for most of these purchases
(Figure 1.5).

Figure 1.5

Net U.S. Purchases of Foreign Securities

(billions of dollars, 2003–2007)

Download an Excel file of this data.

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

Number of Investment Companies and Types of Intermediaries

There are nearly 700 financial firms from around the world that compete in the U.S. market to provide investment management services to fund investors. Nearly 60 percent of U.S. fund and trust sponsors are independent fund advisers, and these sponsors manage more than half of investment company assets (Figure 1.6). Banks, insurance companies, securities broker-dealers, and non-U.S. fund advisers are other types of 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.

Figure 1.6

Nearly 60 Percent of Fund Sponsors Are Independent fund Advisers

(percent of investment company complexes by type of intermediary, December 2007)

Download an Excel file of this data

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

These low barriers to entry led to a rapid increase in the number of fund sponsors in the 1980s and 1990s. However, this trend has reversed itself since 2000. About 338 fund advisers left the fund business from 2000 through 2007; at the same time, about 251 new firms entered (Figure 1.7). The overall effect has been a net reduction of 15 percent in the number of industry firms serving investors. The decrease in the number of advisers has occurred with larger fund sponsors acquiring some smaller fund families and with some fund advisers liquidating funds and leaving the fund business. 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, likely have contributed to the decline in the number of fund sponsors.

Figure 1.7

Number of Fund sponsors

(2000–2007)

Download an Excel file of this data.

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 in recent years. Competitive dynamics also affect the number of funds offered in any given year by the 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. Fund sponsors opened about the same number of funds as they merged or liquidated in 2007 (Figure 1.8).

The total number of other investment companies has fallen considerably since 2000, as sponsors of UITs have been creating fewer new trusts. These investment companies often have preset termination dates and, in conjunction with a slowdown in the creation of new UITs, the total number of UITs has declined substantially. Since 2000, sponsors of ETFs on net created 549 new funds, and closed-end fund sponsors on net added 186 new funds.

Figure 1.8

Number of Investment Companies

(number of each type of investment company, 1995–2007)

Download an Excel file of this data.

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

Investment Company Employment

Fund sponsors added more than 21,000 workers to their payrolls between 2005 and 2007, reaching a record 168,000 employees. Fund sponsors provide advisory, recordkeeping, administrative, custody, and other services to a growing number of funds and their investors.

The largest group of workers provides services to fund investors and their accounts, with more than one-third of fund employees involved in these activities (Figure 1.9). Investor servicing encompasses a wide range of activities to help investors monitor and update their accounts. Employees in these functions work in call centers and help shareholders and their financial advisers with questions about investors’ accounts and processing applications for account openings and closings. They also work in retirement plan transaction processing, retirement plan participant education, participant enrollment, and plan compliance.

Figure 1.9

Investment Company Industry Employment by Job Function

(percent of jobs in registered investment company operations areas, 2007)

Download an Excel file of this data.

Just over one-quarter of the industry's workforce is 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, account for 11 percent of industry employment. Personnel involved with distribution services, such as marketing, product development and design, and investor communications, account for 14 percent of the workforce. 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 12 percent of fund industry jobs.

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 2007, employing nearly one-third of the workers in the fund industry (Figure 1.10). As the industry has grown from its early roots, other states have become significant centers of fund employment. Today, California, Pennsylvania, and Texas also have significant concentrations of fund employees. Fund companies in these states employ about one-quarter of all fund industry employees.

Figure 1.10

Industry Employment by State

(estimated number of employees of registered investment companies by state, 2007)

Download an Excel file of this data.