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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

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

APPENDIX C:
SIGNIFICANT EVENTS IN FUND HISTORY

TIMELINE:
SIGNIFICANT EVENTS FOR FUNDS IN THE FINANCIAL CRISIS

GLOSSARY

FACT BOOK ARCHIVE

Ownership of mutual funds has grown significantly in the last 30 years. Forty-five percent of all U.S. households owned mutual funds in 2008, compared with less than 6 percent in 1980. The estimated 92 million individuals who owned mutual funds included many different types of people with a variety of financial goals. Fund investors purchase and sell mutual funds through four principal sources: professional financial advisers (e.g., full-service brokers and independent financial planners), employer-sponsored retirement plans, fund companies directly, and fund supermarkets.

Individual and Household Ownership

In 2008, an estimated 92 million individual investors owned mutual funds and held 82 percent of total mutual fund assets at year-end. Altogether, 52.5 million households, or 45 percent of all U.S. households, owned funds (Figure 6.1).

FIGURE 6.1

45 PERCENT OF U.S. HOUSEHOLDS OWNED MUTUAL FUNDS

Millions and percentage of U.S. households owning mutual funds, selected years

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Sources: Investment Company Institute and U.S. Census Bureau (Fundamentals, “Ownership of Mutual Funds, Shareholder Sentiment, and Use of the Internet, 2008”)

Mutual funds represented a significant component of many U.S. households’ financial holdings in 2008. Among households owning mutual funds, the median amount invested in mutual funds was $100,000 (Figure 6.2). Seventy-six percent of individuals heading households that owned mutual funds were married or living with a partner, and 46 percent were college graduates. Seventy-eight percent of these individuals worked full- or part-time.

FIGURE 6.2

CHARACTERISTICS OF MUTUAL FUND INVESTORS

May 2008

Mutual Fund Ownership by Age and Income

In 2008, the incidence of mutual fund ownership was greatest among households headed by individuals between the ages of 35 and 64—the group considered to be in their peak earning and saving years (Figure 6.3). More than half of all households in this age group owned mutual funds. The median age of individuals heading households owning mutual funds was 49 (Figure 6.2). Eighteen percent of all individuals heading households owning mutual funds were members of the Silent or GI Generations (born in 1945 or earlier), 46 percent were members of the Baby Boom Generation (born between 1946 and 1964), 24 percent were members of Generation X (born between 1965 and 1976), and 12 percent were members of Generation Y (born in 1977 or later).

FIGURE 6.3

INCIDENCE OF MUTUAL FUND OWNERSHIP GREATEST AMONG 35- TO 64-YEAR-OLDS

Percentage of U.S. households within each age group,* May 2008

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*Age is based on the age of the sole or co-decisionmaker for household saving and investing.
Sources: Investment Company Institute and U.S. Census Bureau (Fundamentals, “Ownership of Mutual Funds, Shareholder Sentiment, and Use of the Internet, 2008”)

The incidence of mutual fund ownership increases with household income (Figure 6.4). The incidence of mutual fund ownership was 10 percent for households with income less than $25,000, and rose to 81 percent for households with income of $100,000 or more. Fifty-eight percent of households owning funds had incomes between $25,000 and $100,000.The median household income of mutual fund–owning households was $80,000 (Figure 6.2).

FIGURE 6.4

INCIDENCE OF MUTUAL FUND OWNERSHIP INCREASES WITH HOUSEHOLD INCOME

Percentage of U.S. households within each income group,* May 2008

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*Total reported is household income before taxes in 2007.
Sources: Investment Company Institute and U.S. Census Bureau (Fundamentals, “Ownership of Mutual Funds, Shareholder Sentiment, and Use of the Internet, 2008”)

Where Individuals Purchase and Own Mutual Funds

Fund investors purchase and sell mutual funds through four principal sources: employer-sponsored retirement plans, fund companies directly, fund supermarkets, and professional advisers, such as full- service brokers and independent financial planners. Fund shares sold through professional financial advisers have traditionally accounted for a large majority of mutual fund assets, but the increasing role of defined contribution (DC) plans has changed that somewhat in the last two decades. In 1990, for example, 72 percent of households’ long-term mutual fund holdings were invested through professional financial advisers (Figure 6.5). By 2008, that share had fallen to 54 percent, largely because of the rapid growth in DC plans, which increased from 8 percent of households’ long-term mutual fund holdings in 1990 to 26 percent by 2008.

FIGURE 6.5

HOUSEHOLDS’ MUTUAL FUND ASSETS BY PURCHASE SOURCE

Percentage of long-term mutual fund assets held by households, year-end, selected years

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Note: Components may not add to 100 percent because of rounding.
Sources: Investment Company Institute and Cerulli Associates, Inc.

There were also offsetting changes in the distribution of assets across other channels. For example, holdings directly with mutual fund companies fell from 19 percent to 14 percent over the period of 1990 to 2008, while holdings through discount brokers and mutual fund supermarkets increased (Figure 6.5).

Although mutual funds play a key role in both the long- and short-term savings strategies of many U.S. households, 76 percent of mutual fund–owning households indicated their primary financial goal for their fund investments was saving for retirement. Thus, many households held funds in workplace retirement plans, individual retirement accounts (IRAs), and other tax-deferred accounts. Nearly two-thirds of households that owned mutual funds held shares inside DC retirement plans (25 percent only held shares inside DC retirement plans and 39 percent held shares both inside and outside DC retirement plans). The remaining 36 percent only held shares outside DC retirement plans (Figure 6.6).

FIGURE 6.6

NEARLY TWO-THIRDS OF MUTUAL FUND–OWNING HOUSEHOLDS HELD SHARES INSIDE DEFINED CONTRIBUTION RETIREMENT PLANS

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*Professional financial advisers include full-service brokers, independent financial planners, bank and savings institution representatives, insurance agents, and accountants.

Inside Employer-Sponsored Retirement Plans

Since 1990, retirement plans at work have become one of the most common sources through which individuals invest in mutual funds. Indeed, many of today’s mutual fund owners were introduced to mutual fund investing through 401(k) and other retirement plans at work. In 2008, 59 percent of mutual fund–owning households indicated that they purchased their first fund through an employer-sponsored retirement plan, and that fraction is much higher for households that purchased mutual funds more recently (Figure 6.7). Fifty-one percent of households that owned mutual funds viewed these plans as their main fund purchase source.

FIGURE 6.7

Employer-Sponsored Retirement Plans Are Increasingly the Source of First Fund Purchase

Percentage of U.S. households owning mutual funds, May 2008

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Note: Employer-sponsored retirement plans include DC plans (such as 401(k), 403(b), or 457 plans) and employer-sponsored IRAs (SEP IRAs, SAR-SEP IRAs, and SIMPLE IRAs).
Sources: Investment Company Institute and U.S. Census Bureau (Fundamentals, “Characteristics of Mutual Fund Investors, 2008”)

Outside Employer-Sponsored Retirement Plans

Among households that purchased mutual funds prior to 1990, 47 percent made their first purchase outside of an employer-sponsored retirement plan, which means the purchase was directly from the fund company, through a discount broker or mutual fund supermarket, or through a professional financial adviser (Figure 6.7). As 401(k) and other employer-sponsored retirement plans have become increasingly popular in the workplace, the fraction of households that make their first foray into mutual fund investing outside of employer plans has fallen. Among those households that made their first mutual fund purchase in 2000 or later, only 32 percent did so outside of an employer-sponsored plan.

Mutual fund investors often use funds to save for retirement outside workplace retirement plans. Indeed, 55 percent of mutual fund–owning households held funds in their IRAs. In many cases, these IRAs held assets rolled over from 401(k) and other employer-sponsored retirement plans.

Among households owning fund shares outside DC retirement plans, 77 percent owned fund shares through professional financial advisers, including full-service brokers, independent financial planners, bank and savings institution representatives, insurance agents, and accountants (Figure 6.6). Forty-four percent owned funds solely through advisers, while another 33 percent owned funds purchased from advisers as well as directly from fund companies, fund supermarkets, or discount brokers. Fifteen percent solely owned funds purchased directly from fund companies, fund supermarkets, or discount brokers.

Professional financial advisers offer investors a wide array of services in addition to helping them select and purchase mutual fund shares (Figure 6.8). Altogether, 63 percent of shareholders with ongoing advisory relationships indicated that they received at least five distinct services from their primary advisers. The services that advisers provide may be grouped into two broad categories: investment services and planning services.

FIGURE 6.8

SHAREHOLDERS RECEIVED NUMEROUS INVESTMENT SERVICES FROM PROFESSIONAL FINANCIAL ADVISERS

Percentage of respondents with ongoing advisory relationships, 2006

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*Multiple responses are included.
Source: Fundamentals, “Why Do Mutual Fund Investors Use Professional Financial Advisers?”

USE OF INVESTMENT SERVICES. Investment services provided by advisers include, among other things, portfolio review, investment recommendations, and asset allocation review. Among the fund investors surveyed who had ongoing advisory relationships, 85 percent said their advisers regularly assessed their portfolios and gave them investment recommendations (Figure 6.8). Sixty-one percent indicated that their advisers helped them allocate assets held in workplace retirement accounts.

While fund investors generally receive investment recommendations from their advisers, many also conduct independent research to confirm these recommendations. One-quarter of shareholders with ongoing advisory relationships “always” undertook their own research, and more than four in 10 “sometimes” conducted their own research. Shareholders who take the lead in making investment decisions with their advisers were the group most likely to undertake their own research before accepting advisers’ recommendations.

USE OF PLANNING SERVICES. Planning services provided by advisers include, among other things, periodic discussion of financial goals, suggesting strategies to help meet specific goals, and the development of a more comprehensive financial plan.

Eighty-three percent of investors who used financial advisers had periodic discussions of their general financial goals with their advisers, and three-quarters received planning services for specific goals, such as retirement security and education saving (Figure 6.8). Three-quarters of fund investors with ongoing advisory relationships said they received comprehensive financial planning assistance from their primary advisers, and six in 10 received advice on how to manage their money in retirement. Fifty-one percent also indicated that they had access to tax planners or other specialists through their advisers. Shareholders with access to investment specialists tended to have high levels of assets; these investors wanted specialized services in areas such as charitable giving or wealth management.

VIEWS ON THE BENEFIT OF THE INVESTOR/ADVISER RELATIONSHIP. Generally, fund investors who chose to work with advisers indicated that the relationship improved their chances of growing their money and gave them peace of mind about their investments. They cited several tangible benefits of the investor/adviser relationship, expressing the common theme among survey respondents that using professional financial advisers provided a level of expertise that enhanced their investment decisionmaking.

Seventy-one percent of shareholders with ongoing advisory relationships cited the need for guidance in understanding their total financial picture, while 74 percent wanted help with asset allocation (Figure 6.9). Seventy-three percent also required explanations of the wide variety of investment options and 71 percent wanted to make sure they were saving enough to meet their financial goals. Sixty-five percent cited making sure their estate was in order as a major reason for their advisory relationship.

FIGURE 6.9

SHAREHOLDERS LOOK TO ADVISERS FOR THE EXPERTISE THEY PROVIDE

Percentage of respondents with ongoing advisory relationships indicating each is a
“major” reason for using advisers,* 2006

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*Multiple responses are included.
Source: Fundamentals, “Why Do Mutual Fund Investors Use Professional Financial Advisers?”

The extent to which investors delegate investment decisionmaking to their advisers appears to shape their perception of the value of the advisory relationship. ICI survey findings indicate that the more shareholders rely on their advisers for investment decisionmaking, the greater the value they place on the advisory relationship. For example, roughly three-quarters of shareholders who delegated or made investment decisions together with their advisers indicated that they used advisers for their financial expertise. Among those shareholders who took the lead in investment decisionmaking, these reasons were less important in their motivation for working with professional financial advisers.

Shareholders’ Use of the Internet

The Internet is another way that some shareholders access fund and other investment information. In 2008, 91 percent of U.S. households owning mutual funds had Internet access, up from 68 percent in 2000, the first year in which ICI measured shareholders’ access to the Internet (Figure 6.10). Paralleling the national pattern, the incidence of Internet access traditionally has been greatest among younger mutual fund shareholders. Increases in Internet access among older shareholder segments, however, have narrowed the generational gap considerably.

In 2008, 82 percent of shareholders with Internet access went online for financial purposes, most often to obtain investment information or check their bank or investment accounts (Figure 6.11). In addition, mutual fund–owning households were much more likely than non-fund-owning households to engage in common online activities, such as accessing email, obtaining information about products and services other than investments, or purchasing products and services other than investments online.

FIGURE 6.10

INTERNET ACCESS INCREASED SIGNIFICANTLY AMONG MUTUAL FUND–OWNING HOUSEHOLDS

Percentage of U.S. households owning mutual funds with Internet access, selected years

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Source: Fundamentals, “Ownership of Mutual Funds, Shareholder Sentiment, and Use of the Internet, 2008”

Figure 6.11

MOST MUTUAL FUND SHAREHOLDERS USED THE INTERNET FOR FINANCIAL-RELATED PURPOSES

Percentage of fund-owning and non-fund-owning households with Internet access1 by online activities,2 May 2008

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1Online activities are based on responding primary or co-decisionmaker for household saving and investing.
2Tabulations are based on online activity between June 2007 through May 2008.
Source: Fundamentals, “Ownership of Mutual Funds, Shareholder Sentiment, and Use of the Internet, 2008”

In early 2008, ICI surveyed more than 500 shareholders who had recently purchased mutual funds about the U.S. Security and Exchange Commission’s proposed Summary Prospectus, which was adopted in late 2008. The survey confirmed results from other ICI research in this area, showing that investors were very much in favor of streamlining information that investment companies provide annually, particularly since the more detailed information would be available through the Internet. Approval ratings for the proposal as a whole exceeded 90 percent. To read the results of ICI’s survey, visit the Institute’s website.

Institutional Ownership

Fund sponsors often create special share classes or funds expressly for institutional investors. Institutional investors often purchase fund shares directly from fund companies. In addition, brokers, banks, and other third parties create “platforms” through which many institutional investors can buy mutual fund shares. These arrangements enable institutional investors, who are often restricted as to the portion of their assets that can be held in any particular mutual fund, to easily diversify their holdings across funds.

Nonfinancial businesses, financial institutions, nonprofit organizations, and other institutional investors held about 18 percent of mutual fund assets in 2008. Nonfinancial businesses were the largest segment of institutional investors in mutual funds (Figure 6.12). These firms primarily use mutual funds as a tool to manage their cash. At year-end 2008, nonfinancial businesses’ mutual fund assets totaled $879 billion, the majority of which was invested in money market funds. Financial institutions were the second-largest component of institutional investors in mutual funds. Their mutual fund assets at year-end 2008 were $528 billion, of which 80 percent was invested in money market funds.

FIGURE 6.12

NONFINANCIAL BUSINESSES WERE THE LARGEST TYPE OF INSTITUTIONAL
INVESTOR IN MUTUAL FUNDS

Assets in long-term and money market funds by type of institution, billions of dollars, year-end 2008

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*Other institutional investors include assets of state and local governments, funds holding mutual fund shares, and other institutional accounts not classified.

Nonprofit organizations held $124 billion in mutual fund assets at year-end 2008.Unlike businesses and financial institutions, nonprofit organizations’ holdings of mutual funds were more evenly split between long-term funds and money market funds. In 2008, other institutional investors, including state and local governments and funds holding mutual fund shares, held $211 billion in mutual funds—most of which was invested in stock, bond, or hybrid funds.