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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 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

Ownership of mutual funds has grown significantly over the past quarter century. Forty-four percent of all U.S. households own mutual funds in 2007, compared with less than 6 percent in 1980. The estimated 88 million individuals who own mutual funds include 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, such as full-service brokers and independent financial planners; directly from fund companies; employer-sponsored retirement plans; and fund supermarkets.

Individual and Household Ownership

An estimated 88 million individual investors own funds, and hold 86 percent of total mutual fund assets. Altogether, 51 million households, or 44 percent of all U.S. households, own funds (Figure 6.1).

Mutual funds represent a significant component of many U.S. households' financial holdings. Among households that own mutual funds, the median amount invested in mutual funds is $100,000 (Figure 6.2). The majority of individuals heading households that own mutual funds are married or living with a partner, and almost half are college graduates. About three-quarters of these individuals work full- or part-time.

Figure 6.1

more than four in ten U.S. Households Own Mutual Funds

(millions of U.S. households owning mutual funds, selected years)

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Sources: Investment Company Institute and U.S. Census Bureau (Fundamentals, "Trends in Ownership of Mutual Funds in the United States, 2007"

Figure 6.2

Fund Ownership by Age and Income

The incidence of ownership of mutual funds is greatest among households headed by individuals age 35 to 64 years—the group considered to be in their peak earning and saving years (Figure 6.3). The median age of individuals heading households that own mutual funds is 49. Forty-five percent of all individuals heading households that own mutual funds are members of the Baby Boom Generation (born between 1946 and 1964), and nearly one-quarter are members of Generation X (born between 1965 and 1976).

Figure 6.3

Incidence of Mutual Fund Ownership Greatest Among 35- to 64-Year-Olds

(percent of all U.S. households within each age group* owning mutual funds, 2007)

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*Age is based on individual heading the household.
Sources: Investment Company Institute and U.S. Census Bureau (Fundamentals, "Trends in Ownership of Mutual Funds in the United States, 2007")

The incidence of mutual fund ownership increases with household income (Figure 6.4). About three in five households that own funds have incomes between $25,000 and $100,000. The median household income of mutual fund-owning households is $74,000.

Figure 6.4

Incidence of Ownership of Mutual Funds Increases with Household Income

(percent of U.S. households within each income group* owning mutual funds, 2007)

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*Income ranges are based upon previous year's pretax household income.
Sources: Investment Company Institute and U.S. Census Bureau (Fundamentals, "Trends in Ownership of Mutual Funds in the United States, 2007")

Where Individuals Own Mutual Funds

Although mutual funds play a key role in both the long- and short-term savings strategies of many U.S. households, nearly three-quarters of mutual fund-owning households indicate their primary financial goal for their fund investments is saving for retirement. Thus, many households hold funds in workplace retirement plans, IRAs, and other tax-deferred and taxable accounts.

Inside Defined Contribution 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 2007, 57 percent of households that own mutual funds indicate they purchased their first fund through an employer-sponsored retirement plan, up from 47 percent in 1998. In total, 24 percent of households' mutual fund holdings are held in employer-sponsored retirement plan accounts. About half of households that own mutual funds view these plans as their main fund purchase source.

Outside Defined Contribution Retirement Plans

Many mutual fund-owning households also own funds outside defined contribution retirement plans (Figure 6.5). Those who own funds outside defined contribution retirement plans typically hold mutual funds in their investment portfolios for several years. On average, mutual fund accounts held outside retirement plans at work have been open for five years (Figure 6.6), and shareholders on average have had a relationship with the fund company offering the fund(s) for seven years (Figure 6.7).

Mutual fund investors often use funds to save for retirement outside workplace retirement plans. Indeed, 56 percent of mutual fund-owning households hold funds in their IRAs. In many cases, these IRAs hold assets rolled over from 401(k) and other employer-sponsored retirement plans.

Figure 6.5

Where Do Shareholders Own Mutual Funds?

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1Professional financial advisers include full-service brokers, independent financial planners, bank and savings institution representatives, insurance agents, and accountants.
2Other sources include fund companies directly, fund supermarkets, and discount brokers.

Figure 6.6

The Average Mutual Fund Account Has Been Open for Five Years

(percent of mutual fund accounts held outside defined contribution retirement plans, by age of account, year-end 2005)

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Figure 6.7

The Average Shareholder Tenure With a Fund Company Is Seven Years

(percent of mutual fund shareholders, by tenure of shareholder with the fund company, year-end 2005)

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Purchasing Funds Through Professional Financial Advisers

Among households that own fund shares outside defined contribution retirement plans, 80 percent currently own fund shares through professional financial advisers, including full-service brokers, independent financial planners, insurance agents, bank or savings institution representatives, and accountants (Figure 6.5). Forty-three percent own funds solely through advisers, while another 37 percent own funds purchased from advisers as well as directly from fund companies, fund supermarkets, or discount brokers. Twelve percent solely own 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. Altogether, nearly two-thirds of shareholders with ongoing advisory relationships indicate that they receive 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).

Figure 6.8

Shareholders Receive Numerous Investment Services from Professional Financial Advisers

(percent 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 have ongoing advisory relationships, more than eight in 10 say their advisers regularly assess their portfolios and give them investment recommendations. About six in 10 indicate their advisers help 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" undertake their own research and more than four in 10 "sometimes" conduct their own research. Shareholders who take the lead in making investment decisions with their advisers are 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.

About 80 percent of investors who use financial advisers have periodic discussions of their general financial goals with their advisers, and three-quarters receive planning services for specific goals, such as retirement security and education saving. Three-quarters of fund investors with ongoing advisory relationships say they receive comprehensive financial planning assistance from their primary advisers, and six in 10 receive advice on how to manage their money in retirement. About half also indicate that they have access to tax planners and other specialists through their advisers. Shareholders with access to investment specialists tend to have high levels of assets; these investors want specialized services in areas such as charitable giving or wealth management.

Views on the Benefits of the Investor/Adviser Relationship. Generally, fund investors who chose to work with advisers indicate the relationship improves their chances of growing their money and gives 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 provides a level of expertise that enhances their investment decisionmaking.

Most shareholders with ongoing advisory relationships cite the need for guidance in understanding their total financial picture and allocating their assets across a range of investments (Figure 6.9). Many also require explanations of the wide variety of investment options as well as assessments of whether they are saving enough for retirement. For others, making sure their estate is in order is a major reason for the advisory relationship.

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 delegate or make investment decisions together with their advisers indicate they use advisers for their financial expertise. Among those shareholders who take the lead in investment decisionmaking, these reasons are less important in their motivation for working with professional financial advisers.

Figure 6.9

Shareholders Look to Advisers for the Expertise They Provide

(percent 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?"

Shareholder Preferences for Fund Information

Over the years, ICI has surveyed investors about the mutual fund information they want before purchasing fund shares. In 2006, ICI conducted in-home interviews with more than 700 shareholders owning funds outside workplace retirement plans about their mutual fund information needs. The study found that investors usually review a wide range of information before purchasing fund shares outside these plans. Most often, investors want to know about a fund's fees and expenses, its historical performance, and its associated risks prior to purchasing shares (Figure 6.10). In contrast, investors rarely review or ask questions about a fund's portfolio manager, board of directors, or proxy voting policies.

Figure 6.10

Shareholders Review a Wide Range of Information Before Purchasing Mutual Fund Shares

(percent of recent fund investors who reviewed or asked questions about each item before most recent fund purchase,1 2006)

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1Multiple responses are included.
2These items must be included in the front of the prospectus in the Risk/Return Summary.
Note: The confidence interval for these estimates is ± 3.6 percentage points at the 95 percent confidence level.
Source: Understanding Investor Preferences for Mutual Fund Information, August 2006

Most recently, ICI surveyed more than 500 shareholders about the U.S. Securities and Exchange Commission's proposed Summary Prospectus. The survey confirmed results from other ICI research in this area, showing that investors are very much in favor of streamlining the information that investment companies provide annually. Approval ratings for the proposal as a whole exceed 90 percent. To read the results of ICI's survey, visit the Institute's website.

Shareholders rely heavily on professional financial advisers for fund information before purchasing fund shares. Nearly three-quarters of investors turned to professional financial advisers for fund information before their most recent share purchases outside workplace retirement plans (Figure 6.11). Professional financial advisers are a predominant source of fund information because most shareholders own funds through advisers and want their advisers to review and discuss the information with them.

Figure 6.11

Shareholders Most Often Consult Advisers for Mutual Fund Information Before Purchasing Shares

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*Multiple responses are included.
Source: Understanding Investor Preferences for Mutual Fund Information, August 2006

The Internet is another way that some shareholders access fund and other investment information. Today, more than nine in 10 U.S. households that own mutual funds have Internet access, up from two-thirds in 2000, the first year in which ICI measured shareholders' access to the Internet. Paralleling the national pattern, the incidence of Internet access traditionally has been greatest among younger mutual fund shareholders (Figure 6.12). Increases in Internet access among older shareholder segments, however, have narrowed the generational gap considerably.

Figure 6.12

Internet Access has increased Significantly Among Mutual Fund Shareholders

(percent of U.S. households owning mutual funds with Internet access, selected years)

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*Revised from Fundamentals, "Ownership of Mutual Funds and Use of the Internet, 2006"

About eight in 10 shareholders who access the Internet go online for financial purposes, most often to obtain investment information or check their bank or investment accounts (Figure 6.13). In addition, mutual fund owners are much more likely than non-fund owners to engage in common online activities, such as accessing email, obtaining information about nonfinancial products and services, or purchasing products and services other than investments.

Figure 6.13

Most Mutual Fund Shareholders Use the Internet for Financial-Related Purposes

(percent of fund-owning and non-fund-owning households with Internet access,1 by online activities,2 2006) 3

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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 2005 and May 2006.
3Revised from Fundamentals, "Ownership of Mutual Funds and Use of the Internet, 2006"

Mutual Fund Purchase Channels Reflect Growth in Defined Contribution Plans

Fund shares sold through professional financial advisers have traditionally accounted for a large majority of mutual fund holdings, 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. By 2007 that share has fallen to 56 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 24 percent by 2007.

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 in the period 1990 to 2007, but holdings through discount brokers and mutual fund supermarkets increased (Figure 6.14).

Figure 6.14

Households' Mutual Fund Assets by Purchase Source

(percent of long-term mutual fund assets held by households, 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.

Institutional Ownership

Nonfinancial businesses, financial institutions, nonprofit organizations, and other institutional investors hold about 14 percent of mutual fund assets in 2007. Nonfinancial businesses are the largest segment of institutional investors in mutual funds. These firms primarily use mutual funds as a tool to manage their cash. At year-end 2007, nonfinancial businesses' mutual fund assets totaled $791 billion, the majority of which was invested in money market funds (Figure 6.15). Financial institutions are the second-largest component of institutional investors in mutual funds. Their mutual fund assets at year-end 2007 were $444 billion, of which 65 percent was invested in money market funds. Nonprofit organizations held $190 billion in mutual fund accounts at year-end 2007. Unlike businesses and financial institutions, nonprofit organizations allocated the majority of their mutual fund assets to stock, bond, or hybrid funds. In 2007, other institutional investors, including state and local governments and funds holding mutual fund shares, held $249 billion in mutual funds, most of which was invested in stock, bond, or hybrid funds.

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, which 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.

Figure 6.15

Nonfinancial Businesses Are the Largest Type of Institutional Investor in Mutual Funds

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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.
Note: Components may not add to the total because of rounding.