Chapter One

Worldwide Regulated Open-End Funds

Investors across the globe have demonstrated strong demand for regulated open-end funds (referred to in this chapter as regulated funds). In the past 10 years, net sales of regulated funds have totaled $12.7 trillion. This demand has been influenced by a number of long-term factors, as well as cyclical and macroeconomic factors. Fund providers have responded to the increasing interest in these funds, offering nearly 119,000 regulated funds that provide a vast array of choices for investors. In many countries, markets for regulated funds are well-developed and highly competitive. At year-end 2018, regulated funds had $46.7 trillion in total net assets.

What Are Regulated Funds?

ICI, following standards set by the International Investment Funds Association (IIFA), defines regulated funds as collective investment pools that are substantively regulated, open-end investment funds.* Open-end funds generally are defined as those that issue new fund shares (or units) and redeem existing shares (or units) on demand. Such funds are typically regulated with respect to disclosure, the form of organization (for example, as either corporations or trusts), custody of fund assets, minimum capital, valuation of fund assets, and restrictions on fund investments, such as limits on leverage, types of eligible investments, and diversification of portfolio investments.

In the United States, regulated funds include mutual funds and exchange-traded funds (ETFs). In Europe, regulated funds include Undertakings for Collective Investment in Transferable Securities (UCITS)—ETFs, money market funds, and other categories of similarly regulated funds—and alternative investment funds, commonly known as AIFs.

In many countries, regulated funds also may include institutional funds (funds that are restricted to being sold to a limited number of non-retail investors), funds that offer guarantees or protection of principal (those that offer a formal, legally binding guarantee of income or capital), and open-end real estate funds (funds that invest directly in real estate to a substantive degree).

* The primary data source for worldwide regulated funds is the IIFA. In 2018, the IIFA collected data on worldwide regulated funds from 47 jurisdictions. For data on individual jurisdictions, see section 8 of the data tables. For more details about the IIFA data collection, see Worldwide Definitions of Terms and Classifications at www.ici.org/info/ww_q3_18_definitions.xls.

Two other highly regulated US investment products, unit investment trusts and closed-end funds, are discussed in chapter 2 and chapter 5, respectively.

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IIFA Presents Expanded Worldwide Regulated Open-End Fund Assets and Flows Report

Investor Demand for Worldwide Regulated Funds

Worldwide regulated funds have seen robust growth in total net assets in the past decade across the United States, Europe, Asia-Pacific, and the rest of the world. Among other factors, rising demand for regulated funds has been driven by investors’ demand for professionally managed and well-diversified products offering access to capital markets and by the increasing depth and liquidity of global capital markets. In 2018, macroeconomic events and other factors—including how investors use regulated funds to help achieve their goals—played a considerable role in shaping global financial markets.

Total Net Assets of Worldwide Regulated Funds

A sharp drop in global stock prices halted regulated fund net asset growth in 2018. Net assets in worldwide regulated funds declined $2.6 trillion in 2018 to $46.7 trillion after having increased for the prior six years (Figure 1.1).* Despite the hit to global equity markets, equity funds—which invest primarily in publicly traded stocks—remained the largest category of regulated funds, accounting for 43 percent of net assets at year-end 2018. Mixed/other funds made up another 23 percent, while bond funds—which invest primarily in fixed-income securities—had 22 percent of net assets. Money market funds, which are generally defined throughout the world as regulated funds that are restricted to holding only short-term, high-quality money market instruments, accounted for 13 percent of net assets.

* In this chapter, unless otherwise noted, data for total net assets and net sales are denominated in US dollars.

Mixed/other funds include balanced/mixed funds, guaranteed/protected funds, real estate funds, and other funds.

Figure 1.1

Total Net Assets of Worldwide Regulated Open-End Funds Fell to $46.7 Trillion in 2018

Trillions of US dollars by type of fund, year-end

   

1 Mixed/other funds include balanced/mixed funds, guaranteed/protected funds, real estate funds, and other funds.

2 Data for total net assets by type of fund are not available in 2009.

Note: Regulated open-end funds include mutual funds, ETFs, and institutional funds.

Source: International Investment Funds Association

The decline in net assets in 2018 was driven by several factors that weighed on global stock markets and foreign exchange markets, particularly in the fourth quarter. Chief among them was the fear of a severe slowdown in global economic growth, stemming in part from lower-than-expected economic growth in China and deteriorating trade relations between China and the United States. In 2018, US stocks fell 5.3 percent (Figure 1.2). Stock markets elsewhere in the world also weakened. For example, European stock markets fell 14.3 percent in 2018, while Asia-Pacific stock markets fell 13.3 percent. In addition, the euro depreciated 4.5 percent against the US dollar in 2018, reducing the value of euro denominated assets when measured in US dollars. In the Asia-Pacific region in 2018, the Australian dollar depreciated 10 percent and the Chinese renminbi depreciated 5 percent against the US dollar.

Figure 1.2

Stock Markets Fell Around the World in 2018

Percent

   

1 The change in the exchange rate of euros is measured as the year-over-year percent change in the exchange rate of US dollars per euro.

2 The total return on US equities is measured as the year-over-year percent change in the Wilshire 5000 Total Market Index.

3 The total return on European equities is measured as the year-over-year percent change in the MSCI Daily Total Return Gross Europe Index (expressed in US dollars).

4 The total return on Asia-Pacific equities is measured as the year-over-year percent change in the MSCI Daily Total Return Gross AC Asia-Pacific Index (expressed in US dollars).

Sources: Bloomberg and MSCI

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Worldwide Regulated Open-End Fund Assets and Flows

How Exchange Rates Can Influence Measurement of Total Net Assets Held by Worldwide Regulated Funds

For worldwide regulated funds holding assets denominated in currencies other than US dollars, fluctuations in US dollar exchange rates can significantly affect the value of these assets when they are expressed or measured in US dollars. For example, when foreign currencies depreciate against the dollar (or, equivalently, the US dollar appreciates against foreign currencies), it will have a negative impact on the value of assets not denominated in US dollars when those assets are measured in US dollars. Figure 1.3 illustrates this effect using two hypothetical scenarios.

Figure 1.3

Impact of Changes in the Exchange Rate on the US Dollar Value of a European Stock

Scenario 1: No change in exchange rate between euros and US dollars

 Year 1Year 2Percent change

1. Market value of European stock expressed in euros

€100 €110 10%

2. Exchange rate of euros (US dollars per euro)

1.00 1.00 0%

3. Market value of European stock expressed in US dollars

$100 $110 10%

Scenario 2: Market value if euro depreciates (US dollar appreciates)

 Year 1Year 2Percent change

4. Market value of European stock expressed in euros

€100 €110 10%

5. Exchange rate of euros (US dollars per euro)

1.00 1.20 20%

6. Market value of European stock expressed in US dollars

$100 $132 32%

In the first scenario, the market value of a European stock, measured in euros, rises from €100 in year 1 to €110 in year 2, an increase of 10 percent. The exchange rate between US dollars and euros, in this scenario, is unchanged at 1.00 in both years. In other words, one euro is worth one US dollar in both years. To convert the euro-denominated value of the European stock into US dollars, multiply by the exchange value of the euro (US dollars per euro). Because this is 1.00 in both years, the value of the European stock expressed in US dollars is exactly the same as when expressed in euros: $100 in year 1 and $110 in year 2. When the US dollar exchange rate with another country is unchanged between two years, any gain or loss in assets denominated in that country’s currency translates into an identical percent gain or loss when the value of those assets is expressed in US dollars.

Exchange rates, however, rarely remain unchanged. The second scenario illustrates what happens when a European stock experiences the same 10 percent gain as in the first scenario (€100 in year 1 to €110 in year 2), but at the same time, the euro depreciates 20 percent against the US dollar. As in the first scenario, in year 1 the market value of a European stock expressed in US dollars is $100. In year 2, however, one euro is now worth 0.80 US dollars. To find the US dollar value of the European stock in year 2, multiply €110 by 0.80 (US dollars per euro) to get $88. The US dollar return on the European stock is now -12 percent—lower than in the first scenario because it accounts for the depreciation of the euro relative to the US dollar.

Worldwide Net Sales of Regulated Long-Term Funds

Despite challenging financial markets in 2018, overall demand for worldwide regulated long-term funds (equity, bond, and mixed/other) as measured by net sales—total sales less total redemptions plus net exchanges—remained positive, though lower than in previous years. Net sales of regulated long-term funds totaled $974 billion in 2018, down from $2.1 trillion in 2017, primarily due to weakening demand in Europe and the United States (Figure 1.4). In Europe, net sales fell from $941 billion in 2017 to $330 billion in 2018, and in the United States net sales dropped from $790 billion to $244 billion. By contrast, net sales in Asia-Pacific rose from $200 billion in 2017 to $332 billion in 2018.

Despite downward pressure on global stock prices and increased equity market volatility, investors worldwide continued to put money in equity funds in 2018, albeit at a reduced pace. Net sales of equity funds, which made up almost half of all net sales, totaled $479 billion in 2018, down from $724 billion in 2017 (Figure 1.5). The largest decline in equity fund investment occurred in the United States, where equity funds had $85 billion in net sales in 2018 compared with $306 billion in 2017. Although index equity funds in the United States had strong net sales in 2018, they were down from their historical peak in 2017. In addition, outflows from actively managed equity funds in the United States continued in 2018. In Europe, net sales of equity funds were strong at the start of 2018 as stock prices around the world were rising. As worldwide equity markets cooled off and then dropped in the fourth quarter, net sales of equity funds in Europe slowed. For the whole of 2018, net sales of equity funds in Europe totaled $126 billion, down from $201 billion in 2017.

Figure 1.4

Net Sales of Regulated Open-End Long-Term Funds in the United States and Europe Slowed in 2018

Billions of US dollars by region, annual

   

* Data for Ireland are not available in 2009.

Note: Regulated open-end funds include mutual funds, ETFs, and institutional funds. Long-term funds include equity funds, mixed/other funds (balanced/mixed, guaranteed/protected, real estate, and other funds), and bond funds, but exclude money market funds.

Source: International Investment Funds Association

In contrast, net sales of equity funds in Asia-Pacific increased to $239 billion in 2018 from $175 billion in 2017. Much of this was attributable to Japan, where demand for equity ETFs has been bolstered since 2013 by the Bank of Japan’s asset purchase program. Another contributor to the rise in equity fund net sales in 2018 was increased demand in China— despite the Shanghai Composite Index falling by 25 percent, a slowing economy, and deteriorating trade relations between China and the United States in 2018.

Amid the backdrop of the more volatile global equity market landscape, changes in monetary policy and rising interest rates likely played a role in the lower demand for bond and mixed/other funds in 2018. Net sales of bond and mixed/other funds totaled $494 billion in 2018, down from $1.4 trillion in 2017 (Figure 1.5). This decline in net sales accounted for 79 percent of the total drop in net sales of regulated long-term funds in 2018 and was concentrated in the United States and Europe.

Bond funds started 2018 with strong inflows, likely reflecting a continuation of the demographic shift noted below. As the year progressed in the United States, however, tighter monetary policy and increased interest rates for corporate borrowing provided a counterbalance. In addition, long-term US Treasury rates did not rise commensurately with the increases in the federal funds rate, resulting in a flattening of the US Treasury yield curve—the difference between the yields on long-term US Treasury notes and short-term US Treasury bills. This development likely led some investors to redeem from intermediate-term and long-term bond funds and invest in funds with shorter durations. In 2018, net sales of US bond funds were $214 billion, down from $477 billion in 2017.

While developments in US interest rates may play a role in European bond fund investors’ behavior, these effects likely were compounded by the announcement from the European Central Bank (ECB) in June that it intended to terminate its quantitative easing scheme at the end of 2018. Following this news, investors may have expected the value of longer-duration bonds to decline and interest rate volatility to increase once the ECB stopped purchasing long-dated bonds. Such concerns likely contributed, in part, to net outflows of $29 billion from bond funds in Europe in 2018. In 2017, European bond funds had received $328 billion in net sales.

Prior to 2018, net sales of bond funds and mixed/other funds had been particularly strong and generally far outpaced net sales of equity funds. Although a number of factors likely affected net flows in these years, two stand out as the most applicable. First, some investors, such as those nearing retirement, may have reassessed their tolerance for investment risk. The global population is aging—in 2018, individuals aged 50 and older were estimated to represent 23 percent of the world’s population, up from 20 percent in 2008.* Some investors may have elected to weight their purchases toward regulated funds with less-variable returns. Returns on bonds tend to be less variable than those on stocks. Because of this, returns on bond funds, and some mixed/other funds that hold substantial proportions of their total net assets in bonds, tend to be less variable than those of equity funds.

* United Nations, Department of Economic and Social Affairs, Population Division. 2017. “World Population Prospects: The 2017 Revision” (June). Available at https://esa.un.org/unpd/wpp.

Second, prior to 2018, investors likely were responding to favorable returns on bonds. In many countries, long-term interest rates declined during and after the financial crisis until 2017. To shore up their economies, major central banks cut short-term interest rates and held them at very low levels for most of the past decade. In addition, some major central banks, notably the US Federal Reserve and the ECB, undertook quantitative easing policies for most of the past decade, which added to the downward pressure on long-term interest rates. When interest rates fall, bond prices rise, boosting returns on bond funds and other funds that have substantial holdings of bonds, such as some mixed/other funds.

Figure 1.5

Worldwide Net Sales of Regulated Open-End Long-Term Funds Fell Across All Asset Classes in 2018

Billions of US dollars by type of fund, annual1

   

1 Data for Ireland are not available in 2009, are included in mixed/other in 2010, and are distributed by type of fund from 2011 to 2018.

2 Mixed/other funds include balanced/mixed funds, guaranteed/protected funds, real estate funds, and other funds.

Note: Regulated open-end funds include mutual funds, ETFs, and institutional funds. Long-term funds include equity funds, mixed/other funds, and bond funds, but exclude money market funds.

Source: International Investment Funds Association

Worldwide Net Sales of Money Market Funds

Worldwide net sales of money market funds totaled $78 billion in 2018, a decrease from the $598 billion in net sales in 2017 (Figure 1.6), driven mostly by a sharp decrease in net sales in the Asia-Pacific region. Money market funds in the Asia Pacific region had net outflows of $99 billion in 2018 after experiencing $404 billion in net inflows in 2017.

Figure 1.6

Worldwide Net Sales of Money Market Funds

Billions of US dollars by region, annual

   

* Data for Ireland are not available in 2009.

Source: International Investment Funds Association

Investor demand for Chinese money market funds accounts for much of the net sales of money market funds in the Asia-Pacific region. Eighty percent of Asia-Pacific’s total net assets in money market funds were held in funds domiciled in China at year-end 2018. Demand for money market funds in China weakened substantially in 2018 as the spread between money market fund yields and those on bank savings deposits narrowed from 3.1 percent at year-end 2017 to 1.9 percent at year-end 2018 (Figure 1.7). In 2018, money market funds in the Asia-Pacific region saw net outflows of $99 billion compared with net inflows of $404 billion in 2017.

Figure 1.7

Net Sales of Money Market Funds in the Asia-Pacific Region Are Related to Chinese Money Market Fund Interest Rate Spreads

 

   

* The interest rate spread is the difference between the annualized asset-weighted average quarterly return on money market funds and the 3-month benchmark deposit rate.

Sources: International Investment Funds Association and the Wind database

In Europe, money market funds saw outflows of $23 billion in 2018 after three consecutive years of inflows (Figure 1.6). Europe, like the United States, has adopted reforms intended to increase the resilience of money market funds to financial shocks. US reforms, which were implemented in October 2016, had significant effects on the composition of net new cash flow to US money market funds in 2016. Although EU reforms for money market funds were adopted in 2017, existing funds are required to be in full compliance by March 2019. The deadline to comply with the 2017 regulatory changes may have caused net sales to fall significantly in France, Ireland, and Luxembourg—the three largest money market fund domiciles in Europe.

In the United States, money market funds had net sales of $182 billion in 2018, up from $117 billion in 2017 (Figure 1.6). Recently, as the Federal Reserve has tightened monetary policy, US money market funds have become more attractive relative to other cash management investments. In particular, the spread between money market fund yields and those on money market deposit accounts has widened by more than 170 basis points since year-end 2016 (Figure 3.18). In addition, the flattening of the US Treasury yield curve in 2018 may have spurred investors to use money market funds and short-term bond funds in an effort to minimize their interest rate risk. Prior to 2017, US money market funds were negatively affected by near-zero US short-term interest rates.

China’s Money Market Fund Industry

The Chinese regulated fund industry is at a relatively early stage of its development. Prior to the 1980s, Chinese household assets consisted mainly of bank deposits, as most assets were owned by the state. China’s financial market reforms started in the 1980s with the reintroduction of the government bond market and reopening of the stock market in the early 1990s. Despite being a relative newcomer, China’s money market fund industry, with total net assets of $1.1 trillion at year-end 2018, is the third largest in the world, behind the United States and Europe. Net assets in Chinese money market funds have increased 800 percent in the past five years, and their share of all Chinese regulated fund net assets has increased to 60 percent at year-end 2018 from 26 percent at year-end 2013.*

The rapid growth in Chinese money market assets is remarkable considering their relatively recent introduction as an investment product. The first money market fund in China was offered in 2004 after the China Securities Regulatory Commission (CSRC) published its first guidelines for money market funds. In 2015, the CSRC announced additional regulations that aimed to more closely align with the blueprint in more-developed markets. Nevertheless, there were significant differences between money market funds domiciled in China and money market funds domiciled in other jurisdictions, such as parameters on weighted average maturity, minimum daily liquidity requirements, eligible instruments, and ability to use leverage for investment purposes. In 2017 and 2018, to address some of these differences, the CSRC announced tighter regulations limiting leverage and daily redemptions, as well as limiting credit risk by reducing money market funds’ ability to invest in lower-quality debt instruments. These changes narrowed the differences between Chinese money market funds and those offered in more-developed markets.

Money market funds offer Chinese households a lower-risk, income-oriented investment that can compete with bank deposits. Retail investors, who hold more than 55 percent of Chinese money market fund assets,* have found that money market funds are an attractive substitute for bank deposits. Until April 2018, bank deposit rates in China were effectively capped, and the yield on money market funds was considerably higher than the maximum rate set by the People’s Bank of China (PBOC). Much like in the United States, net sales of money market funds increase as the yield spread between money market funds and bank deposits widens (Figure 1.7). Between 2014 and 2017, the yield spread was as wide as 320 basis points, helping net assets of Chinese money market funds grow by $678 billion over this period.* Although the PBOC relaxed guidance for bank deposit rates in 2018, deposit rates did not rise rapidly, as the PBOC eased monetary conditions at the same time. As a result, money market fund yields fell due to looser monetary policy and the yield spread of money market funds to deposit rates narrowed considerably. This likely led to reduced net sales of money market funds in 2018.

* Calculated using the Wind database.

Number of Worldwide Regulated Funds

At year-end 2018, fund providers across the globe offered 118,978 regulated funds for sale, up 4.7 percent from 2017 and a 43.4 percent increase since 2009 (Figure 1.1). In 2018, nearly half (47 percent) of these funds were domiciled in Europe (Figure 1.8). The Asia-Pacific region accounted for 28 percent of regulated funds, the United States for 8 percent, and the rest of the world for 17 percent. Forty-six percent of regulated funds were mixed/other funds. Equity funds accounted for 34 percent of regulated funds, bond funds were 18 percent, and money market funds were 2 percent.

Figure 1.8

Number of Worldwide Regulated Open-End Funds

Percentage of funds by region or type of fund, year-end 2018

   

* Mixed/other funds include balanced/mixed funds, guaranteed/protected funds, real estate funds, and other funds.

Note: Regulated open-end funds include mutual funds, ETFs, and institutional funds.

Source: International Investment Funds Association

Total Net Assets of Worldwide Regulated Funds by Region

The total net assets of regulated funds vary widely by geographic region. These differences reflect preferences for specific asset classes, differences in risk tolerances, relative development of capital markets, demographics, macroeconomic developments, and other factors.

The United States and Europe have the world’s largest regulated fund markets. In 2018, the United States maintained its position as the world’s largest fund market, with $21.1 trillion (45 percent) of the world’s $46.7 trillion in regulated fund total net assets (Figure 1.9). Funds domiciled in Europe held $16.5 trillion, or 35 percent of the worldwide total. The Asia-Pacific region had $6.4 trillion in total net assets, and $2.7 trillion was in funds domiciled in the rest of the world.

Figure 1.9

Total Net Assets of Worldwide Regulated Open-End Funds

Trillions of US dollars by region, year-end

   

Note: Regulated open-end funds include mutual funds, ETFs, and institutional funds.

Source: International Investment Funds Association

United States. The relatively large size of the US market stems from a number of factors. One factor is the longevity of US-regulated funds, which have been available in the United States for around 100 years. For example, mutual funds have been available to US investors since the 1920s. Another factor is the strong regulatory framework for securities markets and regulated funds in the United States that was established in the wake of the stock market crash of 1929 and the Great Depression—most notably, the Securities Act of 1933 and the Investment Company Act of 1940. Renewed investor confidence in securities markets and regulated funds led to steady growth in US-regulated funds’ assets.

In recent decades, US demand has been fueled by the availability of regulated funds as investment options in tax-advantaged accounts (for example, 401(k) plans), and by a wide and growing availability of types of funds that help investors meet their investment goals (for example, ETFs and target date funds). Also, assets of regulated funds in the past decade have been boosted by stock market appreciation and by reinvestment of dividends back into funds.

Europe. Europe’s regulated fund market has grown briskly over the past few decades. One important factor helping to drive this growth is the UCITS regulatory framework, which includes passporting—the ability for funds domiciled in one EU country to be offered for sale and purchased by investors in another EU country. Additionally, many countries outside of Europe, such as in the Asia-Pacific region, allow UCITS to be offered for sale to their citizens. The pooling of assets from investors in a range of countries allows for economies of scale that help to lower the costs of funds to individual investors. The UCITS framework further promotes asset pooling across countries by allowing an individual fund to offer share classes that are denominated in a range of different currencies (for example, euros, US dollars, British pounds sterling) and adaptable to tax structures that differ across jurisdictions.

Asia-Pacific. Although the Asia-Pacific region had only 14 percent ($6.4 trillion) of the worldwide total net assets of regulated funds at year-end 2018, the market has been growing rapidly (Figure 1.8). Moreover, given the size of the population and the rapidly increasing economic development and wealth in many countries, there is potential for growth in the region’s regulated fund market.

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When Fund Investment Is Strong, Capital Markets Get Stronger

Factors Influencing Demand for Worldwide Regulated Funds

Research indicates that the size of the regulated fund market in a particular country or region depends on a broad range of factors, including:

  • access to well-developed capital markets
  • household demand for well-diversified investments
  • strong and appropriate regulation of funds and financial markets
  • availability of distribution structures that facilitate access to regulated funds
  • regulated fund returns and costs relative to other available investment products
  • demographics
  • high or improving levels of economic development

Well-Developed Capital Markets

Demand for regulated funds is positively associated with the level of equity capital market development in a country. Residents of countries with more highly developed equity capital markets, such as the United States and those in the European Union, tend to hold a larger share of their household financial wealth in regulated funds.
Figure 1.10 illustrates the relationship between equity capital market development and the size of the regulated fund market in a given country. The horizontal axis provides a measure of a country’s equity capital market development (a country’s stock market capitalization relative to its gross domestic product [GDP]). The vertical axis plots a measure of the size of the regulated fund market in a given country, measured by the total net assets in regulated long-term funds relative to GDP.

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Trends in the European Investment Fund Industry

Figure 1.10

Countries with More-Developed Equity Capital Markets Tend to Have More-Developed Fund Industries

Percent, 2017

   

1 Regulated open-end funds include mutual funds, ETFs, and institutional funds. Long-term funds include equity funds, mixed/other funds (balanced/mixed, guaranteed/protected, real estate, and other funds), and bond funds, but exclude money market funds.

2 Total net asset data for Russia are as of 2017:Q3.

Source: Investment Company Institute tabulations of data from the International Investment Funds Association, World Bank, and World Federation of Exchanges

Generally speaking, as stock market capitalization rises relative to GDP, so do total net assets in regulated funds. Countries with more-developed equity capital markets—such as the United States, the United Kingdom, the Netherlands, and Switzerland—tend to have a higher ratio of regulated long-term fund assets to GDP. For example, the Netherlands’ stock market capitalization exceeds its GDP (133 percent, on the horizontal axis), indicating a highly developed equity capital market, while total net assets in regulated long-term funds are slightly above its GDP (at 112 percent on the vertical axis), indicating a more-developed fund industry. In contrast, countries with less-developed equity capital markets (lower ratios of stock market capitalization to GDP), such as Poland, Russia, and China, tend to have fewer total net assets in regulated long-term funds relative to GDP.

Other Factors Influencing Demand

Other factors also influence the demand for regulated funds, and therefore, the size of the regulated fund market. For example, Japan’s stock market capitalization is 128 percent of GDP, not much lower than the Netherlands (Figure 1.10). Nevertheless, Japan has substantially less net assets in regulated long-term funds as a proportion of its GDP (35 percent). This outcome reflects Japanese households’ tendency to save in bank deposits rather than invest in regulated funds.

Japan is an example of the tendency in some countries—especially those where banks have historically dominated the financial landscape—for households to hold more of their financial assets in bank products, and less in regulated funds (Figure 1.11). Households in Japan, China, and Russia hold more than half of their financial assets in bank deposits and currency and very little in regulated funds. In the United States, banks compete with capital market instruments for households’ financial assets; as a result, households hold a relatively small fraction of their assets in bank deposits (13 percent) compared with 21 percent in regulated funds. Europe is an intermediate case among industrialized nations, with 30 percent of households’ financial wealth in bank deposits and 8 percent in regulated funds. Differences in public policy and tax regimes across countries also likely have contributed to the dispersion of deposits and regulated funds held by households.

Figure 1.11

US Households Have More of Their Wealth in Regulated Funds; Chinese Households Have a Lower Share

Percentage of households’ financial wealth,1 selected dates2

   

1 Households’ financial wealth includes households and nonprofit institutions serving households; data for China exclude nonprofit institutions serving households.

2 Data for the United States and Japan are as of 2018:Q4; data for the European Union and the Republic of Korea are as of 2018:Q3; data for Russia are as of 2017:Q3; and data for China are estimated as of 2014:Q4.

3 For the United States and Russia, regulated funds include total net assets held by mutual funds and ETFs. For the European Union, Japan, the Republic of Korea, and China, regulated funds include investment fund shares as defined by their respective systems of national accounts.

Source: Investment Company Institute tabulations of data from the International Investment Funds Association, Federal Reserve Board, Eurostat, Bank of Korea, Bank of Japan, Chinese Academy of Social Sciences, and Central Bank of the Russian Federation

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Regulated Funds, Emerging Markets, and Financial Stability

Size of Worldwide Regulated Funds in Global Capital Markets

Regulated funds are a growing source of capital for world financial markets, helping to finance businesses, governments, and household activities. As of 2018, worldwide capital markets, as measured by the value of equity and debt securities outstanding, totaled $187 trillion (Figure 1.12). Total net assets of regulated funds constituted 25 percent ($46.7 trillion) of the $187 trillion in worldwide capital markets.

The share of worldwide capital markets held by regulated funds has grown over the past eight years. In 2010, worldwide regulated funds accounted for 20 percent of worldwide capital markets, rising to 25 percent in 2018. Despite this increase, regulated funds still accounted for a relatively small share of worldwide capital markets. The remaining 75 percent of worldwide capital markets are held by a wide range of investors, such as central banks, sovereign wealth funds, defined benefit pension plans, banks, insurance companies, hedge funds, broker-dealers, and households’ direct holdings of stocks and bonds.

Figure 1.12

Worldwide Regulated Open-End Fund Share of Worldwide Equity and Debt Markets

Trillions of US dollars, year-end

   

* Data for worldwide debt markets are as of September 30, 2018.

Note: Regulated open-end funds include mutual funds, ETFs, and institutional funds.

Source: Investment Company Institute tabulations of data from the International Investment Funds Association, World Federation of Exchanges, and Bank for International Settlements