BACK TO TOP

60th edition

INVESTMENT COMPANY FACT BOOK

A Review of Trends and Activities in the Investment Company Industry

CHAPTER TWO

US-Registered Investment Companies

Registered investment companies are an important segment of the asset management industry in the United States. US-registered investment companies play a major role in the US economy and financial markets, and a growing role in global financial markets. These funds managed more than $26 trillion in total net assets at year-end 2019, largely on behalf of more than 100 million US retail investors. The industry has experienced robust growth over the past quarter century from asset appreciation and strong demand from households due to rising household wealth, the aging US population, and the evolution of employer-based retirement systems. US funds supplied investment capital in securities markets around the world and were significant investors in the US stock and municipal securities markets.

IN THIS CHAPTER

Number of Investment Companies in 2019

The total number of investment companies* offered by US financial services companies has increased overall since 2005 (the recent low point) but remains well below the year-end 2000 peak. In 2019, the overall number of investment companies fell by 2.5 percent (Figure 2.1), with each type, except exchange-traded funds (ETFs), contributing to the decline. The number of mutual funds decreased from 9,616 at year-end 2018 to 9,414 at year-end 2019; the number of closed-end funds edged down to 500 at year-end 2019, the lowest level since the early 2000s; and the number of UITs fell from 4,917 at year-end 2018 to 4,571 at year-end 2019. These declines contrast with the continued growth in the number of ETFs, which increased during 2019 by 5.7 percent to 2,175 at year-end 2019.

 

* The terms investment companies and US investment companies are used at times throughout this book in place of US-registered investment companies. US-registered investment companies are open-end mutual funds, closed-end funds, exchange-traded funds, and unit investment trusts.

FIGURE 2.1

Number of Investment Companies by Type
Year-end
 Mutual funds1Closed-end fundsETFs2UITsTotal
1999 7,970 512 30 10,414 18,926
2000 8,349 482 80 10,072 18,983
2001 8,480 490 102 9,295 18,367
2002 8,490 543 113 8,303 17,449
2003 8,406 581 119 7,233 16,339
2004 8,411 618 152 6,499 15,680
2005 8,439 635 204 6,019 15,297
2006 8,704 646 359 5,907 15,616
2007 8,723 664 629 6,030 16,046
2008 8,860 644 743 5,984 16,231
2009 8,594 629 820 6,049 16,092
2010 8,523 626 950 5,971 16,070
2011 8,662 634 1,166 6,043 16,505
2012 8,742 604 1,239 5,787 16,372
2013 8,970 601 1,332 5,552 16,455
2014 9,256 570 1,451 5,381 16,658
2015 9,515 561 1,644 5,188 16,908
2016 9,505 534 1,774 5,100 16,913
2017 9,354 532 1,900 5,035 16,821
2018 9,616 503 2,057 4,917 17,093
2019 9,414 500 2,175 4,571 16,660

Download the Excel file of this data.

1 Data include mutual funds that invest primarily in other mutual funds.

2 ETF data prior to 2001 were provided by Strategic Insight Simfund. ETF data include ETFs that invest primarily in other ETFs.

Sources: Investment Company Institute and Strategic Insight Simfund

Investment Company Assets in 2019

Total net assets in US-registered investment companies rose by $4.6 trillion in 2019, to a year-end level of $26.0 trillion (Figure 2.2). With $25.7 trillion in assets, mutual funds and ETFs accounted for the vast majority.

FIGURE 2.2

Investment Company Total Net Assets by Type
Billions of dollars, year-end
 Mutual funds1Closed-end fundsETFs2UITsTotal3
1999 6,834 157 34 92 7,116
2000 6,956 150 66 74 7,245
2001 6,969 145 83 49 7,246
2002 6,380 161 102 36 6,680
2003 7,399 216 151 36 7,801
2004 8,093 255 228 37 8,614
2005 8,889 276 301 41 9,507
2006 10,395 299 423 50 11,167
2007 11,995 316 608 53 12,973
2008 9,619 185 531 29 10,364
2009 11,109 224 777 38 12,149
2010 11,831 239 992 51 13,113
2011 11,630 244 1,048 60 12,982
2012 13,054 265 1,337 72 14,728
2013 15,049 282 1,675 87 17,092
2014 15,877 292 1,975 101 18,244
2015 15,658 263 2,101 94 18,116
2016 16,353 265 2,525 85 19,227
2017 18,765 277 3,401 85 22,528
2018 17,710 251 3,371 70 21,402
2019 21,292 278 4,396 79 26,044

Download the Excel file of this data.

1 Closed-end fund data include preferred share classes.

2 ETF data prior to 2001 were provided by Strategic Insight Simfund.

3 Total investment company assets include mutual fund holdings of closed-end funds and ETFs.

Sources: Investment Company Institute and Strategic Insight Simfund

The majority of US mutual fund and ETF net assets at year-end 2019 were in long-term funds, with equity funds constituting 58 percent (Figure 2.3). Domestic equity funds (those that invest primarily in shares of US corporations) held 43 percent of net assets; world equity funds (those that invest significantly in shares of non-US corporations) accounted for 15 percent. Bond funds held 21 percent of US mutual fund and ETF net assets. Money market funds, hybrid funds, and other funds—such as those that invest primarily in commodities—held the remainder (21 percent).

Mutual funds recorded $454 billion in net inflows in 2019 (Figure 3.4). Money market funds received $553 billion of net inflows, while long-term mutual funds saw net outflows of $99 billion. Mutual fund shareholders reinvested $340 billion in income dividends and $343 billion in capital gains distributions that mutual funds paid out during the year. Investors continued to show strong demand for ETFs with net share issuance (which includes reinvested dividends) totaling $323 billion in 2019 (Figure 4.8). Unit investment trusts (UITs) experienced net new deposits of $48 billion, about the same as the previous year, and closed-end funds issued a net $5.9 billion in new shares (Figure 5.3).

FIGURE 2.3

The Majority of US Mutual Fund and ETF Total Net Assets Were in Equity Funds
Percentage of total net assets, year-end 2019
Figure 2.3 The Majority of US Mutual Fund and ETF Total Net Assets Were in Equity Funds

Download the Excel file of this data.

* This category includes ETFs—both registered and not registered under the Investment Company Act of 1940—that invest primarily in commodities, currencies, and futures.

Americans’ Continued Reliance on Investment Companies

Households make up the largest group of investors in funds, and registered investment companies managed 23 percent of household financial assets at year-end 2019 (Figure 2.4).

FIGURE 2.4

Share of Household Financial Assets Held in Investment Companies
Percentage of household financial assets, year-end
Share of Household Financial Assets Held in Investment Companies

Download the Excel file of this data.

Note: Household financial assets held in registered investment companies include household holdings of mutual funds, ETFs, closed-end funds, and UITs. Mutual funds held in employer-sponsored DC plans, IRAs, and variable annuities are included.

Sources: Investment Company Institute and Federal Reserve Board

The growth of individual retirement accounts (IRAs) and defined contribution (DC) plans, particularly 401(k) plans, explains some of the increased household reliance on investment companies in the past three decades. IRAs made up 12 percent of household financial assets at year-end 2019, up from 4 percent in 1989, while DC plans have risen from 5 percent of household financial assets to 9 percent over the same period (with 401(k) plans accounting for 6 percent of household financial assets at year-end 2019).

Mutual funds made up a significant portion of DC plan assets (58 percent) and IRA assets (44 percent) at year-end 2019 (Figure 2.5). In addition, the share of DC plan assets held in mutual funds has grown over the past two decades, from 42 percent at year-end 1999 to 58 percent at year-end 2019. Mutual funds also managed $1.3 trillion in variable annuities outside retirement accounts, as well as $10.0 trillion of other assets outside retirement accounts.

FIGURE 2.5

Mutual Funds in Household Retirement Accounts
Percentage of retirement assets in mutual funds by type of retirement vehicle
Figure 2.5 Mutual Funds in Household Retirement Accounts

Download the Excel file of this data.

* This category includes private-sector employer-sponsored DC plans—such as 401(k) plans—403(b) plans, 457 plans, and the Federal Employees Retirement System (FERS) Thrift Savings Plan (TSP).

Sources: Investment Company Institute, Federal Reserve Board, Department of Labor, National Association of Government Defined Contribution Administrators, American Council of Life Insurers, and Internal Revenue Service Statistics of Income Division. See Investment Company Institute, “The US Retirement Market, Fourth Quarter 2019.”

Businesses and other institutional investors also rely on funds. For instance, institutions can use money market funds to manage some of their cash and other short-term assets. At year‑end 2019, nonfinancial businesses held $691 billion (18 percent) of their short-term assets in money market funds (Figure 2.6). Institutional investors also have contributed to growing demand for ETFs. Investment managers——including mutual funds, pension funds, hedge funds, and insurance companies—use ETFs to invest in markets, to manage liquidity and investor flows, or to hedge their exposures.

FIGURE 2.6

Money Market Funds Managed 18 Percent of US Nonfinancial Businesses’ Short‑Term Assets in 2019
Percentage of short-term assets, year-end
Figure 2.6 Money Market Funds Managed 18 Percent of US Nonfinancial Businesses’ Short‑Term Assets in 2019

Download the Excel file of this data.

Note: US nonfinancial businesses’ short-term assets consist of foreign deposits, checkable deposits and currency, time and savings deposits, money market funds, repurchase agreements, and commercial paper.

Sources: Investment Company Institute and Federal Reserve Board

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 20 years. In recent years, they have held a fairly stable share of the securities outstanding across a variety of asset classes, with mutual funds accounting for the majority of the holdings. At year-end 2019, investment companies held 32 percent of US‑issued equities outstanding, little changed from 31 percent at year-end 2016 (Figure 2.7). Investment companies held 21 percent of bonds issued by US corporations and foreign bonds held by US residents at year-end 2019, only a small increase when compared with year-end 2016.

Investment companies held 14 percent of the US Treasury and government agency securities outstanding at year-end 2019, a share that has remained fairly stable over the past few years (Figure 2.7). Also, investment companies have been one of the largest group of investors in the US municipal securities market, holding 29 percent of the securities outstanding at year‑end 2019.

Historically, mutual funds had been one of the largest investors in the US commercial paper market—an important source of short-term funding for major corporations around the world. Mutual funds’ demand for commercial paper arose primarily from prime money market funds. But the 2014 SEC rule amendments required the money market fund industry to make substantial changes by October 2016. Consequently, prime money market funds sharply reduced their holdings of commercial paper—by year-end 2016, the share of the commercial paper market held by mutual funds was 19 percent, down from 46 percent at year-end 2014. By year-end 2017, the share of the commercial paper market held by mutual funds increased to 25 percent and from then on remained largely unchanged through year-end 2019 (Figure 2.7).

FIGURE 2.7

Investment Companies Channel Investment to Stock, Bond, and Money Markets
Percentage of total market securities held by investment companies, year-end
Figure 2.7  Investment Companies Channel Investment to Stock, Bond, and Money Markets

Download the Excel file of this data.

1 The percentage of total US Treasury and government agency securities held by other registered investment companies was less than 0.5 percent in 2016 and 2017.

2 Other registered investment companies held no commercial paper.

Sources: Investment Company Institute, Federal Reserve Board, and World Federation of Exchanges

Growth in Index Funds

Index funds are designed to track the performance of a market index. To do this, the fund manager purchases all the securities in the index or a representative sample of them—in the same proportions as the index—so that the performance of the fund tracks the value of the index. This approach to portfolio management is the primary reason that index funds—which can be formed as either mutual funds or ETFs—tend to have below-average expense ratios.

Index mutual funds were first offered in the 1970s, followed by index ETFs in the 1990s. By year-end 2019, total net assets in these funds had grown to $8.5 trillion (Figure 2.8). Along with this growth, index funds have become a larger share of overall fund assets. At year‑end 2019, index mutual funds and index ETFs together accounted for 39 percent of assets in long-term funds, up from 18 percent at year-end 2009. Nevertheless, actively managed funds accounted for the majority of fund assets (61 percent) at year-end 2019.

FIGURE 2.8

Index Funds Have Grown as a Share of the Fund Market
Percentage of total net assets, year-end
Figure 2.8 Index Funds Have Grown as a Share of the Fund Market

Download the Excel file of this data.

* This category includes a small number of actively managed ETFs.

Note: Data for ETFs exclude non–1940 Act ETFs. Data for mutual funds exclude money market funds.

Growth in index funds over the past decade has been concentrated in funds that invest in equities. During this period, 42 percent of inflows into index funds went to domestic equity funds and 27 percent to world equity index funds. In 2019, the share of the total flow into domestic and world equity index funds fell to 35 percent and 13 percent, respectively, while bond index funds received 51 percent of the total flow. Even with these inflows, bond index funds accounted for only 18 percent of index fund assets at year-end 2019.

Despite their significant growth over the past decade, index domestic equity mutual funds and ETFs remain relatively small investors in the US stock markets, holding only 15 percent of the value of US stocks at year-end 2019 (Figure 2.9). Actively managed domestic equity mutual funds and active ETFs held another 15 percent, while other investors—including hedge funds, pension funds, life insurance companies, and individuals—held the remaining 70 percent.

FIGURE 2.9

Index Fund Share of US Stock Market Is Small
Percentage of US stock market capitalization, year-end
Figure 2.9 Index Fund Share of US Stock Market Is Small

Download the Excel file of this data.

Note: In 2009, data for index ETFs include a small number of actively managed ETFs.

Sources: Investment Company Institute and World Federation of Exchanges

Unit Investment Trusts

Unit investment trusts (UITs) are registered investment companies with characteristics of both mutual funds and closed-end funds. Like mutual funds, UITs issue redeemable shares (called units), and like closed-end funds, they typically issue a specific, fixed number of shares. But unlike either mutual funds or closed-end funds, UITs have a preset termination date based on the portfolio’s investments and the UIT’s investment goals. UITs investing in long-term bonds might have a preset termination date of 20 to 30 years, depending on the maturity of the bonds they hold. UITs investing in stocks might seek to capture capital appreciation in a few years or less. When a UIT terminates, proceeds from the securities are paid to unit holders or, at a unit holder’s election, reinvested in another trust.

UITs fall into two main categories: bond trusts and equity trusts. Bond trusts are either taxable or tax-free; equity trusts are either domestic or international/global. The first UIT, introduced in 1961, held tax-free bonds, and historically, most UIT total net assets were invested in bonds. Equity UITs, however, have grown in popularity over the past two decades. Assets in equity UITs have exceeded the combined assets of taxable and tax-free bond UITs in recent years and constituted 88 percent of the assets in UITs at year-end 2019 (Figure 2.10). The number of trusts outstanding has been decreasing as sponsors created fewer new trusts and existing trusts reached their preset termination dates.

Federal law requires that UITs have a largely fixed portfolio—one that is not actively managed or traded. Once the trust’s portfolio has been selected, its composition may change only in very limited circumstances. Most UITs hold a diversified portfolio, described in detail in the prospectus, with securities professionally selected to meet a stated investment goal, such as growth, income, or capital appreciation.

Investors can obtain UIT price quotes from brokerage or investment firms and investment company websites, and some, but not all, UITs list their prices on Nasdaq’s Mutual Fund Quotation Service. Some broker-dealers offer their own trusts or sell trusts offered by nationally recognized independent sponsors. Units of these trusts can be bought through their registered representatives. Units can also be bought from the representatives of smaller investment firms that sell trusts sponsored by third-party firms.

Though a fixed number of units of a UIT are sold in a public offering, a trust sponsor is likely to maintain a secondary market, in which investors can sell their units back to the sponsor and other investors can buy those units. Even absent a secondary market, UITs are required by law to redeem outstanding units at their net asset value (NAV), which is based on the underlying securities’ current market value.

FIGURE 2.10

Total Net Assets and Number of UITs
Year-end
Figure 2.10 Total Net Assets and Number of UITs

Download the Excel file of this data.

Fund Complexes and Sponsors

A variety of financial services companies offer registered funds in the United States. At year‑end 2019, 81 percent of investment company complexes were independent fund advisers (Figure 2.11) managing 72 percent of investment company assets. Other types of investment company complexes in the US market include non-US fund advisers, insurance companies, banks, thrifts, and brokerage firms.

FIGURE 2.11

More Than 80 Percent of Fund Complexes Were Independent Fund Advisers
Percentage of investment company complexes by type of intermediary, year-end 2019
Figure 2.11 More Than 80 Percent of Fund Complexes Were Independent Fund Advisers

Download the Excel file of this data.

In 2019, 826 fund sponsors from around the world competed in the US market to provide investment management services to fund investors (Figure 2.12). The decline in the number of fund sponsors since year-end 2015 may be due to a variety of business decisions, including larger fund sponsors acquiring smaller ones, fund sponsors liquidating funds and leaving the business, or larger sponsors selling their advisory businesses. Prior to 2015, the number of fund sponsors had been increasing as the economy and financial markets recovered from the 2007–2009 financial crisis. Overall, from 2010 through 2019, 630 sponsors entered the market while 488 left, for a net increase of 142.

FIGURE 2.12

Number of Fund Sponsors
Figure 2.12 Number of Fund Sponsors

Download the Excel file of this data.

Many recent entrants to the fund industry have adopted solutions in which the fund’s sponsor arranges for a third party to provide certain services (e.g., audit, trustee, some legal) through a turnkey setup. This allows the sponsor to focus more on managing portfolios and gathering assets. Through an arrangement known as a series trust, the third party provides services to a number of independent fund sponsors under a single complex that serves as an “umbrella.” This can be cost-efficient because the costs of operating funds are spread across the combined assets of a number of funds in the series trust.

The increased availability of other investment products has led to changes in how investors are allocating their portfolios. The percentage of mutual fund companies retaining assets and attracting net new investments generally has been lower in recent years. In 2019, 32 percent of fund complexes saw inflows to their long-term mutual funds, and 74 percent of ETF sponsors had positive net share issuance (Figure 2.13).

FIGURE 2.13

Positive Net New Cash Flow to Long-Term Mutual Funds and Positive Net Share Issuance of ETFs
Percentage of fund complexes
Figure 2.13 Positive Net New Cash Flow to Long-Term Mutual Funds and Positive Net Share Issuance of ETFs

Download the Excel file of this data.

* Data for ETF net share issuance include reinvested dividends.

In the past decade, the percentage of fund complexes attracting new money into their long‑term mutual funds has decreased, while the concentration of mutual fund and ETF assets managed by the largest fund complexes has increased. The share of assets managed by the five largest firms rose from 35 percent at year-end 2005 to 53 percent at year-end 2019, and the share managed by the 10 largest firms increased from 46 percent to 64 percent (Figure 2.14). Some of the increase in market share occurred at the expense of the middle tier of firms—those ranked from 11 to 25—whose market share fell from 21 percent in 2005 to 16 percent in 2019.

FIGURE 2.14

Share of Mutual Fund and ETF Assets at the Largest Fund Complexes
Percentage of total net assets of mutual funds and ETFs, year-end
 2005201020152016201720182019
Largest 5 complexes 35 42 45 47 50 51 53
Largest 10 complexes 46 55 56 58 60 61 64
Largest 25 complexes 67 74 75 76 77 79 80

Download the Excel file of this data.

Note: Data include only mutual funds and ETFs registered under the Investment Company Act of 1940.

At least two factors have contributed to the rise in industry concentration. First, the increased concentration reflects the growing popularity of index funds—the 10 largest fund complexes manage most of the assets in index mutual funds. Actively managed domestic equity mutual funds had outflows in every year after 2005, while domestic equity index mutual funds had inflows and domestic equity index ETFs had positive net share issuance in each of these years. Second, strong inflows over the past decade to bond mutual funds (Figure 3.10), which are fewer in number and are less likely to be offered by smaller fund sponsors, helped boost the share of assets managed by large fund complexes.

Macroeconomic conditions and competitive dynamics can affect the supply of funds offered for sale. Fund sponsors create new funds to meet investor demand and merge or liquidate those that do not attract sufficient investor interest. A total of 530 mutual funds and ETFs opened in 2019, down from 603 in 2018, and well below the 2009–2018 annual average of 770 (Figure 2.15). The number of mutual fund and ETF mergers and liquidations, however, increased from 594 in 2018 to 612 in 2019.

FIGURE 2.15

Number of Mutual Funds and ETFs Entering and Leaving the Industry
Figure 2.15 Number of Mutual Funds and ETFs Entering and Leaving the Industry

Download the Excel file of this data.

Note: Data include mutual funds that do not report statistical information to the Investment Company Institute and mutual funds that invest primarily in other mutual funds. ETF data include ETFs that invest primarily in other ETFs.

Fund Proxy Voting Reflects Heterogenous Industry

Investment companies are major shareholders of public companies. At year-end 2019, they held approximately 32 percent of US-issued equities outstanding, a number that has changed little over the past several years (Figure 2.7). Like any company shareholder, they are entitled to vote on proxy proposals put forth by a company’s board or its shareholders. Funds normally delegate proxy voting responsibilities to fund advisers who have a fiduciary duty to vote in the best interest of fund shareholders.

During proxy year 2017 (the 12 months that ended June 30, 2017), shareholders of the 3,000 largest public companies considered 25,045 proposals—98 percent (24,580) of which were proposed by management and 2 percent (465) submitted by shareholders. Investment companies cast more than 7.6 million votes on these proposals, with each investment company voting, on average, on about 1,500 separate proxy proposals. Because management proposals account for the lion’s share of proxy proposals, 70.7 percent of funds’ votes were cast on management proposals related to uncontested elections of directors, with an additional 13.2 percent and 9.3 percent related to management proposals on management compensation and ratification of audit firms, respectively.

Investment companies voted in favor of management proposals 94.0 percent of the time. The strong support for management proxy proposals likely reflects that the vast majority of them are not controversial—81 percent of management proposals were uncontested elections of directors and ratifications of the audit firms that companies selected.

During the same 2017 proxy year, 4.1 percent of the votes that investment companies cast were on the 465 shareholder proxy proposals. Among the shareholder proposals, about half were related to social and environmental matters; a quarter to board structures and elections; and the remainder to shareholder rights and antitakeover issues, compensation matters, and miscellaneous issues. Shareholder proxy proposals received support by investment companies, on average, 34.6 percent of the time.

Investment companies’ support for shareholder proposals varied considerably depending on a range of factors. These factors include, among other things, the details of the proposal, the issuer to whom the proposal applied, and the backdrop and context in which the proposal was set. Investment companies tend to offer more support for shareholder proxy proposals that are likely to increase their rights as company shareholders. For example, investment companies voted in favor of shareholder proxy proposals related to shareholder rights or antitakeover measures nearly 50 percent of the time in the proxy year 2017.

Investment companies, on average, have provided more limited support for social and environmental proposals. In proxy year 2017, these proposals received a favorable vote 25.2 percent of the time. Average levels of support can mask important nuances of how investment companies vote on such issues. These kinds of proposals, though classified generally as “social and environmental,” cover a wide array of issues, ranging from the environment to diversity in hiring practices to human rights matters to issues about the safety of a company’s business operations. Also, context is important. For example, suppose virtually identical proposals are directed to two different companies. An investment company might view the proposal as appropriate for the first company, but inappropriate for the second because the latter has already taken steps to address the proposal’s concerns.

In short, there is no one-size-fits-all description of how funds vote, other than to say investment companies seek to vote in the interests of their shareholders and consistent with their investment objectives and policies.

For more information about investment company proxy voting, see “Proxy Voting by Registered Investment Companies, 2017,” ICI Research Perspective.

Environmental, Social, and Governance Investing

Perhaps one of the most significant recent global trends is the increasing attention being paid to environmental, social, and governance (ESG) matters. These matters vary widely, but are generally considered to include topics related to climate change, diversity and inclusion, human rights, the rights of company shareholders, and companies’ compensation structures. The fund industry is responding to increased investor interest in ESG investing by, among other things, creating new funds that explicitly tailor their investments to specific ESG criteria.

Funds consider ESG factors to varying degrees. For decades, some funds have incorporated ESG factors into their investment processes as a way to enhance fund performance, manage investment risks, and identify emerging investment risks and opportunities, much as they would consider macroeconomic or interest rate risks, idiosyncratic business risks, and investment exposures to particular companies, industries, or geographical regions. Because these funds “integrate” ESG factors into the investment process, this type of investing is known as ESG integration.

Funds’ use of ESG integration is distinct from funds’ use of “sustainable investing strategies.” Sustainable investing is a strategy that uses ESG analysis as a significant part of the fund’s investment thesis to seek to pursue investment returns and ESG-related outcomes.

Approaches to ESG Investing

The investment strategies funds use vary, as do the ways they describe their approaches. This section describes some of the most common approaches.

  • Exclusionary investing: Investment strategies that exclude, or “screen out,” investments in particular industries or companies that do not meet certain ESG criteria. This may also be described as negative screening, sustainable, or socially responsible investing (SRI).
  • Inclusionary investing: Investment strategies that generally seek investment returns by pursuing a strategic investing thesis focusing on investments that systematically tilt a portfolio based on ESG factors alongside traditional financial analysis. This may also be described as best-in-class, ESG thematic investing, ESG tilt, positive screening, or sustainable investing.
  • Impact investing: Investment strategies that seek to generate positive, measurable social and environmental impact alongside a financial return. This may also be described as community, goal-based, sustainable, or thematic investing.

These common approaches to ESG investing are not mutually exclusive—that is, a single fund may use multiple approaches (e.g., a best-in-class fund that excludes certain types of investments). As a result, seeking to classify funds that invest according to ESG criteria as either exclusionary, inclusionary, or impact can be challenging. For research purposes, such as monitoring current and historical trends, an alternative that mitigates these challenges is to follow ICI’s long-standing general approach to classifying funds.

How ICI Categorizes Funds for Research and Statistical Purposes

ICI seeks to categorize funds as objectively as possible by applying predetermined rules and definitions to the prospectus language of mutual funds, ETFs, and closed-end funds, with a special focus on the “Investment Objective” and “Principal Investment Strategies” sections.

For example, staff in ICI’s Research Department use prospectus language to determine in which of four broad categories to place a fund: equity, bond, hybrid, or money market. Funds are then placed in subcategories—for example, classifying equity funds as large-, mid-, or small-cap; or bond funds as investment grade or high-yield. To keep fund classifications up-to-date, ICI monitors funds’ prospectuses for material revisions.

This approach produces fund classifications that are consistent and relatively stable, which is very helpful when monitoring current and historical trends in fund data.

Using ICI’s Approach to Classify Funds That Invest According to ESG Criteria

ICI’s approach to classifying funds can be applied in a straightforward manner to all types of funds that invest according to ESG criteria. ICI Research staff reviewed the prospectuses for a vast number of mutual funds and ETFs, examining the investment objective and principal investment strategies sections for language indicating that a fund places an important and explicit emphasis on environmental, social, or governance criteria to achieve certain goals.

Following this approach, in 2019, 511 mutual funds and ETFs with assets of $321.4 billion (Figure 2.16) would be classified generally as investing according to exclusionary, inclusionary, or impact investing ESG criteria.

FIGURE 2.16

Number and Total Net Assets of Funds That Invest According to ESG Criteria
By focus, December 2019
Number and Total Net Assets of Funds That Invest According to ESG Criteria

Download the Excel file of this data.

Note: Data include mutual funds and ETFs. Data include mutual funds that invest primarily in other mutual funds and ETFs that invest primarily in other ETFs.

Among funds that use such criteria in selecting their investments, ICI then used prospectus language to classify these funds into groups based on the frameworks or guidelines expressed at the forefront of their principal investment strategies sections. Funds in these groups emphasize:

  • Broad ESG focus: These funds focus broadly on ESG matters. They consider all three elements of ESG (rather than focusing on one or two of the considerations) or may include ESG in their names. Index funds in this group may track a socially responsible index such as the MSCI KLD 400 Social Index.
  • Environmental focus: These funds focus more narrowly on environmental matters. They may include terms such as “alternative energy,” “climate change,” “clean energy,” “environmental solutions,” or “low carbon” in their principal investment strategies or fund names.
  • Religious values focus: These funds invest in accordance with specific religious values.
  • Other focus: These funds focus more narrowly on some combination of environmental, social, or governance elements, but not all three. They often negatively screen to eliminate certain types of investments.

Of the 511 funds, 180 funds with assets of $106.9 billion fall into the broad ESG focus subcategory; 53 funds with assets of $11.0 billion in the environmental focus subcategory; 141 funds with assets of $104.6 billion in the religious values focus subcategory; and 137 funds with $98.9 billion in assets in the other focus subcategory (Figure 2.16).