Investment Companies See Growth in 2009

The 2010 Investment Company Fact Book released by the Investment Company Institute (ICI) indicates households are the largest group of investors in funds, and registered investment companies managed 21% of households’ financial assets at year-end 2009—matching the previous record set in 2007.  

The growth of individual retirement accounts (IRAs) and defined contribution (DC) plans, particularly 401(k) plans, in conjunction with the important role that mutual funds play in these plans, explain some of households’ increased reliance on investment companies during the past two decades, according to ICI. At year-end 2009, 9% of household financial assets were invested in 401(k) and other DC retirement plans, up from 6% in 1990, and mutual funds managed 51% of the assets in these plans in 2009, up from 7% in 1990.  

IRAs made up 9% of household financial assets, and mutual funds managed 46% of IRA assets in 2009. Mutual funds also managed $3.8 trillion of assets that households held in taxable accounts.  

However, according to ICI, the increase in assets managed by mutual funds from 2008 to 2009 is largely due to the rebound in the value of stocks held in equity and hybrid funds. As households have increased their reliance on funds, their demand for directly held stocks has been decreasing for most of the decade with only moderate renewed interest in 2009. Although household demand for directly held bonds has remained positive over much of the past 10 years, net flows to registered investment companies have been substantially stronger.  

Businesses and other institutional investors also rely on funds, many to manage a portion of their cash and short-term assets, according to the report. As of year-end 2009, nonfinancial businesses held 30% of their cash in money-market funds, recording the second largest proportion in the last 20 years, despite being down from the record 35% at year-end 2008.  

A variety of financial service companies offer registered funds to Americans. By year-end 2009, 73% of fund complexes were independent fund advisers, and these firms managed more than half of investment company assets. Banks or thrifts (8%), insurance companies (7%), brokerage firms (3%), and non-U.S. fund advisers (9%) are other types of fund complexes in the U.S. marketplace. 

In this past decade, the percentage of industry assets at larger fund complexes has increased, due in part to the acquisition of smaller fund complexes by larger ones, according to ICI. The share of assets managed by the largest 25 firms increased to 74% in 2009 from 68% in 2000. In addition, the share of assets managed by the largest 10 firms in 2009 was 53%, up from the 44% share managed by the largest 10 firms in 2000.  

The composition of fund complexes within these groups has changed significantly over the period of 2000 to 2009. One reason for this development may be that negative total returns on U.S. stocks over the decade held down assets managed by fund complexes that concentrate their offerings primarily in domestic equity funds. Meanwhile, strong inflows over the decade to money market funds, which are fewer in number and have fewer fund sponsors than long-term mutual funds, helped push several fund complexes that specialize in money market funds into the largest fund complex groups.

The percentage of fund shareholders with positive opinions about the mutual fund industry declined in 2009. Sixty-four percent of shareholders familiar with mutual fund companies had “very” or “somewhat” favorable impressions of fund companies, down from 73% in 2008. In 2009, 10% of fund investors had a “very” favorable view of the industry, compared with 16% in 2008 and 20% in 2007.

The U.S. Mutual Fund Industry 

With $11.1 trillion in assets, the U.S. mutual fund industry remained the largest in the world at year-end 2009, according to the 2010 Investment Company Fact Book released by the Investment Company Institute. Total net assets increased $1.5 trillion from year-end 2008’s level, largely reflecting the rebound in stock prices in 2009.  

Mutual funds reported $150 billion of net outflows in 2009, but shareholders reinvested $151 billion of income dividends and $14 billion in capital gain distributions that mutual funds paid out during the year. Although investors pulled $539 billion from money market funds, they added $390 billion to long-term mutual funds.  

Retail money-market funds, which are principally sold to individual investors, saw outflows of $307 billion in 2009, while institutional money market funds—used by businesses, pension funds, state and local governments, and other large-account investors—had outflows of $232 billion. 

Exchange-traded funds (ETFs), unit investment trusts (UITs), and closed-end funds experienced mixed results in investor demand. Flows into ETFs slowed somewhat in 2009, with net share issuance (including reinvested dividends) reaching $116 billion. UITs had new deposits of $22 billion, while closed-end funds issued $3.9 billion in new shares during 2009. 

As financial markets stabilized in 2009, institutional investors appeared to have become less risk averse and withdrew cash from government money-market funds. These funds experienced huge inflows during the financial turmoil in 2007 and 2008. In 2009, institutional taxable government money-market funds had outflows of $312 billion, while institutional taxable general purpose money market funds had inflows of $107 billion.  

Equity funds made up 44% of U.S. mutual fund assets at year-end 2009. Domestic equity funds—those that invest primarily in shares of U.S. corporations—held 33% of total industry assets, while international equity funds—those that invest primarily in foreign corporations—accounted for another 11%. Money-market funds accounted for 30% of U.S. mutual fund assets. Bond funds (20%) and hybrid funds (6%) held the remainder of total U.S. mutual fund assets.