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ABOUT THIS BOOK

SECTION ONE:
Overview of Registered Investment Companies

SECTION TWO:
Recent Mutual Fund Trends

SECTION THREE:
Mutual Fund Fees and Expenses

SECTION FOUR:
Who Owns Mutual Funds?

SECTION FIVE:
Mutual Funds in the Retirement and Education Savings Markets

SECTION SIX:
Where Investors Purchase Fund Shares

DATA TABLES

APPENDIX A:
Funds and Taxation

APPENDIX B:
How Funds Operate

GLOSSARY

U.S.-registered investment companies managed a record $8.6 trillion at year-end 2004, about an $800 billion increase from 2003. Mutual funds, managing nearly 95 percent of total investment company assets, held $8.1 trillion. By year-end 2004, closed-end fund assets totaled $254 billion; exchange-traded funds (ETFs), $226 billion; and unit investment trusts (UITs), $37 billion.

This section provides an overview of the U.S. investment company industry:

• noting the major trends in industry and shareholder activity;
• reviewing factors that contributed to investment company growth in 2004;
• summarizing investment companies’ role in the financial markets; and
• discussing U.S. fund sponsors and the competitive forces at work in the U.S. investment company marketplace.

Total Investment Company Assets, 1995–2004

(billions of dollars)

¹Mutual fund data exclude mutual funds that primarily invest in other mutual funds.
²ETF data prior to 2001 were provided by Strategic Insight.
³Total investment company assets include mutual fund holdings of closed-end funds and ETFs.
Note: For more statistics, see the Data Tables in this book and the Statistics and Research section of this site. Download an Excel file of this data.
Sources: Investment Company Institute and Strategic Insight Mutual Fund Research and Consulting, LLC

Recent Highlights and Developments

This year’s edition of the Fact Book notes several industry and shareholder trends:

• Competition among investment companies has kept market concentration stable. Nearly 600 financial intermediaries from around the world provide investment management services to investors through U.S.-registered investment companies. Competitive forces have kept market concentration among the largest fund sponsors stable for the past 15 years (This Section).
• Investment companies remain a major source of funding in securities markets. Investment companies channel American household and business investment into stock, bond, and money markets around the world. Investment companies remain a significant source of capital for the U.S. stock market, holding nearly one-quarter of outstanding U.S. stock in 2004. Investment companies are the largest holders of commercial paper—an important source of short-term financing for major U.S. corporations—and municipal debt (This Section).
• American households rely on funds. About 20 percent of household financial assets were invested in mutual funds and other investment companies in 2004, up from 7 percent in 1990. In 2004, nearly half of all U.S. households owned mutual funds (Sections 2 and 4).
• Investors use financial advisers. Among investors who hold funds outside work retirement plans, more than 80 percent own funds through a professional financial adviser, including full-service brokers, independent financial planners, insurance agents, bank or savings institution representatives, and accountants. Fund ownership through financial advisers is predominant across all shareholder classifications including investor age, education, length of fund ownership, and household mutual fund assets (Sections 3 and 4).
• Fund shareholders hold lower-cost funds. Mutual fund shareholders are heavily invested in mutual funds that have lower-than-average annual fees and expenses. The fees and expenses that fund investors incurred when investing in stock funds in 2003 were 45 percent less than in 1980, and 42 percent less for bond fund investors over the same period (Section 3).
• Retirement account investing through funds remains popular. Retirement plans at work are a common source for mutual fund investing, with more than 60 percent of fund investors owning fund shares inside a retirement plan at work. Investors hold $1.6 trillion of mutual funds through work retirement plans, a 23-fold increase since 1990. About half of all 401(k) assets are invested in mutual funds (Sections 4 and 5).
• Ownership of funds outside retirement plans remains high. Investors use mutual funds outside work retirement plans, with about two-thirds of investors owning funds outside these plans. Investors hold $1.5 trillion in mutual funds in IRAs and hold $4.2 trillion in other types of accounts (Sections 4 and 5).
• Institutional investors use funds. Institutional investors such as businesses, financial institutions, state and local governments, and nonprofit organizations hold 10 percent of mutual fund assets (Section 4).

Sources of Investment Company Asset Growth in 2004

Much of the growth in investment company assets in 2004 occurred because stock funds posted sizeable gains for a second straight year. Rising stock prices worldwide lifted the performance of these funds. On average, U.S. and foreign stock prices rose about 11 percent. Funds that hold foreign stocks and bonds also benefited from an increase in foreign currency exchange rates relative to the U.S. dollar. As foreign currencies appreciated, the dollar value of foreign stocks and bonds rose, lifting the values of investment companies holding these assets.

Additional investor demand was another factor contributing to the growth of investment company assets. Shareholders added $210 billion of net new cash to their stock, bond, and hybrid mutual funds, and reinvested another $78 billion of their fund dividend payments. Although money market mutual funds continued to experience outflows as U.S. interest rates remained low, the strong inflows to the other types of mutual funds produced $144 billion in net new cash and reinvested dividends for all mutual funds. In addition, net issuance to ETFs was a record $55 billion in 2004.

For more statistics on investment companies, see the Data Tables in this book.

Net Inflows to Mutual Funds and Exchange-Traded Funds, 1995–2004

(billions of dollars)

¹Mutual fund data exclude mutual funds that primarily invest in other mutual funds.
²ETF data prior to 2001 were provided by Strategic Insight.
*less than $0.5 billion
Note: Components may not add to totals because of rounding. For more statistics, see the Data Tables in this book and the Statistics and Research section of this site. Download an Excel file of this data.
Sources: Investment Company Institute and Strategic Insight Mutual Fund Research and Consulting, LLC

Role of U.S. Investment Companies in Financial Markets

U.S. investment companies channel American household and business investment into stock, bond, and money markets around the world.

Investment companies hold about 24 percent of the outstanding stock of U.S. companies. They play an even larger role in the municipal debt markets that provide capital to state and local governments, holding 34 percent of all outstanding tax-exempt debt. As a group, investment companies are the largest holders of tax-exempt debt in the United States.

Investment companies also play a significant role in the taxable debt markets. Mutual funds are the largest investor in the U.S. commercial paper market, an important source of short-term funding for major U.S. corporations, and investment companies as a group hold about 10 percent of corporate bonds and U.S. Treasury and agency debt.

Investment Company Holdings of Selected Securities, 2004

(share of total market securities held by investment companies)

Note: Components may not add to totals because of rounding.
Download an Excel file of this data.
Sources: Investment Company Institute, Federal Reserve Board, and World Federation of Exchanges

Fund Sponsors in the U.S. Investment Company Marketplace

Low barriers to entry have resulted in a large number of investment company sponsors in the United States, and active competition among them has helped to keep industry concentration low for many years.

Nearly 600 financial intermediaries from around the world compete in the U.S. market to provide investment management services to investors. Nearly 60 percent of U.S. fund and trust sponsors are independent financial advisers, and these sponsors manage about half of investment company assets. Banks, insurance companies, securities broker-dealers, and non-U.S. sponsors are other major fund and trust sponsors in the U.S. marketplace.

Investment Company Complexes by Type of Intermediary, March 2005

(percent)

Download an Excel file of this data.

These sponsors compete with one another to offer services to investors, and the ability of investors to shift assets from one firm to another has contributed to the competitive forces in the industry. In 2004, 56 percent of all mutual fund sponsors had positive net cash flows, and, conversely, 44 percent experienced outflows. The share of mutual fund complexes with net inflows has ranged from 52 percent to 76 percent during the past 15 years.

Mutual Fund Complexes with Net Cash Inflows to Long-Term Funds, 1990–2004

(percent)

Download an Excel file of this data.

These competitive forces have kept market concentration of the largest fund sponsors stable for the past 15 years, and also altered rankings by size of the largest fund complexes. For example, the largest 10 mutual fund sponsors managed 56 percent of mutual fund assets in 1990; in 2004, the 10 largest complexes managed 51 percent of mutual fund assets. Among the 10 largest firms in 2004, five were not among the 10 largest in 1990. In addition to the competition among mutual funds, closed-end funds, UITs, and ETFs compete with mutual funds in providing investment services to investors, as do other similar products that are not investment companies, such as separately managed accounts and collective trusts. 

Share of Assets at Largest Mutual Fund Complexes*

(percent of industry total)

*Variable annuities are excluded from the calculation of concentration ratios.
Download an Excel file of this data.

As of year-end 2004, there were 15,300 investment companies: 8,044 mutual funds, 6,485 unit investment trusts, 620 closed-end funds, and 151 exchange-traded funds. The number of mutual funds has fallen somewhat since 2001. Competition leads fund sponsors to create new funds to meet investor demand, and also to merge or liquidate funds that do not attract sufficient investor interest.

Number of Investment Companies, 1995–2004
 

¹Mutual fund data exclude mutual funds that primarily invest in other mutual funds.
²ETF data prior to 2001 were provided by Strategic Insight.
Note: For more statistics, see the Data Tables in this book and the Statistics and Research section of this site. Download an Excel file of this data.
Sources: Investment Company Institute and Strategic Insight Mutual Fund Research and Consulting, LLC

The decline in the number of mutual funds and UITs during the past several years owes largely to the introduction of fewer new funds by fund sponsors. In 2000, for example, mutual fund sponsors opened about 1,100 new funds, compared with about 400 new funds in 2004. Fund mergers and liquidations—another factor affecting the number of available funds—have remained fairly stable over the same period, averaging about 600 funds a year between 2000 and 2004. Similarly, sponsors of UITs have been creating fewer UITs. These investment companies often have preset termination dates. The slower pace of creation has caused the number of UITs to decline substantially. At the same time, sponsors of ETFs and closed-end funds, on net, created 66 new funds in 2004.

For more statistics on closed-end funds, exchange-traded funds and unit investment trusts, see Data Tables 11, 12, and 13 in this book. See also the Statistics and Research section of this website.