1401 H Street, NW, Suite 1200 Washington, DC 20005 202/326-5800 www.ici.org Research fundamentals Sandra West, ICI Director of Investor Research, and Victoria Leonard-Chambers, ICI Assistant Director of Investor Research, prepared this report. December 2006 Vol. 15, No. 8 Shareholder Sentiment About the Mutual Fund Industry, 2006 Shareholder Opinion of Mutual Funds Continues to Climb Shareholders’ impressions of mutual funds improved for the third year in a row in 2006,1 following several years of a declining favorability rating that coincided with a stock market downturn between 2000 and early 2003. More than three-quarters of shareholders familiar with mutual fund companies currently have “very” or “somewhat” favorable impressions of fund companies, up from 71 percent in 2003 (Figure 1). In addition, the share of fund investors with “very” favorable impressions of fund companies increased for the fi rst time in fi ve years. The percentage of investors Key Findings Mutual funds’ favorability rating increased in 2006 for the third year in a row. After declining to a low of 71 percent in 2003, the mutual fund favorability rating has risen steadily over the past three years to 77 percent in 2006. Investment performance has the greatest impact on investors’ opinions of funds. Nearly three- quarters of all mutual fund shareholders indicate fund performance is a “very” important factor in forming their views of the industry, and about half cite fund performance as the most important factor. Mutual funds’ favorability rating rises and falls with stock market performance. Shareholders’ opinions of the fund industry were lowest in 2003—the year in which the recent stock market decline bottomed out—but have improved each year since then, moving in tandem with the market. Investors are conf ident that mutual funds will help them meet their f inancial goals. Nearly 90 percent of mutual fund shareholders in 2006 are “very” or “somewhat” confident that investing in mutual funds will assist them in reaching their f inancial goals. • • • • About the Survey Since 1987, the Institute has conducted the ICI Annual Tracking Survey to identify U.S. household ownership of mutual funds. Beginning in 1997, questions were added to the survey to assess shareholders’ views of mutual funds and measure changes in shareholders’ opinions of funds over time, including whether they have favorable or unfavorable impressions of funds and which factors infl uence their impressions. The 2006 ICI Annual Tracking Survey included a randomly selected sample of 3,000 U.S. households, of which 1,440 households, or 48.0 percent, owned mutual funds. Page 2 Fundamentals December 2006 Vol. 15, No. 8 Figure 1 Most Shareholders View Fund Companies Favorably Percent of mutual fund shareholders familiar with mutual fund companies, 2000–2006 Very favorable Somewhat favorable 1998 82 29 53 1997 83 26 57 2000 84 28 57 1999 83 29 54 2002 76 19 57 2001 79 23 56 2004 72 16 56 2003 71 17 54 2006 77 18 59 2005 75 15 60 note: Components may not add to the total because of rounding. source: Investment Company Institute Figure 2 Former Fund Owners Generally Have Positive Impressions of Mutual Fund Companies Impression of Mutual Fund Companies (percent of respondents who previously owned funds and are familiar with mutual fund companies, 2006) Very favorable Not familiar Familiar Familiarity With Mutual Fund Companies (percent of respondents who previously owned funds, 2006) 14 44 10 21 11 5743 Somewhat favorable Somewhat unfavorable Very unfavorable No opinion source: Investment Company Institute Figure 3 A Variety of Factors Shape Shareholders’ Opinions of the Fund Industry Percent of mutual fund shareholders familiar with mutual fund companies who indicate each factor is “very” important, 1997–2006 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Performance of fund investments 85 86 86 72 67 71 68 70 73 74 Personal experience with a mutual fund company NA 60 60 64 57 61 60 57 53 53 Current events in fi nancial markets 50 53 53 50 48 51 47 49 51 51 Opinion of professional fi nancial advisers 47 47 46 46 42 43 46 47 40 40 Stock market fl uctuations 38 47 47 42 42 38 41 39 42 42 Friends and family 34 38 41 45 44 44 43 44 28 31 Media coverage about fund companies 20 25 24 21 19 21 18 20 20 18 NA=not asked that year source: Investment Company Institute December 2006 Vol. 15, No. 8 Fundamentals Page 3 with a “very” favorable view of fund companies increased to 18 percent in 2006 from 15 percent in 2005. Many people who no longer own funds also have positive views of fund companies. More than half of former fund investors who say they are familiar with fund companies have favorable impressions of them (Figure 2). Performance Infl uences Investor Opinion of Fund Industry Fund performance primarily shapes investor sentiment toward fund companies (Figure 3). In fact, nearly half of all fund shareholders in 2006 list fund performance as the most important factor infl uencing their opinions of the mutual fund industry (Figure 4). Personal investment experience, current fi nancial events, and Figure 4 Fund Performance Is the Most Important Factor Shaping Opinions of the Fund Industry Percent of shareholders familiar with mutual fund companies who indicate each factor is “most” important, 2006 Performance of fund investments 2 8 6 11 14 15 44 Media coverage about fund companies Personal experience with a mutual fund company Opinion of professional financial advisers Current events in financial markets Stock market fluctuations Opinion of friends and family source: Investment Company Institute Figure 5 Mutual Fund Favorability Rises and Falls With Market Performance Mutual fund company favorability rating and S&P 500 Index, 1997–2006 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 83 833 82 83 84 79 76 71 72 75 77 1,108 1,332 1,418 1,270 1,079 936 1,103 1,178 1,290 Mutual fund company favorability rating S&P 500 Index, May average note: The mutual fund company favorability rating is the percent of shareholders familiar with fund companies who have a “very” or “somewhat” favorable impression of fund companies. sources: Investment Company Institute and Bloomberg Page 4 Fundamentals December 2006 Vol. 15, No. 8 The ICI Research Department maintains a comprehensive program of research and statistical data collections on investment companies and their shareholders. The Research staff collects and disseminates industry statistics, and conducts research studies relating to issues of public policy, economic and market developments, and shareholder demographics. For a current list of ICI research and statistics, visit the Institute’s public website at www.ici.org/stats/index.html. For more information on this issue of Fundamentals, contact ICI’s Research Department at 202/326-5913. Copyright © 2006 by the Investment Company Institute The Investment Company Institute (ICI) is the national association of U.S. investment companies. ICI seeks to encourage adherence to high ethical standards, promote public understanding, and otherwise advance the interests of funds, their shareholders, directors, and advisers. Investors are confi dent that mutual funds can help them reach their fi nancial goals. Today, nearly 90 percent of all fund shareholders are confi dent that mutual funds will assist them in achieving their fi nancial goals (Figure 6). The share of fund investors who are “very” confi dent that mutual funds can help them meet their fi nancial goals increased to 33 percent in 2006 from 29 percent in 2005, the fi rst year this question was included on the survey. Note 1 The standard error for the 2006 sample of households owning mutual funds is ± 2.6 percentage points at the 95 percent confi dence level. Survey data are weighted to match the age distribution of the U.S. population. the opinions of professional fi nancial advisers also play roles in forming shareholders’ impressions of the mutual fund industry. Media coverage and the opinions of friends are less infl uential. Underscoring the relationship between performance and investor sentiment, ICI’s mutual fund company favorability rating has historically correlated with market performance. The performance of the S&P 500 Index and mutual fund companies’ favorability rating both peaked in 2000, declined between 2001 and 2003, and have increased each year since 2004 (Figure 5). Figure 6 Shareholders Are Confi dent That Funds Can Help Them Achieve Their Investment Goals Percent of all mutual fund shareholders, by level of conf idence that mutual funds can help them meet their investment goals, 2005 and 2006 29 58 2005 Very confident Somewhat confident Not very or not at all confident 13 33 2006 54 13 note: This question was not included in the survey prior to 2005. source: Investment Company Institute