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2021 Investment Company Fact Book

CHAPTER THREE

US Mutual Funds

A mutual fund is an investment company that pools money from shareholders and invests in a portfolio of securities. In 2020, an estimated 102.5 million Americans in 58.7 million households owned mutual funds, relying on them to meet long-term personal financial objectives, such as preparing for retirement. US households and institutions also use money market funds as cash management tools. Mutual funds had net inflows of $205 billion in 2020, or 1.0 percent of year‑end 2019 total net assets. Changing demographics, portfolio rebalancing, and investors’ reactions to US and worldwide economic and financial conditions play important roles in determining how demand for specific types of mutual funds—and for mutual funds in general—evolves.

Overview of Mutual Fund Trends

With $23.9 trillion in total net assets (Figure 3.1), the US mutual fund industry remained the largest in the world at year-end 2020. The majority of US mutual fund net assets at year-end 2020 were in long-term mutual funds, with equity funds alone making up 53 percent of US mutual fund net assets. Bond funds were the second-largest category, with 22 percent of net assets. Money market funds (18 percent) and hybrid funds (7 percent) held the remainder.

FIGURE 3.1

Equity Mutual Funds Held More Than Half of Mutual Fund Total Net Assets
Percentage of total net assets, year-end 2020
Figure 3.1

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Investor Demand for US Mutual Funds

A variety of factors influence investor demand for mutual funds, such as funds’ ability to assist investors in achieving their investment objectives. For example, US households rely on equity, bond, and hybrid mutual funds to meet long-term personal financial objectives, such as preparing for retirement, saving for education, purchasing a house, or preparing for emergencies. US households, as well as businesses and other institutional investors, use money market funds as cash management tools because they provide a high degree of liquidity and competitive short-term yields.

Continued long-running investing trends, portfolio rebalancing, and effects from the COVID-19 pandemic were important factors that influenced investor demand for mutual funds in 2020. Domestic equity mutual funds experienced net outflows, reflecting two major factors: an ongoing shift to index-based products and redemptions to keep equity allocations at their portfolio targets in response to substantial gains in US stock prices during the year. In contrast, demand for bond mutual funds was strong in 2020, despite substantial outflows from bond funds in March. Some of the money that investors directed toward bond funds likely was used to keep fixed-income allocations at their portfolio targets. The aging of the US population also continued to play a role in demand for bond mutual funds. In addition, government money market funds experienced substantial inflows in March and April 2020 as investors sought to preserve and build liquidity.

Entry and Exit of US Mutual Funds

Mutual fund sponsors create new funds to meet investor demand, and they merge or liquidate those that do not attract sufficient investor interest. A total of 268 mutual funds opened in 2020 (Figure 3.2). Fewer domestic and world equity fund launches contributed to the decline in the number of new mutual funds offered from 2019 to 2020. The number of mutual funds that were either merged or liquidated increased 27 percent to 644 funds in 2020—its highest level since 2009—as sponsors eliminated or consolidated more funds of funds from their lineups.

FIGURE 3.2

Number of Mutual Funds Entering and Exiting the Industry
Figure 3.2

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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.

Investors in US Mutual Funds

Demand for mutual funds is, in part, related to the types of investors who hold mutual fund shares. Retail investors (i.e., households) held the vast majority (89 percent) of the $23.9 trillion in US mutual fund net assets at year-end 2020 (Figure 3.3). The proportion of long-term mutual fund net assets held by retail investors is even higher (94 percent). Retail investors also held substantial money market fund net assets ($2.7 trillion), but this was a relatively small share (13 percent) of their total mutual fund net assets ($21.2 trillion).

In contrast, institutional investors such as nonfinancial businesses, financial institutions, and nonprofit organizations held a relatively small portion of mutual fund net assets. At year-end 2020, institutions held 11 percent of mutual fund net assets (Figure 3.3). The majority (59 percent) of the $2.7 trillion that institutions held in mutual funds was in money market funds, because one of the primary reasons institutions use mutual funds is to help manage their cash balances.

FIGURE 3.3

Households Held 89 Percent of Mutual Fund Total Net Assets
Trillions of dollars, year-end 2020
Figure 3.3

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* Mutual funds held as investments in individual retirement accounts, defined contribution retirement plans, variable annuities, 529 plans, and Coverdell education savings accounts are counted as household holdings of mutual funds.

Developments in Mutual Fund Flows

Overall demand for mutual funds as measured by net new cash flow—new fund sales less redemptions, plus net exchanges—declined in 2020 (Figure 3.4). In 2020, mutual funds had net inflows of $205 billion (1.0 percent of year-end 2019 total net assets), following net inflows of $454 billion in 2019. Long-term mutual funds experienced net outflows of $486 billion in 2020, as outflows from equity and hybrid funds were only partially offset by inflows to bond funds. Money market funds received $691 billion in net inflows, driven by inflows into government money market funds as the COVID-19 pandemic created a massive demand for liquidity by businesses, households, governments, and other investors in March 2020. Outside of the shock to demand brought on by the public health crisis, a number of factors—including portfolio rebalancing, broad-based increases in global financial markets, ongoing demographic trends, and demand for indexed products—appeared to influence US mutual fund flows in 2020.

FIGURE 3.4

Net New Cash Flow to Mutual Funds
Billions of dollars, annual
Figure 3.4

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The Global Economy and Financial Markets in 2020

Developments surrounding the COVID-19 pandemic drove macroeconomic trends around the world in 2020. From early 2020 onward, SARS-CoV-2 spread across the globe. Governments made efforts to control the health crisis by imposing strict mandates and social distancing guidelines, which effectively shut down large portions of the economy. This led to a substantial contraction in real global gross domestic product (GDP) of 8.9 percent in the second quarter of 2020 alone. For the year, real global GDP contracted an estimated 3.3 percent—a sharp reversal from growth of 2.8 percent in 2019. This severe deceleration in economic activity was experienced across the world as real GDP declined for many jurisdictions. In the United States, real GDP contracted by an estimated 3.5 percent in 2020 compared with growth of 2.2 percent in 2019; in the euro area, real GDP contracted 6.6 percent in 2020 compared with growth of 1.3 percent in 2019; and in emerging and developing market economies in Asia, real GDP contracted 1.0 percent in 2020 compared with growth of 5.3 percent in 2019.

In addition to the contraction in real GDP, other metrics show the negative effects that the COVID-19 pandemic had on the US economy. The unemployment rate spiked from 3.6 percent in December 2019 to 14.8 percent in April 2020; by December 2020, the unemployment rate had fallen to 6.7 percent. Inflation was low, with the Consumer Price Index rising just 1.4 percent in 2020—compared to 2.3 percent in 2019—below the Federal Reserve’s target of 2 percent inflation. Consumer spending, adjusted for inflation, experienced a year-over-year contraction of 16.5 percent in April 2020. This improved somewhat by December, with consumer spending contracting 3.5 percent year over year. Additionally, the Federal Reserve lowered the federal funds target rate twice in March to near-zero levels.

Financial markets around the world were generally unconcerned with early COVID-19 developments, in part because market participants had little indication of how severe the crisis would become. Stock markets began falling in the third week of February 2020, as governments began to impose quarantines and social distancing mandates. US stocks reached an all-time high on February 19, and by March 23, they had plummeted 35.0 percent.* Additionally, the Chicago Board Options Exchange (Cboe) Volatility Index (VIX)—which tracks the volatility of the S&P 500 index and is a widely used measure of market risk—jumped to record levels. Values less than 20 are associated with a period of market calm and values greater than 30 are associated with a high degree of investor fear. In 2020, the daily VIX reached a record peak of nearly 83 on March 16 and was above 30 for 32 percent of the trading days. From February 21, 2020, to the end of the year, the daily VIX never dropped below 20. By comparison, volatility in 2019 was fairly subdued—the daily VIX was below 20 for most of 2019 (94 percent of trading days) and never exceeded 30.

 

* As measured by the Wilshire 5000 Index.

During this period, the Federal Reserve implemented a multitude of measures to calm markets and ease the flow of credit to households and businesses. For example, the Federal Reserve cut shortterm interest rates, created multiple lending facilities to provide liquidity to the credit markets, and eased the terms at which major central banks could borrow US dollars. For the remainder of 2020, the US economy adjusted to the unique demands imposed by the COVID-19 public health crisis and financial markets recovered, with US stocks returning 21 percent for the year and US bonds returning 8 percent.*

 

* As measured by the FTSE US Broad Investment Grade Bond Index.

Stock prices around the world in 2020 followed a similar pattern to the United States—a sharp downward spike in March was followed by steady increases for the remainder of the year, as investors became more optimistic about a “return to normal.” In Japan, the Nikkei 225 index was up 16 percent in 2020; in China, the Shanghai Composite Index was up 14 percent; and the broader MSCI Emerging Markets Index rose nearly 16 percent. In Europe, the MSCI Europe Index increased just 2 percent in 2020. In the United Kingdom, the value of stocks in the Financial Times Stock Exchange (FTSE) 100 Index declined 14 percent in 2020.

Long-Term Mutual Fund Flows

Although net new cash flows into long-term mutual funds are typically correlated with market returns, they tend to be moderate as a percentage of total net assets even during episodes of market turmoil. Several factors may contribute to this phenomenon. For example, households (i.e., retail investors) own the vast majority of US long-term mutual fund net assets (Figure 3.3). Retail investors generally respond less strongly to market events than do institutional investors. Most notably, households often use mutual funds to save for the long term, such as for college or retirement. Many of these investors make stable contributions through periodic payroll deductions, even during periods of market stress. In addition, many mutual fund shareholders seek the advice of financial advisers, who may provide a steadying influence during market downturns. These factors are amplified by the fact that net assets in mutual funds are spread across more than 100 million investors and that fund investors have a wide variety of individual characteristics (such as age or appetite for risk) and goals (such as saving for the purchase of a home, for education, or for retirement). They also are bound to have a wide range of views on market conditions and how best to respond to those conditions to meet their individual goals. As a result, even during months when funds as a whole experience net outflows, many investors continue to purchase fund shares.

Equity Mutual Funds

Historically, net new cash flows to equity mutual funds have tended to rise and fall with returns on stocks (Figure 3.5). Global stock markets returned 17 percent in 2020, following a 27 percent return in 2019.* Despite strong global stock market performance for the year, equity mutual funds experienced net outflows totaling $646 billion in 2020 (5.7 percent of year-end 2019 total net assets), following $362 billion in net outflows in 2019. In both years, outflows from equity mutual funds were concentrated in domestic equity funds.

 

* As measured by the MSCI All Country World Daily Gross Total Return Index.

FIGURE 3.5

Net New Cash Flow to Equity Mutual Funds Typically Is Related to World Equity Returns
Monthly
Figure 3.5

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1 Net new cash flow is reported as a percentage of previous month-end equity mutual fund total net assets, plotted as a six-month moving average.

2 The total return on equities is measured as the year-over-year percent change in the MSCI All Country World Daily Gross Total Return Index.

Sources: Investment Company Institute, MSCl, and Bloomberg

Equity mutual funds had net outflows in every month in 2020 (Figure 3.6). In the first three months of the year, investors had redeemed, on net, only $101 billion from equity mutual funds. Flows to mutual funds, in general, tend to be higher in the first quarter than at other times of the year because investors who receive year-end bonuses may invest that money relatively quickly in the new year. In addition, some investors make contributions to their individual retirement accounts (IRAs) before filing their tax returns. As the year progressed, net outflows from equity mutual funds accelerated, with investors redeeming a net $545 billion from April through December. During this period, outflows were smallest in April and November. In April, US stocks returned 13 percent as investor confidence in financial markets returned following a series of actions taken by the Federal Reserve. In November, US stocks returned 12 percent, alongside the announcement of successful results from COVID-19 vaccine trials.

FIGURE 3.6

Net New Cash Flow to Equity Mutual Funds in 2020
Billions of dollars; monthly, 2020
Figure 3.6

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Portfolio rebalancing likely played a role in investors’ decisions to redeem from equity funds in 2020. In 2020, the 17 percent return on global stocks outpaced the 8 percent return on US bonds and would have resulted in equities accounting for a larger share of investors’ portfolios. For example, without taking any investment actions, investors following a 60/40 target portfolio allocation (60 percent in equity funds and 40 percent in bond funds) would have seen their equity allocation rise to 62 percent of their total portfolio from relatively strong gains in stock prices. To remain at their equity allocation targets, investors would have needed to redeem from equity funds in 2020.

In addition to portfolio rebalancing, net outflows from domestic equity mutual funds in 2020 also may have been driven by investor demand for domestic equity exchange-traded funds (ETFs). As discussed in chapter 4, demand for ETFs has been very strong over the past several years. Domestic equity ETFs had net creations in every month of 2020 except for February, which saw net redemptions of less than $2 billion. Overall, demand for domestic equity ETFs resulted in $189 billion in net share issuance in 2020 (Figure 4.10). In contrast, domestic equity mutual funds had net outflows of $471 billion (Figure 3.6) over the same period.

Demand for world equity mutual funds weakened further in 2020, with investors redeeming $175 billion (Figure 3.6), on net, compared with net redemptions of $60 billion in 2019. Outflows from world equity mutual funds were spread across investment objectives but were concentrated in international equity mutual funds, which experienced outflows of $120 billion in 2020. International equity mutual funds do not hold US stocks, and while global returns on stocks were positive in many countries in 2020, returns on US stocks were higher. Investors may have responded by moving into funds more focused on US equities. For example, global equity mutual funds, which usually hold some US stocks, saw $37 billion in net outflows in 2020; emerging market equity mutual funds had outflows of $12 billion; and regional equity mutual funds and world equity mutual funds that follow alternative investment strategies, collectively, had $6 billion in net outflows in 2020.

Rebalancing may also have contributed to outflows from world equity mutual funds in 2020. Some types of funds rebalance portfolios automatically as part of an asset allocation strategy. The assets in funds offering asset allocation strategies—such as target date funds (discussed in more detail here)—have grown considerably over the past decade. These funds typically hold a higher proportion of foreign equities and bonds than many US investors had traditionally allocated to foreign investments. As global equity markets rose in 2020, these kinds of asset allocation funds rebalanced their portfolios away from stocks, including foreign stocks, to maintain their target allocations.

Asset-Weighted Turnover Rate

The turnover rate—the percentage of a fund’s holdings that have been bought or sold over a year—is a measure of a fund’s trading activity. The rate is calculated by dividing the lesser of purchases or sales (excluding those of short-term assets) in a fund’s portfolio by average total net assets.

To analyze the turnover rate that shareholders actually experience in their funds, it is important to identify those funds in which shareholders are most heavily invested. Neither a simple average nor a median takes into account where fund assets are concentrated. An asset-weighted average gives more weight to funds with more net assets, and accordingly, indicates the average portfolio turnover actually experienced by fund shareholders. In 2020, the asset-weighted annual turnover rate experienced by equity mutual fund investors was 32 percent, well below the average of the past 36 years (Figure 3.7).

Investors tend to own equity funds with relatively low turnover rates. In 2020, about half of equity mutual fund total net assets were in funds with portfolio turnover rates of less than 27 percent. This reflects the propensity for mutual funds with below-average turnover to attract shareholder dollars.

FIGURE 3.7

Turnover Rate Experienced by Equity Mutual Fund Investors
Figure 3.7

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Note: The turnover rate is an asset-weighted average.

Bond Mutual Funds

Bond mutual fund net new cash flows typically are correlated with the performance of US bonds (Figure 3.8), which, in turn, is largely driven by the US interest rate environment. Long-term interest rates fell sharply in the first quarter of 2020 and finished the year substantially lower than they were at the beginning of the year. The yield on the 10-year Treasury started 2020 at 1.92 percent and had declined to 0.70 percent by the end of March. By early August, the 10-year Treasury yield had decreased further to 0.52 percent—its lowest point of the year. From that point, the 10-year Treasury yield steadily increased 41 basis points to finish the year at 0.93 percent. For the year as a whole, the total return on US bonds was 8 percent.

FIGURE 3.8

Net New Cash Flow to Bond Mutual Funds Typically Is Related to Bond Returns
Monthly
Figure 3.8

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1 Net new cash flow is reported as a percentage of previous month-end bond mutual fund total net assets, plotted as a three‑month moving average. Data exclude high-yield bond mutual funds.

2 The total return on bonds is measured as the year-over-year percent change in the FTSE US Broad Investment Grade Bond Index.

Sources: Investment Company Institute, FTSE Russell, and Bloomberg

Taxable bond mutual funds received relatively strong inflows in 2020 except between February and April, when uncertainty over the COVID-19 pandemic was at its peak. In March, investors looking to shore up their cash positions redeemed $213 billion from taxable bond mutual funds, or 5.3 percent of their total net assets at the end of February (Figure 3.9). At the same time, conditions in fixed-income markets deteriorated rapidly. Dislocations were first seen in the US Treasury market—normally a safe haven during periods of market stress—as yields on US Treasuries rose, while stock prices fell, from March 9 to March 18. Investors were selling Treasuries for a variety of reasons, such as to meet their need for cash, to rebalance around market conditions, and to meet margin calls. The dislocations in the Treasury market eventually spread to short-term credit markets, including the interbank lending, commercial paper, wholesale deposits, and short-term municipal debt markets. By mid-March, liquidity dried up, short- and long-term credit markets ceased to function, and the flow of credit to the economy evaporated. In March and April, the Federal Reserve took measures, including creating a broad range of lending facilities, that injected liquidity into the markets, smoothed the functioning of short- and long-term credit markets, and restored the flow of credit to the economy.

After April, taxable bond mutual funds experienced significant inflows. Between May and December 2020, taxable bond funds received $373 billion in inflows (Figure 3.9). Portfolio rebalancing likely played a role in these inflows. Global stocks returned 34 percent between April 30, 2020, and December 31, 2020, while US bonds returned 3 percent. Returning to this example, an investor with a 60/40 target portfolio allocation (60 percent in equity funds and 40 percent in bond funds) at the end of April, who took no investment actions, would have seen their portfolio share in bond funds drop to 34 percent—well below the 40 percent target allocation—by the end of December. Investors and target date funds following asset allocation strategies would have needed to purchase bond funds during this period to remain at their target allocations.

Investor demand varied across specific categories of taxable bond mutual funds in 2020, with the bulk of investor flows being directed toward investment grade bond mutual funds, which received $193 billion in net inflows in 2020. In addition, government bond mutual funds saw inflows of $26 billion; multisector bond mutual funds saw inflows of $6 billion; and high-yield bond mutual funds had inflows of $4 billion. World bond mutual funds, which typically hold a mix of bonds denominated in US dollars and foreign currencies, had net outflows of $24 billion.

Investor demand for taxable bond mutual funds also varied by the maturity or duration of their portfolios. In particular, short-term taxable bond funds received inflows of $66 billion in 2020, or 11.6 percent of their year-end 2019 total net assets, compared with inflows of $139 billion, or 4.2 percent of net assets, for other taxable bond funds.

Like demand for taxable bond mutual funds, demand for municipal bond mutual funds was relatively strong throughout 2020 except during March and April. In March, for example, municipal bond mutual funds experienced outflows of $42 billion, which represented 4.9 percent of their total net assets at the end of February (Figure 3.9). However, municipal bond funds experienced net inflows of $39 billion for the year as a whole.

FIGURE 3.9

Net New Cash Flow to Bond Mutual Funds in 2020
Billions of dollars; monthly, 2020
Figure 3.9

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How Bond Mutual Funds Manage Investor Flows

When meeting redemptions, fund managers’ actions are guided by market conditions, expected investor flows, and other factors. A fund might, for example, decide to sell some of its holdings to raise the cash needed to fulfill redemptions. But its choice of which particular securities to sell may depend on market conditions. For example, during a market downturn, with liquidity at a premium, some fund managers might seek to add shareholder value by selling some of their funds’ more-liquid bonds (which, being in high demand, are trading at a premium to fundamental value). Other fund managers may conclude that it is necessary and appropriate to sell a representative “slice” of their funds’ entire portfolios.

Bond mutual fund managers have other ways of meeting redemption requests. For example, a fund might already have cash on hand. Or, the fund may use the cash that bond mutual funds receive each day in the form of interest income from bonds held in the portfolio, proceeds from matured bonds, or new sales of fund shares.

In addition, bond funds often use derivatives or hold liquid assets other than cash. For example, a high-yield bond fund might hold some portion of its assets in equities, because equities are very liquid, and the return profiles of high-yield bonds and equities can be similar. Derivatives can be more liquid than their physical counterparts, and funds are required to segregate liquid assets to support their derivatives positions. As these positions are closed, this cash collateral provides a ready source of liquidity to meet redemptions. This is especially true for many of the funds commonly called liquid alternative funds, as these funds are explicitly designed to allow frequent investor trading, and do so in large measure through the use of derivatives.

Long-Term Demand for Bond Mutual Funds

Despite several periods of market turmoil—including the COVID-19 pandemic, which led to substantial outflows in March 2020—bond mutual funds have experienced net inflows through most of the past decade. Bond mutual funds received $2.3 trillion in net new cash flow and reinvested dividends from 2011 through 2020 (Figure 3.10).

A number of factors have helped sustain this long-term demand for bond mutual funds, including demographics. Older investors tend to have larger account balances because they have had more time to accumulate savings and take advantage of compounding. At the same time, as investors age, they tend to shift toward fixed-income products. Over the past decade, the aging of Baby Boomers has boosted flows to bond funds.

FIGURE 3.10

NBond Mutual Funds Have Experienced Net Inflows Through Most of the Past Decade
Cumulative flows to bond mutual funds, billions of dollars, monthly
Figure 3.10

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Note: Bond mutual fund data include net new cash flow and reinvested dividends.

The continued popularity of target date mutual funds also likely helped to limit outflows from bond mutual funds in 2020. Target date funds invest in a changing mix of equities and fixed-income investments. As the fund approaches and passes its target date (which is usually specified in the fund’s name), the fund gradually reallocates assets from equities to fixed-income investments, including bonds. Target date funds usually invest through a fund-of-funds approach, meaning they primarily hold and invest in shares of other equity and bond mutual funds or ETFs. Over the past 10 years, target date mutual funds have received net inflows of $494 billion. By year-end 2020, target date mutual funds had total net assets of $1.6 trillion (Figure 8.20). Investor interest in these funds likely reflects their automatic rebalancing features as well as their inclusion as an investment option in many defined contribution (DC) plans (Figure 8.12).

These long-term factors, combined with positive returns on bonds and inflows from portfolio allocation strategies, have caused bond mutual fund total net assets to double over the past decade—from $2.6 trillion at year-end 2010 to $5.2 trillion at year-end 2020. However, their share of the US bond market (US government bonds, corporate bonds, and tax-exempt bonds) has stayed relatively stable during this time. Bond mutual funds held 9 percent of the US bond market at year-end 2020, compared with 8 percent at year-end 2010.

Hybrid Mutual Funds

Hybrid funds (also called asset allocation funds or balanced funds) invest in a mix of stocks and bonds. This approach offers a way to balance the potential capital appreciation of stocks with the income and relative stability of bonds over the long term. The fund’s portfolio may be periodically rebalanced to bring its asset allocation more in line with prospectus objectives, which could be necessary following capital gains or losses in the stock or bond markets.

Over the past six years, investors have moved away from hybrid mutual funds, which had been a popular way to achieve a managed, balanced portfolio of stocks and bonds (Figure 3.11). In 2020, hybrid mutual funds had outflows of $84 billion (or 5.3 percent of prior year-end total net assets), following $230 billion of net outflows over the previous five years. Many factors likely have contributed to this change. For example, investors may be shifting out of hybrid funds and into portfolios of ETFs that are periodically rebalanced, often with the assistance of a fee-based financial adviser. In addition, investors may be shifting assets toward target date funds and lifestyle funds as an alternative way to achieve a balanced portfolio. For example, in 2020, assets in target date funds were $1.6 trillion, up substantially over the past decade (Figure 8.20).*

 

* ICI generally excludes funds of funds from total net asset and net new cash flow calculations to avoid double counting. Although target date funds are classified as hybrid funds by ICI, 97 percent of target date fund assets are in funds of funds, and therefore, their flows are excluded from the hybrid mutual fund flows presented in Figure 3.11.

Net outflows from hybrid funds from 2015 through 2020 were concentrated in flexible portfolio funds, which can hold any proportion of stocks, bonds, cash, and commodities, both in the United States and overseas. Following the 2007–2009 global financial crisis, many investors sought to broaden their portfolios and lower the correlation of their investments with the market or limit downside risk. Flexible portfolio funds can help investors achieve those goals. As a result, flexible portfolio funds saw net inflows of $88 billion between 2009 and 2014. However, after a long bull market and comparably lower returns in funds offering downside protection, investors have redeemed, on net, $163 billion from flexible portfolio funds in the past six years.

FIGURE 3.11

Net New Cash Flow to Hybrid Mutual Funds
Billions of dollars, annual
Figure 3.11

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Growth of Other Investment Products

Outflows from some long-term mutual funds over the past decade reflect a broader shift, driven by both investors and retirement plan sponsors, toward other pooled investment vehicles. This trend is reflected in the outflows from actively managed funds and the growth of index mutual funds, ETFs, and collective investment trusts (CITs) since 2007.

Index mutual funds—which hold all (or a representative sample) of the securities in a specified index—have been popular among investors over the past two decades. Of households that owned mutual funds, 43 percent owned at least one equity index mutual fund in 2020. As of year-end 2020, 490 index mutual funds managed total net assets of $4.8 trillion. However, index mutual funds experienced outflows of $100 billion in 2020—a reversal from an extended period of annual inflows (Figure 3.12). Outflows from index domestic and world equity mutual funds ($102 billion and $55 billion, respectively) were only partially offset by inflows into index bond and hybrid mutual funds ($57 billion). Some of the outflows from index equity mutual funds are likely attributable to portfolio rebalancing, with investors shifting assets from equity mutual funds to bond mutual funds as they seek to stay within some target portfolio allocation (see here). The outflows from index equity mutual funds also reflect some assets moving from mutual funds into other products, such as ETFs or CITs. At year-end 2020, net assets in index equity mutual funds made up 30 percent of total equity mutual fund net assets, unchanged from 2019 (Figure 3.13).

FIGURE 3.12

Net New Cash Flow to Index Mutual Funds
Billions of dollars, annual
Figure 3.12

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FIGURE 3.13

The Steady Growth of Index Equity Mutual Funds Stalled in 2020
Percentage of equity mutual funds’ total net assets, year-end
Figure 3.13

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Index domestic equity mutual funds and ETFs have particularly benefited from the overall increased investor demand for index-based investment products. From 2011 through 2020, index domestic equity mutual funds and ETFs received $1.9 trillion in net new cash and reinvested dividends, while actively managed domestic equity mutual funds experienced net outflows of $1.9 trillion (including reinvested dividends) (Figure 3.14). Index domestic equity ETFs have grown particularly quickly—attracting twice the amount of net inflows of index domestic equity mutual funds since 2011. Part of the recent increasing popularity of ETFs is likely attributable to more brokers and financial advisers using them in their clients’ portfolios. In 2019, full-service brokers and fee-based advisers had 21 percent and 33 percent, respectively, of their clients’ household assets invested in ETFs, up sharply from 6 percent and 10 percent in 2011 (Figure 3.15).

FIGURE 3.14

Some of the Outflows from Domestic Equity Mutual Funds Have Gone to ETFs
Cumulative flows to domestic equity mutual funds and net share issuance of index domestic equity ETFs, billions of dollars, monthly
Figure 3.14

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Note: Mutual fund data include net new cash flow and reinvested dividends; ETF data for net share issuance include reinvested dividends.

FIGURE 3.15

Fee-Based Advisers Are Investing Larger Portions of Client Portfolios in ETFs
Percentage of household assets invested in investment category by adviser type
Figure 3.15

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1 This category includes wirehouses as well as regional, independent, and bank broker-dealers.

2 This category includes registered investment advisers and dually registered investment adviser broker-dealers.

3 This category excludes an unknown portion of assets from investors who received fee-based advice but implemented trades themselves through discount brokers and fund supermarkets.

Source: Cerulli Associates, “The State of US Retail and Institutional Asset Management, 2020”

CITs are an alternative to mutual funds for DC plans. Like mutual funds, CITs pool the assets of investors and (either actively or passively) invest those assets according to a particular strategy. Much like institutional share classes of mutual funds, CITs generally require substantial minimum investment thresholds, which can limit the costs of managing pooled investment products. Unlike mutual funds, which are regulated under the Investment Company Act of 1940, CITs are regulated under banking laws and are not marketed as widely as mutual funds; this can also reduce their operational and compliance costs as compared with mutual funds.

More retirement plan sponsors have begun offering CITs as options in 401(k) plan lineups. As Figure 3.16 demonstrates, this trend has translated into a growing share of assets held in CITs by large 401(k) plans. That share increased from 6 percent in 2000 to an estimated 25 percent in 2019. This recent expansion is due, in part, to the growth in target date CITs.

FIGURE 3.16

Assets of Large 401(k) Plans Are Increasingly Held in Collective Investment Trusts
Percentage of assets in 401(k) plans with 100 participants or more
Figure 3.16

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Note: Assets exclude Direct Filing Entity assets that are reinvested in collective investment trusts. Data prior to 2019 come from the Form 5500 Research data sets released by the Department of Labor. Data for 2019 are preliminary, based on Department of Labor Form 5500 latest data sets.

Source: Investment Company Institute tabulations of Department of Labor Form 5500 data

Money Market Funds

In 2020, money market funds received $691 billion in net new cash flows, up from $553 billion in 2019 (Figures 3.4 and 3.17). Government money market funds received substantial inflows ($835 billion) while prime money market funds and tax-exempt money market funds had outflows of $111 billion and $33 billion, respectively.

FIGURE 3.17

Net New Cash Flow to Money Market Funds in 2020
Billions of dollars; monthly, 2020
Figure 3.17

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Demand for government money market funds in March and April 2020 was shaped by the efforts of businesses, households, and governments to preserve or build liquidity. As market volatility and investor uncertainty peaked in March, investors of all types used government money market funds, which primarily hold securities issued by the US Treasury, to help them preserve liquidity. Government money market funds experienced inflows of $834 billion in March, followed by additional inflows of $342 billion in April. From May through December, government money market funds had outflows of $338 billion. Even though financial markets became significantly calmer after April, the bulk of the cash that flooded into government money market funds remained.

Meanwhile, prime money market funds experienced outflows of $139 billion in March 2020, 17.6 percent of their net assets at the end of February. In particular, institutional prime money market funds had outflows of $91 billion (29.1 percent of their total net assets at the end of February) and retail prime money market funds had outflows of $48 billion (10.1 percent of their total net assets at the end of February). A combination of factors may have contributed to these outflows. Investor demand for safe, liquid assets meant that some of the outflows from prime money market funds may have moved into government money market funds.

The 2014 reforms from the Securities and Exchange Commission (SEC) may also have played a role; for example, they granted funds the option to impose fees or gates on redemptions if their weekly liquid assets dropped below the 30 percent regulatory minimum. As weekly liquid assets of some institutional prime money market funds approached the 30 percent threshold, the pace of outflows accelerated because of the risk that a fund could impose a liquidity fee or redemption gate. Toward the end of March 2020, the Federal Reserve established a range of facilities to lend to virtually every sector of the economy, including to money market funds through the Money Market Fund Liquidity Facility. These facilities eased pressures on short-term credit markets and money market funds, and outflows from prime money market funds reversed. In April, prime money market funds experienced inflows of $49 billion, followed by inflows of $46 billion in May.

In March 2020, the Federal Reserve lowered the federal funds target rate twice. By the end of April, the federal funds rate was hovering at a little more than zero, and net yields on prime and government money market funds—which closely track short-term interest rates—had dropped significantly (Figure 3.18). By year-end 2020, government money market fund net yields were 0.01 percent and prime money market fund net yields were 0.03 percent. To keep net yields above zero in 2020, many advisers reinstituted the expense waivers they had provided to their money market funds during the ultralow interest rate environment from 2009 through 2015. Consequently, the expenses waived by money market funds increased sharply from an estimated $1.2 billion in 2019 to an estimated $3.1 billion in 2020 (Figure 3.19).

FIGURE 3.18

Net Yields of Money Market Funds Were Nearly Zero by the End of 2020
Percent, month-end
Figure 3.18

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* Net yields of money market funds are annualized seven-day compound net yields.

Sources: iMoneyNet and Federal Reserve Board

FIGURE 3.19

Money Market Fundsʼ Use of Expense Waivers Increased in 2020
Money market fund expenses waived, billions of dollars
Figure 3.19

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Source: Investment Company Institute tabulations of iMoneyNet data