This section provides a broad overview of U.S.-registered investment companies—mutual funds, closed-end funds, exchange-traded funds, and unit investment trusts—and their sponsors.

Americans' Continued Reliance on Investment Companies

Role of Investment Companies in Financial Markets

Number of Investment Companies and Types of Intermediaries

Investment Company Employment

U.S.-registered investment companies play a significant role in the U.S. economy and world financial markets. These funds managed more than $10 trillion in assets at the end of 2008 for 93 million U.S. investors. Funds supplied investment capital in securities markets around the world and were among the largest group of investors in the U.S. stock, commercial paper, and municipal securities markets.

Investment Company Assets in 2008

U.S.-registered investment companies managed $10.3 trillion at year-end 2008 (Figure 1.1), a $2.6 trillion decrease from year-end 2007. Major U.S. stock price indexes declined about 40 percent during the year, significantly lowering total net assets of funds invested in domestic equity markets. Declines in stock prices abroad had a similar effect on funds invested in foreign stocks. U.S. stock and bond funds holding international assets decreased further from the strengthening of the U.S. dollar and the resulting decrease in the dollar value of foreign securities. Including funds offered in foreign countries, worldwide mutual fund assets decreased by $7.2 trillion to $19.0 trillion as of year-end 2008.

The decline in the value of U.S. fund assets was tempered somewhat by new investments. Shareholders added $411 billion in new cash to mutual funds in 2008 and reinvested $214 billion of income dividends that mutual funds distributed during the year. Although investors pulled $234 billion from stock funds as negative stock market returns reduced demand for these funds, these outflows were offset by strong inflows to fixed-income funds as investor concerns about the global economy and inflows from other cash investments boosted flows (into money market funds in particular). Other types of registered investment companies experienced mixed results in investor demand. Flows into exchange-traded funds (ETFs) continued to expand, with net share issuance (including reinvested dividends) reaching a record $177 billion. Unit investment trusts (UITs) had gross issuance of $24 billion, while closed-end funds issued only $329 million in new shares during 2008.

FIGURE 1.1

Investment Company TOTAL NET Assets BY TYPE

Billions of dollars, year-end, 1995–2008

	Mutual funds¹	Closed-end funds	ETFs²	UITs	Total³
1995	$2,811	$143	$1	$73	$3,028
1996	3,526	147	2	72	3,747
1997	4,468	152	7	85	4,712
1998	5,525	156	16	94	5,791
1999	6,846	147	34	92	7,119
2000	6,965	143	66	74	7,248
2001	6,975	141	83	49	7,248
2002	6,390	159	102	36	6,687
2003	7,414	214	151	36	7,815
2004	8,107	254	228	37	8,626
2005	8,905	277	301	41	9,524
2006	10,397	298	423	50	11,167
2007	12,000	313	608	53	12,974
2008	9,601	188	531	29	10,349

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¹Mutual fund data exclude mutual funds that primarily invest in other mutual funds.
²ETF data prior to 2001 were provided by Strategic Insight Simfund; ETF data include investment companies not registered under the Investment Company Act of 1940 and exclude ETFs that primarily invest in other ETFs.
³Total investment company assets include mutual fund holdings of closed-end funds and ETFs.
Note: Components may not add to the total because of rounding.
Sources: Investment Company Institute and Strategic Insight Simfund

Americans’ Continued Reliance on Investment Companies

Households are the largest group of investors in funds, and registered investment companies managed 19 percent of households’ financial assets at year-end 2008 (Figure 1.2). This share is down from 2007, reflecting the drop in the value of stocks held in equity and hybrid funds. Nevertheless, the share of household assets held in funds remained above levels seen in the early 1990s. As households have increased their reliance on funds, their demand for directly held stocks and bonds has grown more slowly. For example, over the period 2004 to 2008, households purchased, on net, a total of $2.4 trillion in mutual funds (including through variable annuities), ETFs, and closed-end funds, while they sold $2.5 trillion of directly held stock (Figure 1.3). Much of this shift by households toward funds has been through net purchases of mutual funds.

FIGURE 1.2

Share of Household Financial Assets Held in Investment Companies

Percentage, year-end, 1980–2008

Figure 1.2

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Sources: Investment Company Institute and Federal Reserve Board

The growth of 401(k) and other defined contribution (DC) plans and the important role that mutual funds play in these plans explain some of households’ heavier reliance on investment companies during the past two decades. At year-end 2008, 9 percent of household financial assets were invested in 401(k) and other DC retirement plans, up from 6 percent in 1990. Mutual funds managed 44 percent
of the assets in these plans. Households also have invested in mutual funds outside of DC plans. Individual retirement accounts (IRAs) made up 9 percent of household financial assets, and mutual funds managed 44 percent of IRA assets in 2008. Mutual funds also managed $3.6 trillion of assets that households held in taxable accounts.

FIGURE 1.3

Household Net Purchases of Financial Assets¹

Billions of dollars, 2004–2008

Figure 1.3

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¹New cash and reinvested dividends are included.
²Mutual funds (including variable annuities), closed-end funds, and ETFs are included.
³Commercial paper and seller-financed mortgages are included.
⁴Net acquisition of assets in the form of equity in noncorporate business, DB plans, foreign deposits, security credit, reserves for certain life insurance policies, and other miscellaneous assets are included.
Sources: Investment Company Institute and Federal Reserve Board

As individuals have increased their reliance on funds, so have nonfinancial businesses and other institutional investors such as life insurance companies and other financial institutions. Many institutions rely on mutual funds to manage a portion of their cash and other short-term assets. Money market funds geared toward institutional investors attracted $525 billion in new cash during 2008. Increased economic uncertainty during the year and ongoing turmoil in the money markets encouraged these investors to increase their holdings of money market funds, especially those funds invested in Treasury and government agency debt. Part of the increased demand came from some investors moving their cash holdings into money market funds and out of unregistered cash pools and direct investments in money market instruments. By the end of the year, for example, nonfinancial businesses held a record 32 percent of their cash in money market funds.

Institutional investors have also contributed to the growing demand for ETFs. Investment managers, including mutual funds and pension funds, use ETFs to manage liquidity. This strategy allows them to keep fully invested in the market while holding a highly liquid asset to manage their investor flows. Asset managers also use ETFs as part of their investment strategies, including as a hedge for their exposure to equity markets.

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

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 15 years and held a significant portion of the outstanding shares of U.S.-issued stocks, bonds, and money market securities at year-end 2008. Investment companies as a whole were the largest group of investors in U.S. companies, holding 27 percent of their outstanding stock at year-end 2008 (Figure 1.4).

Investment companies also held the largest share of U.S. commercial paper—an important source of short-term funding for major U.S. and foreign corporations. Money market funds account for the majority of funds’ commercial paper holdings, and the share of outstanding commercial paper these funds hold tends to fluctuate with investor demand for money market funds and the overall supply of commercial paper. During the second half of 2007 and early 2008, when money market funds had strong cash inflows, their holdings of commercial paper rose, along with their holdings of Treasury and agency securities, certificates of deposit, and other money market instruments.

FIGURE 1.4

Investment Companies Channel Investment to Stock, Bond, and
Money Markets

Percentage of total market securities held by investment companies, year-end 2008

Figure 1.4

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Note: Components may not add to the total because of rounding.
Sources: Investment Company Institute, Federal Reserve Board, and World Federation of Exchanges

As the financial crisis intensified in 2008, increased uncertainty about firms’ credit quality, higher demand for money market funds invested only in Treasury and government agency debt, and a severe lack of liquidity in the commercial paper market prompted many money market funds to reduce their purchases of commercial paper. In addition, some money market funds utilized the Federal Reserve’s Asset-Backed Money Market Mutual Fund Liquidity Facility and sold asset-backed commercial paper in September 2008. During the last three months of the year, money market funds increased their holdings of commercial paper considerably, largely in response to government programs seeking to foster liquidity in the commercial paper market and the money market in general. Nevertheless, holdings of commercial paper by money market funds at year-end 2008 were still moderately below those of year-end 2007. Over the same period, total outstanding commercial paper declined by 11 percent as investor demand for asset-backed commercial paper and financial commercial paper dropped sharply. This percentage decline in the overall supply of commercial paper just about offset the percentage reduction in money market funds’ holdings of commercial paper. As a result, mutual funds’ share of the commercial paper market edged down to 44 percent at year-end 2008, from 45 percent at year-end 2007.

At year-end 2008, investment companies held 33 percent of tax-exempt debt issued by U.S. municipalities, which is on par with direct household ownership. Funds’ share of the tax-exempt market has risen only slightly in the past several years despite the strong flows into these funds, as the overall supply of tax-exempt debt has grown. Funds held 15 percent of U.S. Treasury and government agency securities at year-end 2008. Funds played a more modest role in the corporate bond market, but still held approximately 9 percent of the outstanding debt securities in this market.

Number of Investment Companies and Types of Intermediaries

In 2008, there were nearly 700 financial firms from around the world that competed in the U.S. market to provide investment management services to fund investors. Sixty percent of U.S. fund and trust sponsors were independent fund advisers (Figure 1.5), and these sponsors managed more than half of investment company assets. Banks, thrifts, insurance companies, brokerage firms, and non-U.S. fund advisers are other types of fund sponsors in the U.S. marketplace.

FIGURE 1.5

60 Percent of Fund Sponsors Were Independent Fund Advisers

Percentage of investment company complexes by type of intermediary, year-end 2008

Figure 1.5

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Historically, low barriers to entry have attracted a large number of investment company sponsors to the fund marketplace in the United States. These low barriers to entry led to a rapid increase in the number of fund sponsors in the 1980s and 1990s. However, competition among these sponsors and pressure from other financial products have reversed this trend. About 400 fund advisers left the fund business over the period 2000 to 2008; in the same time, about 300 new firms entered (Figure 1.6). The overall effect has been a net reduction of 12 percent in the number of industry firms serving investors. The decrease in the number of advisers has occurred with larger fund sponsors acquiring some smaller fund families and with some fund advisers liquidating funds and leaving the fund business. In addition, several other large sponsors of funds have recently sold their fund advisory businesses. The portion of fund companies that have been able to retain assets in addition to attracting new investments has been lower in this decade than during the 1990s (Figure 1.7). Two bear markets leading to outflows from stock funds and other competitive pressures affected the profitability of fund sponsors and contributed to the decline in their number in the past nine years.

FIGURE 1.6

Number of Fund Sponsors

2000–2008

Figure 1.6

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FIGURE 1.7

Fund Complexes with Positive Net New Cash Flow to stock, bond, and hybrid funds

Percentage, selected years

Figure 1.7

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The decline in the number of fund sponsors has been concentrated primarily among those advising mutual funds, and their exit from the industry has caused the growth in the number of mutual funds to slow in recent years. Competitive dynamics also affect the number of funds offered in any given year by the fund advisers that remain. In particular, fund sponsors create new funds to meet investor demand, and they merge or liquidate funds that do not attract sufficient investor interest. Fund sponsors continued this pattern by opening fewer than 80 additional mutual funds, on net, in 2008 (Figure 1.8).

FIGURE 1.8

Number of Mutual Funds Leaving and Entering the Industry*

2000–2008

Figure 1.8

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*Data include mutual funds that do not report statistical information to the Investment Company Institute. Data also include mutual funds that invest primarily in other mutual funds.

The total number of other investment companies has fallen considerably since 2000, as sponsors of UITs have been creating fewer new trusts (Figure 1.9). These investment companies often have preset termination dates, and in conjunction with a slowdown in the creation of new UITs, the total number of UITs has declined substantially. Additionally, closed-end fund sponsors shut down 18 more funds than they opened in 2008. Sponsors of ETFs, however, opened over 100 new funds, on net, in 2008.

Figure 1.9

Number of Investment Companies by Type

Year-end, 1995–2008

	Mutual funds¹	Closed-end funds	ETFs²	UITs	Total
1995	5,761	500	2	12,979	19,242
1996	6,293	498	19	11,764	18,574
1997	6,778	488	19	11,593	18,878
1998	7,489	492	29	10,966	18,976
1999	8,004	512	30	10,414	18,960
2000	8,371	482	80	10,072	19,005
2001	8,519	492	102	9,295	18,408
2002	8,512	545	113	8,303	17,473
2003	8,427	584	119	7,233	16,363
2004	8,419	619	152	6,499	15,689
2005	8,451	635	204	6,019	15,309
2006	8,723	647	359	5,907	15,636
2007	8,749	664	629	6,030	16,072
2008	8,889	646	743	5,984	16,262

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¹Mutual fund data include only mutual funds that report statistical information to the Investment Company Institute. The data also include mutual funds that invest primarily in other mutual funds.
²ETF data prior to 2001 were provided by Strategic Insight Simfund; ETF data include investment companies not registered under the Investment Company Act of 1940 and ETFs that invest primarily in other ETFs.
Sources: Investment Company Institute and Strategic Insight Simfund

Investment Company Employment

Based on results of a biennual survey, fund sponsors added more than 21,000 workers to their payrolls between 2005 and 2007, reaching a record 168,000 employees (latest data available). Fund sponsors provide advisory, recordkeeping, administrative, custody, and other services to a growing number of funds and their investors.

The largest group of workers provides services to fund investors and their accounts, with 36 percent of fund employees involved in these activities (Figure 1.10). Investor servicing encompasses a wide range of activities to help investors monitor and update their accounts. Employees in these functions work in call centers and help shareholders and their financial advisers with questions about investors’ accounts and with processing applications for account openings and closings. They also work in retirement plan transaction processing, retirement plan participant education, participant enrollment, and plan compliance.

FIGURE 1.10

Investment Company Industry Employment by Job Function

Percentage of jobs in registered investment company operations areas, March 2007

Figure 1.10

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Twenty-seven percent of the industry’s workforce was employed by a fund’s investment adviser or a third-party service provider in support of portfolio management functions such as investment research, trading and security settlement, information systems and technology, and other corporate management functions. Jobs related to fund administration, including financial and portfolio accounting and regulatory compliance duties, accounted for 11 percent of industry employment. Personnel involved with distribution services, such as marketing, product development and design, and investor communications, accounted for 14 percent of the workforce. Sales-force employees—including registered representatives and sales support staff where at least 50 percent of the employee’s revenue is derived from mutual fund sales—and mutual fund supermarket representatives represented 12 percent of fund industry jobs.

For many industries, employment tends to be concentrated in locations of the industry’s origins, and investment companies are no exception. Massachusetts and New York served as early hubs of investment company operations, and remained so in 2007, employing nearly one-third of the workers in the fund industry (Figure 1.11). As the industry has grown from its early roots, other states have become significant centers of fund employment. California, Pennsylvania, and Texas also have significant concentrations of fund employees. Fund companies in these states employed about one-quarter of all fund industry employees as of March 2007.

FIGURE 1.11

Industry Employment by State

Estimated number of employees of registered investment companies by state, March 2007

Figure 1.11

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