According to the most recent Investment Company Institute Factbook, the fund industry, based on what they refer to as emergence of fund entrepreneurs have made the middle class the money class. With 90 million households owning mutual funds, either in their 401(k)s or some other type of defined contribution plan available n the workplace or through their investments in various types of IRAs, a picture of a mature and developed industry has emerged.
With 90 million Americans holding $12.2 trillion in assets in these investments, the ICI study, the 50th anniversary of this industry marketing factbook, points towards the ability of these funds to achieve a wide range of investment strategies that have helped 44% of households move closer to their financial goals. Admittedly, this increase in investment activity is the direct result of the creation of defined contribution plans and IRAs as pensions became less prominent in for retirement income.
While households have found the use of mutual funds to their liking, so have institutional investors and businesses found the tool a good place to park cash and short-term assets. This increase, while not noted in the research may be contributing to the length of the recent economic downturn as business is reluctant to invest in their own operations, preferring to keep cash (which the ICI does note as a record) in money market accounts instead. Many of these entities have employed ETFs to a greater degree to keep those assets even more liquid.
But not all is well in terms of who offers these products. Ten years ago, there were 792 fund sponsors; today there are only 685. In all but three of the years surveyed for the study (2000-2009), more fund sponsors left the business that entered. Competition, mergers and acquisitions and two bear markets pushed a great deal of the fund sponsors from the business during that time period.
This consolidation of fund sponsors is also reflected in the number of mutual funds offered, with 400 fewer funds in 2009 than just a decade earlier. In 2000, 1,111 new mutual funds entered the competition for investor dollars. By 2009, 824 funds had been merged or liquidated, twice the number of new offerings. The total number of funds across all offerings (mutual funds, closed-end funds, ETFs, UITs) had dropped to 16,120 from 19,005. ETFs grew over the same period by 100% while UIT lost the same percentage of investors.
A couple of interesting trends developed over that period as well. Money market outflows were more or less matched by bond fund inflows. Not since 2003 when outflows in all classes of mutual funds fell by $43 billion did the industry see so much money leave ($150 billion in 2009). The lion’s share of this transitory cash was in equity funds, the result the research suggests was due to poor market performance.
This flight from risk to long-term, more conservatively focused funds pointed to lower investor tolerance to potential losses even though that very risk could be credited with the outstanding growth in the industry over the same period. Hybrid funds, those with a combination of stocks and bonds attracted $60 billion during 2009.
Ninety percent of the hybrid funds were funds of funds, with numerous formerly stand-alone tools being grouped together, repackaged and sold as safer than their stand-alone variety. Credit the clever marketing of target-date funds (life cycle funds) for the growth in this corner of the market.
Index funds, the report shows, are held by one in four investors with almost half of the new money entering the market being deposited in these market indexes.
Next up in part two of the Middle Class: The Money Class? – who invests in mutual funds.
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