learned in Chapter 4, your risk can be lowered by holding a portfolio of diversified
securities rather than a limited number. Small investors buying stocks individually
may find it difficult to acquire enough securities in enough different industries to cap-
ture this benefit. Additionally, mutual funds provide a low-cost way to diversify into
fund industry.
Chapter 20 The Mutual Fund Industry
491
foreign stocks. It can be difficult and expensive to invest in a foreign security not
listed on U.S. exchanges. The net assets in world equity funds totaled $512 billion
in 2009, representing over 8% of all U.S. mutual fund investments.
Significant cost advantages may accrue to mutual fund investors. Institutional
investors negotiate much lower transaction fees than are available to individual
investors. Additionally, large block trades of 100,000 shares or more trade accord-
ing to a different fee structure than do smaller trades. By buying securities through
a mutual fund, investors can share in these lower fees.
One of the main features that has driven mutual fund growth has been access
to managerial expertise. Despite the fact that research discussed in Chapter 6
has consistently demonstrated that mutual funds do not outperform a random pick
from the market, many investors prefer to rely on professional money managers to
select their stocks. The failure of mutual funds to post greater-than-average returns
should not come as a surprise given our discussion of market efficiency. Still, the
financial markets remain something of a mystery to a large number of investors. These
investors are willing to pay fees to let someone else choose their stocks.
The increase in the number of defined-contribution pension plans has also been
a factor in mutual fund growth. In the past, most pension plans either invested on
behalf of the employee and guaranteed a return or required employees to invest in
company stock. Now, most new pension plans require the employee to invest his or
her own pension dollars. With pension investments being made every payday, the
mutual fund provides the perfect pension conduit. Currently, over 22% of all pension
dollars are invested in mutual funds. This amount is likely to grow as more pension
plans convert to the defined-contribution structure.
Table 20.1 shows the total net assets, number of funds, and number of mutual
funds accounts since 1970. There are currently over 8,000 separate mutual funds
for investors to choose from. It is interesting to note that this means there are more
separate mutual funds than there are stocks trading on the New York and NASDAQ
stock exchanges combined.
In 38 years the amount invested in mutual funds has increased from $47 billion
to nearly $10 trillion. To put this figure in perspective, this is about the same as the
total assets of all commercial banks in the United States at the beginning of 2004.
Ownership of Mutual Funds
An estimated 52.59 million, or 45%, of households own mutual funds. By the begin-
ning of 2010, 82% of mutual fund shares were owned by households, with the rest
held by fiduciaries and other business organizations. This represents a tremendous
increase since 1980, when only 5.7% of households held mutual fund shares (see
Figure 20.1). The median mutual fund investor is middle class, 49 years old, married,
employed, and possesses financial assets of $200,000. About 45% are college grad-
uates. The median household income is $80,000, and fully 92% cite preparing for
retirement as one of their main reasons for holding shares.
Mutual funds accounted for $3.1 trillion, or 22%, of the $14 trillion U.S. retire-
ment market at the beginning of 2009. This represents 31% of all mutual fund assets.
Deposits into retirement mutual funds come from two sources: employer-sponsored
defined-contribution plans, especially 401(k) plans, and individual retirement accounts
(IRAs). Figure 20.2 shows the average asset allocation of all 401(k) mutual fund
accounts. The bulk of retirement assets are in equity funds, followed by guaranteed
investment contracts, bond funds, and company stock.
