|
Year
Net Assets (millions) Number of Funds Number of Accounts (thousands)
1970
47,618
361
10,690
1971
55,045
392
10,901
1972
59,830
410
10,635
1973
46,518
421
10,331
1974
35,776
431
10,074
1975
45,874
426
9,876
1976
51,276
452
9,060
1977
48,936
477
8,693
1978
55,837
505
8,658
1979
94,511
526
9,790
1980
134,760
564
12,088
1981
241,365
665
17,499
1982
296,678
857
21,448
1983
292,985
1,026
24,605
1984
370,680
1,243
27,636
1985
495,385
1,528
34,098
1986
715,667
1,835
45,374
1987
769,171
2,312
53,717
1988
809,370
2,737
54,056
1989
980,671
2,935
57,560
1990
1,065,194
3,079
61,948
1991
1,393,189
3,403
68,332
1992
1,642,543
3,824
79,931
1993
2,069,960
4,534
94,015
1994
2,155,320
5,325
114,383
1995
2,811,290
5,725
131,219
1996
3,525,800
6,248
149,933
1997
4,468,200
6,684
170,299
1998
5,525,209
7,314
194,029
1999
6,846,339
7,791
226,212
2000
6,964,630
8,155
244,705
2001
6,974,910
8,305
248,701
2002
6,383,480
8,243
251,123
2003
7,402,420
8,125
260,698
2004
8,095,080
8,040
269,468
2005
8,891,110
7,974
275,479
2006
10,396,510
8,117
288,596
2007
12,000,640
8,026
292,590
2008
9,602,600
8,022
264,597
2009
11,120,730
7,691
270,949
Source: Investment Company Institute, 2010 Investment Company Fact Book, 50th ed. (Washington, DC:
ICI), p. 124. Reprinted with permission.
Chapter 20 The Mutual Fund Industry
493
0
5
10
15
20
35
40
25
30
1990
1988
1986
1984
1982
Percent
1980
1997
1996
1994
1992
2000
1999
1998
2001 2002 2003 2004 2005 2006 2007 2008 2009
45
50
55
F I G U R E 2 0 . 1
Household Ownership of Mutual Funds
Data Source: Investment Company Institute, 2010 Investment Company Fact Book, 50th ed. (Washington, DC: ICI), p. 80.
www.icifactbook.org/index.html
.
money funds
6%
bond funds
9%
GICs and
stable value
8%
lifecycle
15%
equity funds
38%
other
3%
balanced funds
13%
money funds
9%
bond funds
15%
GICs and
stable value
23%
company stock
8%
equity funds
28%
other
3%
balanced funds
18%
company stock
8%
lifecycle
6%
people in 20s
people in 60s
F I G U R E 2 0 . 2
Average Asset Allocation for All 401(k) Plan Balances
Source: Investment Company Institute, 2010 Investment Company Fact Book, 50th ed. (Washington, DC: ICI), p. 104.
Reprinted with permission.
494
Part 6 The Financial Institutions Industry
Mutual Fund Structure
Mutual fund companies frequently offer a number of separate mutual funds. They are
called complexes and are defined as a group of funds under substantially common
management, composed of one or more families of funds. The advantage to investors
of fund complexes is that investments can usually be transferred among different
funds within a family very easily and quickly. Additionally, account information can
be summarized by the complex to help investors keep their assets organized.
In this section we will look at how mutual funds are structured and at the types
of investments the funds hold.
Open- Versus Closed-End Funds
Mutual funds are structured in two ways. The first funds were what are now called
closed-end funds. In a closed-end fund, a fixed number of nonredeemable shares
are sold at an initial offering and are then traded in the over-the-counter market
like common stock. The market price of these shares fluctuates with the value of
the assets held by the funds. The market value of the shares may be above or below
the value of the assets held by the fund, depending on the market’s assessment of
how likely managers are to pick stocks that will increase fund value.
The problem with closed-end funds is that once shares have been sold, the fund
cannot take in any more investment dollars. Thus, to grow the fund managers must
start a whole new fund. The advantage of closed-end funds to managers is that
investors cannot make withdrawals. The only way investors have of getting money
out of their investment in the fund is to sell shares.
Today, the closed-end fund has been largely replaced with the open-end fund.
Investors can contribute to an open-end fund at any time. The fund simply increases
the number of shares outstanding. Another feature of open-end funds is that the fund
agrees to buy back shares from investors at any time. Each day the fund’s net asset
value is computed based on the number of shares outstanding and the net assets
of the fund. All shares bought and sold that day are traded at the same net asset value.
See the Case for a complete discussion of computing the net asset value.
Open-end mutual funds have a couple of advantages that have contributed to the
growth of mutual funds. First, because the fund agrees to redeem shares at any time,
the investment is very liquid. As discussed earlier, this liquidity intermediation has
great value to investors. Second, the open-end structure allows mutual funds to grow
unchecked. As long as investors want to put money into the fund, it can expand to
accommodate them. For example, the Vanguard S&P 500 index fund has holdings
of about $100 billion. These advantages explain why 98% of all mutual fund dollars
are invested in open-end funds.
Organizational Structure
Regardless of whether a fund is organized as a closed- or an open-end fund, it will
have the same basic organizational structure. The investors in the fund are the share-
holders. In the same way that shareholders of corporations receive the residual
income of a company, the shareholders of a mutual fund receive the earnings, after
expenses, of the mutual fund.
The board of directors oversees the fund’s activities and sets policy. They are also
responsible for appointing the investment advisor, usually a separate company, to
manage the portfolio of investments and a principal underwriter, who sells the fund
Chapter 20 The Mutual Fund Industry
495
shares. SEC regulation requires that a majority of the directors be independent of the
mutual fund.
The investment advisors manage the fund in accordance with the fund’s stated
objectives and policies. The investment advisors actually pick the securities that
will be held by the fund and make both buy and sell decisions. It is their expertise
that determines the success of the fund.
Stock (at current market value)
$20,000,000
Bonds (at current market value)
$10,000,000
Cash
$ 500,000
Total value of assets
$30,500,000
Liabilities
– $ 300,000
Net worth
$30,200,000
C A S E
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