10 years of broad fund expansion - and prospects for even more
Ten years ago the Investment Company Institute, the trade association of the mutual fund industry, collected data on 410 mutual funds, of which 330, or 80 percent, were classified as aggressive growth, growth, or growth-and-income funds. The remaining 80 funds were either balanced or income funds.
In 1981 the institute followed more than 650 mutual funds. The three equity categories made up 285, or just 44 percent, of the total. Thirty-four percent of all funds, including 150 money market funds, were in categories that did not even exist in the early 1970s.
A few additional numbers illustrate the effect of the broader product line. In 1973, total industry assets were $46.5 billion and total sales were $4.4 billion. Equity funds had the lion's share of the assets and market - 80 percent of total assets and 83 percent of sales.
The general disenchantment with all types of common stock investments after 1974 forced the industry to diversify, to become less dependent on any single product and thus position itself for the major change in climate. The market spoke and we listened.
For example, in 1981 net assets under management reached $242 billion. About the remaining $57 billion, equity products still accounted for 69 percent of the assets, but fully 60 percent of sales were in other types of funds.
Looked at another way, of the $195 billion increase in assets since 1973, money market funds contributed the largest amount, $182 billion. Short-term municipal bond funds contributed $4 billion. Other fund products, primarily bond and income funds, chipped in with $11 billion, and equity funds accounted for only $3 billion.
While new fund products help give the industry a firm foundation for future growth, the original product, the equity fund, recently enjoyed a resurgence of popularity. In 1981 common stock fund sales reached $6 billion, the highest amount in the industry's history.
Probably the best explanation for the renewed popularity of equity funds is the growing recognition of their excellent investment performance record in recent years. For example, for the five years ending with 1981, the average investment in common stock mutual funds with dividends and capital gains reinvested had gained about 92 percent in value, comparing favorably with a five-year 47 percent gain of the S&P 500 - which translates into an 8 percent annual rate. The return on mutual funds also outdistanced the 63 percent rise in the consumer price index over the same period.
Increased public awareness will continue to contribute to money market fund sales. Between 1974 and the present, public awareness of money funds has grown from almost zero to about 75 percent of the current household population. This change augurs well for the future of money market funds and for the industry as a whole, since awareness is the first step on the road to becoming a shareholder of other types of funds.
Although money market funds may have introduced mutual funds to millions of individuals, the vast retirement-plan market remains virtually untouched by the fund industry. Despite past problems in reaching that market, there have been recent indications that there has been greater penetration in this area by mutual funds and it is likely to be of increasing importance in the coming years.
A few figures will help show just how important this market is. At the end of 1980, the combined assets of the main types of retirement plans totalled nearly , over the previous year.
The private non-insured segment is the largest, with year-end 1980 assets of about $286 billion. At present mutual funds hold only 2 percent of this market. To study the causes of this unrealized potential for mutual funds, the institute surveyed a sample of plan sponsors. Not surprisingly, we found that investment performance and trouble-free management are among the most important skills a sponsor looks for in a plan manager.
A more surprising finding was that many sponsors have little knowledge of mutual funds and generally have mistaken impressions of where to find the best investment performance.
For example, only 3 percent of those surveyed thought that mutual funds had achieved the best performance record among institutions over the past 10 years. By contrast, 25 percent thought that first position belonged to bank trust departments, and 13 percent thought insurance companies had achieved the best results. In actuality, over the 10 years ending June 30, the average equity mutual fund had returned over 132 percent, far outdistancing the 94 percent achieved by the insurance companies and the 90 percent scored by bank pooled funds.
David Silver is president of the Investment Company Institute.