Mutual Funds: Portfolio Structures, Analysis, Management, and Stewardship

CHAPTER 3

The Economics of Mutual Funds

DAVID M. SMITH, Ph.D., CFA Associate Professor of Finance and Director of the Center for Institutional Investment Management, the University at Albany (SUNY)

 

 

 

Investment companies, and mutual funds in particular, have become a dominant investment vehicle. Total investment dollars in mutual funds grew very slowly in the decades subsequent to passage of the Investment Company Act of 1940, but this was because the growth occurred on a very small base. According to the Investment Company Institute (ICI, 2009), the U.S. annual growth rate for open-end mutual fund net assets between 1940 and 2008 was 15.8 percent. Gremillion (2005) reports that by 1994, mutual fund assets had grown to a level that exceeded the total deposits in Federal Deposit Insurance Corporation-insured banks. Since then, mutual fund net assets have increased more than fivefold, and mutual funds are now owned by more than half of all U.S. households.

This chapter discusses the size and market concentration of the mutual fund industry, the market entry and exit of mutual funds, the benefits and costs of mutual fund size changes, principal benefits and costs of ownership from fund shareholders’ perspective, and mutual fund governance.

SIZE AND STRUCTURE OF THE MUTUAL FUND INDUSTRY

The ICI (2009) reports that net assets of mutual funds worldwide have risen from $11.9 trillion at year-end 2000 to $19.0 trillion at year-end 2008. About 51 percent of these net assets are in ...