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Factors that affect the demand for equity, bond, hybrid, and money market funds, at year-end 2012

Investor Demand for U.S. Mutual Funds

U.S. Mutual Fund Assets

With $13 trillion in assets, the U.S. mutual fund industry remained the largest in the world at year-end 2012. Total net assets increased $1.4 trillion from the level at year-end 2011, boosted by growth in equity, bond, and hybrid fund assets.

Demand for mutual funds increased in 2012 with net new cash flows of all types of mutual funds totaling $196 billion. Investor demand for certain types of mutual funds appeared to be driven, in large part, by a continued trend toward investment diversification, the demographics of the U.S. population, and uncertainty surrounding the year-end fiscal cliff.

Inflows to bond funds were quite strong and net withdrawals from equity funds picked up—their fifth consecutive year of outflows. Hybrid funds remained popular with inflows increasing again in 2012. After three years of sizable outflows, money market funds experienced a small net outflow of less than $500 million. This slowdown in net redemptions owed in large part to investors moving to cash at year-end because of fiscal cliff concerns.

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Investor Demand for U.S. Mutual Funds

Investor demand for mutual funds is influenced by a variety of factors, not least of which is funds’ ability to assist investors in achieving their investment objectives. For example, U.S. households rely on equity, bond, and hybrid mutual funds to meet long-term personal financial objectives such as preparing for retirement.

U.S. households as well as businesses and other institutional investors use money market funds as cash management tools because they provide a high degree of liquidity and competitive short-term yields. Changing demographics and investors’ reactions to changes in U.S. and worldwide economic and financial conditions play important roles in determining how demand for specific types of mutual funds and for mutual funds in general evolves over time.

U.S. Mutual Fund Assets

The U.S. mutual fund market—with $13 trillion in assets under management at year-end 2012—remained the largest in the world, accounting for 49 percent of the $26.8 trillion in mutual fund assets worldwide (Figure 2.1).

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The majority of U.S. mutual fund assets were in long-term funds

The majority of U.S. mutual fund assets were in long-term funds. Equity funds made up 45 percent of U.S. mutual fund assets at year-end 2012 (Figure 2.1). Domestic equity funds (those that invest primarily in shares of U.S. corporations) held 33 percent of total industry assets. World equity funds (those that invest primarily in non-U.S. corporations) accounted for another 12 percent. Bond funds accounted for 26 percent of U.S. mutual fund assets. Money market funds (21 percent) and hybrid funds (8 percent) held the remainder of total U.S. mutual fund assets.

More than 700 sponsors managed mutual fund assets in the United States in 2012. Long-run competitive dynamics have prevented any single firm or group of firms from dominating the market. For example, of the largest 25 fund complexes in 1995, only 15 remained in this top group in 2012. Another measure of market concentration is the Herfindahl-Hirschman Index, which weighs both the number and relative size of firms in the industry. Index numbers below 1,000 indicate that an industry is unconcentrated. The mutual fund industry had a Herfindahl-Hirschman Index number of 465 as of December 2012.

Nevertheless, in the past 12 years the percentage of industry assets at larger fund complexes has increased. The share of assets managed by the largest 10 firms in 2012 was 53 percent, up from the 44 percent share managed by the largest 10 firms in 2000 (Figure 2.2). In addition, the share of assets managed by the largest 25 firms was 73 percent in 2012 compared with 68 percent in 2000. Several factors likely contributed to this development.

One factor is the acquisition of smaller fund complexes by larger ones. Second, total returns on U.S. stocks* averaged 3.5 percent annually from year-end 2000 to year-end 2012 and likely held down assets managed by fund complexes that concentrate their offerings primarily in domestic equity funds—many of which tend to be smaller fund complexes. In addition, domestic equity mutual funds have had outflows for seven consecutive years. Third, in contrast, total returns on bonds averaged 6 percent annually in the past 12 years.

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Finally, strong inflows over the decade to bond funds, which are fewer in number and have fewer fund sponsors than equity mutual funds, helped boost the share of assets managed by those large fund complexes that offer bond funds.

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Cory Mtchell

Cory has been a professional trader since 2005, and holds a Chartered Market Technician (CMT) designation. He has been widely published, writing for Technical Analysis of Stock & Commodities magazine, Investopedia, Forbes, Benzinga, and others.