Management Investment Offices, Open-End

SIC 6722

Companies in this industry

Industry report:

The open-end management investment industry is comprised of investment companies that sell shares in open-end mutual funds. Open-end funds require the issuing company to redeem the shares upon request by the security holder. Often referred to as the mutual fund industry, the open-end fund industry comprises about 95 percent of the mutual fund market. Unit investment trusts, face-amount certificates, and closed-end mutual funds are excluded from this classification. Mutual fund management firms that work for investment companies are part of the investment advice industry discussed in SIC 6282: Investment Advice.

Industry Snapshot

Following unprecedented industry growth throughout much of the 1980s, as investors transferred assets from other financial sectors into mutual funds and investments in general increased, mutual fund assets continued to increase rapidly through the 1990s. A strong securities market, as well as an influx of new dollars from other financial sectors, contributed to the surge. Although mutual funds nourished the U.S. economy in many ways, such as providing capital to some thinly traded securities markets, the growing industry was also cited by some observers as a leading cause of stock market volatility.

The liberal practices of the 1990s caught up to the industry in the early 2000s as the economy entered a recession, the dot-com industry spun downward, and the stock market dropped off sharply after the terrorist attacks of September 11, 2001. Scandal rocked the industry in 2003 when numerous specific firms and the industry as a whole came under intense scrutiny for improper trading practices. However, by the mid-2000s the economy had improved, bolstered by historically low interest rates, and in 2004 fund assets increased by 11 percent. U.S. open-end mutual funds controlled more than $8.1 trillion in assets by mid-2005, and nearly 50 percent of all U.S. households owned shares in mutual funds, which was up from 6 percent in 1980. More than 8,100 such open-ended funds were in existence in the mid-2000s.

Like all participants in the financial services industry, management investment companies were affected by the subprime mortgage crisis and resulting financial and credit of the late 2000. Basically, after a surge in housing sales during the early and mid-2000s, due in part to the availability of low-interest, subprime mortgages, the housing bubble burst. Housing prices fell as interest rates rose, and many Americans, amid a spiraling economy, found they could not make their house payment. Default rates skyrocketed, as did foreclosures. The investment indusry was affected because a majority of these subprime mortgages had been packaged and sold to investors on Wall Street. After the housing fiasco, many of these investments became worthless. However, in late 2010 the indusry was looking toward a recovery. According to the Investment Company Institute, U.S.-registered investment companies managed $12.2 trillion at the end of 2009, and about 91 percent of these investments were in mutual funds.

Organization and Structure

A mutual fund is a corporation chartered by a state to operate as an open-end investment company. The company invests in a portfolio of assets and obtains capital by selling shares in its own securities. Capital is in turn reinvested in the portfolio. Income from investments is disbursed to shareholders or is used to compensate fund managers and expenses. The price investors pay for a share of the company is based primarily on the market value of the securities in the portfolio. The distinguishing characteristic of an open-end fund in relation to a closed-end fund is that the investment company must redeem an investor's shares upon his or her request. Mutual fund investors also benefit from professional management of their money, which they might otherwise be unable to afford. One disadvantage of mutual fund investing is that mutual funds are not tailored to the specific investment needs or tax status of individual shareholders. The shares in the fund are valued at their net asset value (NAV), and share prices fluctuate every day.

Many mutual funds provide investors with many services. Shareholders may elect to have money automatically withdrawn from their accounts on a periodic basis for investment in a mutual fund. Many funds also offer check-writing privileges and automatic reinvestment programs that pour dividends and capital gains back into new shares. The reinvestment option has proven to be very popular due to the tax saving advantages of not withdrawing dividends.

Types of Funds.
The two primary types of mutual funds are "no-load" and "load" funds. No-load funds do not require investors to pay fees or sales commissions, and the price of a share in a no-load fund is identical to its net asset value. The investment company typically acts as the distributor for its funds, and therefore bypasses brokerage fees and commissions. Investors in no-load funds do, however, usually incur some indirect costs related to marketing and other advertising expenses.

Shares in load funds, on the other hand, are usually sold through separate distributorships. The distributors sell fund shares through dealers and brokers, such as banks, insurance companies, or financial planners. According to the National Association of Securities Dealers (NASD)--the former regulatory body of the securities industry that was replaced by the Financial Industry Regulatory Authority in 2007--in 2005 the front-end load, or commission, could not exceed 8.5 percent of the value of the investment. In 2005, commissions generally were between 5 percent and 5.57 percent on front-end load funds.

Commissions are often scaled down as the size of the purchase increases, and although investment performance on average is the same for no-load and load funds, total returns are usually higher on no-load funds because of their lack of fees. During the mid-2000s, about 51 percent of all funds were no-load funds, up from just 40 percent in 1994. In addition, many low-load funds charged commissions as low as 2 percent or 3 percent.

Mutual funds can also be categorized according to the contents of their portfolios or their investment objectives. Although a plethora of funds serve diverse market segments, the three major categories of funds are common stock, bond, and money market.

Aggressive growth funds, also known as capital appreciation, seek to maximize capital gains, rather than current income. This type of fund is considered relatively risky and more volatile than many other funds because it typically focuses on securities of companies or industries with unproven potential for strong growth. Managers of aggressive funds may also make use of options or short-term speculative trading techniques. In the 1990s, more than 200 aggressive growth funds were available on the U.S. market. However, the aggressive growth market lost much of its appeal during the early 2000s as losses mounted during the dot-com bust and the telecommunications downfall.

On the other hand, the objective of a balanced fund is to conserve the investor's principal, pay a high level of income, and promote long-term growth. Assets in this type of fund are usually invested in a combination of conservative bonds, preferred stock, and common stock. Corporate bond funds try to achieve a similar objective by investing in a combination of corporate debt, U.S. treasury bonds, or other federal bonds.

Money market funds are low-risk investment vehicles holding short-term, high-grade securities such as treasury bills, certificates of deposit, and commercial paper. This type of fund was popular in the mid-2000s because it maintained a very stable net asset value. Tax-exempt money market funds, however, invested in municipal securities with short maturities. In the mid-2000s, approximately 950 money market funds were available to investors.

Global equity and bond funds maintain a portfolio of securities and debt instruments traded worldwide. These funds offer American investors access to diverse financial markets and companies that would otherwise be difficult, or impossible, to capitalize on. The investment of the fund is in stocks of U.S. and foreign companies. Other popular open-end mutual funds include income-mixed, municipal bond, high-yield bond, precious metal, and income-equity funds.

Mutual Fund Owners.
Although mutual funds are usually initiated and often indirectly managed by investment companies, shareholders own the funds. Shareholders include large numbers of individual investors with financial backgrounds ranging from modest to wealthy. In addition, many pension plans, profit-sharing funds, and other institutional investors also place portions of their assets in mutual funds. As Americans embraced mutual funds during the 1980s, the diversity of shareholders increased. For instance, in 1980 only 6 percent of all U.S. households held shares in mutual funds, but by 2005, this jumped to nearly 50 percent. About 20 percent of all household assets were invested in mutual funds, up from 7 percent in 1990.

Of the households that owned funds, 72 percent owned equity funds, 41 percent held bond and income funds, and 50 percent were shareholders of money market funds. The average household held shares in four funds. More than 80 percent of these customers bought their shares through a sales force of some type, such as a financial planner, bank, brokerage firm, or insurance agent. About 14 percent of the households invested directly through the investment company. As of 2010, the median mutual fund owner was 50 years old and earned about $80,00 a year. Seventy-six percent of shareholders were married. Seventy-six percent were saving for retirement.

The Industry's Role in Financial Markets.
The mutual fund industry is a major means of financial intermediation in the U.S. economy because of its popularity with investors and has a decisive impact on formation of domestic capital markets. During the 1990s, money market funds regularly controlled more open-market paper in the United States than any other industry segment. Furthermore, mutual funds provided an efficient tool to help finance everything from corporations and start-up companies to mortgages and governments.

Mutual fund companies were also the largest institutional purchasers of corporate equities, buying approximately one-quarter of all corporate bonds that were issued. Moreover, the amount of discretionary assets that U.S. households invested in mutual funds was estimated at nearly 20 percent in the mid-2000s.

In comparison to other U.S. financial institutions, mutual fund investment companies had become serious contenders in terms of controlling assets by the mid-2000s. All mutual funds combined contained more than $8.1 trillion in assets in 2005.

Investment companies operating mutual funds are regulated by the Securities and Exchange Act of 1934 and the Investment Company Act of 1940. The 1934 act was established to maintain fair and honest securities markets, and it also enforces other laws requiring investors to have access to information about the underlying condition of companies in which they invest. The Securities and Exchange Commission (SEC) administers federal regulation of the industry. The 1940 act provides for the registration and regulation of companies that are primarily engaged in the business of investing in securities.

Among many other requirements, the 1940 act stipulates that a company must redeem shares duly offered by shareholders within seven calendar days at per-share net asset value; the maximum load cannot exceed 9 percent of the share's offering price; and shareholders must be sent complete financial reports at least semiannually. Furthermore, a fund must have at least 75 percent of its funds invested so that not more than 5 percent is invested in any one issue and not more than 10 percent of the voting securities of any corporation are held by the fund. Mutual funds must also comply with regulations of each state in which its shares are held.

Background and Development

Mutual funds, in one form or another, have been functioning in financial markets since the nineteenth century. Funds in Great Britain, for instance, helped to finance reconstruction of the post Civil War U.S. economy by investing in farms, railroads, and businesses. British mutual funds heavily influenced the U.S. industry's development, and the first U.S. open-end mutual fund, Massachusetts Investors Trust, was started in 1924.

The Great Depression and World War II hampered asset growth in mutual funds. The period from 1929 to 1940 did, however, serve to establish the regulatory infrastructure that influenced the industry throughout the twentieth century. For instance, in 1940 the Investment Company Institute (originally called the National Association of Investment Companies) was established to develop industry standards and to influence mutual fund legislation.

Fewer than 300,000 shareholders, representing about $450 million in accounts, were participating in the industry in 1940. By 1945, however, mutual funds held more than $1 billion. The industry continued to realize vibrant growth throughout the postwar expansion as a surplus of investment dollars flowed from all sectors of the financial markets. In 1951, mutual funds represented more than one million accounts. This amount grew to about $17.4 billion in 1960.

Before 1960, mutual funds were viewed as a relatively conservative and placid investment instrument, much like trusts and endowment funds. In the late 1960s, however, a new breed of mutual fund company began to develop. Focusing on investment performance, these new companies offered maximum capital appreciation and high risk. Several of the new funds also practiced speculative trading techniques, such as short selling and options, in the hope of raising profits. Sophisticated investors began to find the new breed of aggressive funds attractive, and many people felt these funds offered the hands-on investment management they were seeking. In fact, 96 new "maximum capital gains" funds were launched in 1968 and 1969 alone. By 1970, about 400 funds of all types held more than $50 billion. Although the new aggressive funds took a beating in the 1970 bear market, they helped to expand the role of mutual funds and increase public awareness of mutual funds.

Until 1970, mutual funds were viewed as an efficient means of investing primarily in the stock market. The industry was transformed by the advent of the first money market mutual fund (MMMF) in 1971, called the Reserve Fund. This product allowed small investors to participate in high short-term interest rates in the money market that had previously been accessible only to the relatively wealthy. People suddenly had a viable alternative to bank deposits with substandard government-regulated interest rates. Municipal bond funds followed MMMFs in 1977, and tax-exempt MMMFs debuted in 1979.

As interest rates surged above 17 percent in the 1970s and early 1980s, massive amounts of funds shifted from bank deposits to higher paying MMMFs. As a result, the mutual fund industry controlled about $300 billion in assets by the early 1980s. Furthermore, nearly 75 percent of all mutual fund assets were held by money funds in 1982. Nevertheless, the 1980s would be the industry's most pivotal decade for change and growth.

Beginning in 1982, several factors influenced a major shift in the allocation of assets within the mutual fund industry. Falling interest rates reduced the popularity of money funds in comparison to other types of mutual funds. Strong securities markets brought more money into bond and equity funds. Also, a general increase in public familiarity with mutual funds, combined with the deregulation and metamorphosis of U.S. financial markets, increased the amount of money invested in mutual funds. By the early 1990s, the percentage of industry assets held by MMMFs had fallen to about 34 percent. Equity and bond funds each held about 36 percent and 30 percent, respectively.

While the composition of the industry shifted, mutual funds continued to realize dynamic asset growth throughout the 1980s. Many new funds and investment vehicles brought more investors into mutual funds. The public's awareness and familiarity with mutual funds was another factor that boosted industry assets. In addition, many institutional investors, such as pension funds and bank trust departments, invested increasing amounts in mutual funds to cut costs and increase returns on their portfolios.

Basic fund categories that were experiencing the greatest proliferation of new entrants in the late 1980s and early 1990s included taxable MMMFs, growth, state municipal bond, and international funds. Expansion of new funds had slowed, however, for income-mixed, high-yield bond, precious metal, and aggressive growth funds.

By 1990, 3,105 different mutual funds held more than $1 trillion in assets and represented more than 60 million shareholder accounts. These figures represented steady, stunning growth throughout the decade. While in 1980 only about 12 million shareholders participated in 564 accounts controlling $300 billion in assets, five years later the industry encompassed about $500 billion in assets, 35 million shareholders, and 1,528 different funds.

Mutual fund growth continued at a rapid pace throughout the 1990s, increasing from more than $1 trillion in fund assets in 1990 to more than $1.7 trillion by mid-1993. An influx of bank and pension assets into mutual funds was responsible for much of the growth. Other trends taking place in the industry in 1993 included an increase in the popularity of specialized mutual funds, shifts in the distribution channels used to sell shares, and escalating international activity.

Fund asset growth in the 1990s was largely a result of strong securities markets combined with an infusion of new investment dollars. Despite economic recession, the Dow Jones Industrial Average shot past a record high 3,500 in 1993, resulting in a boon for equity funds. At the same time, new money shifted to the mutual fund industry from other financial institutions. Although maturing certificates of deposit sent assets from banks to fund companies, the greatest reason for the deluge of cash was a diversion of retirement savings from traditional pension management institutions such as banks, trusts, and insurance companies.

Various social and economic changes in the 1970s and 1980s created an environment that led growing numbers of pension plan sponsors and participants to mutual funds. By investing 401(k) and other pension assets into mutual funds, sponsors and participants realized greater diversification of assets and participation in retirement plans. Furthermore, many participants favored mutual funds over other investment vehicles because they felt they had more control over their savings and a better understanding of how their funds were being invested. Although the share of U.S. assets held by pension funds was nearly double that held by mutual funds in 1992, mutual funds gained quickly.

The impact of mutual fund growth was also evident in the stock market. In the early 1990s, mutual funds bought more stock market equity than pension funds for the first time. Mutual fund dominance of equity markets caused some observers to question whether the trend was a positive one for the stock market, which was increasingly susceptible to fund-induced volatility. Mutual fund equity purchases shot up 87 percent in 1992, to $80.5 billion, which beat the 1991 record high of $43 billion in equity purchases. Indeed, in 1991 and 1992 mutual funds bought more equities than all private pension funds combine bought between 1960 and 1989.

Long-term mutual funds, which invest for long-term gains, were responsible for much of the industry growth in the early 1990s. As the percentage of industry assets invested in short-term funds fell to less than 35 percent by 1993, long-term fund assets grew to more than 65 percent.

Other Trends.
Contributing to the growth and competitiveness of the mutual fund industry were new distribution routes. To survive in a more competitive economic environment, caused in part by the strength of the mutual fund industry, banks and other financial institutions were selling mutual fund shares to generate fee income.

The banking industry, in particular, plunged into mutual fund sales in 1987 when banks were deregulated to act as full-service brokers. By 1992, more than 3,500 banks had entered the mutual fund fray and sold 30 percent of all shares. In addition to selling shares, 700 banks managed proprietary funds in 1993, accounting for about 10 percent of the mutual fund market.

Prospects for regulatory changes in the early 1990s boded well for the industry's future in general. The SEC's Division of Investment Management recommended numerous changes in 1992 that potentially could affect the industry, such as deregulation of sales fees and commissions, registration exemptions for transactions involving sophisticated investors, and provisions for the globalization of mutual fund sales. A notable proposal advocated cross-border marketing of fund shares with countries with safeguards similar to those in the United States.

In addition to new distribution routes, an abundance of new specialty funds appealed to investors with unique needs in the mid-1990s. At this time, the number of categories into which mutual funds were divided had grown to 21, up from seven in 1975. Furthermore, at the end of 1996, there were more than 2,700 funds operating. The category expanded to include funds emphasizing securities in utilities, biotechnology, aviation, telecommunications, real estate, and other niche markets.

In the long run, analysts speculated that demographic changes would boost industry assets, as aging baby-boomers saved for retirement and investor-directed retirement programs continued to shift to mutual funds. Distribution channels and new products were expected to continue to evolve and increase the efficiency of the industry. Banks were expected to increase their sales role, and the division between load and no-load funds might eventually become obscured. As the industry matured, companies were expected to seek cost-efficiency through labor-saving automation, streamlining marketing programs, and merging with, or acquiring, other mutual fund companies.

By the late 1990s, it was estimated that 40 percent of households in the United States had stock investments. The overall favorable market conditions in the 1990s for the United States resulted in an average growth in fees and commissions for securities companies of up to 30 percent annually. Online stock trading resulted in consumers who could trade in real time, and in only a few years time during the late 1990s, the financial services industry rose to a value of about $6 billion. The flurry of activity and increase in interested individual investors caused many financial services to offer new mutual funds at an increasing rate. Some of these funds grew so large that it impaired their ability to post outstanding returns.

The continued globalization of the world economy also affected the financial market and mutual fund offerings and performance. In a 1998 industry periodical article, experts suggested that investors take advantage of world market volatility by trading United States open-ended mutual funds. The authors outlined a strategy that included buying open-ended international mutual funds when the Standard & Poor's (S&P) index rose by a substantial amount, as well as switching back to a U.S. index fund on the day that the S&P declined significantly. Apparently, the strategy had proven effective because of foreign markets' tendency to show correlation among returns, and because this correlation appeared to travel from the United States to foreign markets.

After a robust end to the 1990s, the industry was stymied in the early 2000s by a recessive economy and a sluggish stock market. Many investors, who began planning their own investment strategies through online and discount firms, were caught in the dot-com and telecommunications downfalls, leading to a return of more investors seeking professional advice in the mid-2000s. During 2004 the stock market responded positively to increased consumer activity, which was spurred on by historically low interest rate. As a result the mutual fund industry grew 11 percent during the year.

Although during 2004 money market accounts had a net outflow of $157 billion as investors moved funds out of low-interest investments, the net inflow into stock, bonds, and hybrid stock funds and reinvested dividends led to an overall positive result of $144 billion of new cash investments into mutual funds during the years. Although not nearly the influx as $624 billion in 2001, the results were a significant improvement from just $36 billion in 2003, a year marked by an outflow of $258 billion in money market funds.

According to the Investment Company Institute, in May 2005 the mutual fund industry in the United States held assets valued at $8.12 trillion. Of that total, $4.41 trillion were held in stock funds; $535.9 billion were in hybrid funds; $987.5 billion were in taxable bond funds; $334 billion were in municipal bonds; $1.54 billion were in taxable money market funds; and $315.5 billion were in tax-free money market funds.

Retirement planning remained a key component of fund ownership, with 60 percent of investors retaining shares of employer-sponsored retirement funds. At the end of 2004 mutual funds held $3.1 trillion in retirement accounts, about 24 percent of the U.S. retirement market of $12.9 trillion. Pension funds, insurance companies, banks, and brokerages accounted for the remaining $9.8 trillion in retirement funds.

The number of mutual funds in 2004 was 8,044, down 4 percent from 2001. The slight decline in funds was due to market consolidation, which led merged organizations to clean up their fund offerings, and the slowdown in the introduction of new mutual funds. During the period of robust growth, funds proliferated rapidly from 5,725 in 1995 to over 8,300 by 2001. In 2000 alone, the industry introduced 1,100 new mutual funds to the market. In contrast, only 400 new funds were created in 2004. "It's probably a good thing," Donald Sowa of Sowa Financial Group Inc. told Pensions & Investments in March 2005, continuing, "Too many fund companies had adopted this 'flavor-of-the-month' mentality."

During the mid-2000s the mutual fund industry was rebuilding its image, which was tarnished during multiple scandals and allegations beginning in 2003. In that year the SEC leveled charges at 21 firms for improper trading practices, such as market timing and late trading. Some firms were accused of improperly rewarding brokerages for steering investors to specific funds, even when it was not in the investor's best interest. Putnam Investments Inc., Janus Capital Group, and Citigroup Inc. were among those in hot water with the SEC. In 2005 Citigroup Inc. and Putnam Investments agreed to pay fines of $20 million and $40 million, respectively, for failing to disclose that brokers were paid to recommend specific mutual funds.

The mutual fund scandal led to an increased emphasis on disclosure and fund management. In June 2004 the SEC adopted a new rule that required that the chairperson of a mutual fund as well as 75 percent of the fund's directors be independent from management. The SEC confirmed the ruling in June 2005 with an effective date of January 16, 2006. However, the U.S. Chamber of Commerce filed a suit against the SEC to stay the rule's implementation until controversial issues that were still being worked out in litigation were resolved. The Chamber's primary concern was that the SEC did not fully take into account the additional expense necessary to reach full compliance.

Current Conditions

At year-end 2009, the U.S. mutual fund market held $11.1 trillion in assets. Of this total, 44 percent were domestic equity funds (33 percent domestic and 11 percent international), 30 percent were money market funds, 20 percent were bond funds, and 6 percent were hybrid funds. Although the amount invested in all mutual funds in 2009 was down in 2009, bond mutual funds grew significantly that year, when net inflows reached a record $376 billion.

Investment companies faced increasing regulation as the second decade of the twenty-first century began. This segment of the U.S. financial services industry--like all others--waited to experience the effects of the provisions in the sweeping reform act known as the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in July 2010. Under provisions of the act, for example, the Securities and Exchange Commission voted unanimously to propose rules for establishing a whistleblower program that would include monetarily rewarding those who came forward with information on abuses in the system. The Investor Protector Fund held up to $3 million in reward money. Although the efforts by the federal government to provide protection to consumers in order to avoid such situations as the foreclosure fiasco of the late 2000s, many questioned whether the increased government intervention would benefit the industry or the economy and society in general.

Industry Leaders

Open-end investment companies are actually owned by the shareholders that belong to the mutual fund, so the shareholders elect board members and approve various operating policies, such as selection of the investment advisor and the basic contents of the portfolio. The day-to-day management and operation of mutual funds is typically handled by a separate fund management company (see SIC 6282: Investment Advice) because of the way that funds are structured. In fact, members of the board of directors, which owns a management company, establish most funds. Indeed, the purpose of starting a fund is often to allow those board members' management company to earn fees as the investment advisor for the fund.
The top five companies held 39 percent of all industry assets in 2009. The top ten largest managed 53 percent of fund assets, and the top 25 held almost 75 percent of assets. Top fund management companies included Fidelity Investments of Boston, a privately owned company with 2009 revenues of $11.1 billion and assets of more than $1.3 trillion under management. Vanguard managed more $1.1 trillion of assets and offered 150 different funds. Its Vanguard 500 was one of the largest mutual funds in the country. State Street Global had the largest number of assets under management as of 2009, with over $1.4 trillion. BlackRock held just under $1.3 trillion.

Major banks also contributed to the industry. The Bank of New York Mellon Corporation was formed in 2007 when the Bank of New York purchased Mellon Financial. In 2009 the firm had some $1 trillion assets under management and $8.2 billion in revenues. JPMorgan Chase was also an industry leader, especially after buying bear Stearns and Washington Mutual in 2008. JPMorgan Chase's Asset Management division had about $1.7 trillion of assets under supervision in 2010. Overall earnings for the banking giant were more than $115 billion in 2009.


Most of the jobs created by the open-end investment industry are with investment advisement firms, insurance companies, and other institutions that handle the daily management of funds and develop portfolio investment strategies. Management firms employ large numbers of portfolio managers, financial analysts, and other investment professionals. According to the Investment Company Institute, investment companies employed 157,000 U.S. workers in 2009.

About 600 companies competed for mutual fund investment advice and management services in 2010. Of the companies competing in the late 2000s, about 59 percent were independent financial advisors; banks/thrifts and insurance companies each accounted for about 10 percent, whereas 14 percent were non-U.S. advisors and 7 percent were brokerage firm "wirehouses".

America and the World

The U.S. mutual fund market was the largest in the world at the end of 2009, accounting for $11.1 trillion in assets or 48 percent of total in mutual fund assets worldwide, according to the Investment Company Institute. By region outside the United States, Europe held 33 percent of mutual funds assets; Africa and Asia, 12 percent; and Central and South America, 6 percent.

Positive foreign currency exchange rates relative to the U.S. dollar benefited U.S. investment companies that held foreign assets during the mid-2000s. In addition, many global stock exchanges showed significant improvement, and thus the assets of foreign funds grew 11 percent overall during 2004.

As the middle class continues to expand, particularly in emerging industrial nations, the amount of foreign assets invested in mutual funds is predicted to accelerate. Furthermore, as financial markets become more global and integrated, opportunities for cross-border sales by U.S. companies could skyrocket. Although the large Japanese financial market remained closed to U.S. competitors, European and South American markets were showing promise.

The European Community (EC) operates its fund system through the Undertakings for Collective Investment in Transferable Securities (UCITS) directive. This directive facilitated cross-border marketing of mutual fund shares within the EC under a common structure. Several holes existed in the plan, however. For example, many tax issues and questions about marketing and distribution needed work. UCITS was under review in 2005, with many European investors hoping that UCITS III will clean up the original regulatory guidelines.

Research and Technology

Technological advances in information systems and computer automation had a significant impact on open-end investment companies in the 2000s. By implementing state-of-the-art systems, mutual funds and their management companies were achieving more efficient customer service, reducing errors in record-keeping and reporting, and reducing labor costs. As the industry became increasingly price competitive, automation offered a critical edge for industry leaders. The proliferation of information available via the Internet increased investor knowledge and sharpened competition.

Mutual fund companies also benefited from technological advances affecting foreign and domestic securities markets. With advanced satellite communications networks and online trading systems, investment companies increased their access to up-to-the-minute investment information from markets around the world. It is possible to track and buy or sell securities on several Asian markets. Mutual funds also used computer advances to integrate and synthesize their reporting and investment operations.

Interestingly, larger mutual fund companies experienced stiffer competition from smaller competitors that used the new technology to level the playing field. By forming alliances with fellow companies that offered complimentary services, specialty investment and consulting companies delivered high quality packaged services for prices at or below those commanded by the large "one-stop-shop" mutual funds.

Information technology that allowed allied companies to integrate their reporting and investing data provided the crucial link necessary to fuse their services. The alliances were especially successful at capturing and managing investment dollars from retirement plans that would have otherwise been invested with large mutual funds.

© COPYRIGHT 2018 The Gale Group, Inc. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. For permission to reuse this article, contact the Copyright Clearance Center.

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