Reshaping the American financial system - Mutual Funds, part 1

New England Economic Review, July-August, 1997 by Peter Fortune

The Financial Research Corporation's Access/FRC data base reports that at year end 1996 there were 10,009 mutual funds and 5,983 portfolios. At year end [TABULAR DATA FOR TABLE 1 OMITTED] 1996 the Investment Company Institute reported a total of 6,235 mutual funds, of which 5,247 were non-money market funds. The bulk of assets under mutual fund management are held in funds formed into fund complexes, or families. The family structure provides a number of economies of both scale and scope. For example, a central research staff can serve funds with very different investment goals, and large capital outlays in information technology can be spread over more shareholders. The family structure also provides investors with an easy and low-cost method of transferring money between funds: Exchanges between funds within a family typically involve no charges and can be done overnight. This easy transfer is of particular importance to retirement fund holders, who can switch funds within a family with no tax consequences.

Table 1 lists the mutual fund families with year-end 1995 assets exceeding $20 billion, ranked by size. At year end 1996 these 27 families accounted for 63 percent of the industry's assets (as measured by the ICI), a decline from 66 percent at year-end 1995. The 27 families also managed 3,505 classes of shares in 1,904 different portfolios, an average of almost two classes of shares per portfolio.(9) The concentration in the industry is quite high, with the top three families at year end 1996 accounting for $832 billion, or almost 25 percent of industry assets. The table also shows a 20.8 percent average growth in assets under management by the 27 fund families during 1996, a high growth rate but less than the 27.3 percent growth in industry assets.

The largest family of funds is under the aegis of Fidelity Investments. Formed in 1946, Fidelity was a sponsor of money market funds in the early 1970s and has grown to manage, at year end 1996, nearly $430 billion of assets in about 225 different portfolios with a total of over 300 classes of shares. Among Fidelity's funds is the largest single mutual fund, the Magellan Fund, with almost $55 billion of assets. Ninety percent of mutual funds sold by Fidelity Distributors Corporation are direct-marketed, and about 65 percent are no-load. The Fidelity Advisors Funds, consisting of 32 portfolios and 100 classes of shares with total assets of $32 billion, are sold primarily through third parties such as brokers, banks, and life insurance companies, and only 20 percent are no-load. Fidelity also manages about $20 billion in separate accounts for trusts and endowments.

Fidelity illustrates the structure of fund families. The parent company, FMR Corporation, owns several affiliates which provide services to each fund, subject to trustee and shareholder approval. For example, Magellan Fund's investment advisor is Fidelity Management & Research, its distributor is Fidelity Distributors Corporation, its transfer agent is Fidelity Service Company, and its custodian and accounting services are provided in-house by Fidelity Accounting and Custody Services. Most of the Fidelity funds have contracts with the same agents, and trustees often serve on the boards of many funds.(10)