Mutual Fund Management
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Industry Overview
The US mutual fund management industry includes about 600 companies with about $10 trillion in assets under management. Major companies include BlackRock, Capital Research and Management (American Funds), FMR (Fidelity Investments), JPMorgan Chase, and Vanguard.
Competitive Landscape
Demand is affected by the growth of retirement capital and returns on alternative investments. The profitability of individual companies depends on investment expertise and effective marketing. Large companies have economies of scale in operations and marketing; small companies can compete effectively by producing higher investment returns.
Products, Operations & Technology
Major services include the initial formation of a mutual fund, sales and redemption of shares, investment advisory services, and day-to-day management.
Each mutual fund is a separate open-end investment company, with shareholders (the investors) and a board of directors, but no operating staff. The sponsor of a fund usually serves as investment adviser and manager of the fund, and receives an annual fee typically calculated as a percentage of fund's assets. Large mutual fund operators may sponsor and manage dozens of funds, collecting a management fee from each. In addition to paying a management fee, mutual funds pay the underwriters who sell their shares, the custodian of their portfolio, the transfer agent, and an independent auditor. The expense ratio for a fund is the sum of all annual expenses divided by the average net assets of the fund. The average industry expense ratio is about 1 percent.
A mutual fund typically specializes in one particular type of investment or investment strategy, such as investing only in government bonds or only in the stocks of small companies. By sponsoring a range of such specialized funds (a family of funds), managers allow investors to create their own diversified fund portfolio within a single fund family. Major mutual fund investment categories include large and small US stocks, foreign stocks, bonds, money markets, and hybrids. Stock mutual funds typically make up the largest proportion of mutual fund assets.
While many mutual funds are actively managed in an attempt to get superior investment returns, some are operated as index funds, which try merely to match the return of a well-known basket of securities such as the S&P 500. Index funds generally have low expenses because they minimize trading and don't need sophisticated investment advice. One-third of households that own mutual funds own at least one index fund, according to the Investment Company Institute.
Mutual fund managers rely heavily on computer systems to manage portfolios and make trades, analyze and implement investment strategies, ensure regulatory compliance, and provide accounting and reporting to investors. Internet sites are an important tool for sales to investors.
