SIC 6722 Management Investment Offices—Open-End
SIC 6722
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.
525910
Open-End Investment Funds
The mutual fund industry experienced explosive growth in the 1980s that continued through the mid-2000s, as investors transferred assets from other financial sectors into mutual funds, and investments in general increased. U.S. open-end mutual funds controlled more than $8.1 trillion in assets by mid-2005, making them a major force in the country's economy. In 2005, nearly 50 percent of all U.S. households owned shares in mutual funds, which was up from 6 percent in 1980. During 2004, assets in funds by more than $800 billion, compared with 2003. More than 8,100 such open-ended funds were in existence in the mid-2000s.
Following unprecedented industry growth throughout much of the 1980s, 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.
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.
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), a regulatory body that monitors the securities industry, the front-end load, or commission, cannot 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 is popular because it maintains a very stable net asset value. Tax-exempt money market funds, however, invest 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.
Although mutual funds are usually initiated and often indirectly managed by investment companies, shareholders own the funds...
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