1. Asset growth In 1990, the mutual fund industry was a relatively small industry among financial intermediaries, with just over $1 trillion in assets, or 12% of the total sector (see Table 1). By contrast, depository institutions had almost five times the assets, or 56% of the sector (of which commercial banks accounted for $3.3 trillion or 38%, and assets of life insurance companies equaled $1.4 trillion or 16%).

By the end of the 1990s, the mutual fund industry had become a major player among financial intermediaries, with almost $7 trillion in assets and 39% of the overall sector. Although mutual fund assets slightly lagged those of all depository institutions taken as a whole-at $7.6 trillion, or 43% overall-they exceeded commercial bank and life insurance assets of nearly $6 trillion, or 34%, and $3.1 trillion, or 18%, respectively. Thus, mutual funds, which grew at a compound annual rate of 23% from 1990 to 1999, were the fastest-growing segment of financial intermediaries, which in total grew at a compound annual rate of 8.1% over the same period.

What caused the tremendous growth in mutual fund assets during the 1990s? As discussed in prior Chapters, several factors played a role, including a prolonged bull market in U.S. stocks, an increase in the popularity of defined contribution retirement plans, the creation of attractive new fund products and the introduction of enhancedservices to shareholders. Other factors contributing to asset growth include the broad variety of new products, distribution channels and pricing structures developed by the fund industry.

FundsTABLE 1

Assets of major institutions and financial intermediaries ($ millions)

1 990
(revised)

% of Total

1 999

% of Total

% Change

Compound
Annual
Growth Rate
Depository institutions

$4,912,370

 56.0

$7,560,620

 42.8 53.9 4.9
Commercial banks‘

3,337,480

 38.1

5,994,080

 33.9 79.6 6.7
Credit unionsb

217,240

 2.5

415,130

 2.3 91.1 7.5
Savings institutions`

1,357,650

 15.5

1,151,410

 6.5 -15.2 -1.8
Life insurance

$1,367,370

 15.6

$3,104,510

 17.6 127.0 9.5
Investment institutions

$2,488,112

 28.4

$7,004,779

 39.6 181.5 12.2
Bank-administered trusts

1,368,666

 15.6

N.A.

 N.A.

N.A.

N.A.
Closed-end investment

companies

52,554

 0.6

158,225

 0.9 201.1 13.0
Mutual funds‘

1,066,892

 12.2

6,846,339

 38.7 541.7 22.9
Total

$8,767,852

 100.0

$17,669,909

 100.0 101.5 8.1

lncludes U.S.-chartered commercial banks, foreign banking offices in the United States, bank holding companies and banks in affiliated areas.

Includes only federal or federally insured state credit unions serving natural persons.

Includes mutual savings banks, federal savings banks and savings and loan associations.

Reflects only discretionary trusts and agencies.

lncludes short-term funds; excludes funds of funds.

Source: Federal Reserve Board, Federal Financial Institutions Examination Council, Investment Company Institute.

2. Asset composition At the end of 1990, 47% of mutual fund assets were money market funds, and less than 23% were equity funds. By the end of the decade, equity funds represented almost 57% of assets, and money market funds dropped to a 27% share (see Figure 10.7). As noted above, money market funds charge a lower management fee on average than bond funds, which in turn charge a lower management fee on average than equity funds. Therefore, this dramatic shift from money market funds to equity funds should have significantly raised management fees on average for the industry, all other things being equal.

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Composition of Mutual Funds Part 1