Despite the huge growth of mutual funds, the marked shift in fund types and the creation of new distribution channels, the concentration of market share within the fund management industry remained remarkably stable during the 1990s. The industry has continued to be led by 10 fund managers with 45% to 55% of all mutual fund assets under management and 25 managers with 70% to 75% of all mutual fund assets under management. But many of the leaders changed places over the decade—some because of strong performances and others due to mergers and acquisitions. At the same time, the number of fund complexes overall has continued to increase as new fund managers have taken advantage of the mutual fund industry’s low barriers to entry.

1. Overall industry concentration and turnover In 1990, there were 464 mutual fund complexes, of which the top 10 managed 56% of total industry assets and the top 25 managed 76% of total assets. By the end of 2000, the mutual fund industry was modestly less concentrated at the top. There were 654 complexes at that date, with the top 10 accounting for 46% of total assets and the top 2, accounting for 71% of total assets.The list of top 25 fund complexes has changed significantly, with some complexes dropping out and others stepping in.

FundsMany of the top complexes of 1990 were still in the top 10in 2000, including well-known names like Fidelity, Merrill Lynch and Vanguard. But there was turnover within the ranks; several top players disappeared or changed places as a result of merger activity, while some new names like Janus rose from relatively unknown status into the top 10.

These changes at the top of the fund manager industry were the result of multiple factors. First, there was a marked shift from bond and money market funds to equity funds during the 1990s. Accordingly, fund managers with a higher-than-average share of their assets in equity funds tended to grow more quickly than fund managers more oriented toward money market and bond funds. For instance, this factor appears to have helped American Funds with its strong equity line, while hurting Dreyfus with its concentration in money markets. Second, relative out- performance in equity funds, especially in growth funds during the late 1990s, was an important factor in change of rankings. For example, the high-performing Janus growth funds spurred its rise in the rankings, as the relative under-performance of Merril Lynch’s value-oriented funds hurt its ranking. A third factor was the ability of fund managers to expand through internal growth, especially through expansion in the rapidly growing field of 401(k) plans.This type of internal expansion, with particular emphasis on the 401(k) field, characterized the growth of both Vanguard and Putnam. A fourth and final factor was the impact of merger and acquisition activity on the fund group rankings. Several of the fund complexes that remained in the top 10 during the 1990s did so through a merger with one or more middle-size firms. This was true when Franklin and Templeton merged in 1992. This was also true when Morgan Stanley, having acquired Van Kampen and Miller, Andersen and Sherrerd (MAS), merged with Dean Witter to form MSDW Advisers. Similarly, AMVESCAP PLC advanced into the top 10 partly through an acquisition-related strategy, combining the top-25 AIM Group with the smaller INVESCO Funds Group Inc. funds to reach the number 7 rank in assets in 2000.

At the same time, the success of the fund management industry, together with the ease of entry, attracted many new competitors. During the 1990s, 316 investment management firms entered the mutual fund industry. These new entrants more than replaced the 151 investment management firms, leaving the mutual fund industry through mergers or liquidations.5 Although none of the new entrants was among the top 10 or 25 fund managers by the end of 2000, the fund assets managed by new entrants did amount to $757 billion, or 11% of total mutual fund assets in 2000, according to the ICI. Moreover, the aggregate market share of the number 15 through number 25 fund groups grew significantly over the decade, from 12.3% in 1990 to 16.8% in 2000. By 2000, the number 25 fund group managed assets of $84.9 billion, more than 10 times the $7.9 billion managed by the number 25 player in 1990.

2. Fund industry concentration The sheer size of the assets managed by some U.S. fund complexes—almost $900 billion for the largest—can had to the impression that the U.S. fund industry is dominated by a few giants and that smaller competitors have little chance to succeed. Certainly, the largest players in the mutual fund business have a significant market share. But is the industry truly more concentrated than others?

Economists look to quantitative measures to find an objective way of defining and measuring market concentration. One of the best-known measures is the HerfindahlHirschman Index (HHI), which describes market concentration in terms of a single number that can be compared across different parts of the economy. The HHI is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For example, for a market consisting of four firms with shares of 30%, 30%, 20% and 20%, the HHI is 2,600 (302 + 302 + 202 + 202 = 2,600).The theoretical maximum score for an industry with only one competitor would be 1002, or 10,000.

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