22 Mar The mutual fund at 100: is it bceoming obsolete?
100년 전 Edward Leffler 라는 사람이 revolutionised financial markets.
His invention, the open-ended mutual fund, allowed retail customers to buy into a diversified portfolio of stocks and be confident that they would get a fair value when they wanted their money back.
Leffler’s innovation gave lower and middle calss people an ownership stake in American capitalism. It also spawned financial titans like Fidelity and Vanguard and thousands of smaller competitors that together employ hundreds of thousands of people.
Mutual funds manage nearly $20tn in US assets and about $63tn worldwide,
including everything from stakes in fledgling tech start0ups to government bonds.
More than half of all American households and 116mn of the country’s 333m residents hold shares in a least one mutual fund.
Today, the mutual fund’s dominance is under threat from newer rivals that promise tax advantages, lower fees and rapid trading. US mutual funds suffered more than $1tn in net outflows from January 2021 to December 2023. While they gathered about $13bn in net inflows in February, it was the first time they had a positive month in two years.
The active stockpicking funds that have been the industry’s bread and butter have suffered the biggest decline as a newer option, exhcnage traded funds, amassed more than $2tn in inflows in the US since January 2021, including more than $575bn last year alone.
Some industry observers predict that the glory days are ending. US money managers showed the world how to help ordinary people share in modern public markets. But as mutual fund celebrates its 100th birthday, many investors want something faster, cheaper or just differnet. Unless asset managers adapt, mangy of them – and one of the most successful fianancial products of all time – could slowly slide into irrelevance.
Money managers who have spent generations building businesses based on mutual funds content they will survive and even thrive because investors like and understand the product. It also continues to have advantage in specific areas such as small company stocks and retirement savings.
Even so, the alternatives to mutual funds ahve fundamentally reshaped the investment marketplace, as customers opt not just for ETFs but also separately managed accounts and collective investment trsuts. The shift has made BlackRock the largest asset manager with $10tn in assets and forced longtime stalwards including Fidelity, Capital Group and Pimco to adapt.
To understand the significance fo Leffler’s brainwave, picture the financial world as it existed in 1924. The stocks and bond markets were booming, but so were financial scams. Ordinary Americans wanted to participate, but found individual stocks and bonds too expendisve. Many ended up giving their money to unregulated investment pools, which often refused to say what assets they held and offered no guarantee that participants would be able to exit when they wished. Many ended up being wiped out.
Wealthy Britons had been using investment trusts since the 1870s, but MFS made diversified investments accessible to the masses. Its first fund not only allowed small investors to buy in graudally to a regularly disclosed portfolio but also let them sell back their shares whenver they wanted, at the value of the underlying assets.
Comptetitors such as Wellington and Capital Group followed suit.
After the Depression, Congress gave the structure te national stamp of approval with a 1940 funds law that remains the template for Us retail investment funds today. By 1959, Time Magazine had put the MFS chief executive on its cover to illustrate a story about mutual funds, calling them “the fastest-growing, most competitive and most controversial phenomenon of the US financial world”
Mutual funds got another boost iin the 1980s, as big companies started shifting away fro defined benefit pensions. Instead, employers offered to match their workers’ contributions to a slate of mutual funds inside a tax-advantaged retirement plan, usually known as a 401(k) after the relevant section of the tax code. By the year 2999, Fidelity, then the biggest fund company, was managing nearly $1tn, and Us mutual funds a s a whole had climbed to $7tn in assets.
The challenge to mutual fund dominance has been brewing since the State Treet launched the very first US EFT in 1993, an S&P 500 tracking fund known as SPY that now has $500bn in assets.
For investors, ETFs are like mutual funds on speed. Instead of pricing the pooled asset one a day, as mutual funds do, ETFs trade continuously on exchanges as stocks do. They can keep up this frenetic pace because shares are sole through online trading platforms, and financial firms create and redeem shares with in=kind baskets of securities, rather than having to buy and sell the underlying assets.
That structure attracts frequent traders who want to bet on market movements or the price of speific assets such as gold or bitcoin and also gives ETFs distinct avantages in the competition for long-term investors. EFT sponsors do not have to invest in the same level of back office customer service, so their costs can be lower than traditional mutual funds. And due to a quirk of the Us code, ETFs avoid the annual capital gains tax charges that buy-and-hold mutual fund investors incur when they invest outside a retirement plan.
That puts ETFs in pole position as the rapid rise of passive investing saw investors abandon active managers and pour money into low0fee products that track specific indices. Tracker funds now account for more than hlaf of all US pooled investmenrs. The three largest US ETF providers – BlackRock, Vanguard and State Street – have amassed commanding market shares predominantly through broad-based passive products.
ETFs also benefited as retail investors gravitated towards financial advisers. Because they charge management fees on top of those leived by the funds they recommend, financial advisers are under pressure to keep the total costs down.
Mutual funds lost another advantage in 2019, when the Securities and Exchange Commission removed cumbersome permitting requirements and made it easier for active fund managers to enter the ETF market. THat opened the floodgates, as latecomers with sizable amutual fund franchises began pouring in. Between 2014 and today, US ETF assets quadrupled from $2tn to $8tn,. While that total is still well shy of the $19.6tn in mutual funds, ETFS are closing the gap, powered by popular new products, such as February’s launch of the first spot bitcoin ETFs.
There are also secondary challenges brewing from other pooled accouts that cater to very wealthy people and institutional investors. Separatey managed accounts grew from about $856bn at the end of 2014 to $1.7tn by 2022, while collective investment trusts nearly doubled from almost $2.4tn to more than $4.6tn in that time.
Many asset managers are scrambling to adjust to clinet demands. Nearly 2,000 ETFs launched in the US between 2019 and 2023, nearly double the 1,100 new mutual funds.
Mutual funds may be losing popularity, bu that doesn’t mean they are going away anytime soon.
There is so much long-term money already tied up in existing funds that it wouuld take decades, or even generations, for it to sliip away. More than $10.4tn is in the Us defined contribution pension plans, and another $5.8tn is in individual retirement accounts, per the ICI. None of that money can be withdrawn without incurring large penalities until the owners reach their sixties.
Furthermore, mutual funds remain the top vehicle for US workers who are saving for future retirement. Most large 401(k) and other retirement accounts are already set up to use mutual funds, and within such accounts there is no particular tax advantage to using an ETF.
The headwinds for mutual funds have also been much stronger in equities than in other types of assets.
Fixed income mutual funds suffered only $85bn in outflows between January 20921 and the end of last year, because money pouring into passive bond funds offset most of the departures from actie mutual funds. And money market funds, which use the same structures as investment mutual funds but compete with banks for cash savings, currently hold an aditional $6tn in assets, an all-time high. Asset managers also say the mutual fund structure works better than ETFs for giving smaller investors access to alternatives, such as private dequity and private credit, which have been growing in popularity.
Even within equities, US asset managers say mutual funds retain significant advantages in areas such as international and small company stocks. Unlike ETFs, mutual funds can be closed to new investmenr before they get too garge to manage and they only have to disclose their holdings periodically. That makes it easier for stockpicking mutual funds to buy and sell investments without tipping off rivals and high-frequency traders.
The situation is also quite different outside the US. WHile inveestors in Canada, South Korea and South Africa are keenly interested in active ETFs, those in most other countries remain focused on products, structured like US mutual funds. That’s partly because ETFs do not carry the same tax benefirs outside the US and suffere from a disadvantage in countreis such as Spain. Moreover, mutual funds were never as dominant outside the US, so they will still have room to grow. In 2022, just 23 per cent of new European fun launches were ETFs, compared with 70 per cent in the US.
The divergence will protect mutual funds from extinction, but it is also forcing money managers to deliver their investment strategies in many different packages. Even MFS, the original mutual fund pioneer, is not immune.
After generations of offering a prix fixe menu, the most successful asset managers are shifting to a buffet.
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