The Investment Company Institute released its "2024 Investment Company Fact Book," an annual compilation of statistics and commentary on the mutual fund space. Subtitled, "A Review of Trends and Activities in the Investment Company Industry," the latest edition tells us, "With stock markets rising across the globe in 2023 (26% in the United States, 21% in Europe, and 12% in the Asia-Pacific region) worldwide total net assets of equity funds, which invest primarily in publicly traded stocks, increased by 18% to $31.8 trillion at year-end 2023. Bond funds -- which invest primarily in fixed-income securities -- saw their total net assets increase 12% over the same period, somewhat reflecting total returns (capital gains and interest income) on bonds in Europe and the Asia-Pacific region of 7% and 6%, respectively. Net assets of money market funds, which are regulated funds restricted to holding short-term, high-quality debt instruments, also increased substantially. We excerpt from the latest "Fact Book" below.
Discussing "Worldwide" mutual funds (page 18), ICI writes, "Worldwide net sales of money market funds totaled $1.5 trillion in 2023, up from $161 billion in 2022.... The increase in worldwide demand for money market funds was spread across all geographical regions but was primarily driven by a substantial increase in net inflows in the United States. Investor demand for money market funds in the United States increased from $1 billion in 2022 to $1.1 trillion in 2023. In the Asia-Pacific region, money market funds experienced net inflows of $136 billion in 2023, about even with the net inflows of $132 billion in 2022."
They explain, "Investors use money market funds because they are professionally managed, tightly regulated vehicles with holdings limited to high-quality, short-term debt instruments. As such, they are highly liquid, attractive, cash-like alternatives to bank deposits. Generally, demand for money market funds is dependent upon their yields and interest rate risk exposure relative to other high-quality fixed-income securities."
ICI continues, "In the United States, net sales of money market funds increased because of heightened demand from both retail and institutional investors. In 2023, money market fund yields reached their highest level in more than 15 years. Both retail and institutional investors were attracted to the high market yields and low interest rate risk offered by money market funds, especially in light of the substantial interest rate volatility that bond funds were experiencing during this time."
The Worldwide section adds, "Demand for money market funds in the Asia-Pacific region is dominated by Chinese money market funds, which hold the bulk of money market fund total net assets in the region. The People's Bank of China lowered interest rates further in 2023, decreasing the official one-year Loan Prime Rate to 3.45%. The reduction in the short-term interest rate was in response to sluggish economic performance. Regardless, net inflows into money market funds in the Asia-Pacific region remained positive for the year."
Under the section "Role of Investment Companies in Financial Markets," they say, "Investment companies held 22% of bonds issued by US corporations and foreign bonds held by US residents at year-end 2023 and 15% of the US Treasury and government agency securities outstanding. Investment companies also have been important investors in the US municipal securities market, holding 27% of the securities outstanding at year-end 2023. Finally, mutual funds (primarily prime money market funds) held 22% of the US commercial paper market -- a critical source of short-term funding for many major corporations around the world."
ICI writes in Chapter 3, "Overview of Mutual Fund Trends," "With $25.5 trillion in total net assets, the US mutual fund industry remained the largest in the world at year-end 2023. The majority of US mutual fund net assets at year-end 2023 were in long-term mutual funds, with equity funds alone making up 52% of US mutual fund net assets. Money market funds were the second-largest category, with 23% of net assets. Bond funds (19%) and hybrid funds (6%) held the remainder."
They state, "A variety of factors influence investor demand for mutual funds, such as funds' ability to assist investors in achieving their investment objectives. For example, US households rely on equity, bond, and hybrid mutual funds to meet long-term personal financial objectives, such as preparing for retirement, saving for emergencies, or saving for education. US households, as well as businesses and other institutional investors, use money market funds as cash management tools because they provide a high degree of liquidity and access to prevailing short-term market yields."
ICI adds, "Investor demand for mutual funds increased in 2023 -- driven by significant inflows into money market funds that more than offset outflows from long-term funds. Money market funds experienced strong demand as investors were attracted to the highest short-term yields in the more than 15 years. By contrast, equity mutual funds experienced outflows in 2023 (despite strong stock market returns), reflecting an ongoing shift to other products. Additionally, bond mutual funds experienced modest outflows, which may reflect investors shifting some of their bond fund positions into money market funds to mitigate interest rate risk amid substantial interest rate volatility."
Discussing, "Investors in US Mutual Funds," they comment, "Demand for mutual funds is, in part, related to the types of investors who hold mutual fund shares. Retail investors (i.e., households) held the vast majority (88%) of the $25.5 trillion in US mutual fund total net assets at year-end 2023.... When looking at only long-term mutual funds, the share of net assets held by retail investors was even higher (95%). Retail investors also held substantial money market fund net assets ($3.9 trillion), but this was a relatively small share (18%) of their total mutual fund net assets ($22.5 trillion)."
The Fact Book continues, "By contrast, institutional investors such as nonfinancial businesses, financial institutions, and nonprofit organizations held a relatively small portion of mutual fund net assets. At year-end 2023, institutions held 12% of mutual fund net assets.... The majority (66%) of the $3.0 trillion that institutions held in mutual funds was in money market funds, because one of the primary reasons institutions use mutual funds is to help manage their cash balances."
The section on "Money Market Funds" (page 57), explains, "In 2023, money market funds saw substantial inflows of $957 billion -- a significant reversal from outflows of $13 billion in 2022.... Government money market funds experiencing the bulk of inflows ($700 billion), while prime money market funds and tax-exempt money market funds saw inflows of $249 billion and $8 billion, respectively."
Finally, ICI writes, "Robust demand for money market funds was particularly pronounced in March 2023, when investors rushed to these funds in response to the regional banking crisis, which began with the failure of Silicon Valley Bank. Money market funds continued to experience strong demand at various times during the rest of the year. Investors were drawn to the elevated market yields and low interest rate risk that these funds offered, especially in light of persistently high interest rate volatility in the bond markets during this time. To manage interest rate risk and shorten the duration of their fixed-income investments, some investors may have strategically reallocated a portion of their bond fund investments into money market funds."
