The Investment Company Institute released its "2018 Investment Company Fact Book," an annual compilation of statistics and commentary on the mutual fund industry. Subtitled, "A Review of Trends and Activities in the Investment Company Industry," the latest edition reports that equity funds again saw outflows, bond funds had near record inflows, and money market funds had their strongest inflows in almost 10 years in 2017. Overall, money funds assets were $2.847 trillion at year-end 2017, making up 15% of the $18.7 trillion in overall mutual fund assets. Retail investors held $1.007 trillion, while institutional investors held $1.840 trillion. We excerpt from the latest "Fact Book" below. (Note: Our Peter Crane will also be attending ICI's General Membership Meeting on May 23, so let us know if you'd like to arrange a visit at the show in Washington.)

ICI writes on "Worldwide Regulated Funds," "Forty-four percent, or $21.8 trillion, of total net assets in regulated funds were in equity funds, which invest primarily in publicly traded stocks.... Mixed/other funds made up another $11.2 trillion, while bond funds -- which invest primarily in fixed-income securities -- had total net assets of $10.4 trillion. Money market funds, which are generally defined throughout the world as regulated funds that are restricted to holding only short-term, high-quality money market instruments, had $5.9 trillion in total net assets, or 12 percent of worldwide regulated fund total net assets."

They explain, "In 2017 alone, investors across the globe purchased $2.1 trillion in additional shares of regulated long-term funds. Forty-two percent of those net sales ($879 billion) went to bond funds in 2017. Much of these sales were attributable to the United States, where bond funds posted exceptionally strong inflows (see chapters 3 and 4). With stock prices rising rapidly around the world, some fund investors may have felt it appropriate to add to their bond fund holdings to keep their allocations of stocks and bonds in line with their long-term objectives. Worldwide net sales of money market funds totaled $598 billion in 2017, a sharp increase from the $82 billion of net sales in 2016."

On this global growth, the book tells us, "The pattern of net sales over 2016 and 2017 primarily owed to developments in the Asia Pacific region, where money market funds had net sales of $404 billion in 2017, after experiencing net outflows of $14 billion in the previous year. Investor demand for Chinese money market funds strongly influenced net sales of money market funds in the Asia Pacific region. Nearly 80 percent of Asia-Pacific's total net assets in money market funds were held in funds domiciled in China at year-end 2017."

It continues, "Investor demand for money market funds in the Asia-Pacific region appears to be related to changes in the total return on the short-term money market instruments held by these funds.... Investors pulled back from Asia-Pacific money market funds as the total return on Chinese money market instruments declined from 4.3 percent in 2015 to 2.6 percent in 2016. As the total return on these money market instruments rose throughout 2017, investor demand for Asia-Pacific money market funds increased."

They add on global developments, "In Europe, money market funds saw net sales of $72 billion in 2017, the third straight year of positive net sales.... Europe, like the United States, has adopted reforms intended to increase the resilience of money market funds to financial shocks. US reforms, which were implemented in October 2016, had significant effects on the composition of net new cash flow to US money market funds in 2016. The influence, if any, of Europe's impending regulatory changes on money market flows in that region is uncertain. Although European Union (EU) reforms for money market funds were adopted in 2017, existing funds are required to be in full compliance by January 2019."

ICI writes, "In the United States, net sales of money market funds were $118 billion in 2017, the largest year of positive net sales since 2008. Over the past decade, US money market funds have faced headwinds because of regulatory reforms and near-zero US short-term interest rates. With short-term interest rates rising in the United States in 2017, US money market funds became more attractive relative to other cash management investments."

Worldwide, they tell us, "The majority of US mutual fund and ETF assets at year-end 2017 were in long-term funds, with equity funds constituting 59 percent.... Bond funds held 21 percent of US mutual fund and ETF assets. Money market funds, hybrid funds, and other funds -- such as those that invest primarily in commodities -- held the remainder (20 percent)."

The Fact Book comments, "Businesses and other institutional investors also rely on funds. For instance, institutions can use money market funds to manage some of their cash and other short-term assets. At yearend 2017, nonfinancial businesses held $575 billion (16 percent) of their short-term assets in money market funds."

It also states, "Historically, mutual funds have been one of the largest investors in the US commercial paper market -- an important source of short-term funding for major corporations around the world. Mutual fund demand for commercial paper arose primarily from prime money market funds. In 2016, however, the assets of prime money market funds fell 70 percent (nearly $900 billion) as these funds adapted to the 2014 SEC rule amendments that required the money market fund industry to make substantial changes by October 2016. Consequently, prime money market funds sharply reduced their holdings of commercial paper. From yearend 2015 to year-end 2016, mutual funds' share of the commercial paper market fell from 40 percent to 19 percent.... By year-end 2017, mutual funds had increased their share of the commercial paper market to 25 percent."

The ICI adds, "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 competitive short-term yields.... The total number of mutual funds that exited the industry dipped slightly in 2017, as fewer domestic equity and money market funds were liquidated, essentially offsetting an increase in the number of merged funds."

Finally, they write in an unusually short section on "Money Market Funds," "In 2017, money market funds received $107 billion in net new cash flows. Prime money market funds received the bulk of the inflows ($76 billion), followed by government money market funds with $30 billion in inflows. The increased demand for money market funds likely stems from the Federal Reserve's decision to raise the federal funds target rate three times in 2017, which increased the attractiveness of money market funds as an investment for excess cash. Yields on prime and government money market funds ratcheted up in 2017 and far exceeded the stated rate on money market deposit accounts (MMDAs)."

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