The Investment Company Institute released its "2023 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 down across the globe in 2022 -- 19% in the United States, 15% in Europe, and 17% in the Asia-Pacific region -- worldwide total net assets of equity funds, which invest primarily in publicly traded stocks, decreased by 20% to $26.9 trillion at year-end 2022. Bond funds -- which invest primarily in fixed-income securities -- saw their total net assets decrease 16% over the same period, primarily reflecting capital losses on bonds in the United States and Europe of 12% and 14%, respectively. In contrast, net assets of money market funds -- which are generally understood to be regulated funds that are restricted to holding short-term, high-quality debt instruments -- increased slightly." We excerpt from the latest "Fact Book" below.

Discussing "Worldwide" mutual funds (page 12), ICI writes, "Worldwide net sales of money market funds totaled $171 billion in 2022, down from $673 billion in 2021.... The decline in worldwide demand for money market funds was largely driven by a decrease in net sales in the United States and the Asia-Pacific region. Investor demand for money market funds in the United States decreased from $424 billion in 2021 to $10 billion in 2022; and in the Asia-Pacific region, money market funds experienced net inflows of $132 billion in 2022, down from $254 billion in 2021."

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 fell as purchases by retail investors were offset by redemptions from institutional investors.... In 2022, `short-term interest rates ramped up quickly in the United States, and in the second half of 2022, were higher than longer-dated fixed-income securities. US retail investors were particularly attracted to the relatively high yields and extremely low interest rate risk offered by money market funds, especially in light of the double-digit capital losses seen in stock and bond markets."

They comment, "By contrast, US institutional investors, on net, redeemed cash from money market funds. This development is consistent with historical patterns in institutional money market fund flows during a monetary policy tightening cycle. Because of their size and investment knowledge, some institutional investors can easily invest directly in short-term instruments. This allows those institutional investors to capture higher yields immediately when the Federal Reserve raises the federal funds rate rather than waiting for the yield in a money market fund to catch up as older, lower-yielding short-term securities mature and are replaced with newer, higher-yielding paper."

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 in the summer of 2022, as China's economy was affected by the government's zero-COVID policy. As a result, net inflows into money market funds in the Asia-Pacific region in the first half of 2022 turned to net outflows, lowering the overall net sales of money market funds in the region for the year."

Chapter 2, "U.S.-Registered Investment Companies," states, "Total net assets in US-registered investment companies decreased in 2022 to a year-end level of $28.9 trillion, with the vast majority held by mutual funds and ETFs. US-registered investment company total net assets were concentrated in long-term funds, with equity funds alone holding $16.6 trillion -- 57% of all investment company total net assets at year-end 2022.... Bond funds held $5.9 trillion in assets, while money market funds, hybrid funds, and other funds -- such as those that invest primarily in commodities -- held the remaining $6.4 trillion."

It also says, "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. Institutional investors also have contributed to the growing demand for ETFs.... Finally, mutual funds (primarily prime money market funds) held 17 percent of the US commercial paper market -- a critical source of short-term funding for many major corporations around the world.... US households and institutions also use money market funds as cash management tools."

ICI writes in Chapter 3, "Overview of Mutual Fund Trends," "With $22.1 trillion in total net assets, the US mutual fund industry remained the largest in the world at year-end 2022. The majority of US mutual fund net assets at year-end 2022 were in long-term mutual funds, with equity funds alone making up 51% of US mutual fund net assets. Money market funds were the second-largest category, with 22% of net assets. Bond funds (20%) and hybrid funds (7%) held the remainder."

They state, "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.... [D]emand for bond mutual funds weakened considerably in 2022, as the Federal Reserve raised interest rates at the fastest pace in four decades to combat rising inflation, which led to significant losses in bond markets. Demand for money market funds steadily shifted from outflows to inflows as investors -- particularly retail investors -- were attracted to rising short-term yields."

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 also held substantial money market fund net assets ($3.0 trillion), but this was a relatively small share (16%) of their total mutual fund net assets ($19.4 trillion). In 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 2022, institutions held 12% of mutual fund net assets.... The majority (64%) of the $2.7 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 50), explains, "In 2022, money market funds saw net outflows of $4 billion.... Prime money market funds and tax-exempt money market funds received inflows ($224 billion and $25 billion, respectively), but these flows were offset by outflows from government money market funds ($253 billion). Most of the demand for money market funds in 2022 was from retail investors. Retail money market funds had net inflows of $254 billion while institutional money market funds had net outflows of $258 billion."

It continues, "In 2022, short-term interest rates ramped up quickly amid aggressive monetary tightening and by year-end were higher than longer dated fixed-income securities. Retail investors were particularly attracted to rising yields and extremely low interest rate risk offered by money market funds, especially in light of significant capital losses in stock and bond markets. To mitigate these losses, retail investors may have shifted some of their bond fund positions into money market funds to shorten the duration of their fixed-income investments."

Finally, ICI adds, "In contrast, institutional investors, on net, redeemed cash from money market funds -- a development that is consistent with previous monetary policy tightening cycles. Because of their size and investment knowledge, some institutional investors can easily invest directly in short-term instruments. This allows those institutional investors to capture higher yields immediately when the Federal Reserve raises the federal funds rate -- rather than waiting for yields on money market funds to catch up as older, lower-yielding short-term securities mature and are replaced with newer, higher-yielding paper."

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