1 XI. Mutual Funds

2 TOPICS TO BE DISCUSSED 1.THE U.S. MUTUAL FUND INDUSTRY 2.PERFORMANCE MEASUREMENT 3.BIAS IN INDUSTRY DATA 4.PERSISTENCE IN PERFORMANCE 5.PREDICTING CASH FLOWS 6.PERFORMANCE OF NEW CASH FLOWS 7.SOME NEW DEVELOPMENTS IN THE MUTUAL FUND INDUSTRY

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8 Assets of Major Intermediaries (Trillions) Commercial Banks 7.36 Credit Unions 0.56 Saving Institutions 1.36 Life Insurance Companies 3.37 Closed End Funds 0.16 Exchange Traded Funds 0.10 Mutual Funds 6.39

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13 Number of Mutual Fund Complexes Over 400 In 2002 Top Ten Companies Hold 56% Of Assets Top 25 Complexes 76% Of Assets

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15 Total Institutional Assets in Mutual Funds and as Percent of Mutual Fund Total Assets ,582 2,504 3,143 2, %38.3%41.5% 44.7%46.3% 45.1% 46.7%

Annual %Growth Australia42,909356, Canada197,985248, France495,774845, Germany146,888209, Ireland22,728250, Italy209,410378, Japan311,335303, Luxembourg390,673803, United Kingdom 253,683288, Total Non- USA. 2,822,7964,878, U.S.4,468,2016,391, Worldwide Assets of Open-end Investment Companies (millions of U.S. dollars) Only countries with assets over 2 m in 2002 included in the list Total Non-U.S. includes 39 countries for which ICI collect data.

17 Channels Used for Mutual Fund Investments (Percent of Respondents) 35.2% 13.3%4.7% 9.4% 17.8% 19.6% *1/3 Online 2/3 Office

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23 The Retirement Market and How it Invests

24 Total Retirement Market 10.2 Trillion Dollars 2.1 T or 21% in Mutual Funds 8.1 T of 79% Managed by Pension Funds, Banks, Insurance Companies, and Brokerage Firms

25 Retirement Market Size % of Shares Invested Share in Trillion RM in Mutual Funds in Defined Contribution Plan Primarily 401 (k) Plans (68% of Total) 2.1T 22% 45% 9% 2. Defined Benefit Plan 4.5T 44% 1% 3.IRA’s 2.3T 23% 46% 24% 4.Fixed and Variable Annuity 1.2T 11%

26 Its Importance to the Mutual Fund Industry

27 How Important is the Retirement Market to Mutual Funds 1990 – 19% Owned by Retirement Accounts 2002 – 33% Owned by Retirement Accounts 2002 – 44% of Long Term Funds 12% of Money Market Funds

28 Other Retirement Plans 44 10% 403 (b) Plans 74 16% 401 (k) Plans 82 18% IRAs % Total 436 Mutual Fund Assets by Type of Retirement Plan 1992 in billions of dollars

29 Mutual Fund Assets by Type of Retirement Plan 2002, in billions of dollars Other Retirement Plans 177 8% 403 (b) Plans 194 9% 401 (k) Plans % IRAs % 2,124 Billion

30 Type of Retirement Plan Assets in 1992 Assets in 2002 Growth Rate Per Year IRAs 401(k) Plans 403 (b) Plans Other Retirement Plans Growth Rate of Retirement Plan Assets in Mutual Funds (Assets in billions of dollars)

31 How Are Retirement Assets Invested By Retirement Market Common Stock – Domestic 56% Common Stock – Foreign 7% Bonds 14% Money Market Funds 13% Hybrid Funds 10%

32 Domestic Foreign Bond HybridMoney Market IRAs51.7%7.7%14.4%9.2%16.8% 401(k) Plans59.2%7.9%10.3%12.2%10.2% 403 (b) Plans73.7%6.2%6.7%6.2%7.2% Other Employer Sponsored Plans 46.9%6.2%27.6%7.3%11.9% Total55.8%7.4%13.6%9.8%13.3% Equity How Plans Allocate Their Mutual Fund Investments, 2002