October 5, 1990
TO: MEMBERS - ONE PER COMPLEX NO. 43-90
RE: REPORT ON THE ENVIRONMENT FOR THE INVESTMENT COMPANY
INDUSTRY IN THE 1990S
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Enclosed is a copy of "The Environment for the Investment
Company Industry in the 1990s", a recently completed study
conducted for the Institute by Heidi Fiske Associates. This
broad-ranging study is based on extensive research and interviews
with over 250 industry leaders, regulators, analysts and
competitors. It was commissioned by the Institute's Board of
Governors to help members anticipate how to best serve the
investing public and to prosper in the coming decade, and to aid
the Board in planning the Institute's future direction.
Assets of mutual funds are likely to show robust growth of
just over 12 percent a year during the 1990s, according to
projections for the report by ICI Chief Economist Jacob Dreyer.
From just under $1 trillion at the end of 1989, mutual fund
assets could reach $3.5 trillion or more by the end of 2000. The
Fiske report goes on to project that mutual funds will represent
an increasingly larger share of Americans' financial wealth
during the 1990s. Pooled investments of many kinds are expected
to enjoy continued popularity, including those in competition
with mutual funds. This is undoubtedly due in large measure to
the success of funds in the 1980s, when in some years assets
exploded at a 25 percent rate. Projected annual growth rates in
the 1990s are considered more sustainable than those of the
previous decade.
Experts inside and outside the industry, asked for their
views of the 1990s, say they expect traditional mutual fund
organizations to face keener competition, particularly from
commercial banks, which are expected to be permitted to enter
more fully the mutual funds market. Also cited as challenges
facing the industry are the opportunities for American fund
groups to compete in expanding new markets abroad and the
probable influx of well financed foreign competitors in the
U.S. marketplace.
The report emphasizes that advanced computer technology
will play a strategic role for funds in providing improved
service at manageable cost. By mid-decade, many shareholders
will be obtaining advice and service via computer. The report
also identifies fund marketing as the likeliest operation to be
revolutionized by technology, with the strongest influence on
funds that are marketed directly.
The report anticipates a resurgence in equity-like products
in the 1990s. Mutual funds stand to benefit from the arrival of
attractive new products which offer equity returns along with
some features to comfort the risk-averse investor.
Within institutional markets, mutual funds' prospects are
deemed most bright in the realm of smaller private pension
reserves, which are growing particularly rapidly. Recent
marketing studies suggest that both defined benefit and defined
contribution plans of such smaller companies, will prove an
important source of growth for funds, which deliver expert
management at competitive costs. The report identifies (401(k)
plans as particularly promising markets, but challenging ones.
"The trick is to reach this diffuse market profitably," it notes.
The report also predicts that the individual investor will
become even more important because of growth in markets where
they will share the investment decision making with an
institution. The institution, typically an employer, will
determine what investment options to provide; the individual
decides which option to use. Such markets are dubbed "insti-
vidual" by the authors and include many 401(k) and 403(b) plans
and Simplified Employee Plan IRAs.
The report addresses the debate concerning the future
savings rate of the baby boom generation, and notes that, unless
the nation's overall savings rate increases, most of the impetus
for asset growth will come from internal buildup. Consequently,
industry leaders emphasized that client retention would be a
significant concern.
While the Institute provided substantial assistance to
Fiske Associates in the preparation of the report, conclusions
and projections in the report are those of the study's authors
and do not necessarily represent the official position of the
Institute staff or its' membership.
A technical appendix to the report, as well as a full
bibliography, are being prepared and will be made available to
you in the near future. For additional copies of the report,
please contact Michelle Worthy, Investment Company Institute,
1600 M Street, NW, Suite 600, Washington, DC 20036. We would
welcome your comments or questions about the report.
David Silver
President