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7/24/2019 Mutual0funds0i0challenges0to0growth

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MUTUAL FUNDS IN DEVELOPING MARKETS:ADDRESSING CHALLENGES TO GROWTH

Mutul Funds inDvlopin Mrkts:Addrssin Chllns to Growth

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2015 International Bank for Reconstruction and Development / The World Bank

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Acknowldmnts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viii

Acronms nd Abbrvitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix

Excutiv summr . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Chptr 1. Ovrviw of Mutul Fund Sctor Chrctristics in Slct Dvlopin Countris . . . . . . . . . . . . . . . . . . . . .5

Objctiv . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Dfinition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Rol of Mutul Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Asst Accumultion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Finncil Intrmdition nd Mutul Fund Invstmnts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Ownrship of Mutul Funds: Institutionl nd Rtil Invstors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Distribution of Mutul Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

Mutul Fund Chrs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Intrdpndnc with Bnks, Pnsion Funds, nd Insurnc Compnis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

In Summr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Chptr 2. Lisltion, Rultion, nd Txtion of Mutul Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Ll nd Rultor Apprtus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

K Aspcts of th Ll/Rultor Frmwork. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Othr Lws Tht Affct Mutul Fund Dvlopmnt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Txtion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

In Summr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Chptr 3. Mrkt Drivrs nd Impdimnts to Mutul Fund Dvlopmnt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Dmnd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Mrkt Structur nd Infrstructur. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

In Summr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Appndics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73

Appndix 1: Mutul Fund Stud Cs Studis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73

Bril . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Kn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Morocco. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

Pru . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Turk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

Appndix 2: Glossr . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

Rfrncs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

Tbl of Contnts


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MUTUAL FUNDS IN DEVELOPING MARKETS:ADDRESSING CHALLENGES TO GROWTHvi

Box 1.1 Histor of Invstmnt Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Box 1.2 K Mutul Fund Mrkts Worldwid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Box 1.3 Cptiv nd Third-Prt Distribution Chnnls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Box 1.4 Fund Chrs nd Shr Clsss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

Box 2.1 Histor of Mutul Fund Lisltion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Box 2.2 IOSCO Principls on Collctiv Invstmnt Schms (CIS). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Box 2.3 Rultin b Function or Institution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27

Box 2.4 Vrints on Mutul Funds Formd s Opn-Endd Invstmnt Compnis . . . . . . . . . . . . . . . . . . . . . . . . . 30

Box 2.5 Vrints on Mutul Funds Formd s Unit Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Box 2.6 Vrints on Mutul Funds Formd s Contrctul Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Box 2.7 Closd-Endd Funds nd U.K. Exmpl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Box 2.8 Mutul Funds Formd s Invstmnt Compnis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Box 2.9 Mutul Funds nd Rtirmnt Svins. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Box 2.10 Bril nd Pru Txtion Rim for Mutul Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47

Box 3.1 Distinction btwn Rtil nd Institutionl Dmnd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Box 3.2 Brilin Fund Mrkt Rspons to Invstor Fr of Infltion nd Intrst Rt Voltilit . . . . . . . . . . . . 58

Box 3.3 Mon Mrkt Funds nd th Risks of Constnt Vlu MMFs in Voltil Intrst Rt Environmnts . . . 59

Box 3.4 Achivin Invstmnt Divrsifiction in Undn Equit Mutul Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Box 3.5 Nontrditionl Distribution Chnnls for Mutul Funds in Indi. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Box 3.6 Mrkt Infrstructur Supportin Mutul Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Fiur 1.1 Global Mutual Fund Assets under Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Fiur 1.2 2013 Largest Mutual Fund Assets under Management by Country/Region. . . . . . . . . . . . . . . . . . . . . . . . . .8

Fiur 1.3 Total Mutual Funds Assets under Management: High-Income MF sectors versusMiddle-Income MF Sectors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Fiur 1.4 2012 Mutual Fund Assets and Compound Annual Growth Rate, 20022012. . . . . . . . . . . . . . . . . . . . . . . . . . .9

Fiur 1.5 Annual Net Sales, 20012012, $ millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Fiur 1.6 ICI Data for Mutual Fund Sector Asset Exposure: High-Income versus Middle-Income Countries. . . . . 11

Fiur 1.7 2012 Mutual Fund Asset Exposure Broken Down by Asset Class. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Fiur 1.8 Distribution Channels for Mutual Funds in Selected European Countries, 2011 . . . . . . . . . . . . . . . . . . . . . 13

Fiur 3.1 Net Acquisition of Deposits and Currency and Net Retail Sales of Mutual Funds by U.K.Households versus Bank of England Base Rate, 20042013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

Fiur 3.2 Global Net Sales of Equity Funds versus Annual Return on Equities, 20022013 . . . . . . . . . . . . . . . . . . 60

Fiur 3.3 Total Expense Ratios in Select Emerging and Developed Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Fiur 3.4 2012 Mutual Fund Assets/GDP versus Stock Market Capitalization/GD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Fiur 3.5 Bank Domination of Mutual Fund Operators by Number of Operators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

List of Boxs

List of Fiurs


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Tbl 1.1 Min Distribution Chnnls for Mutul Funds b Countr, Yr End 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Tbl 1.2 Tpicl Fund Chr Rts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Tbl 2.1 Componnts of th Ll nd Rultor Apprtus for Mutul Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Tbl 2.2 Lisltion Enblin Mutul Funds in Slctd Emrin Mrkts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Tbl 2.3 Vritions in Primr Lisltion Enblin Mutul Funds s t Yr End 2012 . . . . . . . . . . . . . . . . . . . . 25

Tbl 2.4 Mutul Fund Rultors in Slctd Mrkts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Tbl 2.5 Abilit of th Rultor to Issu Rultions in Cs Stud Mrkts s t Yr End 2012. . . . . . . . . . .27

Tbl 2.6 SROs nd Trd Associtions in Slctd Mrkts t Yr End 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Tbl 2.7 Ll Structurs of Mutul Funds Envisd in Slctd Emrin Mrkts Countriss t Yr End 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Tbl 2.8 K Rols nd Rsponsibilitis of Diffrnt Prtis to Mutul Funds Worldwid, b Ll Structur 34

Tbl 2.9 Prsnc of Structurl Vritions in Cs Stud Mrkts s t Yr End 2012. . . . . . . . . . . . . . . . . . . . 35

Tbl 2.10 Rquird Licnsd Sttus for Entitis Rsponsibl for Mutul Fund Oprtion for Slctd Countris. 36

Tbl 2.11 Custod Arrnmnts for Diffrnt Ll Structurs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37

Tbl 2.12 Chrs Limitd b Rultion nd Gnrl Lvl of Chrs in Cs Stud Countris st Yr End 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Tbl 2.13 Abilit to Offr Forin Mutul Funds to th Domstic Public Subjct to Ristrtion withth Rultor s t Yr End 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Tbl 2.14 Lvls t Which Tx M Hv n Impct on Funds nd Thir Invstors . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Tbl 2.15 Dscription of Txtion Sstms of Funds in Slctd Countris s t Yr End 2012 . . . . . . . . . . . . . 48

Tbl 3.1 Slctd Emrin Mrkts Ctorid b Gross Ntionl Incom pr Cpit: Vlu ofMutul Funds s Prcnt of GDP, Yr End 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

List of Tbls


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Acronms nd Abbrvitions

ACD Authorisd Corport Dirctor

ANBIMA Associo Brsilir ds Entidds dos Mrcdos Finnciro d Cpitis (Bril)

AUM Assts Undr Mnmnt

CIS Collctiv Invstmnt Schm

EEA Europn Economic Ar

ETF Exchn-Trdd Fund

EU Europn Union

GAAP Gnrll Accptd Accountin Principls

GDP Gross Domstic Product

ICI Invstmnt Compn Institut

IFRS Intrntionl Finncil Rportin Stndrds

IOSCO Intrntionl Ornition of Scuritis Commissions

IRA Individul Rtirmnt Account

MMF Mon Mrkt Fund

NAV Nt Asst Vlu

OECD Ornistion for Economic Co-oprtion nd Dvlopmnt

SEBI Scuritis nd Exchn Bord of Indi

SEC Scuritis nd Exchn Commission (U.S.)

SRO Slf-Rultor Ornition

UCITS Undrtkins for Collctiv Invstmnt in Trnsfrbl Scuritis


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EXECUTIVE SUMMARY

|

Excutiv SummrBckround

An stimtd 76,200 mutul funds worldwid currntl control bout $30 trillion1in ssts undr mnmnt, rprsntin just ovr 20 prcnt of totl loblssts undr mnmnt on bhlf of invstors worldwid.2 Mutul fundshv tpicll com bout s n outcom of dvlopd finncil mrkts, not cus of it. Unsurprisinl, thrfor, dvlopd mrkts control rouhl ovr90 prcnt of mutul fund ssts.3Yt mn dvlopin countris r currntl

skin to fostr domstic mutul fund sctor, bcus mutul funds providcost-ffctiv, profssionll mnd divrsifiction of risk to invstors, whilsupportin conomic rowth.

Mutul funds r mjor intrmdir btwn svrs nd

borrowrs, thrin svins out of bnk dposits nd invstin

ths svins into mon mrkt instrumnts, bonds, nd

quitis issud b ovrnmnts nd corports. Mutul fundsr ssntill dsind to divrsif risk for smllr svrs who donot hv nouh mon to chiv this divrsifiction thmslvs;thus, mutul funds tnd to b middl clss svins vhicl.

Howvr, ths funds r lso vlubl invstmnt vhicl forinstitutionl invstors nd corports who likwis bnfit fromthis cost-ffctiv profssionl mnmnt of divrsifiction ofrisk. Mutul funds thrfor pl sinificnt rol in invstin forrtirmnt s wll s srvin s n undrlin invstmnt vhicl forinsurnc compnis. Likwis, corports find th cost-ffctivdivrsifiction of risk offrd b mon mrkt funds (which invstprdominntl in short-trm dbt instrumnts) ttrctiv fortrsur mnmnt.

Mutul fund mrkts somtims dvlop ornicll.Howvr, inmn mrin mrkts, nd somtims dvlopd mrkts, mutulfunds r oftn snthticll dvlopd b first stblishin thll nd rultor frmwork, bsd on intrntionl stndrds,

for such funds to xist. In th Unitd Kindom, th Unitd Stts,nd Zimbbw, funds dvlopd first nd fund-spcific lw ndrultion cm ltr. In othr css, such s Kn, Morocco,or Spin,4fund lw nd rultion wr st up bfor funds wrctull crtd.

Th vrin scl of domstic mutul fund mrkts round th

worldin both dvlopin nd mtur mrktsis function of

mn diffrnt intrctin fctors.Th divrsit of fund sctorslso rflcts th divrsit of nvironmnts in which th oprt.5Morovr, mutul funds thmslvs df clr comprison bcus

th r not stndrdid in trms of ll structur, invstmntfocus, or mnmnt stl; nor r th lws consistntlctorid in vilbl dt. Polic mkrs nd rultorsmust undrstnd th mutul fund sctor to rlisticll ssssth sctors bilit to function, nd to ffctivl fcilitt ndsuprvis ths funds.

This stud provids polic mkrs in dvlopin countris whosk to fostr th domstic mutul fund sctor with hndbook

to undrstnd th sctor; it prsnts rn of ll/rultor

nd mrkt-rltd fctors tht driv or impd mutul funds.Th objctiv of this rport is to l out slint fturs tht hlpdvlop th mutul fund industr in dvlopin countris nd unlocksom of th k drivrs nd impdimnts tht tpicll ssist orstunt thir rowth. Fw rports so fr hv drwn on cross-countrstudis to xmin dvlopin countr mutul fund sctors. Thisstud xplors th ntur of mutul fund sctors in diffrntdvlopin countris nd prsnts, throuh illustrtiv xmpls,th htronit in chrctristics tht ris for mutul fundsctors dvlopd in diffrnt orphic nd conomic contxts.6

Th stud focuss primril on publicl offrd, domstic mutulfunds (lll domicild in th host countr in which th r

primril distributd). Th stud drws from fiv countr csstudis of mutul fund sctors conductd b th World Bnk in2012Bril, Kn, Morocco, Pru, nd Turknd on vriousothr xmpls. Th dtils of ths studis r providd in thchptrs tht follow, usin dt nd insihts from th tim ofth rspctiv cs studis, with updtd dt whr possibl.Th stud lso drws on 2013 lobl surv conductd b thIntrntionl Ornition of Scuritis Commissions (IOSCO)on mutul fund mrkts in dvlopin countris. Throuhout th


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|MUTUAL FUNDS IN DEVELOPING MARKETS:ADDRESSING CHALLENGES TO GROWTH

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rport ths cs studis r rfrncd to dpict th htronits wll s similritis in trnds of mutul fund sctors lobll. Thrdr must not tht ths xmpls r not mnt to rflct bstor worst prctic, but rthr r usd for illustrtiv purposs.

Introduction to Mutul FundsA mutul fund is form of opn-ndd collctiv invstmnt

schm,7 or invstmnt fund. It is pool of svins collctdfrom multipl invstors who bu units rprsntin proportiontownrship of th fund. Th rsultin pool of funds, or th fundscpitl, is collctivl mnd b profssionl mnmntcompn, in lin with th invstmnt objctiv outlind in th fundsprospctus. Mutul funds r tpicll undrstood to mn opn-ndd funds; tht is, funds tht r oblid to bu bck thir shrsor units from holdrs on rulr (usull rd s dil) bsis.This form of collctiv invstmnt schm is closl rultdbcus it is lll liibl to thr svins from th public nd isrquird, in turn, to invst thos svins in divrsifid portfolio of

trnsfrbl/trdbl scuritis.Mutul funds tpicll consist of four min tps of funds,

dfind b thir sst xposur:(1) funds tht invst prdominntlin quit scuritis, (2) funds tht invst prdominntl in dbtscuritis, (3) funds tht invst in hbrid of both quit nd dbtscuritis, nd (4) funds tht invst in short-trm dbt instrumnts(mon mrkt funds).8

Ths funds r st up throuh on of thr common ll

structurs: trust, corport, or contrctul-tp funds. Thcountrs ll trdition, whthr civil cod or common lw, willinflunc th tp of ll structur nbld for mutul funds. Thll structur tpicll mbds ovrnnc rquirmnts to dl

with som of th principl-nc risks inhrnt in th mutul fundmodl.9Th ll structur lso dtrmins th rrnmnts foroprtin th fund, sfurdin its ssts, nd nsurin third-prtsuprvision. Dspit th prvlnc of diffrnt ll structurs, thoprtionl chrctristics of mutul fund structurs r bcominincrsinl similr, s rultor frmworks cohr round thIOSCO principls on collctiv invstmnt schms (outlind inChptr 2) nd, incrsinl, rionl stndrds.

Dmnd for mutul funds drivs from institutionl invstors

(includin corports) nd rtil invstors. In som countris,such s Pru, th mutul fund sctor is virtull 100 prcnt rtilownd. In othr css, such s Morocco, institutionl invstorsown mor thn 90 prcnt of ssts undr mnmnt in mutul

funds. Althouh in mn countris funds cn b licnsd nd txds mutul funds onl if th mt th divrsit of ownrship tst,in othr countris it is possibl for fund to b crtd nd soldxclusivl to sinl institutionl clint undr th sm lisltivnd rultor rquirmnts s funds tht r offrd to th public.10This is th cs in Bril, for instnc, whr Articl 71 of Instruo409 prmits fund to b crtd xclusivl for sinl clint.Similrl, in Morocco, th mutul fund industr is chrctridb lr numbr of ddictd funds; tht is, rltivl lrproportion of funds r st up s invstmnt structurs ddictd

to limitd numbr of invstors, usin th sm ll frmworkst up for funds sold to rtil invstors.11

Dvlopmnt of Mutul Fund Sctors

For policmkrs skin to initit or xpnd mutul fund

sctor, th first stp is to idntif th currnt lvl of dvlopmntnd succss of th mutul fund sctor.

If thr is no mutul fund sctor in th conom, nd th countr

sks to initit such funds, policmkrs should first considr

th ntur nd scl of th cpitl mrkts.Th should ssss,for instnc if cpitl mrkts r xpndin nd offrin potntilfor mutul funds to xpnd; nd if thr is sufficint liquidit in thmrkt to llow mutul funds to sil oprt. Bcus mutulfunds must b bl to invst nw mon flowin into thm nd bbl to ris mon b sllin ssts whn invstors wish to xit thfund, th cnnot oprt in nrrow nd illiquid cpitl mrkts. Ifth stock mrkt, for instnc, lists 30 or fwr scuritis nd mostor ll of ths r rrl trdd,12 thn it is unlikl tht mutulfunds could function ffctivl. In such css, bfor dvlopinmutul funds, polic mkrs could first sk to improv th lvl ofissunc nd mrkt turnovr in th cpitl mrkts. Th couldlso prioriti improvin th nvironmnt for closd-ndd fundssuch s vntur cpitl nd privt quit fundstht do notnd liquid ssts to function, sinc ths funds cn lso hlp ddto issunc listd on xchns.

If, on th othr hnd, th countr hs mutul fund sctor,

policmkrs must undrstnd th currnt hlth nd lvl of

dvlopmnt of this sctor. Th must ssss how th mutulfund mrkt hs dvlopd rltiv to th conom;13 whthrth mrkt is prcivd to offr ood potntil for dvlopmnt;14

how ffctiv th sctor hs bn in mobiliin svins;15

nd thrltiv succss of mutul funds with rspct to othr svinsvhicls. If th mutul fund sctor is thouht not to b rowinsufficintl, th nxt stp is to idntif th rsons for indqutrowth. Tpicll (but not lws) ths rsons will fll into on ormor of th followin ctoris which r furthr xplord in thchptrs of this stud:

Qulit of lw nd rultion nd suprvision.Whil oodqulit ll nd rultor frmwork in itslf will not crt succssful mutul fund mrkt,16th mrkt nds dqutrultion nd suprvision to crt invstor confidnc. Onth othr hnd, xcssivl complx rultion m wll b dtrrnt: Most hihl dvlopd mrkts strtd without n

rultion nd hd to crt frmworks to tckl problmss th ros, continull dptin thm ovr tim. Lw ndrultion ovrnin pnsion funds nd othr institutionlinvstors m lso limit thir invstmnt into mutul funds;this, in turn, m ffct th mutul fund sctors succss.

Lvl of svins.If thr is n insufficintl lr middl clsswith surplus svins tht r willin to risk nd dplo thssvins for th lon trm in mutul funds, dmnd for mutulfunds will quit simpl b indqut. In this cs it cn busful to fcilitt institutionl invstors such s pnsion


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EXECUTIVE SUMMARY

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funds to invst in mutul funds, whil rtr rtil dmnd formutul funds dvlops.

Finncil litrc nd wrnss of finncil products. Iffinncil litrc nd wrnss is low, thr m b dcrsdrtil intrst in mutul funds. Awrnss nd duction

prorms to dvlop rtil dmnd is lon-trm nd xpnsivxrcis, which nscnt sctor m not b bl to undrtk,so ovrnmnt or rultor support m b ndd. Dvlopin finncil dvisor sctor m lso dvlop rtil dmnd formutul funds, sinc mn popl prfr to t fc-to-fcfinncil uidnc.17

Tx trtmnt of mutul funds. If mutul funds hv lssfvorbl tx sttus thn othr tps of svins vhicls(such s bnk dposits or insurnc products), thn th runlikl to ttrct svins from individuls or invstmnts frominstitutionl invstors.

Comptition from othr svins mdi, in prticulr

mndtor pnsion fund svins nd bnk dposits.Whrpnsion svin is mndtor, this m ffct mutul fundsithr positivl or ntivl. If pnsion funds cn invstin mutul funds, thn mutul fund rowth m b ffctdpositivl; if th cnnot, nd prticulrl if rquird lvls ofmndtor pnsion svin r hih, this will tnd to crowd outothr svins, includin mutul funds. If svin into pnsionfunds is voluntr nd such funds r mor tx fficint thnmutul funds nd cnnot or do not invst in mutul funds, thisis likl to rduc th potntil for mutul fund sctor rowth.Similrl, if intrst rts on bnk dposits r hih, invstorsm find littl incntiv to risk cpitl in mutul funds invstinin shrs or bonds, prticulrl if dposits r mor tx fficint

thn invstin in mutul funds.

Comptition from forin domicild funds.If funds domicildin forin jurisdictions cn b publicl offrd, nd ths fundsoffr widr lobl invstmnt covr, bttr tx trtmnt ortx voidnc, or rtr crdibilit thn domsticll domicildfunds, thn locl funds will find it hrdr to compt.

St of dvlopmnt of stock mrkt. As rcnt ICIstud18 nots thr is stron vidnc tht th rltiv siof countrs cpitl mrkt is corrltd with th si of thmutul fund industr in tht countr. A prrquisit to rowthof th mutul fund industr round th world is ccss to ndqut suppl of trdbl stocks nd bonds. Cpitl mrkts

lso nd to b liquid; tht is, th suppl of scuritis must trdwith som rulrit. If cpitl mrkts r not xpndin,mutul funds r lso unlikl to xpnd.

Accss to distribution. Mutul funds nd distributors ththv n incntiv to sll units to th public. If bnks (whichdomint th distribution of finncil srvics) or finncildvisrs do not find it sufficintl rmunrtiv to mrktmutul funds to th public, this could rduc th potntilfor mutul fund xpnsion. Bnk domintion of distribution

chnnls for mutul funds cn lso rstrict indpndnt fundoprtors from ntrin th mrkt.

Flxibilit in mrktin mutul funds. If th ll ndrultor frmwork dos not nbl innovtiv fundstructurssuch s mstr-fdrs; umbrll funds; nd

multi shr or unit clsssmutul fund oprtors m nothv dqut flxibilit to mrkt mutul funds, which mimpd th sctor from ccumultin ssts.

If mutul funds r sufficintl ttrctiv to invstors, thn

oprtors will com forwrd to crt, offr nd mn ths

funds, nd distributors will b rd to distribut thm. Innrl, mutul fund mrkt (or sctor of tht mrkt) mrpidl xpnd if th oprtors of mutul funds find prticulrdvnt tht cn b xploitd. Th ntur of th dvnt mvr from countr to countr: In on countr mon mrkt fundm b bl to offr hihr rturns to invstors bcus incom pidout b th fund is not subjct to withholdin tx, whrs intrstpid on bnk dposit is; in nothr, mutul fund m offr n

institutionl invstor w to convnintl nd cost ffctivlchiv instnt xposur to domstic or forin mrkt.

Givn th htronit of contxts within which mutul funds

oprt, it is not possibl to idntif sinl pth tht cn

nsur mutul fund sctors succss nd mk crtin tht

th sctor contributs ffctivl to th conom of countr. On th contrr, mn fctors intrsct to influnc outcoms, soutlind in th chptrs of this rport.

Endnots

1. Source: Investment Company Institute 2014.

2. UK Fund Management 2014, The Financial Markets Series,TheCityUK, September 2014.

3. ICI Statistics on global mutual fund markets.

4. In Spin, mutul fund sctor cm into bin ftr th

countr pssd mutul fund lw, followin th Europn

Unions Dirctiv on Undrtkins for Collctiv Invstmnt

in Trnsfrbl Scuritis (UCITS) in 1985. UCITS is st of

Europn Union Dirctivs tht provid collctiv invstmnt

schms pssport to oprt throuhout th EU onc in

complinc with th dirctiv nd uthorid b mmbr stt.

5. Plntir, L. Christophr. 2014."Globlistion nd th Globl Growth

of Lon-Trm Mutul Funds." ICI Globl Rsrch Prspctiv 1, no.

1 (Mrch). Avilbl t www.icilobl.or/ pdf/ici_pr01-01.pdf.6. Althouh this rport sks to brodl xplor strikin spcts

of th mutul fund sctor in mrin mrkts, it dos not o

into spcific issus rltd to mutul funds. Such spcific issus

includ but r not limitd to th dbt on whthr or not ctivl

mnd funds outprform pssivl mnd funds, dtils on

th ntur nd dvlopmnt of rltivl nw mutul fund products

such s xchn-trdd funds, nd dlvin into th ntur of

offshor fund cntrs nd th impdimnts to thir dvlopmnt.

Th rport lso dos not xmin spcific lrnins from mutul


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4

fund sctor vnts in dvlopd countr contxts, such s th

mutul fund mrkt timin scndl of 2003 in th Unitd Stts.

7. Collective investment scheme is the term used by IOSCO

to designate such funds.

8. Funds cn b furthr subdividd b invstmnt objctiv (incom,

rowth, cpitl prsrvtion, or mixtur of ths) or b orphicfocus (.., lobl quit) or sctor focus (.., tchnolo stocks).

9. Th oprtor (or nt) who mns th fund dos not own th

ssts of th fund. Th ssts r ithr bnficill ownd b

thos who own units in th fundth invstors (th principls)

or th r ownd b th fund itslf whn it is compn, which

is in turn ownd b its shrholdrs (th invstors in th fund).

This dichotom lds to th possibilit of conflicts of intrst.

10. Sinc ths funds r st up undr th sm ll nd rultor

rquirmnts s publicl offrd invstmnt funds, ths r

includd in this nlsis.

11. Out of th 330 uthorid mutul funds, bout 145 wr

ddictd to sinl invstor, s of Dcmbr 31, 2011.

Ddictd mutul funds rprsntd 41 prcnt of totlssts undr mnmnt in Morocco t nd of 2011.

12. Tht is, stock mrkt turnovr s prcnt of mrkt

cpitlition is lss thn 10 prcnt.

13. Totl mutul fund ssts undr mnmnt s prcnt of

ross domstic product ovr tim.

14. Prorssion in th numbr of mutul fund oprtors ovr th

prvious th tn rs, or sinc incption of th industr.

15. Mutul fund ssts undr mnmnt s prcnt of vlu

of totl bnk dposits.

16. Indd mn mrkts hv stt-of-th-rt rultion nd no

ctivit.

17. Howvr, this is complx r to dvlop nd rult sincsuch dvic should covr widr rn of finncil srvics thn

mutul funds.

18. Plntir, L. Christophr. 2014. "Globlistion nd th Globl Growth

of Lon-Trm Mutul Funds." ICI Globl Rsrch Prspctiv 1, no.

1 (Mrch). Avilbl t www.icilobl.or/ pdf/ici_pr01-01.pdf.


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Mor spcificll, mutul fund is form of collctiv invstmntschm (CIS) tht is closl rultd bcus it is lll liiblto thr svins from th public nd is rquird in turn toinvst thos svins prdominntl in divrsifid portfolio oftrnsfrbl/trdbl scuritis.5Th trm mutul fund6 usdin this rport rlis on th trm tpicll usd in Cnd nd th

Unitd Stts to rfr to rultd nd publicl offrd collctivinvstmnt schms. Usull structurd s opn-ndd funds (sbox 1.1), ths funds mt rultor rquirmnts for unrstrictdoffr to th nrl public nd r oblid to bu bck shrsor units from thir holdrs t rqust on rulr bsis t thcurrnt vlu of thos shrs or units. Ths funds m tk nof tpicll thr ll structurs: contrctul, corport, or trust(this is discussd mor in chptr 2) nd in som countris m brquird to hv divrsifid ownrship.

Althouh mutul funds mt rquirmnts for funds offrd to thpublic, th m lso b ttrctiv to institutionl invstors.Insom countris mutul fund ssts undr mnmnt m drivmor from institutionl invstors thn from individul mmbrs ofth public. This is most likl to ris whr such funds r tx-fficint nd cost-ffctiv w of holdin portfolio of ssts ndwhr th r prmittd to mt th nds of sinl invstor. Inmn countris funds cn b licnsd nd txd s publicl offrd

mutul funds onl if th mt divrsit of ownrship tst, whichims to prvnt individuls or corports from misusin funds txprivils to void or vd tx. In othr countris fund cn bcrtd to b sold xclusivl to sinl institutionl clint undrth sm lisltiv nd rultor rquirmnts s funds thtr offrd to th public. This is th cs in Bril,15whr Articl

71 of Instruo 409 prmits fund to b crtd xclusivl for sinl clint; nd in Morocco, whr rltivl lr proportion offunds r st up s invstmnt structurs ddictd to limitdnumbr of invstors (such s n insurnc compn, publicpnsion mnmnt institution, ovrnmnt fund, or privtfoundtion).16 Ths funds provid th convninc of hvin portfolio mnd within wll-structurd nd suprvisd llfrmwork whil providin th lvl of customition rquird bth invstor, notbl in trms of sst lloction, invstmnt stl,nd risk profil. Prmittin funds with sinl invstor cn b w to kick-strt mutul fund dvlopmnt bfor rtil dmndfor such vhicls dvlops.

This stud focuss primril on domstic mutul funds, tht is,mutul funds tht r lll domicild in th host countr inwhich th r primril sold.17Th stud builds on th fiv countrcs studis lludd to bov s wll s lobl surv conductd bth Intrntionl Ornition of Scuritis Commissions (IOSCO)

Histor of Invstmnt Funds

Th rlist invstmnt fund ws closd-ndd fund formd in th Nthrlnds in 1774. In 1868, such fund ws formd in Britinnd in 1893 in th Unitd Stts. Th first opn-ndd mutul fund, which could continuousl crt nd cncl units nd thus vr itscpitl, ws th Msschustts Invstmnt Trust crtd in th Unitd Stts in 1924.8

Th first British funds objctiv rmins tru for tht of modrn invstmnt fund, spcificll to provid th invstor of modrtmns th sm dvnt s th lr cpitlist in diminishin risk b sprdin invstmnt. 9 Followin th Wll Strt crsh of 1929,ll nd rultor frmworks spcific to mutul funds strtd to b introducd, for xmpl, th U.S. Invstmnt Compn Act of1940 nd th U.K. Prvntion of Frud (Invstmnts) Act of 1939.10

Opn-Endd Mutul Fund

Mutul funds r tpicll opn-ndd funds, tht is, funds tht r oblid to bu bck thir shrs or units from holdrs on rulr(usull rd s dil) bsis. Ths funds cn issu nd rdm shrs or units, llowin invstors to invst in or divst from th fund.Th fund ssts r vlud t thir mrkt pric (mrk-to-mrkt) on dil bsis, hnc llowin th dil clcultion of nt sstvlu of ch shr or unit in th fund tht is th bsis of th pric t which invstors bu or sll shrs or units. This mns thtinvstors do not hv to srch for sllr of shr/unit in mutul fund in th mrkt. Instd th invstors cn purchs th shr/unit dirctl from th fund, usull throuh th fund mnmnt compn. Convrsl, th holdr of shr in mutul fund dos nothv to look for bur but cn sll it dirctl to th mutul fund.

Opn-ndd funds r mnd ithr pssivltht is, trckd to n indxor ctivlwhrb th fund mnmnt compn

mplos spcific strt to invst ssts. To nsur th cn mt th potntil liquidit dmnds on th fund, ths funds rrquird to invst prdominntl in liquid scuritis such s hih-qulit bonds, quitis, nd commrcil ppr or short-trm dposits.11Voltil, illiquid, or shllow cpitl mrkts r thus not suitbl to such funds bcus th cnnot sil bu or sll ssts to mtdmnd for sl or rdmption.

Anothr distinctiv ftur of opn-ndd funds is thir pur quit cpitl structur: tht is, th m ris mon onl b sl ofshrs or units nd r not prmittd to issu dbt scuritis.12 Gnrll opn-ndd funds m onl borrow up to 10 prcnt of thirvlu, but onl for th short trm, nd not to lvr rturns.13

Tothr, ths fturs ssur n invstor into publicl offrd opn-ndd mutul fund tht th r undrtkin n unlvrd,divrsifid, nd hihl liquid invstmnt.

This opn nd s-throuh structur mns tht whn n invstor purchss mutul fund shrs, th cpitl of th fund incrss,nd whn n invstor rdms shrs, th cpitl of th fund dcrss: hnc th trm vribl cpitl lso pplid to ths funds.14

Box 1.1: Histor of Invstmnt Funds7


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CHAPTER 1:OVERVIEW OF MUTUAL FUND SECTOR CHARACTERISTICS IN SELECT DEVELOPING COUNTRIES

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on mutul fund mrkts in dvlopin countris. Throuhout thrport ths cs studis r rfrrd to, to dpict th htronits wll s similritis in trnds of mutul fund sctors lobll. Thrdr must not tht ths xmpls r not mnt to rflct bstor worst prctic, but rthr r usd for illustrtiv purposs.

Rol of Mutul FundsA k rson for ncourin th dvlopmnt of mutul fundsis tht th mobili th svins of smll invstors, which mihtothrwis rmin in bnk dposits, into cpitl mrkts.Thsmobilid svins provid sourc of lonr-trm finncin forcompnis nd ovrnmnts issuin bonds nd for compnisissuin quitis, thus supportin conomic rowth. Mon mrktfunds (MMFs), whil tpicll invstin onl in instrumnts with durtion of undr on r, cn lso provid finnc b buinshort-trm instrumnts such s Trsur bills (T-bills) ndcorport ppr. Furthr, th rturns rnd b fund invstorsshould ovr tim rduc th potntil for dpndnc upon th

stt in rtirmnt nd mk houshold finncs mor rsilint. Inth Unitd Stts, th bist mutul fund mrkt in th world,mutul funds hld lmost 25 prcnt of ll U.S. stock t th ndof 2012, mkin thm on of th lrst invstors in U.S. finncilmrkts.

Mutul funds lso hv conomic bnfits for thir invstors:Th provid cost-fficint sprd of risk for rtil invstors,institutionl invstors, nd corports. Gnrll most individulinvstors do not hv lr sums of mon to invst, nd crtin divrsifid portfolio of shrs or bonds would rquir tns or hundrdsof thousnds of U.S. dollrs. Furthr, th cost of cquirin such portfolio would b hih rltiv to th mount ths invstors hvvilbl to invst, nd th slction of th portfolio would rquir

xprtis tht th m not hv. Mutul funds, which tpicllccpt subscriptions of $500 or $1,000, provid this divrsifictionfor thm. B invstin throuh mutul fund, rtil invstors rssurd tht thir svins r mnd b invstmnt profssionlswho divrsif risk t rltivl low trnsction costs bcus thbu nd sll ssts in rtr bulk thn n individul invstin smllmounts could chiv.18Sinc mutul funds r nrll invstdin vr liquid finncil instrumnts, mutul fund shrs or units rusull rdmbl on dil bsis, nd invstors cn rdm thirshrs t will.19 Institutionl invstors oftn invst in mutul fundsto lso in xposur to prticulr sst clss or orphiclrion whr th cost of invstin vi mutul funds is lowr thnth cost of hirin xprts to mn th dsird portfolio.20Studis

show tht mutul funds hv bcom th primr finncil wlthccumultion vhicl in Amricn socit, spcill for middl-mrkt consumrs nd th mrin fflunt.21

Mutul funds cn pl sinificnt rol in invstin forrtirmnt.Both dfind bnfit nd dfind contribution pnsionschms m b invstors in mutul funds. In th cs of dfindbnfit schms, this is likl to b for th rsons ivn bov.In th cs of dfind contribution schms, individul schmmmbrs m choos to hold shrs or units in mutul funds inthir dfind contribution ccounts. In th Unitd Stts, for

instnc, in 2013, 81 prcnt of mutul fundownin housholdsownd shrs or units in ths funds throuh mplor-sponsorddfind contribution rtirmnt plns.22 Mutul funds r lsoundrlin invstmnts for othr dfind contribution pnsionschms, such s th 401(k).23 As k invstmnt product inmn rtirmnt plns, Amricn mutul funds pl criticl rol

in th finncil scurit of millions of individuls s th prprthm for rtirmnt.

Mon mrkt fundsmutul funds tht invst prdominntlin short-trm dbt instrumnts issud b ovrnmnts,compnis, nd finncil institutions such s bnkslso srvn importnt intrmdir rol b rspondin to th short-trmliquidit nds of ths issurs.Ths funds pl n importntcsh mnmnt function in som countris bcus th rusd b mn corports for trsur mnmnt. Th mlso ssist in finncin bnks b invstin in crtificts of dpositnd s countrprts to sl nd rpurchs trnsctions thtprovid liquidit to bnks.24For rtil, corport, nd institutionlinvstors, MMFs rprsnt stron ltrntiv to trm dpositsin th bnkin sstm if, for instnc, ths funds p hihrintrst rt thn tht vilbl on dposit,25or if th r notsubjct to withholdin txs pbl on intrst from dposits.MMFs mnd lobll $4.76 trillion s of nd 2013 (nrl 16prcnt of totl ssts undr mnmnt in mutul funds)26ndr on of th pillrs of th shdow bnkin sstm. Th downsidto this is tht if MMFs r mjor providrs of short-trm finnc tocorports or bnks (s in th Unitd Stts), nd thr is run onon or mor of such funds, this could disrupt th flow of short-trmfunds to corportions, finncil institutions, nd ovrnmnts, thuspotntill prsntin sstmic risk.

Asst AccumultionAn stimtd 76,200 mutul funds worldwid currntl controlbout $30 trillion27 in ssts undr mnmnt, rprsntin

just ovr 20 prcnt of totl lobl ssts undr mnmnton bhlf of invstors worldwid (s fiur 1.1).28Th mutul fundindustr hs bn chrctrid s on of th most succssfulfinncil innovtions.29 Vrious rsons hv contributd to thstron rowth of th mutul fund industr lobll. Frnndot l. rfr to th lobl dvlopmnt of cpitl mrkts, whichhs contributd to invstor confidnc in th intrit, liquidit,nd fficinc of finncil mrkts, nd mrkt-bsd finncil

Figure 1.1: Global Mutual Fund Assets under Management

(in $ trillions)

Sourc: ICI 2014.

12 1211

1416

18

22

26

19

2325

24

27

30 31

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


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sstms s bin fctors tht ld to this rowth.30At th lvl ofth individul invstor, with loblition hs lso com incrsinwrnss of invstmnt products, risin prsonl incoms,nd stronr pptit for riskll of which contribut to thttrctivnss of invstmnt products such s mutul funds.Followin th 20072008 Globl Finncil Crisis, nt sls wr

nrll positiv but somwht voltil, nd totl lobl mutulfund ssts undr mnmnt took until 2012 to pss thprvious pk of $26.2 trillion chivd in 2007.31 Mutul fundssls worldwid hv bnfitd from th opportunitis prsntd bth rowth of rtirmnt ssts, prticulrl dfind contributionpnsion plns.32

Nint prcnt of lobl mutul fund ssts33undr mnmntdriv from dvlopd mrkts.Th Unitd Stts hs b fr thlrst mutul fund mrkt worldwid with mor thn 50 prcntof lobl mutul fund ssts undr mnmnt.34Europn funds,proplld b cross-bordr rionl mrkt,35collctivl mnjust ovr 30 prcnt of lobl mutul fund ssts.36Som Europn

mrkts hv hih proportion of mutul fund ssts xprssd s prcnt of ross domstic product (GDP); for xmpl, Frncsmutul fund sctor hs ssts vlud t lmost 57 prcnt of GDP.Fiur 1.2 nd box 1.2 show th othr k worldwid mrkts formutul funds.

Box 1.2: K Mutul Fund Mrkts Worldwid

Figure 1.2: 2013 Largest Mutual Fund Assets under Management by Country/Region

Sourc: ICI 2014.

Unitd Stts

With nt ssts of mor thn $15 trillion t r nd 2013, or lmost hlf of totl lobl mutul fund ssts undr mnmnt, thworlds lrst mutul funds industr is loctd in th Unitd Stts. Just ovr 46 prcnt of ll U.S. housholds ownd mutul funds ttht dt, mn of thm throuh rtirmnt plns.37

Europ

Collctivl Europn funds constitutd just undr third of lobl mutul fund ssts ($9.4 trillion) t r nd 2013. Two intrntionlfinncil cntrs for funds sold cross bordrs, Irlnd nd Luxmbour, rspctivl ccountd for $1.4 trillion nd $3 trillion of ths ssts. 38At r nd 2013, Frnc ($1.5 trillion) nd th Unitd Kindom ($1.2 trillion) wr th lrst domstic mutul fund mrkts in Europ.

Finncil intrtion in Europ hs lso ctld th dvlopmnt of sinl mrkt for mutul funds. Undr th Undrtkins forCollctiv Invstmnt in Trnsfrbl Scuritis (UCITS) dirctiv, mutul funds cn b mrktd cross bordrs; tht is, fund thtis formd nd pprovd in on Europn Economic Ar (EEA)39countr undr th dirctiv cn b mrktd in nothr EEA mmbrcountr, without dditionl pprovl.

At th nd of Dcmbr 2013, th totl vlu of Europn mutul funds ws $9.3 trillion drivin from 34,743 funds, comprd with $15trillion invstd in 7,582 U.S. mutul funds t th sm dt.40

Asi-Pcific

At r nd 2013, th Asi-Pcific rion controlld $3.4 trillion in mutul fund ssts, with pproximtl hlf th ssts hld b mutulfunds in Austrli ($1.6 trillion nd 1,415 funds). Chin ($479 billion nd 699 funds) nd Jpn ($774 billion nd 4,922 funds) lso hvsibl mutul fund sctors.41

50% United States

France5%

Brazil3%

United Kingdom4%

Canada3%3% Other

China2%

Japan3%

Australia5%

Other Europe22%


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Mutual fund sectors are becoming incrsinl common indvlopin countris, dspit still bin quit smll.Accordinto dt collctd b ICI, mutul fund ssts undr mnmntin middl-incom countris hv rown from 2.3 prcnt of loblmutul fund ssts in 2001 to 6.3 prcnt in 2012,42lthouh hih-incom countris hld ovr 93 prcnt of ssts undr mnmnt

(s fiur 1.3). But mrin mrkts, with th notbl xcptionof Bril, oftn hv rltivl smll mutul fund sctors. At rnd 2013, Bril hd th fifth lrst domstic fund mrkt lobllnd th lrst mutul fund industr in th dvlopin world, withmor thn $1 trillion of ssts undr mnmnt nd n unusulllr numbr of funds, totlin just ovr 8,000.43Th nxt lrstmrkt in Ltin Amric ws Mxico, with rouhl tnth of Brilsmutul fund ssts (or $120 billion in ssts undr mnmnt[AUM]) t th nd of 2013. Most othr mrin mrkt mutul

fund sctors r much smllr in comprison to Bril in trms ofsi. Chin ($479 billion) nd Kor ($285 billion) r th lrstmutul fund industris ftr Jpn in Asi. In Afric, th lrstmrkt is South Afric, with $143 billion t r nd 2013. Nirihs th scond lrst mrkt in Sub-Shrn Afric, with $953million in AUM t r nd 2013,44nd Kn, with pproximtl

$270 million in AUM in mid-2012, is th smllst mutul fund sctorincludd in this nlsis. In Europ, th smllst mutul fund sctormon dvlopin countris ws Bulri with $504 million tr nd 2013; Turk, cs stud countr, with $14 billion undrmnmnt, is th tnth smllst mrkt in Europ.45

Mutul fund sctors cross dvlopin countris hvxprincd vribl rowth. As fiur 1.4 shows, mutul fundsctors in svrl mrin mrkts hv rcordd doubl-diit

Figure 1.3: Total Mutual Fund Assets under Management: High-Income MF sectors versus Middle-Income MF Sectors

Sourc: ICI dt usin World Bnk roup countr clssifictions s of 2013.

Not: This informtion is drivd from th ICI Globl Mutul Fund Sctor dtbs, which did not includ n low-incom countris. Hih-incom countris r both OECD ndnon-OECD.46

97.7% 97.8%97.3%

97.2% 96.9%96.7%

94.4%

94.5%93.0% 92.6% 92.5%

92.5%93.5%

2.3% 2.2%

2.7%

2.8%3.1%

3.3%

5.6%

5.5%

7.0%7.4% 7.5%

7.5%

6.5%

12 11

1416

18

22

26

19

2325

24

27

30

5

10

15

20

25

30

35

2001 2002

$, Billions

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Percentage of Total Global AUM $, Billions

High Income Middle Income Total Net Assets

Figure 1.4: 2012 Mutual Fund Assets and Compound Annual Growth Rate, 20022012

Sourcs: IOSCO Surv, ICI, trd ssocitions, World Bnk cs studis, rultor wbsits nd dt. Sourc of 2002 dt for dvlopd countris is Invstmnt CompnInstitut Fct Book 2005, tbl 44, http://www.ici.or/pdf/2005_fctbook.pdf

Not: For Morocco nd Russi, 2011 numbrs hv bn usd, bcus dt for 2012 wr unvilbl.

Keny

a

Nige

ria

Cost

aRica

Slov

enia

Russia

Pakis

tan

Peru

Hung

ary

Turk

ey

Indo

nesia

Saud

iArabia

Moro

cco

Mala

ysia

Mexico

India

SouthA

frica

Kore

aCh

inaBr

azil

Brazil27%

China38%

Korea6%

South Africa18% India

15%

Mexico14%

Malaysia21%

Morocco19%

Indonesia14%

Turkey

12%

Hungary8%

Peru

16%

Pakistan22%

Russia26%

Slovenia26%

Costa Rica3%

Nigeria24%

-5

0

5

10

15

20

25

30

35

40

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

AUM 2012 ($, Millions) CAGR AUM Growth 20022012

$, Millions Percent Growth


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rowth rts in th lst 10 rs, vrsus dvlopd mrkts suchs Frnc (6 prcnt), Jpn (9 prcnt), th Unitd Kindom (13prcnt), nd th Unitd Stts (7 prcnt).47For instnc, fiur1.4 shows tht Bril (27 prcnt) nd Chin (38 prcnt) hvxprincd considrbl nnul rowth btwn 2002 nd 2012in thir mutul fund sctors. Chins rowth hs bn prticulrl

strikin, from $17 billion in 2002 to lmost $440 billion in 2012,idd b stron sls in th mutul fund sctor s shown in fiur1.5. Althouh Niri, Pkistn, Russi, nd Slovni still hdrltivl smll mutul fund mrkts of round $700 million to $3billion in AUM t th nd of 2012, ths industris hv xprincdconsidrbl rowth ovr th lst 10 rs, s displd in fiur1.5. Niris mutul fund sctor rw from $77 million in 2002 toovr $600 million in 2012; Pkistns mutul fund sctor rw from$425 million in 2002 to ovr $3 billion in 2012; Russis mutul fundsctor rw from $372 million in 2002 to mor thn $3 billion in2011,48nd Slovnis mutul fund sctor xprincd pronouncdrowth from $244 million in 2002 to ovr $2 billion in 2012. On thothr hnd, Kors mutul fund sctor hs xprincd 6 prcntrowth, in lin with dvlopd ntions, whrs Cost Rics

mutul fund sctor shrnk (3 prcnt) ovr th lst 10 rs. Thrsons for such rowth vr from countr to countr nd rdu to complx intrctions btwn rn of fctors, such smutul funds rltiv tx fficinc, th vilbilit of invstmnts,whthr pnsion funds nd insurnc compnis hv dvlopdnd if so whthr th r bl to invst in mutul funds, nd thrts of rturn mutul funds cn chiv rltiv to thos vilblon bnk dposits nd othr comptin invstmnts. As n xmpl, k drivr of sls of bond nd quit funds in dvlopd mrktsin rcnt rs hs bn th vr low lvls of intrst vilbl onbnk dposits, which hs cusd svrs to sk out invstmntswith hihr ilds.

Enblin vrit of fund structurs llows rtr flxibilit inmrktin to invstors nd cn hlp ccumult ssts in bothdvlopd countris nd mrin mrkts. Th mstr-fdrstructur, for instnc, is rltivl rr structur lobll thtis widl usd in Bril nd ccounts prtl for th prolifrtionof funds in this mrkt; it is usd to nbl invstmnt in forin

funds, which othrwis is not prmittd in Bril. Th mstr-fdr structur llows on fundth fdr, bsd in countrAto hv ssntill onl on invstmntshrs or units in mstr fund, bsd in countr or trritor B. An numbr offdr funds cn invst in mstr fund. Thus, for xmpl, withinth EU, fdr UCITS crtd nd bsd in Frnc, Grmn, Itl,Spin, nd th Unitd Kindom could bu units in mstr UCITS,bsd in Luxmbour, which in turn invsts in Europn quitis.This structur nd othr structurl vrints r discussd in mordtil in chptr 2.

Finncil Intrmdition nd Mutul FundInvstmnts

Mutul funds invst in trdbl scuritis tht r roupd b sstclss. Mutul funds tpicll consist of four min tps of funds,which r dfind b th rultor or trd ssocition: (1) fundstht invst prdominntl in quit scuritis, finncin compnis;(2) funds tht invst prdominntl in dbt scuritis, finncinovrnmnts or compnis; (3) funds tht invst in hbrid of bothquit nd dbt scuritis; nd (4) funds tht invst in short-trm dbtinstrumnts (MMFs), finncin ovrnmnts nd compnis. Fundscn b furthr subdividd b invstmnt objctiv (incom, rowth,cpitl prsrvtion, or mixtur of ths) or b orphic focus (..,lobl quit) or sctor focus (.., tchnolo stocks).

Figure 1.5: Annual Net Sales, 20012012

Sourcs: IOSCO surv, ICI, trd ssocitions, World Bnk cs studis, rultor.

Not: Indonsi, Kn, nd Niri r not includd bcus nt sls dt r unvilbl

-100,000

0

100,000

200,000

300,000

400,000

500,000

600,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

SaudiArabia

Russia

Mexic

o

Malay

siaBrazil

Morocco

Korea

China

Turkey

SouthA

frica

SloveniaInd

iaPeru

CostaRica

Pakis

tan

Hungary

$, Millions

$, Millions


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Mutul fund sctors in dvlopd nd dvlopin mrktshv vrin sst clss xposurs. Fiur 1.6 shows ICI dtfor mutul fund sctors in hih-incom vrsus middl-incomcountris, brokn down b sst clss xposur. Ths dt showtht ovr th lst iht rs hih-incom countr mutul fundsctors hv hd on vr ovr 40 prcnt of ssts invstd

in to quit funds nd rouhl 20 prcnt or lss invstd in bondfunds. MMFs rnd from 16 prcnt to 31 prcnt of ssts, butonl bout 10 prcnt of ssts ws invstd in hbrid funds. Forxmpl, in th Unitd Stts, quit funds constitutd ovr 50prcnt of U.S. mutul fund ssts t r nd 2013, nd fundstht invstd primril in U.S. domstic quit hld 38 prcnt oftotl mutul fund ssts. Bond funds constitutd 22 prcnt of

U.S. mutul fund ssts.49Althouh th dt for middl-incomcountris r limitd to 14 countris in this dtbs, it showstht in ths countris, ssts invstd in quit funds hv bnlimitd to n vr of pproximtl 20 prcnt ovr th lstiht rs, but ssts invstd in bond funds r lmost doublthis t bout 40 prcnt. Assts invstd in MMFs wr bout 15

prcnt, whrs thos invstd in blncd funds wr bout 20prcnt. In mrin mrkts, mutul funds nrll hv hihrxposurs to fixd-incom nd mon mrkts (short-trm dbtinstrumnts) nd lss xposur to quitis. Fiur 1.7 shows thvlu of ssts invstd in th diffrnt ctoris of mutul fundt r nd 2012 for vrious conomis. Exposur to quitis isoftn low in mrin mrkts, with mon th lowst worldwid

Figure 1.6: ICI Data for Mutual Fund Sector Asset Exposure: High-Income versus Middle-Income Countries

Sourc: ICI 2014.

HighIncome

MiddleIncome

HighIncome

MiddleIncome

HighIncome

MiddleIncome

HighIncome

MiddleIncome

HighIncome

MiddleIncome

HighIncome

MiddleIncome

HighIncome

MiddleIncome

HighIncome

MiddleIncome

HighIncome

MiddleIncome

0

10

20

30

40

50

60

70

8090

100

2005 2006 2007 2008 2009 2010 2011 2012 2013

OtherBalanced/MixedMoney MarketBondEquity

Percent

Figure 1.7: 2012 Mutual Fund Asset Exposure Broken Down by Asset Class

Sourcs: IOSCO surv, ICI, trd ssocitions, World Bnk cs studis, rultor.

Not: For Mlsi, Morocco, Pru, nd Russi, 2011 numbrs wr usd bcus 2012 numbrs wr unvilbl. For Kn, Jun 2012 numbrs from World Bnk cs studwr usd.

Turkey

SouthA

frica

Slovenia

SaudiArabia

Russia

Peru

Pakis

tan

Nigeria

Morocco

Mexic

o

Malay

siaKorea

Keny

a

Indonesia

India

Hung

ary

CostaRica

Brazil

China

Debt Funds Equity Funds Hybrid Funds Money Market Funds Other Funds

0

10

20

30

40

50

60

70

80

90

100

Percent


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bin Cost Ric (1 prcnt), Mxico (7 prcnt), Pru (3 prcnt),nd Turk (3 prcnt). In countris such s Bril nd Pru, mutulfunds hv sinificnt xposur to bonds. In Pru, for instnc, 96prcnt of ssts undr mnmnt in mutul funds r invstdin fixd-incom or MMFs.50Similrl, in Morocco 85 prcnt of thtotl vlu of mutul funds is invstd in fixd-incom nd MMFs. In

fct, Moroccn mutul funds wr hvil invstd in ovrnmntscuritis in th rl 2000s nd strtd to divrsif onl in thmiddl of th lst dcd. Howvr, sinc 2002, corport scuritishv bn rowin stdil, nd corport bonds rprsnt 13prcnt of totl ssts undr mnmnt in Morocco.51Chptr 3discusss som of th rsons for such trnds.

Hih MMF xposurs in mn mrin mrkts impl thtths sctors r s t filin to mobili svins intolonr-trm instrumnts. Fiur 1.7 shows this to b th csin countris such s Cost Ric (87 prcnt MMFs), Hunr (71prcnt), Mxico (50 prcnt), Pkistn (72 prcnt), Turk (58prcnt), nd Sudi Arbi (61 prcnt). In Turk, th mutulfund sctor hs bn domintd b MMFslmost 60 prcnt ofAUM t nd 2012. In Morocco, MMFs rprsntd mor thn 25prcnt of totl AUM t th nd of 2011 nd hv bn rowint n vr nnul rt of 23 prcnt sinc 2005. Chptr 3provids som rsons wh MMFs tnd to b succssful in mnmrin mrkts.

Ownrship of Mutul Funds: Institutionlnd Rtil InvstorsWhn nlin mutul fund ownrship, wht is ctorids n institutionl or rtil invstor m vr from countrto countr.Rtil invstors r individuls tht mk thir owndcisions (whthr with or without dvic) to bu nd sll mutul

fund shrs or units. An institutionl invstor is n invstmntvhicl tht thrs mon from numbr of prsons (ll orphsicl), nd whos mnr tks th invstmnt dcisions sto wht to bu nd sll for th funds portfolio in linmnt withits objctivs but without rfrnc to mmbrs of th schm.Howvr, th distinction md btwn wht is ctorid s rtil nd institutionl invstmnt in mutul fund cn vr, so thtit is difficult to mk dfinitiv comprisons. In som css, thrm, of cours, simpl b no dt, if countris do not diffrntitbtwn rtil nd institutionl sls in thir sttistics; this isth cs, for instnc, in Kn. In som countris sls m bclssifid s rtil, which in othr countris m b clssifid sinstitutionl. This is prticulr problm for sls tht r mdthrouh dfind contribution pnsion schms, which, for xmpl,in th Unitd Stts r ctorid s rtil (sinc th mutulfund invstmnts hld b th schm r chosn b th individul),whrs in Frnc ths workplc pnsions r ctorid sinstitutionl. Of cours, t th nd of th d, ll dmnd drivsfrom individuls bcus it is thir mon tht contributs topnsion schms nd ps for insurnc policis.

Institutionl invstors r oftn ctiv nd substntil ownrsof mutul funds in both dvlopd nd dvlopin countris, butin som mrin mrkts, rtil invstors r mor dominnt.Oftn k drivr of institutionl invstmnt into mutul funds is

whthr, nd to wht xtnt, thir ll nd rultor frmworkllows such invstors to invst in mutul funds.52 Institutionlinvstors m b sinificnt forc in mutul fund mrkts. ThMoroccn mutul fund industr hs chivd rmrkbl rowthpproximtl 20 prcnt pr nnum ovr th lst dcdlrlbcus of institutionl invstors53tht own mor thn 90 prcnt

of totl ssts undr mnmnt. In Bril, onl 18 prcnt ofssts undr mnmnt ws hld b rtil invstors; th rstws ownd b pnsion funds, corports, public institutions,forin invstors, nd othrs.54Howvr, institutionl invstmnt isnot lws dominnt in mutul fund sctors. In 2012, institutionlinvstmnt in mutul funds in Turk ws onl 1 prcnt, which isprobbl prtl bcus both pnsion schms nd lif insurncwr t th rl sts of dvlopmnt.55This is vr low whncomprd to Frnc (69 prcnt) or Grmn (54 prcnt) whrworkplc pnsions nd spcil invstmnt funds for institutionlinvstors, rspctivl, r sinificnt ownrs of mutul funds. Itis low vn in comprison with Hunr (6 prcnt) nd Romni(4 prcnt).56Pruvin pnsion funds, on th othr hnd, tpicll

do not own domstic mutul funds, but instd chnnl thircpitl to forin mutul funds such s UCITS bsd in Dublin orLuxmbur. Chptr 3 discusss som of th rsons for vrincin institutionl dmnd.

Distribution of Mutul FundsDistribution of mutul funds primril rfrs to how mutulfunds r sold to th public, which m b throuh ffilitd orunffilitd ntitis(s box 1.3). Mutul funds m lso b solddirct throuh dirct mil, dvrtisin, or thir wbsit without thintrvntion of distributor.

In mn countris, individuls m choos mutul funds s

undrlin ssts of thir pnsion pln. Emplor-sponsorddfind contribution plns tpicll dduct svins from mplopchcks to lloct towrd rtirmnt (th mplor m lsocontribut). Th mplo cn thn choos to invst ths svinsin mnu of funds. Similrl, individuls usin prsonl pnsionpln cn choos to us mutul funds s thir undrlin invstmnt(.., U.S. IRAs). This form of dfind contribution schm is inffct prsonl ccount tht is tx-fficint wrppr. Thwrppr holds rtirmnt svins tht r chosn b th individulconcrnd (with or without dvic). This tp of dfind contributionschm is lss common in dvlopin mrkts, whr th wll-known Chiln modl cn b sn instd. For instnc, in Pru ndin Turk, individuls slct th pnsion schm tht th wish toinvst in, nd th mnr invsts thir svins ccordin to sttdobjctivs.

Distribution chnnls r usull mor divrsifid in dvlopdcountris with lrr nd mor fflunt popultions ndindividuls cn choos pnsion pln. Althouh bnks oftndomint rtil distribution of funds in dvlopd countris, thisvris from countr to countr nd ovr tim. In continntl Europwhn th first UCITS dirctiv ws pssd in 1985, bnks wr thprdominnt distributors of mutul funds. Howvr, ovr tim sinvstor fflunc nd knowld hv rown, mor providrs offinncil dvic hv dvlopd nd mor invstors hv strtd to


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sk out funds othr thn thos offrd nd mnd b ffilitsof th bnks th us. Th rowth of distribution throuh privt

bnks, finncil dvisrs, nd fund suprmrkts in rcnt dcdsis ssocitd with ths trnds. Fiur 1.8 shows tht rtil bnksstill domint distribution in Grmn, Itl, nd Spin, butdistribution chnnls in Frnc r mor divrs. Bnk sls offunds of funds (funds tht invst in othr funds tht m or mnot b mnd b nonffilitd ntitis) nd opn rchitctursls b bnks of nonbnk mnd funds m hv ssistd inmintinin bnk dominnc. Howvr, th hv lso nbldnonbnk-mnd funds to ccss bnk distribution in rcntrs. In th Unitd Kindom, on th othr hnd, bnks historicllhv not bn mjor distributors of funds. This m prtl hvbn bcus U.K. bnks prfrrd to rtin dposits nd mintinlndin cpcit, nd prtl bcus of concrns tht if th sold

funds tht prformd bdl, clints miht xit th bnk rltionshipltothr. As fiur 1.8 shows, th mjorit of rtil distribution in

th Unitd Kindom tk plc vi indpndnt finncil dvisrs.

In mrin mrkts, th rn of rtil distribution chnnls tndsto b nrrowr, nd bnks tnd to b dominnt (s tbl 1.1). Lssdvlopd mrin mrkts do not tpicll ftur indpndntfinncil dvisrs or fund suprmrkts, bcus ths businssswould not b finncill vibl in nscnt finncil mrkt: Thrwill simpl not b nouh dmnd for thir srvics.60In Und, forxmpl, th onl mjor finncil dvisr is forin ownd nd primrilsrvics thos who invst offshor. Givn tht bnks tpicll hv lr nd stblishd clint bs nd ntionwid brnch ntworks,th r clrl wll plcd to sll finncil products, such s mutulfunds, to thir clints nd indd cn dd nothr rvnu strm

Box 1.3: Cptiv nd Third-Prt Distribution Chnnls

A cptiv distribution chnnl is usull prt of th sm corport roup s th ntit tht oprts th fund nd tpicll willonl sll th funds of th in-hous fund oprtor. Th most tpicl xmpl of this is bnk tht owns fund mnmnt compnnd slls its mutul funds throuh bnk brnchs. Anothr xmpl would b n insurnc compn tht owns fund mnmnt

compn nd uss its insurnc dirct sls forc/nts to sll its funds.In contrst, third-prt distribution chnnl is indpndnt of th oprtor of th fund nd its ffilits. Third-prt distributionchnnls includ sls throuh indpndnt finncil dvisors,57privt bnks,58wlth mnmnt firms, nd scuritis brokrs. Inturn, ths dvisrs m rciv fs nd commissions from th funds oprtor (or mor rrl th fund) for succssful sls59 or brmunrtd b w of fs pbl b th clint.

In mn countris fund suprmrkts provid third-prt (usull onlin) pltforms tht hous informtion on funds nd llowdiffrnt invstmnt mnrs or fund fmilis to sll thir funds to individuls who us tht pltform. Such pltforms m b owndb unffilitd third prtis, but th m lso b ownd b fund mnmnt compnis; incrsinl th provid srvics in morthn on countr in rion.

Figure 1.8: Distribution Channels for Mutual Funds in Selected European Countries, 2011

Sourc: MckWillims LLP.

Retail Bank Private Bank Insurance Wrapper IFC-advised Supermarket

Direct Institution/CorporationFunds of Funds

11

42 48

55

102

9

17

15

13

51

9

10

18 14 5

8

12

6

8 65

6

5625

910

9 4

8

38

6 814

1810

0

10

20

30

40

50

60

70

80

90

100

France Germany Italy Spain Switzerland United Kingdom

Percent


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b doin so.61In Turk until 2012 mutul funds wr prdominntlboth foundd b, nd distributd b, bnks; indd onl finncilintrmdir institutions such s bnks nd brokr firms wrllowd to distribut funds. Similrl, in Bril bnks not onl domintdistribution of mutul funds to rtil invstors; th lso dministr

ths funds. In Pru, mutul funds r sold lmost xclusivl to thcustomrs of th bnks tht own th fund mnmnt compniswho control 96 prcnt of ssts undr mnmnt. Sls of mutulfunds (nd mn othr finncil products) in nscnt mrkts willtnd to b drivn b commissions to distributors rthr thn suitbldvic to potntil invstors. Chptr 3 discusss som of th nsuinconsquncs of this domintion b bnks, such s th ris of brrirsto ntr for nw plrs nd switchin costs for clints.

Dirct sls b fund mnmnt compnis to rtil invstorsusull rprsnt lowr proportion of fund sls. Tpiclldirct sls r conductd throuh mil, -mil, dvrtismnts inprint mdi, or th wbsit of th promotr, but in rcnt rs thishs not bn mjor distribution chnnl, s is indictd in fiur

1.8 on Europn fund distribution. In Kn, for instnc, dirctsl of unit trusts is undrstood to b miniml. In Morocco, onlon of th 16 sst mnmnt compnis ctull distributdits mutul funds throuh th Intrnt.62 Pur onlin sls offunds r usull not possibl unlss lctronic sinturs rlll nbld in th countr concrnd. In mn (dvlopd nddvlopin) countris n invstor cn opn n ccount to purchsnd rdm units onl b providin phsicl documnt with wtink sintur, lthouh th cn trd onlin usin scurit codsthrftr.

Institutionl sls, such s to insurnc compnis or pnsionschms or corportions nd funds of funds, r usull lsomd dirctl btwn th fund mnmnt compn nd thpotntil clint.For instnc, Brils xclusiv funds discussdbov r sold dirctl to clints nd not throuh third-prt

distributors. Similrl, in Morocco, bcus institutionl invstorsdomint, mutul funds r nrll distributd dirctl b fundmnmnt compnis to lr invstors such s insurnccompnis, pnsion funds, nd commrcil compnis.

Mutul Fund ChrsOprtors of mutul funds tpicll rciv two tps ofrmunrtion: (1) chrs lvid on invstors s th bu fundshrs or units, or sll fund shrs or units nd (2) nnulmnmnt chrs. Th ntr chr lvid on n invstorwhn th bu shrs or units in fund is ssntill dsindto rmunrt th fund mnmnt compn for th cost ofttrctin tht invstor to th fund. An xit chr, if pbl, is

tpicll lvid onl on n invstor who is rdmin fund shror unit tht ws not subjct to n ntr chr.63Such chris dsind to disincntivi rdmption in th short trm. Annnul mnmnt chr is lvid on th fund to compnstth oprtin ntit for th cost of mnin th fund. From ninvstors point of viw, th prformnc of th fund quls thrturns on th fund, minus its chrs nd n othr xpnss.Thrfor th hihr th costs rltd to ntrin or lvin fund,or bin n invstor in fund, th lowr th rturn to th invstor.This hihlihts fundmntl conflict of intrst btwn th fundmnmnt compn nd th invstor: Th fund mnmnt

Tbl 1.1: Min Distribution Chnnls for Mutul Funds b Countr, Yr End 2012

Countr BnksInsurnc

CompnisScuritis

BrokrsFinncilAdvisrs

Sls AntsFund

Suprmrkt

Bril

Chin Cost Ric

Hunr

Indi

Indonsi

Kn

Kor

Mlsi

Morocco

Pkistn

Pru

Sudi Arbi

South Afric

Turk

Sourc: IOSCO surv.


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compn is motivtd to mximi potntil profitbilit blvin s hih chr s is fsibl whrs th invstor wishsto p th lowst chrs possibl to mximi rturns. Funds mb bl to issu diffrnt clsss of units or shrs, ch of whichm hv diffrnt chrin structur rltd to th w thosshrs or units r distributd nd th ssocitd cost of this tp

of distribution. (S box 1.4 for dtils; tbl 1.2 shows tpicl fsfor diffrnt tps of funds.)

Annul mnmnt chrs vr ccordin to th clss ofssts in which th fund invsts, nd in most countris thischr is xprssd s sttd prcnt of ssts undrmnmnt, rrdlss of th si of th fund.In both mrinmrkts nd dvlopd mrkts, chrs r tpicll lowr forMMFs, hihr for bond funds, nd hihst for quit funds nd for

funds of funds. Whn funds r smll (.., $10 million or lss) mostsrvic providrs will not rn nouh from prcnt-bsd fto covr thir costs, so th will tnd to chr sttd flt ffor thir srvics, which cn ld to hih nnul costs for funds. Astud of Europn quit funds sold cross bordrs showd thtfunds with 10 million or lss undr mnmnt hd dditionl

nnul oprtin costs (xcludin th cost of buin nd sllinfund ssts) of round 2 prcnt on top of nnul mnmntchrs of round 1.4 prcnt, totlin 3.4 prcnt, whrs fundswith 500 million or mor undr mnmnt hd dditionl costsof round 0.2 prcnt on top of nnul mnmnt chrs ofround 1.4 prcnt, totlin 1.6 prcnt.66 Th U.S. mutul fundmrkt is n xcption, whr fund m rport, for xmpl, mnmnt f of 0.40 prcnt on th first $500 million in ssts,0.35 prcnt on ll ssts btwn $500 million nd $1 billion, nd

Box 1.4: Fund Chrs nd Shr Clsss

Annul Mnmnt Chr

Th nnul mnmnt chr, usull dfind s prcnt of th vlu of fund ssts, is pid b th fund to th fund mnmntcompn or foundr. This chr is primril for slctin nd mnin th portfolio of th fund.

Othr Annul Costs Pid b Funds

Althouh th cost of srvicin invstors in th fund is somtims covrd b th nnul mnmnt chr, tpicll sprtdministrtion or ristrtion chr is md to th fund to covrs such costs. Th fund m lso p othr chrs sprtl forbord rmunrtion nd costs, fund dministrtion, sf kpin of ssts (custod), nd suprvision b trust or dpositr (thsm b sttd mount or prcnt of vlu or mixtur of ths). On-off costs such s udit nd ll fs r lso tpicllpid b th fund. Th invstmnt rsrch firm Morninstr finds tht nnul xpnss r th most rlibl prdictor to fundsprformnc; thus invstors r bst off with funds tht hv low nnul xpnss.64

Entr Chr

Fund mnmnt compnis hv historicll pid sls commissions to thos who sll funds on thir bhlf (distribution chnnls),lthouh this trnd is chnin in som dvlopd nd dvlopin mrkts. Tpicll th fund mnmnt compn ps th distributorn introductor commission from th ntr chr it rcivs from invstors subscribin to th fund nd/or tril commission (prcnt of th nnul mnmnt f tht is pid nnull for s lon s th invstor rmins in th fund). Usull th fundmnmnt compn notits th lvl of commission pbl with th distributor concrnd. Howvr, incrsinl in dvlopdmrkts rultion rquirs invstors, rthr thn th fund mnmnt compn, to r to n f or commission pbl with thdistributor.65

Exit Chrs

Exit nd rdmption chrs r pid b th invstor whn th lv th fund. Ths chrs hlp th fund mnmnt compnmn th dil flows out of th fund.

Shr Clsss nd Chrin Structurs

A fund cn issu diffrnt clsss of units or shrs, ch of which m hv diffrnt chrin structur. As nrl rul, th hihrth chrs of fund, th mor likl hihr commissions r bin pid to distributor.

For instnc:

Institutionl invstors: Funds cn issu clss of shrs to institutionl invstors with no ntr nd no xit chr nd lowr nnulmnmnt chr (sinc in this cs distributors r not bin pid commissions).

Rtil invstors rchd throuh distributor: Funds cn issu clss of shrs to rtil invstors throuh distributor, with hihrntr chr nd hihr nnul chr (usd to p commission to tht distributor) but no xit chr.

Rtil invstors rchd dirctl: Funds cn issu clss of shrs sold dirctl to th rtil invstor b th fund mnmnt compntht m hv no ntr chr, firl hih nnul chr, nd n xit chr.


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0.30 prcnt on ssts in xcss of $1 billion. Thus, if th fundcontins $1.5 billion in totl nt ssts, th mnmnt chris scld bck ccordinl.67This slidin scl is not, howvr, common prctic lobll.

Annul mnmnt chrs cn oftn b hihr in dvlopincountris (s tbl 1.2). In dvlopd mrkts, nrll, 2prcnt nnul chr would b on th hihst nd of th scl.Funds in mrin mrkts m hv fw conomis of sclnd thrfor m nd to chr hihr fs. In Kn, nnulmnmnt chrs of most mutul funds cn b s hih s3.5 prcnt. In Turk, bnks usd to chr 5.5 prcnt in nnulfs for MMFs (th most populr mutul fund in Turk), which isxorbitnt b intrntionl stndrds bcus tpicll nnulcosts for such funds r lss thn 0.8 prcnt; howvr, this lvl ofchrs ws ccptbl in n nvironmnt whr MMFs wr soldb bnks for clints to rciv intrst whr non ws pblon currnt ccounts nd whn intrst rts wr s hih s 50prcnt. Th Turkish rultor subsquntl cppd th nnul fs

on ths MMFs t 1.1 prcnt;68 this md oprtin such fundsmuch lss rmunrtiv, nd with sprds on lndin bcominmor ttrctiv, bnks hd rtr incntiv to promot dposits.Evn in Bril, whr th mutul fund sctor is lr, th tx ddministro or nnul mnmnt chr cn rn from 0prcnt to 3 or 4 prcnt for som rtil quit funds.69Culturlttituds to chrs vr: In som countris, invstors m rsisthih ntr chrs but not rsist hih nnul mnmnt chrs,whrs in othrs th m not rsist hih ntr chrs but rdtrrd b hih nnul chrs. Invstor prfrnc m lso binfluncd b how lon th intnd to st invstd: Thos ththv shortr horions would clrl prfr low or no ntr chrs,nd lonr-trm invstors would prfr th opposit.

W s trnd w from ntr nd xit fs cusd brultor chn in som dvlopd nd mrin mrkts.Rultors incrsinl r rquirin invstors to r or to pcommissions to distributors instd of th fund mnmntcompn rin ths with th distributor. This hs th ffct ofrducin or limintin ntr chrs. In som mrkts rultorsr concrnd tht if thr r hih xit fs ths m dtrinvstors from xrcisin thir k rihttht is, to rdmndrultors m sk to plc limits on such chrs. In Cnd, sof Dcmbr 2011, invstors hd purchsd mor thn 30 prcntof mutul fund ssts t no lod; tht is, th fund or invstor did

not offr sls commission to n dvisor (.., dirct sls), nor wrth invstors chrd for xitin th fund.70

Intrdpndnc with Bnks, PnsionFunds, nd Insurnc CompnisMn mutul fund mrkts, both dvlopd nd dvlopin,displ sinificnt intrdpndnc btwn bnks ndmutul funds.This is prtl bcus bnks oftn own mutul fundmnmnt compnis nd distribut mutul funds but lsobcus mutul funds m invst in bnks nd lso compt withbnk products.71For xmpl, shrs in bnks m b listd ndform mjor prt of stock mrkt cpitlition nd so form prtof th portfolio of quit funds. In mrin mrkts, tpicll fw fund mnmnt compnis control th bulk of mutul fundssts, nd bnks oftn domint th mutul fund sctor ithrdirctl (s in Turk whr bnks hv bn bl to found funds) orthrouh ownin invstmnt mnmnt firms (s in continntlEurop). For instnc, in Pru, t th tim of th cs stud, four

bnks, ch ownin fund mnmnt compn,72controlld 95prcnt of ssts undr mnmnt. Bnks lso oftn domintmutul fund offrin nd distribution. This dnmic cn pospotntil conflicts bcus MMFs r ssntill substitut forbnk dposits.73(S chptr 3 for mor on this discussion.) MMFslso m invst to substntil xtnt in crtificts of dposit(CD) nd commrcil ppr issud b bnks nd in rpos, crtinnothr sourc of intrdpndnc.74A rpid dclin of MMFs couldthus hv n impct on liquidit for th bnkin sctor. As t rnd 2011, mor thn 50 prcnt of Turkish MMF ssts wr invstdin rvrs rpos75 whr bnks wr th min countrprtis. InMorocco, mutul funds hld mor thn n stimtd 30 prcntof ssts undr mnmnt in bnk bonds or quit. Moroccn

mutul funds hv lso providd sinificnt liquidit to th bnkinsctor in th form of rpos, trm dposits, nd CDs.76

Mutul fund sctors lso displ sinificnt intrdpndncwith pnsion funds nd insurnc compnis, bcus lonr-trm mutul funds compt with pnsion funds or insurncproducts, nd mutul funds r oftn th undrlin invstmntfor ths institutionl invstors.In countris whr contributionsto pnsion schms r mndtor, individuls r lss likl lsoto voluntril mk dditionl invstmnts such s in mutul funds.In such css, if ths pnsion schms cnnot thmslvs invstinto mutul funds (bcus of lw or rultion) or do not invst in

Tbl 1.2: Tpicl Fund Chr Rts

Fund TpEntr Chr Annul Mnmnt Chr Rdmption Chr

Dvlopd Emrin Dvlopd Emrin Dvlopd Emrin

Mon mrkt funds 01% 05% 0.10.5% 0.252.68% 0% 03.6%

Equit funds 06 06.5 0.12 0.757.25 05 110

Bond funds 05 05 0.51.5 0.23.15 05 03.6

Mixd funds 06 05 0.52 0.397.15 05 04.2

Sourcs: World BnkIOSCO surv nd World Bnk stimts.

.Th lowst chrs r tpicll ssocitd with xchn trdd funds or indxd (pssivl mnd) funds.


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thm (bcus th offr no dvnt), it is not likl mutul fundsctors will xpndwith th possibl xcption of MMFs, but thswould hv to b mor tx fficint thn bnk dposits or produchihr lvls of intrst. In Pru, th domstic mutul fund sctoris smll both bcus individuls r mndtd to sv 10 prcntof thir slr into pnsion schms nd bcus ths schms

do not invst in domstic mutul funds (lthouh th do invstin mutul funds bsd outsid Pru for intrntionl xposur). InAustrli, b contrst, whr 9.5 prcnt (risin rdull to 12prcnt in 2019) of ons slr must b contributd to mndtorpnsion svins (known s suprnnution), mutul funds hvbn usd xtnsivl s n undrlin invstmnt, nd th mutulfund sctor hs xpndd stronl, bin th scond lrstdomstic mrkt in th world t th nd of 2013. (This is discussdmor in chptrs 2 nd 3.) Similrl, lonr-trm mutul funds mcompt with lif insurnc svins products, whil lso bnfitinfrom invstmnts of insurnc compnis s institutionl invstorsor bin usd b thm for unit-linkd products. Insurnc compnism lso own fund mnmnt compnis nd distribut mutul

funds. In Kn, for instnc, thr fund mnmnt compnisownd b insurnc firms mnd n stimtd 70 prcnt ofmutul fund ssts, nd th mjorit of rtil sls wr thouhtto driv from insurnc sls forcs. Lst, both pnsion funds ndinsurnc compnis m outsourc thir sst mnmnt tofund mnmnt compnis tht run mutul funds.

In Summr1. A mutul fund is form of collctiv invstmnt schm

or invstmnt fund; tht is, it is pool of svins tpicllcollctd from multipl invstors who bu shrs or unitsrprsntin proportiont ownrship of th fund. Thrsultin pool of funds, or th funds cpitl, is collctivl

mnd b profssionl mnmnt compn, in lin withth invstmnt objctiv outlind in th funds prospctus.This form of collctiv invstmnt schm is closl rultdbcus it is lll liibl to thr svins from th publicnd is rquird in turn to invst thos svins in divrsifidportfolio of trnsfrbl/trdbl scuritis.

2. Mutul funds cn b mjor chnnl of intrmditionbtwn svrs nd borrowrs, thrin svins ndinvstin thm into shortr- or lonr-trm scuritis issudb ovrnmnts nd corports.Ths funds r vlublinvstmnt vhicl for rtil invstors, institutionl invstors,nd corports. Th m pl sinificnt rol in invstinfor rtirmnt s wll s srvin s n undrlin invstmntvhicl for insurnc compnis. MMFs m pl n importntcsh mnmnt function whr th r usd b corportsfor trsur mnmnt.

3. Mutul funds tpicll consist of four min tps of funds,which r dfind b th rultor or trd ssocition: (1)

funds tht invst prdominntl in quit scuritis, (2)funds tht invst prdominntl in dbt scuritis, (3) fundstht invst in hbrid of both quit nd dbt scuritis, nd(4) funds tht invst in short-trm dbt instrumnts (MMFs).Mutul fund sctors in dvlopd nd dvlopin mrktshv vrin sst clss xposurs. In mrin mrkts,

ths funds nrll hv hihr xposurs to fixd-incomnd mon mrkts. Hih MMF xposurs in mn mrinmrkts impl tht ths sctors r s t filin to mobilisvins into lonr-trm instrumnts; howvr, th m lsoindict invstor vrsion to th rtr voltilit or lonr-trm holdin ntild in invstin in bonds or quitis, nd/or lck of vilbilit of bonds or quitis in which to invst.

4. Mutul funds r ssntill dsind to providdivrsifiction of risk for smllr svrs who do not hvnouh mon to chiv this divrsifiction thmslvs;thus, th tnd to b middl clss svins vhicl.Howvr,institutionl invstors r oftn ctiv nd substntil ownrsof mutul funds in both dvlopd nd dvlopin countris.In som mrin mrkts, institutionl invstors r not sdominnt, somtims bcus th institutionl invstor bsitslf is smll or bcus ths invstors chnnl invstmntslswhr.

5. Distribution chnnls for mutul funds r usull mordivrsifid in dvlopd countris with lrr nd morfflunt popultions, lthouh bnks oftn pl lr prt.In mrin mrkts, th rn of rtil distribution chnnlstnds to b nrrowr, nd bnks tnd to b th dominntdistribution chnnl. Althouh th oprtor is rsponsibl forth sls polic nd distribution of mutul fund, licnsddistributors usull sll th fund(s) on th oprtors bhlf.

6. Th scl nd succss of dvlopmnt of mutul funds in non countr is th outcom of complx intrctions btwn vrit of fctors,such s mutul funds rltiv tx fficinc,th vilbilit of invstmnts nd of invstmnts tht offr rlrts of rturn, whthr pnsion funds nd insurnc compnishv dvlopd nd r bl to invst in mutul funds, ndth rts of rturn mutul funds cn chiv rltiv to thosvilbl on bnk dposits nd othr comptin invstmnts.

7. Th nxt chptr provids n ovrviw of th ll ndrultor drivrs nd impdimnts rltd to mutul fundsctor rowth.


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Endnots

1. Ths middl-incom countris includd Arntin, Bril,

Bulri, Chin, Cost Ric, Hunr, Indi, Mxico, Pkistn,

Philippins, Romni, South Afric, nd Turk. Th stud uss

World Bnk dfinitions of dvlopd countris s hih-incom

OECD nd hih-incom non-OECD clssifiction, nd fordvlopin countris World Bnk dfinitions of low-incom nd

middl-incom conomis (s of 2013) Th ICI is lobl trd

ssocition for rultd invstmnt funds, bsd in th Unitd

Stts, tht compils intrntionl sttistics on bhlf of th

Intrntionl Invstmnt Funds Assocition, n ornition of

ntionl mutul fund ssocitions.

2. Th World Bnk undrtook cs studis on th mutul fund

sctors of ths countris in 2012.

3. Althouh this rport sks to brodl xplor strikin spcts

of th mutul fund sctor in mrin mrkts, it dos not o

into spcific issus rltd to mutul funds. Such spcific issus

includ but r not limitd to th dbt on whthr or not

ctivl mnd funds outprform pssivl mnd funds,

dtils on th ntur nd dvlopmnt of rltivl nw mutul

fund products such s xchn trdd funds, nd dlvin into

th ntur of offshor fund cntrs nd th impdimnts to thir

dvlopmnt. Th rport lso dos not xmin spcific lrnins

from mutul fund sctor vnts in dvlopd countr contxts,

such s th mutul fund mrkt timin scndl of 2003 in th

Unitd Stts.

4. Collctiv invstmnt schm is th trm usd b IOSCO to

dsint such funds.

5. This dscription lso brodl fits dfind contribution pnsion

schms, which oprt in th sm w s mutul funds but

r subjct to pnsion-spcific tx trtmnt nd to limittions

upon withdrwl from th schm. Both dfind bnfit nd

dfind contribution pnsion schms m b invstors into

mutul funds. Th stud dos not includ hd funds, which r

nric trm for fund tht m b opn ndd or closd ndd

nd m tk vrit of ll structurs includin limitd

prtnrship but tht do not mt th rultor rquirmnts for

offr to th nrl public.

6. This is nric trm usd worldwid, lthouh it hs no ll

sinificnc.

7. This sction is drwn from discussion of th histor of invstmnt

funds in World Bnk stud in Turk.

8. A. Khorn, H. Srvs, nd P. Tufno, Explinin th Si of

th Mutul Fund Industr round th World, Journl of FinncilEconomics78 (2005): 14585.

9. Forin & Colonil Invstmnt Trust Prospctus 1868.

10. S chptr 2.

11. This liquidit/vribl cpitl ftur lds to importnt

consquncs in computin th nt sst vlu of th fund, which

is th bsis of th sl nd rdmption pric of such funds, s wll

s th prformnc of th fund, nd its dil mnmnt.

12. For instnc, th U.S. Invstmnt Compn Act of 1940 prvnts

ths opn-ndd funds from issuin snior dbt or n tp of

borrowin. Th ll-quit cpitl structur distinuishs such

funds from hd funds nd closd-ndd funds tht tpicll

ppl lvr to nhnc rturns. S Conrd S. Ciccotllo, Th

Ntur of Mutul Funds, in Mutul Funds: Structurs, Anlsis,

Mnmnt, nd Stwrdship, d. John A. Hslm (Nw York:

Wil, 2010), pp. 315.

13. Ciccotllo, Th Ntur of Mutul Funds.

14. In contrst, with closd-ndd fund, which is tpicll trdd on

stock xchn, s Ciccotllo xplins in his rticl, Th Ntur

of Mutul Funds, which hs fixd numbr of shrs or units in

issu (lik n ordinr listd compn) tht r bouht nd sold

on stock xchns.

15. Sinc ths funds r st up undr th sm ll nd rultor

rquirmnts s publicl offrd invstmnt funds, ths r

includd in this nlsis.

16. Out of th 330 uthorid mutul funds, bout 145 wr ddictd

to sinl invstors, s of Dcmbr 31, 2011. Ddictd mutul

funds rprsntd 41 prcnt of totl ssts undr mnmnt

in Morocco s t r nd 2011.17. Forin funds cn b construd in two ws. On is domstic

fund crtd in nd oprtin in th host countr but invstin

brod; th othr is fund bsd outsid th countr concrnd

but sold into it. For xmpl in Turk, forin fund dos not

oprt in Turk but is sold into Turk.

18. Dpthi Frnndo, Lor Klppr, Victor Sull nd Dimitri Vitts

(2003), Th Globl Growth of Mutul Funds, World Bnk Polic

Rsrch Workin Ppr (WPS3055).

19. Tpicll ftur of opn-ndd mutul funds, which r th

min subjct of this rport. This is dscribd in box 1.1.

20. Such invstors m lso b bl to chn thir xposurs to

prticulr ssts or mrkts mor sil nd mor rpidl b

disinvstin from on fund nd invstin in nothr fund thn

b disinvstin from dirctl hld portfolio nd buin nw

dirctl hld portfolio.


22. Michl Bodn nd Dnil Schrss, Profil of Mutul Fund

Shrholdrs, 2013, ICI Rsrch Rport (Fbrur) (Wshinton,

DC: Invstmnt Compn Institut, 2014).


24. Invstmnt Compn Institut.

25. Bcus th cn ccss wholsl mrkt intrst rts tht

r not ccssibl othrwis.

26. Invstmnt Compn Institut 2013.27. Invstmnt Compn Institut 2014.

28. UK Fund Mnmnt 2014, Th Finncil Mrkts Sris,

ThCitUK, Sptmbr 2014; th othr 80 prcnt is pnsion

funds, insurnc funds, privt quit funds, sovrin wlth

funds, hd funds nd privt wlth.

29. Khorn t l., Explinin th Si of th Mutul Fund Industr

round th World.

30. Frnndo t l., Th Globl Growt

mutual0funds0i0challenges0to0growth

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