Recent Trends in Mutual Funds

When you want to get the scoop on the mutual fund industry -- from the mutual fund industry itself -- you head over to the Investment Company Institute (ICI), the fund biz's trade group. The ICI recently released its latest report on the American mutual fund world, and it contains some tidbits worth knowing.

For example, consider the gargantuan size of it all. There were a total of 8,121 U.S. mutual funds examined in this latest report (as of October 2006), up from 7,964 two years ago. (Worldwide, there are nearly 60,000 mutual funds.) Note that there are close to the same number of funds in America as there are individual stocks!

Together, these U.S. funds managed a whopping $10 trillion in assets, up 3% year over year. To put that number in perspective, it's nearly as much as our entire annual gross domestic product (GDP). (And as a reminder, our GDP of $12-plus trillion represents the value of all goods and services produced in America in a year.)

On a worldwide scale, mutual funds manage some $19 trillion in funds, meaning that the U.S. market holds more than half of all fund investments.

The ICI also noted which kinds of funds experienced the most cash inflows and outflows. Here are some trends to note:

Going global
Stock funds took in almost twice as much in October as they did in September. Much of this $12 billion inflow went to American "world equity funds" (which focus on global companies). This is not so surprising, since it seems that more and more people are beginning to notice that values abound abroad. Even Warren Buffett has been shopping overseas, recently snapping up a majority stake in a large Israeli tool-making company, Iscar. And here at the Fool, we recently launched a brand-new newsletter focused on finding top-notch foreign investments: Motley Fool Global Gains. (It's headed by Bill Mann, and you can try it for free.)

Stocks first
The biggest growth in total assets occurred in stock funds, which gained 3.8% in October (vs. 1.5% for taxable bond funds and 1.9% for taxable money market funds). That's not surprising to me, either, since we can, over long periods, expect stocks to outpace bonds and many other alternatives. (But over short periods -- such as a single October -- anything can happen.) Indeed, stock funds contain more than half of all the $10 trillion in fund assets. That might make you feel good, knowing that so many dollars are in what would seem to be the right place. But remember that most mutual funds don't fare as well as the market average, which is why the easiest and best place for many people to invest is in a simple broad-market index fund, since it will at least roughly match the market's performance.

If you're willing to put in a little effort, though, you can aim to do much better than the market average. That's because a bunch of mutual funds out there are long-term outperformers, with talented management and reasonable fees. Our Motley Fool Champion Funds newsletter has recommended many such funds -- and its recommendations, on average, are beating their respective benchmarks by some 9%. (Click here to try it for free for a whole month, with full access to all past issues and all recommended funds.)

One recently recommended fund focuses on large-cap value stocks, and it's topped the market's average return by more than four percentage points over the past three and five years. Its top holdings include Schering-Plough (NYSE: SGP  ) , Southwest Airlines (NYSE: LUV  ) , Marathon Oil (NYSE: MRO  ) , and Dow Chemical (NYSE: DOW  ) . (If nothing else, checking the holdings of respectable mutual funds can be a great way to discover promising individual companies in which you might want to invest.)

ETFs everywhere
Another major trend related to mutual funds is the recent explosion in the number and popularity of exchange-traded funds (ETFs). These beasts are part fund, part stock, trading like stocks on the open market. We've covered ETFs frequently here in Fooldom, and you can learn more about them in these articles:

Here's to a happier portfolio! (And hey -- consider forwarding this article to anyone whose financial future you care about. Just click on the "Email" link near the bottom of the page.)

Only three days left in this season's Foolanthropy campaign! Visit www.foolanthropy.com to learn about five reader-nominated charities and make a donation.

Longtime Fool contributor Selena Maranjian owns shares of no stock mentioned in this article. Dow Chemical is an Income Investor recommendation. The Motley Fool is Fools writing for Fools.


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