Pooling Money: The Future of Mutual Funds by Yasuyuki Fuchita

Pooling Money: The Future of Mutual Funds by Yasuyuki Fuchita

PAULA A. TKAC 1

Mutual Fund Innovation:
Past and Future

The only thing that stays the same is change. 
—heraclitus⁄melissa etheridge
The process of change, whether in technology, marketing, or the mutual
fund industry, is continual. As the demands of investors change and new
intellectual discoveries are made, new technology becomes available, and new reg-

ulations are passed, the marketplace changes and mutual fund families are pre-

sented with new opportunities to make a profit. Innovation, then, is both certain
and at the same time unpredictable. It is easy to predict that change will occur—
for nothing stays the same—but it is very difficult to predict the exact form that
innovation will take.1 The goal of this chapter, nonetheless, is to predict future
innovations in the mutual fund industry. 
In predicting the future, it helps to look to the past. Studying previous inno-

vations increases understanding of the economic forces and motivations that cur-

rently influence mutual fund families, financial advisers, and investors. That
knowledge, combined with basic economic analysis, is the key to predicting how
those players will change and react to change in the future. It also helps to have a

predictable, exogenous event that will quite certainly affect the industry. Fortu-

nately, we are in the middle of just such an event right now—the unstoppable
progression toward retirement of the baby boom generation. 
The baby boom has been affecting the U.S. economy since it began in 1946.
Newsweek magazine reported on the birthrate increase in 1948 in an article enti-

tled “Population: Babies Mean Business,” which chronicled the rising demand for
infant clothing and prepared baby food and noted the new firms starting up in
the children’s recording and book industries. Moreover, the article noted, “busi-

ness analysts predicted that eventually the boom in babies would have salutary
effects on every corner of the nation’s economy.” The mutual fund industry has
been no exception. Mutual funds have, almost literally, grown up with the baby
boomers, and the shift of the 80 million members of that generation from
worker-savers to retirees-consumers will surely influence the evolution of the
industry going forward. This chapter presents an analysis of some of the likely
features of future changes. 
Financial Innovation in the Mutual Fund Industry 
In considering how the U.S. mutual fund industry is likely to evolve in the future,
it is instructive to take a brief look at industry innovations in the recent past. A
comprehensive look at the process and drivers of financial innovation, even within
the mutual fund world, is beyond the scope of this chapter, but Tufano (2003) and
Frame and White (2004) provide modern surveys of the academic literature
regarding financial innovation more broadly. As those studies note, innovation can
involve the introduction of new financial products or services, new or enhanced
processes for developing or distributing products and services, and new organiza-

tional forms. Innovation in behind-the-scenes processes such as recordkeeping and
quantitative modeling will not, for the most part, be addressed in this chapter, but
it surely is occurring nonetheless. The pages that follow provide a “helicopter tour”
of innovations in products, services, and industry organization in the mutual fund
industry as well as a brief discussion of the forces driving the innovations. 
Product Innovations 
The 8,120 mutual funds in existence today, defined broadly as open-end com-

mingled accounts, have already been the subject of much innovation; many in
fact are quite different from the original fund, the Massachusetts Investors Trust
(MIT), introduced in 1924. Still in existence more than eighty years later, MIT

Pooling Money: The Future of Mutual Funds by Yasuyuki Fuchita