Mutual Fund
A mutual fund (or investment company) is a pooled investment vehicle that allows many parties to collectively invest in a professionally managed portfolio of assets. Mutual funds are an especially attractive investment for retail investors for three reasons:
They allow even small investment holdings to be diversified across numerous securities or multiple asset classes.
They are convenient, providing professional management and fund administration, while offering easy mechanisms for buying or selling shares.
They can be (read the small print!) inexpensive, affording retail investors economies of scale that are generally only available to institutional investors.
In the United States, mutual funds can be formed in any state as a corporation, trust or limited partnership. They are regulated by the SEC and are subject to corporate, trust or limited partnership law, as appropriate, plus additional requirements under the 1940 Investment Companies Act. To prevent investors from being taxed twice, mutual funds are exempt from federal taxes so long as they satisfy IRS requirements for sources of income and diversification of holdings. They must also distribute substantially all their income and capital gains to shareholders each year. Generally, shareholders are taxed on the income and capital gains distributed to them.
A famous example of a mutual fund is the Magellan Fund, which was launched in 1963. For many years, it had strong performance, actively trading a diversified portfolio of stocks and bonds. In 2005, the fund had $50 billion in assets and hundreds of thousands of investors, most of them retail investors.
A mutual fund's net asset value (NAV) is calculated as
[1]
mutual fund's net asset value (NAV)
where fund liabilities might be unpaid expenses, such as directors' compensation or management fees, which are paid out of the fund's portfolio. NAV represents the liquidation value of one share of the mutual fund. If an investor holds 10,000 shares of a mutual fund whose NAV is $26.14, the shares represent an ownership interest in a fraction of the fund worth
10,000 × $26.14 = $261,400 [2]
There are two types of mutual funds: open-end funds and closed-end funds. With an open-end fund, investors who want to buy or sell shares do so directly with the fund, which continually issues or redeems shares as needed. On any given trading day, orders to buy or sell shares placed prior to the close of trading settle at that day's NAV, calculated at the close of trading. Orders placed after the close of trading settle at the next trading day's NAV. For example, if an investor places an order to buy 1,000 shares at 11:00AM on a Tuesday, and the fund's NAV for Tuesday is calculated at 4:30PM as $85.26, he pays $85,260 for the shares. If he buys an additional 100 shares at 8:00PM on Friday, that transaction will settle based on the NAV calculated at 4:30PM on Monday.
Closed-end funds are more like industrial corporations. They issue a fixed number of shares, and these trade on a stock exchange. Investors who want to buy or sell shares must do so on the exchange. Share prices are driven by supply and demand, and they often stray from a fund's NAV. More often than not, they trade at a discount of several percent to the NAV. This apparent violation of the law of one price is a recurring topic of scholarly research.
Some closed-end funds have their own management teams. Others hire an investment management firm to manage their portfolios. Most open-end funds hire an investment management firm. This is legally how the relationship works, but the reality is a bit like a tail wagging its dog. Most open-end funds are launched by an investment management firm. The investment management firm selects the initial board of directors (or trustees) who then hire the investment management firm to manage the portfolio. It is theoretically possible that investors might later elect a new board that hires a different investment management firm to manage the portfolio, but this never happens. Corporate governance for mutual funds is as dysfunctional as it is for industrial corporations, so shareholders have little say in management affairs.
When an investment management firm launches a mutual fund, it generally provides more ongoing services to the fund than just investment management. It may provide (or otherwise arrange for) fund administration, marketing, fund accounting, custody, transfer agency and other services. Such investment managers are called fund management companies. They tend to launch entire families of funds (or fund families) offering funds invested with a variety of asset classes or investment styles. The Magellan Fund is managed by Fidelity Investments, but it is just one fund in an extensive family. Fidelity's offerings include funds that invest in stocks, bonds and money market instruments. It offers foreign and domestic funds. Some are actively managed. Others are passively managed. Some invest in tax-exempt municipal securities, and the tax benefits flow through to investors as tax-exempt distributions. All Fidelity's funds have pretty much the same people on their boards of directors. None of the funds have employees. Fidelity does everything.
Mutual fund investors incur a number of expenses. Most are paid out of fund assets, so investors pay them indirectly. One of these is the management fee paid by the fund to the management company. This is a fixed percent of the fund value paid in installments each year. Management fees vary considerably according to the type of fund and the management company. For an actively managed equity fund, they typically are 0.8% to 1.2%. For a passively managed index fund, they might be 0.1% to 0.2%. Management fees for actively managed bond funds are usually 0.4% to 1.0%. Specialized funds, say those that invest in a specific emerging market, may have proportionately higher management fees.
Other expenses paid out of fund assets include directors' compensation and transaction costs, including broker commissions, bid-ask spreads and impact costs.
For some funds, getting in or out can be an investor's biggest expense. This generally isn't the case with closed-end funds, where an investor can buy or sell shares for the price of a broker commission. With open-end funds, things are more complicated.
Open-end funds may be sold directly by the management company, or they may be sold by an unaffiliated distribution company, such as a bank or broker. Funds sold through an unaffiliated distribution company often charge sales loads (or loads). Most common are front-end loads. When an investor purchases shares, a fixed fraction of the investment is subtracted to compensate the party who sold the fund. Only the balance is invested in the fund. Historically, front-end loads of 7% or 8% were common, but they have come down since the advent of 12b-1 fees (explained below). The share price of a front-end load fund may be quoted as the NAV or it may be quoted as the offering price, which includes the load. For example, if a fund has an NAV of $45.00 and a 3% front-end load, its offering price is:
[3]
offering price
A back-end load is a sales load that is subtracted from the proceeds when an investor sells shares in a fund. These usually decline with the length of time shares are held. A fund might have a back-end load of 5% for shares sold within a year, 4% for within the next year, and so forth, ending with a 0% load after five years. Back-end loads are also called contingent deferred sales charges (CDSC)
In 1980, the SEC adopted Rule 12b-1, which allows funds to pay marketing and sales expenses directly out of fund assets, just like management fees. Such fees have come to be known as 12b-1 fees. While they may be used to pay for advertising or to mail prospectuses to potential investors, 12b-1 fees are primarily used as a means of compensating brokers or other independent distributors of a mutual fund, either in lieu of or in addition to a load. A common arrangement is for a fund to charge no load, but the management company advances a commission to the broker. The fund company then recoups the advanced commission through a 12b-1 fee. The fund also has a decreasing back-end load to cover the management company in case the investor sells her shares before the entire commission has been recouped.
12b-1 fees complicated fund expenses and lead to some controversy. Traditionally, a no-load fund was a fund sold directly by the management company. With 12b-1 fees, broker-distributed funds were soon being advertised as no-load, disguising the fact that they charged hefty 12b-1 fees. Some funds sold to unsophisticated investors were so laden with loads, 12b-1 fees, management fees and transaction costs as to make them little more than legalized robbery.
The SEC responded by tightening rules. Since 1988, funds have been required to disclose all loads and fees in tables near the front of the prospectus. Since 1993, funds charging more than a 0.25% 12b-1 fee have been prohibited from advertising themselves as no-load. Also, in 1995, the National Association of Securities Dealers has limited the commissions funds can pay.
While mutual funds are mostly run by a management company, the management company typically appoints a single employee to have final say on what the fund does or does not invest in. These fund managers usually come from the best business schools and spend a number of years as analysts, researching stocks for the fund company, before being promoted to fund manager. Some fund managers are fortunate enough (or have sufficient "skill", if you reject the efficient market hypothesis) that their fund performs exceptionally well. Such funds gain notoriety, and may be aggressively advertised by the management company. Their managers can achieve almost celebrity status. During the 1980s, Fidelity investments grew to become the largest fund company in the world, based on the success of Magellan and the celebrity status of its manager at the time, Peter Lynch.
Famous funds and celebrity managers posed a problem for the industry. Investors in different distribution channels might all be interested in a particular successful fund, but its fee or load structure might limit it to just certain channels. For example, a broker might have a client who hears about and wants to invest in a well-known no-load fund. Since the no-load fund would pay him no load or other commission, the broker will likely steer her towards some other fund that charged a load or 12b-1 fee. This can cause confusion for investors and missed sales opportunities for fund companies.
The SEC addressed this problem in 1995 with Rule 18f-3. This allows an open-end mutual fund to issue different classes of shares having different fees and loads. One class might have a load and be sold through brokers. Another might have a high 12b-1 fee and be sold through financial planners. A third class might have a lower 12b-1 fee and be distributed to defined contribution pension plans. Exhibit 1 is reproduced from the prospectus of the Franklin Aggressive Growth Fund, illustrating its five different classes.
Example: Fees and Loads for the Multi-Class Franklin Aggressive Growth Fund
Exhibit 1
Fees and Loads for the Fund
Reproduced from pages 10-11 of the prospectus of the Franklin Aggressive Growth Fund, dated September 1, 2007.
An alternative to having multiple classes of shares is a hub-and-spoke (or master/feeder) arrangement. Here, there is a single central portfolio, called the hub or master. This needn't be a mutual fund. It could just be a limited partnership. Multiple open-end mutual funds then invest in the hub, holding it as their sole investment. Accordingly, the mutual funds hold identical investments, but they can offer investors differing fee and load structures.
The origins of mutual funds[1] can be traced to early vehicles for pooling of risk, including life annuities and tontins. When privately issued, such commitments needed to be backed by an asset or a portfolio of assets. In this sense, the instruments were collective investments.
In 1774, Amsterdam broker Abraham van Ketwich sold subscriptions in a pooled investment vehicle called Endragt Maakt Magt. Proceeds were invested in debt instruments. Investors were promised a 4% return plus additional distributions if performance was good. Also, based on a lottery, some shares would be retired at a premium before the stated 25 year maturity. Shares traded on the Amsterdam stock exchange, making this the first known example of a closed-end mutual fund. Other similar funds were subsequently offered to Amsterdam investors.
Starting in the mid 1800's, pooled investment vehicles were structured as trusts. The first was the Société Civile Genèvoise d'Emploi de Fonds, launched in Switzerland in 1849. Others followed, in England, Scotland and the United States. Typically, depending on jurisdiction and the specific legal structure of a fund, a trust structure meant holdings could not be changed, and investors (beneficiaries of the trust) had no means of increasing or decreasing their holdings prior to the trust's set liquidation date. Like a modern mutual fund, income was generally distributed to investors as it was earned.
Recognizably modern closed-end and open-end mutual funds first appeared in the United States in the 1920s, investing almost exclusively in equities. By the time of the 1929 stock market crash, closed-end funds had some $3 billion in assets with the average fund trading at a 47% premium. Open-end funds lagged with just $140 million in assets. At the time, the total capitalization of the US equities market was about $87 billion.
The crash was devastating for the US stock market, but it was doubly so for closed-end funds. Many had engaged in illegal activities (or activities that would subsequently be made illegal) or employed leverage to boost returns. Not only did their portfolios plummet with the stock market, but leverage magnified the drop. Compounding this, the average premium on closed-end funds plummeted from 47% to a discount of 25%. The fallout was so bad, not a single closed-end fund was launched in the United States through the 1930's.
Open-end funds faired better. Their portfolios fell with the market, but they had avoided illiquid or questionable investments due to their need to buy or sell fund shares for investors on a daily basis. They had generally avoided leverage for the same reason. Equity investing languished for many years following the 1929 crash, but open-end funds attracted more investors than closed-end funds. In 1943, open-end funds' assets exceeded closed-end funds' assets for the first time, and they have done so ever since.
Another consequence of the 1929 crash was depression-era legislation. The 1933 Securities Act focused on primary markets, ensuring disclosure of pertinent information relating to publicly offered securities. The 1934 Securities Exchange Act focused on secondary markets, ensuring that exchanges, brokers and dealers act in the best interests of investors. The 1940 Investment Company Act was a compromise between the mutual fund industry and the SEC that explicitly regulates mutual funds. The 1940 Investment Advisers Act regulates mutual fund investment managers other than banks..
Mutual funds traditionally invested in equities and, to a lesser extent, bonds. When interest rates skyrocketed in the early 1980s, money market funds became popular, fueling rapid growth in the mutual fund industry. Today, money market funds still represent a significant portion of mutual fund assets, but fund types have proliferated to take advantage of financial innovation and globalization.
Pooled investment vehicles exist in nations around the world. The United Kingdom's unit investment trusts differ in significant ways from mutual funds. Pooled investment vehicles in France are similar to mutual funds, and theirs is a large market. Europe's 1985 Undertakings for Collective Investment in Transferable Securities Directive (UCITS) established rules for pooled investment vehicles. Funds established in accordance with these rules can be sold across today's EU subject to local tax and marketing laws.
Luxembourg and Dublin have capitalized on this directive, establishing themselves as centers for administering EU-wide mutual funds and other pooled investment vehicles.
Outside Europe and the United States, there are active mutual fund markets in Canada, Australia and parts of Asia and South America, including Hong Kong, Japan and Brazil.
They allow even small investment holdings to be diversified across numerous securities or multiple asset classes.
They are convenient, providing professional management and fund administration, while offering easy mechanisms for buying or selling shares.
They can be (read the small print!) inexpensive, affording retail investors economies of scale that are generally only available to institutional investors.
In the United States, mutual funds can be formed in any state as a corporation, trust or limited partnership. They are regulated by the SEC and are subject to corporate, trust or limited partnership law, as appropriate, plus additional requirements under the 1940 Investment Companies Act. To prevent investors from being taxed twice, mutual funds are exempt from federal taxes so long as they satisfy IRS requirements for sources of income and diversification of holdings. They must also distribute substantially all their income and capital gains to shareholders each year. Generally, shareholders are taxed on the income and capital gains distributed to them.
A famous example of a mutual fund is the Magellan Fund, which was launched in 1963. For many years, it had strong performance, actively trading a diversified portfolio of stocks and bonds. In 2005, the fund had $50 billion in assets and hundreds of thousands of investors, most of them retail investors.
A mutual fund's net asset value (NAV) is calculated as
[1]
mutual fund's net asset value (NAV)where fund liabilities might be unpaid expenses, such as directors' compensation or management fees, which are paid out of the fund's portfolio. NAV represents the liquidation value of one share of the mutual fund. If an investor holds 10,000 shares of a mutual fund whose NAV is $26.14, the shares represent an ownership interest in a fraction of the fund worth
10,000 × $26.14 = $261,400 [2]
There are two types of mutual funds: open-end funds and closed-end funds. With an open-end fund, investors who want to buy or sell shares do so directly with the fund, which continually issues or redeems shares as needed. On any given trading day, orders to buy or sell shares placed prior to the close of trading settle at that day's NAV, calculated at the close of trading. Orders placed after the close of trading settle at the next trading day's NAV. For example, if an investor places an order to buy 1,000 shares at 11:00AM on a Tuesday, and the fund's NAV for Tuesday is calculated at 4:30PM as $85.26, he pays $85,260 for the shares. If he buys an additional 100 shares at 8:00PM on Friday, that transaction will settle based on the NAV calculated at 4:30PM on Monday.
Closed-end funds are more like industrial corporations. They issue a fixed number of shares, and these trade on a stock exchange. Investors who want to buy or sell shares must do so on the exchange. Share prices are driven by supply and demand, and they often stray from a fund's NAV. More often than not, they trade at a discount of several percent to the NAV. This apparent violation of the law of one price is a recurring topic of scholarly research.
Some closed-end funds have their own management teams. Others hire an investment management firm to manage their portfolios. Most open-end funds hire an investment management firm. This is legally how the relationship works, but the reality is a bit like a tail wagging its dog. Most open-end funds are launched by an investment management firm. The investment management firm selects the initial board of directors (or trustees) who then hire the investment management firm to manage the portfolio. It is theoretically possible that investors might later elect a new board that hires a different investment management firm to manage the portfolio, but this never happens. Corporate governance for mutual funds is as dysfunctional as it is for industrial corporations, so shareholders have little say in management affairs.
When an investment management firm launches a mutual fund, it generally provides more ongoing services to the fund than just investment management. It may provide (or otherwise arrange for) fund administration, marketing, fund accounting, custody, transfer agency and other services. Such investment managers are called fund management companies. They tend to launch entire families of funds (or fund families) offering funds invested with a variety of asset classes or investment styles. The Magellan Fund is managed by Fidelity Investments, but it is just one fund in an extensive family. Fidelity's offerings include funds that invest in stocks, bonds and money market instruments. It offers foreign and domestic funds. Some are actively managed. Others are passively managed. Some invest in tax-exempt municipal securities, and the tax benefits flow through to investors as tax-exempt distributions. All Fidelity's funds have pretty much the same people on their boards of directors. None of the funds have employees. Fidelity does everything.
Mutual fund investors incur a number of expenses. Most are paid out of fund assets, so investors pay them indirectly. One of these is the management fee paid by the fund to the management company. This is a fixed percent of the fund value paid in installments each year. Management fees vary considerably according to the type of fund and the management company. For an actively managed equity fund, they typically are 0.8% to 1.2%. For a passively managed index fund, they might be 0.1% to 0.2%. Management fees for actively managed bond funds are usually 0.4% to 1.0%. Specialized funds, say those that invest in a specific emerging market, may have proportionately higher management fees.
Other expenses paid out of fund assets include directors' compensation and transaction costs, including broker commissions, bid-ask spreads and impact costs.
For some funds, getting in or out can be an investor's biggest expense. This generally isn't the case with closed-end funds, where an investor can buy or sell shares for the price of a broker commission. With open-end funds, things are more complicated.
Open-end funds may be sold directly by the management company, or they may be sold by an unaffiliated distribution company, such as a bank or broker. Funds sold through an unaffiliated distribution company often charge sales loads (or loads). Most common are front-end loads. When an investor purchases shares, a fixed fraction of the investment is subtracted to compensate the party who sold the fund. Only the balance is invested in the fund. Historically, front-end loads of 7% or 8% were common, but they have come down since the advent of 12b-1 fees (explained below). The share price of a front-end load fund may be quoted as the NAV or it may be quoted as the offering price, which includes the load. For example, if a fund has an NAV of $45.00 and a 3% front-end load, its offering price is:
[3]
offering priceA back-end load is a sales load that is subtracted from the proceeds when an investor sells shares in a fund. These usually decline with the length of time shares are held. A fund might have a back-end load of 5% for shares sold within a year, 4% for within the next year, and so forth, ending with a 0% load after five years. Back-end loads are also called contingent deferred sales charges (CDSC)
In 1980, the SEC adopted Rule 12b-1, which allows funds to pay marketing and sales expenses directly out of fund assets, just like management fees. Such fees have come to be known as 12b-1 fees. While they may be used to pay for advertising or to mail prospectuses to potential investors, 12b-1 fees are primarily used as a means of compensating brokers or other independent distributors of a mutual fund, either in lieu of or in addition to a load. A common arrangement is for a fund to charge no load, but the management company advances a commission to the broker. The fund company then recoups the advanced commission through a 12b-1 fee. The fund also has a decreasing back-end load to cover the management company in case the investor sells her shares before the entire commission has been recouped.
12b-1 fees complicated fund expenses and lead to some controversy. Traditionally, a no-load fund was a fund sold directly by the management company. With 12b-1 fees, broker-distributed funds were soon being advertised as no-load, disguising the fact that they charged hefty 12b-1 fees. Some funds sold to unsophisticated investors were so laden with loads, 12b-1 fees, management fees and transaction costs as to make them little more than legalized robbery.
The SEC responded by tightening rules. Since 1988, funds have been required to disclose all loads and fees in tables near the front of the prospectus. Since 1993, funds charging more than a 0.25% 12b-1 fee have been prohibited from advertising themselves as no-load. Also, in 1995, the National Association of Securities Dealers has limited the commissions funds can pay.
While mutual funds are mostly run by a management company, the management company typically appoints a single employee to have final say on what the fund does or does not invest in. These fund managers usually come from the best business schools and spend a number of years as analysts, researching stocks for the fund company, before being promoted to fund manager. Some fund managers are fortunate enough (or have sufficient "skill", if you reject the efficient market hypothesis) that their fund performs exceptionally well. Such funds gain notoriety, and may be aggressively advertised by the management company. Their managers can achieve almost celebrity status. During the 1980s, Fidelity investments grew to become the largest fund company in the world, based on the success of Magellan and the celebrity status of its manager at the time, Peter Lynch.
Famous funds and celebrity managers posed a problem for the industry. Investors in different distribution channels might all be interested in a particular successful fund, but its fee or load structure might limit it to just certain channels. For example, a broker might have a client who hears about and wants to invest in a well-known no-load fund. Since the no-load fund would pay him no load or other commission, the broker will likely steer her towards some other fund that charged a load or 12b-1 fee. This can cause confusion for investors and missed sales opportunities for fund companies.
The SEC addressed this problem in 1995 with Rule 18f-3. This allows an open-end mutual fund to issue different classes of shares having different fees and loads. One class might have a load and be sold through brokers. Another might have a high 12b-1 fee and be sold through financial planners. A third class might have a lower 12b-1 fee and be distributed to defined contribution pension plans. Exhibit 1 is reproduced from the prospectus of the Franklin Aggressive Growth Fund, illustrating its five different classes.
Example: Fees and Loads for the Multi-Class Franklin Aggressive Growth Fund
Exhibit 1
Fees and Loads for the FundReproduced from pages 10-11 of the prospectus of the Franklin Aggressive Growth Fund, dated September 1, 2007.
An alternative to having multiple classes of shares is a hub-and-spoke (or master/feeder) arrangement. Here, there is a single central portfolio, called the hub or master. This needn't be a mutual fund. It could just be a limited partnership. Multiple open-end mutual funds then invest in the hub, holding it as their sole investment. Accordingly, the mutual funds hold identical investments, but they can offer investors differing fee and load structures.
The origins of mutual funds[1] can be traced to early vehicles for pooling of risk, including life annuities and tontins. When privately issued, such commitments needed to be backed by an asset or a portfolio of assets. In this sense, the instruments were collective investments.
In 1774, Amsterdam broker Abraham van Ketwich sold subscriptions in a pooled investment vehicle called Endragt Maakt Magt. Proceeds were invested in debt instruments. Investors were promised a 4% return plus additional distributions if performance was good. Also, based on a lottery, some shares would be retired at a premium before the stated 25 year maturity. Shares traded on the Amsterdam stock exchange, making this the first known example of a closed-end mutual fund. Other similar funds were subsequently offered to Amsterdam investors.
Starting in the mid 1800's, pooled investment vehicles were structured as trusts. The first was the Société Civile Genèvoise d'Emploi de Fonds, launched in Switzerland in 1849. Others followed, in England, Scotland and the United States. Typically, depending on jurisdiction and the specific legal structure of a fund, a trust structure meant holdings could not be changed, and investors (beneficiaries of the trust) had no means of increasing or decreasing their holdings prior to the trust's set liquidation date. Like a modern mutual fund, income was generally distributed to investors as it was earned.
Recognizably modern closed-end and open-end mutual funds first appeared in the United States in the 1920s, investing almost exclusively in equities. By the time of the 1929 stock market crash, closed-end funds had some $3 billion in assets with the average fund trading at a 47% premium. Open-end funds lagged with just $140 million in assets. At the time, the total capitalization of the US equities market was about $87 billion.
The crash was devastating for the US stock market, but it was doubly so for closed-end funds. Many had engaged in illegal activities (or activities that would subsequently be made illegal) or employed leverage to boost returns. Not only did their portfolios plummet with the stock market, but leverage magnified the drop. Compounding this, the average premium on closed-end funds plummeted from 47% to a discount of 25%. The fallout was so bad, not a single closed-end fund was launched in the United States through the 1930's.
Open-end funds faired better. Their portfolios fell with the market, but they had avoided illiquid or questionable investments due to their need to buy or sell fund shares for investors on a daily basis. They had generally avoided leverage for the same reason. Equity investing languished for many years following the 1929 crash, but open-end funds attracted more investors than closed-end funds. In 1943, open-end funds' assets exceeded closed-end funds' assets for the first time, and they have done so ever since.
Another consequence of the 1929 crash was depression-era legislation. The 1933 Securities Act focused on primary markets, ensuring disclosure of pertinent information relating to publicly offered securities. The 1934 Securities Exchange Act focused on secondary markets, ensuring that exchanges, brokers and dealers act in the best interests of investors. The 1940 Investment Company Act was a compromise between the mutual fund industry and the SEC that explicitly regulates mutual funds. The 1940 Investment Advisers Act regulates mutual fund investment managers other than banks..
Mutual funds traditionally invested in equities and, to a lesser extent, bonds. When interest rates skyrocketed in the early 1980s, money market funds became popular, fueling rapid growth in the mutual fund industry. Today, money market funds still represent a significant portion of mutual fund assets, but fund types have proliferated to take advantage of financial innovation and globalization.
Pooled investment vehicles exist in nations around the world. The United Kingdom's unit investment trusts differ in significant ways from mutual funds. Pooled investment vehicles in France are similar to mutual funds, and theirs is a large market. Europe's 1985 Undertakings for Collective Investment in Transferable Securities Directive (UCITS) established rules for pooled investment vehicles. Funds established in accordance with these rules can be sold across today's EU subject to local tax and marketing laws.
Luxembourg and Dublin have capitalized on this directive, establishing themselves as centers for administering EU-wide mutual funds and other pooled investment vehicles.
Outside Europe and the United States, there are active mutual fund markets in Canada, Australia and parts of Asia and South America, including Hong Kong, Japan and Brazil.