Investment companies and funds in the United States

The role of mutual funds and investment companies in the United States is growing every decade, contributing to the development of the local economy, business prosperity and the well-being of private investors.

This segment of the American financial market has a rich history and is characterized by very complex legislation and government regulation.

The system of investment services in the United States, which began to formalize back in the 1930s, is now considered one of the most developed in the world. The largest investment companies, attracting funds from millions of households and legal entities, make a huge contribution to the American economy and help finance large projects in the United States and other countries of the world.

This is a thriving sector that deserves the close attention of entrepreneurs and managers.

Skywalk Investment Group offers a wide range of investment services for large businesses in the United States and other countries.

We are ready to provide long-term financing for capital intensive projects, including flexible loans in the amount of 50 million euros or more with a maturity of up to 20 years.

Our team guarantees full financial and legal support for your projects.

History of investment funds in the United States

At an early stage in the development of the financial market, specialized investment funds and other collective investment institutions (CIIs) become an important factor in the transformation of household and business funds into investments.

Investment funds in the United States today can be called the main mechanism for pooling funds from various investors under the management of a professional manager to ensure the safety of funds and profit.

The emergence of collective investment institutions is associated with an increase in the interest of small investors in securities market instruments that are not available to each of them individually, but are convenient and profitable when pooling funds. In the United States, these processes usually took place earlier than in other countries, which led to the impressive success of the American CIIs.

The prototype of modern investment funds appeared in the 18th century in Europe. In 1774, Dutch trader and broker Abraham van Ketwich created a prototype for a closed-end investment fund called Unity Makes Strength. This fund pooled funds of private investors for their further investment in bonds issued by governments and banks of foreign countries.

The fund's investors were promised an income of 4% per annum.

Investment companies, pooling the financial resources of private investors, later appeared in Belgium (1822), Switzerland (1849) and France (1852).

The first investment companies offered private investors professional management of their funds, which gave a significantly higher return on investment than placing savings in banks on their deposit accounts.

The number of small investors grew at a faster pace than the level of education and qualifications of people in investment operations. In this regard, the first investment and consulting company was formed in the United States in 1899, which consulted small investors on the investment of savings in various sectors of the American economy. By 1910, the number of such companies in the United States had increased to ten.

The development of investment and consulting services helped prepare the American financial market for the emergence of investment funds. These companies gradually began to move from individual to collective consultation, and then they moved to pooling funds from households and businesses for collective investment.

Stages of development of American collective investment institutions

In the development of American investment funds, financiers distinguish four stages.

The time frame of the first stage in 1892-1933, the American market for investment funds (mutual funds) began to form.

Closed-end investment funds were the first to appear. In 1893, the first private equity fund, The Boston Personal Property Trust, was created in the United States to pool funds from Harvard University employees.

The first open-end investment fund, the Massachusetts Investory Trust, was established in 1924, also in Boston. An open-end investment fund, unlike a closed one, bought back shares from its shareholders at their first request. By 1929, there were 19 open-end investment funds and about 700 closed-end funds in the United States.

However, at first, the population was skeptical about collective investment institutions as a new way of investing. This period of history was characterized by inadequate government regulation and various kinds of abuse by investment fund managers. It is not surprising that during the Great Depression most of the active investment companies and funds went bankrupt.

The second stage in the development of collective investment institutions in the United States fell on 1933-1945. This period was characterized by the improvement of regulation of the investment market. In 1933, the Securities Act was passed to regulate the activities of issuers of securities.

It was followed in 1934 by the Securities Exchange Act (SEA), which regulated trading in securities, and also established the United States Securities and Exchange Commission (SEC).

The main goal of the SEC is to protect investors by supporting fair competition in the securities market.

The third fundamental piece of legislation was The Investment Company Act, passed in 1940. It regulates the process of establishing investment companies that invest in securities. However, despite significant improvements in the regulation of investment funds, the outbreak of World War II prevented their rapid development and slowed down the improvement of collective investment institutions in the United States.

The third stage (mid-1950s to early 1980s) is characterized by the growth of assets of American investment companies and funds.

In the early 1950s, the number of registered investment funds exceeded 100, and this growth continued for another two decades.

In the late 1960s, mutual funds invested more than 80% of their funds in stocks.

However, the recession in the stock market in 1973-1974 along with high inflation led to an outflow of investor funds. Further development of investment funds required an innovative approach, which led to the emergence of new types of funds.

The first money market fund called the Reserve Fund appeared in the United States in 1971. It provided investors with returns that were almost 2 times higher than the return on bank deposits.



By 1982, 76% of mutual fund assets were invested in money market funds, 8% in bond funds, and 16% in equity funds. At the end of 1975, the first investment fund based on the S&P 500 index was created.

Official statistics on US investment funds have been available since 1945.

The table below shows the dynamics of investment fund assets in 1945-1980 (billion dollars).

Funds	1945	1950	1960	1970	1980
Open-end investment funds	1.0	3.3	17.0	46.8	70.4
Close-end investment funds	1.2	2.0	6.4	6.1	7.9
Money market investment funds	-	-	-	-	76.4

Until the 1980s, the development of investment funds in the United States was well ahead of its closest competitors such as the UK, France and Japan.

Subsequently, this gap narrowed somewhat, mainly due to the global influence of investment funds of the EU countries. In other countries, with rare exceptions (Canada, Australia), the role of investment funds has always been insignificant.

However, in the 1990s, collective investment institutions became widespread in almost all countries of the world. Their growth was fueled by the globalization of world finance and the expansion of transnational financial groups in an increasing number of countries, as well as the successful development of the stock and bond market. An additional factor has been demographic changes, in particular population aging in most high- and middle-income countries.

This process has led to an increased demand for reliable and liquid financial instruments that provide long-term cash flows for investment companies around the world.

The fourth stage in the development of investment funds in the United States began in the mid-1980s and continues to this day. In the early 1980s, new legislation came into force that allowed opening corporate savings plans (for example, 401-k and others) and individual retirement accounts (IRAs) on favorable tax terms.

According to this plan, the company monthly deducts part of its employees' salaries (before tax) into investment instruments, among which there are investment funds.

This has led to a significant proportion of financial resources flowing into US investment funds through pension schemes.

Also, the current stage of development of the American investment market is characterized by the growth of investment companies that specialize in the professional management of large assets. These companies are often sources of funding for capital-intensive projects.

If you are interested in opportunities for financing investment projects in the United States, contact Skywalk Investment Group for advice.

We specialize in long-term financing of large projects in the fields of heavy industry, mining and processing of minerals, renewable energy, chemical industry, real estate and tourism.

Brief description of investment companies and funds in the USA

The wide variety of collective investment institutions in modern American law is, in fact, the result of a long evolution of investment activity in this country.

Below we have given the classification of investment companies and funds, indicating the key principles of their work and some features.

Classification of investment companies

When we talk about investment companies, these are usually corporate structures.

They include an investment fund and an investment management company. In addition to corporate forms, there are other types of investment companies that differ in their structure and nature of investment and methods of attracting investors' funds.

In order for investors to receive stable high profits, their funds are pooled and invested in various potentially profitable projects. Cash flows are generated due to pooling of funds and competent actions of the financial manager. At its core, the activities of an investment company can be compared to the activities of a financial intermediary.

Financial experts distinguish the following three functions that investment companies perform.

In fact, these are the three main activities on which American investment companies make money:

• Purchase and sale of securities.
• Distribution of capital in different areas in order to reduce investment risks.
• Issue of securities for “controlled” trading on the stock market.

The services of investment companies are available to various investors, both large and small.

The profit that the depositor will receive as a result of the operation directly depends on the successful investment. Companies, based on the results of the reporting period or a specific operation, receive a percentage of profits and a fee for investment management.

To better understand the investment process and its limitations, it is important to know the classification of collective investment institutions in a particular country. In the US legislation, as in the most developed legislation in this area, investment companies are divided into three categories.

Face-amount Certificate Companies. These are companies that issue certificates that entitle the holder to receive a fixed income or demand the redemption of the certificate within a specified time frame. The nature of the relationship "company-investor" is very similar to the process of obtaining a loan from a bank. However, this advanced investment tool allows American companies to attract cheaper financing than bank loans.

An investment company turns to investors and asks to finance its activities in the stock market, for which it guarantees a fixed income (for example, 5-10% per year) by issuing debt obligations.

The risk for investors is low, as the guarantees of payments are the assets of the investment company, including real estate and securities. Currently, this type is not common in the United States.

Unit Investment Trusts. In US law, UITs are investment companies that sell shares (units) of their relatively stable investment portfolio of bonds or stocks. Shares of trusts have a limited circulation period, after which they must be redeemed or sold. In this case, the proceeds are distributed among the holders of the shares.

Obviously, trusts are conveniently formed from bonds with their constant coupon yield and payment of par value at maturity. If the investment trust is formed of shares, then at the onset of the set date all the shares in its portfolio are sold, and the proceeds are distributed among the shareholders.



Shares of trusts are purchased through the brokerage companies establishing the trust or through other brokers acting as agents. If the investor does not want to wait until the deadline, he can sell the shares to the founder of the trust. Since portfolio management is practically not carried out, such investment companies in the United States are sometimes called Non-managed Investment Companies. This group of investment companies can be classified as close-end funds.

Investment Management Companies. All investment companies other than certificate issuing companies or UITs are considered investment management companies. These companies issue securities, which are most often a share in assets that changes depending on the results of the company's investment policy.

Less commonly, the securities of management companies correspond to debt obligations giving investors the right to receive a fixed income. These investment companies in the United States are created in the form of corporations.

Investment management companies can mean Investment Advisors and, in particular, Portfolio Managers. Both are not formally investment companies. They are institutions or individual agents in the stock market that provide services for managing the assets of investment funds or funds of individual investors. Investment management companies are divided into open-ended companies and close-ended companies.

Classification of investment funds

The term "investment fund" is not the same as the concept "investment company".

The company forms an investment fund from the resources of its investors, directed to the purchase of various assets, either under its own control or under the control of a management company.

Thus, an investment company is a composite concept and includes a management company (or any other management structure) and an investment fund.

Investment fund activities include the following:

• Receiving funds and other property of private investors and companies on attractive terms.

• Consolidation of investors' assets in a single property complex (fund), the management of which is transferred to the fund or a specialized investment management company.

• Investment of funds from this fund on a diversified basis in securities and other investment objects for the purpose of long-term generation of investment income (dividends, interest and other income) or subsequent resale of investment objects.

The activities of investment companies and funds in the United States are based on the principles of diversification, transparency and protection of investors' interests established by current legislation.

The general principle of operation of investment funds in the United States is the accumulation of savings of individuals and legal entities for joint investment through the purchase of securities. The main difference in the activities of funds from companies is that the fund invests in securities; investing in real productive assets is prohibited by law in most countries.

Investment companies can create funds of four types.

Open-ended investment funds, or mutual funds issue an unlimited number of shares (units). Investors buy additional shares and sell them to the management company, which leads to a change in the total number of shares. Units of mutual funds are bought and sold through the fund manager.

Closed-end funds issue a fixed number of shares, after the sale of which new shares are not issued. In other words, closed-end funds have a fixed capital structure. The funds usually have professional managers who form investment portfolios and manage them in accordance with the investment goals of these funds.

Investors wishing to invest in a closed-end fund after all shares (units) have already been sold will have to buy them back from the owners. Shares of closed-end funds are traded on stock exchanges and the over-the-counter market. As a result, the price of a share in a closed-end fund depends not only on the estimated value of the share, but also on the situation on the stock market.

Unit Investment Trusts are a type of closed-end fund. These trusts charge a fee for the sale of units, while open-ended fund investors can choose a fund that does not charge such a fee.

Real Estate Investment Trusts (REITs) manage acquired real estate and mortgage-backed securities. The largest real estate investment trusts in the United States, such as American Tower, Crown Castle or Simon Property Group, enable millions of private investors to invest in real estate without the need to own and manage those properties. These trusts were especially popular in the mid-1990s when inflation was expected to rise.

During the stock market crash (2001-2002), investors again began to view real estate trusts as a safe haven for their capital.

Basically, a real estate investment trust is a form of closed-end fund that invests in real estate with the money received from the sale of shares to investors. REITs acquire, develop and manage real estate by paying shareholders rental income and interest on mortgage-backed securities.

According to the Investment Company Act of 1940, real estate investment trusts are not formally considered investment funds, as they buy real assets or financial instruments based on such assets.

The key difference between the types of funds is determined by the rules for the issue and redemption of securities of these funds. Shares of an open-end investment fund can be presented for redemption on any business day, and the management company must redeem them based on the current value of the assets. Closed-end fund shares are traded only on the secondary market and cannot be presented for redemption.

In addition, Exchange Traded Funds (ETFs) have recently been singled out.

The latter are exchange-traded funds, the shares of which are traded on the exchange. The structure of an exchange-traded investment fund essentially repeats the structure of the corresponding base index. These funds can be created both as an open-end investment fund and as a unit investment trust. However, the main difference is that ETFs are traded on an exchange.

The management company will form an ETF, which will consist of the shares it purchases.

The fund is divided into units or the fund issues its own shares traded on the primary ETF.

These shares are bought by large broker-dealers (the so-called “authorized person”) in blocks of at least 50,000 shares. In the future, broker-dealers sell shares in the secondary market to smaller investors.

In this case, an authorized person can act as a market maker, i.e. itself to trade ETF shares in the secondary market, or can exchange its blocks of shares for underlying assets with a third parties.

Some ETFs invest in commodities or commodity-based instruments such as crude oil and precious metals. Although these commodity ETFs are essentially the same as ETFs that invest in securities, they are not formally considered investment funds under the Investment Company Act 1940 in the United States.

Comparison of collective investment institutions in the EU and the United States

As pioneers of the global investment market, American companies have laid the foundations for CIIs and influenced their development around the world.

But in general, the activities of investment companies in the United States are different from European companies.

The table below compares the legal framework for collective investment in the United States and the European Union.

Criteria	United States	European Union
Main legislative acts	The Securities Act 1933, the Securities Exchange Act 1934, and the Investment Company Act 1940.	Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS). Amended by Directive 2014/91 / EU.
Types of investment funds	Management companies (divided into open-end and closed-end funds; diversified and non-diversified); unit investment funds; investment companies issuing certificates.	European legislation identifies such organizational forms as contract (mutual fund under the control of a management company), trust (unit trust) and corporate investment company.
Investment fund registration	Registration is done by the Securities and Exchange Commission (SEC).	Registration is carried out by the national regulatory authority of the EU Member State.
Capital requirements	The minimum net asset value of an investment fund in the United States is set at USD 100,000.	The minimum share capital of the management company must be at least EUR 125,000. A multiplying coefficient is provided depending on the value of the assets under the management of the given company. The minimum share capital of a corporate-type investment company is set at EUR 300,000.
Investment diversification requirements	A diversified investment fund is required to invest at least 75% of assets in such a way that each issuer has no more than 5% of the assets of the fund. The investment fund must not own more than 10% of the voting shares of the issuing company.	UCITS Investment Fund must not invest more than 5% of its assets in securities or money market instruments issued by a single issuer. National legal requirements can increase this limit up to 35%. There are also restrictions for investment companies to acquire non-voting shares of one issuer, debt securities and money market instruments of one issuer.
Investor information	Investment funds are obliged to provide their investors at least once every six months with the following information: • Balance sheet, as well as information about the total value of the investment at the reporting date. • Report on the volumes and total value of securities as of the reporting date. • Statement of income and expenses of the investment fund for the reporting period. • Report on payments to investment fund managers, investment advisors, as well as other employees and affiliates. • Information on the purchase / sale of securities, excluding government securities, for the reporting period.	Investment funds in the EU are required to publish the following information for investors: • A prospectus which contains basic information about • investment fund, including investment areas. • Annual report and semi-annual report with financial indicators for the reporting period. In addition, each fund is required to provide key information for investors, which contains information adapted for easier understanding by retail investors and characterizes certain aspects of the investment fund.

Development prospects of investment companies and funds

US-registered investment funds managed USD 18.1 trillion in assets at the end of 2015.

Stock markets were unstable in 2015, so income from investments in securities practically did not affect the value of assets of investment funds. However, such situations are quite rare.

Investment companies and funds in the United States play an important role in the development of the economy and financial market. This industry has grown significantly over the past 30 years, primarily due to the introduction of new retirement plans, the growth in the welfare of the population, as well as the increasing life expectancy of the US population.

Shares of investment funds are a simple, affordable and understandable instrument for investing funds placed on pension accounts, which leads to a constant growth of this type of investment. Over the 15 years from 1980 to 1995, there was a sharp increase in the number of households investing in mutual funds, which was associated with the introduction of new programs. As of 2015, the number of investing households exceeded 54 million.

According to the Investment Company Institute (an independent association that unites all types of US investment funds), the main goals of investing in mutual funds are to increase retirement savings, reduce the tax base, create contingency savings, and savings for the subsequent large purchase or education.

The share of assets of open-end investment funds in the United States at the beginning of 2016 was the largest in the world, accounting for 48% of the total assets of open-end mutual funds (more than $ 37 trillion). Despite this, the share of US open-end investment funds by the number of registered companies is the smallest, which indicates a high concentration of assets.

If we talk about other regions of the world, the European Union is in second place in terms of the development of investment companies and funds in the world. The share of assets of open-end investment funds of the European Union in 2015 amounted to 34% in terms of assets. In terms of the number of registered investment companies (47%), the European Union significantly exceeds all other regions. The last places with the smallest assets were occupied by the countries of South and North America (excluding the USA).

The impact of collective investment institutions on the American economy

The activities of investment companies and funds in the United States have a significant impact on the socio-economic development of the country.

Such funds are the simplest, safest and most cost-effective form of household investment. They serve to derive benefits in the form of growth in the capitalization of the stock market and the distribution of dividends, coupons and other payments.



American collective investment institutions provide high-return savings with moderate risks and increase the wealth of the state at the expense of the wealth of its citizens. One of their important functions is long-term financing of capital-intensive investment projects that, for one reason or another, cannot receive bank loans or other forms of financing.

The social role of investment funds

A distinctive feature of investment funds is the simplicity and ease of use of this tool by a wide range of investors.

Their shares can be bought and sold directly from the fund, or a private investor can use the professional services of a broker, financial advisor, bank or insurance agent for this.

Among the set of additional services, it is necessary to note investment plans (reinvestment of the due share of the fund's income or an automatic plan for new investments) and pension plans.

Investment funds offer their investors other services, including sending monthly and quarterly reports, providing information for filing tax returns, and 24-hour access to a personal account. As a special type of financial intermediary, funds provide investors with unique economic advantages that make investments particularly attractive.

Investment funds in the United States provide diversification of investor investments, which allows them to receive a real economic effect in the form of preserving the return on investments while reducing the risks of investment and income losses. Diversification of investments in securities of different issuers, the profitability of which varies in different areas during the same period of time, allows collective investment institutions to limit the risks for investors associated with unfavorable performance of a particular company or industry.

These institutions solve the problem of small investments.

Private investors in the United States generally do not have enough funds to build a diversified portfolio to reduce investment risk and generate acceptable returns.

The pooling of the funds of many small participants in a fund provides a unique opportunity for each investor to earn money on securities (assets) of different issuers.

By pooling the funds of many investors, investment funds use economies of scale. This refers to reducing the fixed costs of investors for managing their investment resources and minimizing transaction costs when buying and selling securities and other assets for each unit of investment.

Due to the broad activity of investment companies and funds, the threshold requirements for entering the market of capital-intensive investment objects are reduced. For example, commercial property in most cases is not available to small private investors, and pooling funds in one investment fund allows everyone to invest in such assets.

Strengthening the US economy and financial market

By promoting the involvement of free cash in investment activities and ensuring the generation of income and reliable protection of these investments, CIIs solve a number of social problems.

It is about protecting private property and citizens' savings, increasing confidence in financial institutions. All this contributes to the improvement of the economic situation in the country.

Investment funds are not direct lenders to companies, with the exception of certain types of venture capital funds, hedge funds and specialized funds investing in corporate bonds. They purchase shares mainly on the secondary market.

The role of such funds in the investment mechanism is that they contribute to the growth of capitalization and market value of companies, making it easier for them to borrow from banks and capital markets. By shaping long-term domestic demand in the stock market, CIIs have a significant impact on the level of stock prices, depending on the performance of companies.

Changes in the capitalization of American companies play an important role in making investment decisions of lenders, leading to a more efficient reallocation of resources between sectors of the economy, industries and companies. All of the above helps to increase the investment attractiveness of large companies and their projects. Thus, investment companies in the United States support the demand in the securities market and increase the capitalization of large businesses.

It should also be emphasized that the state is one of the largest issuers of securities.

A significant portion of federal and local budget spending in the United States is financed from funds raised in the placement of securities.

The rise in demand for government securities and other equity instruments can be largely attributed to the spread of collective investment.

For example, US federal and local governments often look to investment companies and funds to place bonds and obtain financing for long-term projects. Today, funds specializing in transactions with such government bonds are developing rapidly. One reason is that they offer local investors a high income that is not subject to state or federal taxes.

The advisory role of investment companies is very important for the financial market in order to reduce the risk of making mistakes by other investors. As long-term professional investors, CIIs typically select assets for their portfolio based on an analysis of business benchmarks and, to a lesser extent, technical analysis of market conditions. This assessment can be considered the most accurate and consistent with the economic condition of the issuer.

This circumstance is of particular importance in the context of the emerging market of innovative sectors (for example, renewable energy sources).

Against the background of low capitalization, the traditional approach does not provide an adequate assessment of the future potential value of assets.

Financing new companies and investment projects

Collective investment institutions help promote new and promising enterprises to the market by supporting their shares on stock exchanges.

This is due to the fact that the shares of such companies are initially low in value, but in the case of commercial success or support from market leaders, they grow at a high speed.

This growth is expected by investment funds investing in them.

When young companies offer their shares for public sale, their success is determined by the position of the leading investment funds.

Thus, the actions of investment funds to purchase certain instruments serve as an indicator of assets tending to growth for non-specialized financial institutions and other interested market participants. Participation of well-known investment companies such as BlackRock, Vanguard Group or Invesco can be the key to success of the project thanks to the authority of these financial giants.

The funds themselves are willing to buy shares in such companies.



This is due to the fact that their portfolio includes shares of dozens of projects and companies, and the overall risk is significantly less compared to the chance of earning a high income. By making it easier for promising businesses and real investors to enter the market, CIIs cleanse the stock market of bad-looking securities and financial fraud, helping to revitalize the entire market.

American investment funds and companies usually do not purchase large stakes in joint stock companies, avoiding excessive concentration of financial resources in companies and industries.

As minority shareholders, they are usually interested in the growth of capitalization and other performance indicators of joint stock companies. They also strive to maintain high standards of corporate governance. Unlike ordinary minority shareholders, investment funds have experienced investment management personnel who can act as independent directors of joint stock companies.

The development of investment funds has led in recent years to serious positive changes in the field of corporate governance.

The participation of fund representatives on boards of directors as independent observers strengthens the control system of minority shareholders over the management of joint-stock companies and enhances the efficiency of American business in general.

The proliferation of investment funds not only provides private investors with an alternative investment opportunity, but also accelerates economic growth. Moreover, the active participation of CIIs in business financing has a positive impact on the development of the US banking system due to the factor of competition.

Table: The impact of collective investment institutions on the economy and society.

Functions	State	Society	Business	Economy
Placement of household savings with moderate risks and high investment returns	+	+
Accelerating the use of free capital in the national economy			+	+
Reducing investment risk through portfolio diversification		+	+
Reducing the fixed costs of a private investor compared to direct purchase of securities		+
Rational distribution of investment resources between areas of the American economy	+		+	+
Increased demand for government securities	+
Professional assessment of the market value of assets and enterprises		+	+	+
Market promotion and support for promising enterprises and innovations			+	+
Improving corporate governance standards	+		+	+
Creation of a competitive environment for the banking sector and reduction of interest rates		+	+	+
Establishing partnerships between large businesses and society		+	+
Protecting accumulated funds and accelerating the growth of household income	+		+	+
Development and revitalization of the American securities market	+	+	+	+

Do you need more information about financing opportunities for business projects in the USA?

Contact our representative at any time.

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