It’s a Wonderful Lie: Mutual Fund Advocacy for Shareholders’ Rights, part 1
Jennifer S. Taub | Monday, August 17, 2009 at 06:00AM Halfway through the American film classic, It’s a Wonderful Life, there is a run on the Bailey Building and Loan in fictional Bedford Falls. The lobby teems with panicked customers, demanding cash for their shares. Attempting to discourage redemptions, George Bailey, played by Jimmy Stewart, implores:
- No, but you... you... you're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house...right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?
The rather simple finance lesson serves its purpose. Stewart is able to convince enough investors to hold off. With clearer understanding of where their money is invested, they are able to make choices. Some still demand cash on the spot (notwithstanding the 60 day redemption window). Others decide to subordinate worries of potential lost profit to social concerns for their neighbors.
It is surprising, that Stewart’s words were enlightening to the crowd. Surely they (and theater goers) should have understood how building and loan collectives operated. According to Howard Piquet, in Building and Loan Associations in New Jersey (Princeton: 1930), in roughly 1929, around the time the events within the film were to have occurred, there were more than 12 million individuals invested in building and loan institutions in the U.S. Assets of these cooperatives were approximately $8 billion, with nearly 90% invested in mortgages. Given the ubiquity of buildings and loans, at first, it may seem surprising that scriptwriters would expect an audience to believe that residents of Bedford Falls would be in the dark as to their inner-workings.
Yet the speech is convincing both to the audience in the mid 1940s and to us in the present day. In the present era, notwithstanding the ubiquity and size of another type of collective investment vehicle, the mutual fund, most do not understand its operations or importance in the broader markets. More than 93 million Americans save through mutual funds--half of all U.S. households. Unlike the buildings and loans depicted in the film, today’s real life mutual funds are not predominately concentrated in our neighbors' houses. They are typically broadly diversified. However, like audience goers of that era, many of us need a lesson on where and how our savings are invested.
Mutual funds are giant pools of investments. As of June 2009, in the US, mutual funds contain more than $10 trillion in assets. Americans invest in mutual funds through many channels including retirement plans, brokers, financial advisers, insurance companies or directly through fund operators or “families." Mutual fund operators like Fidelity, American Funds and Vanguard use investors’ money to buy securities—including shares of corporations like PetroChina, General Electric and Wal-Mart. Through this process, one third of all US listed corporations are owned by mutual funds. Mutual fund investors do not have the rights and protections available to shareholders of the underlying corporations, because a shell company, the mutual fund, is the legal shareholder.
Mutual funds hold tremendous wealth, are ubiquitous savings vehicles for individual investors, and have consolidated power. In terms of wealth, as of the year-ended 2006, assets in mutual funds worldwide stood at $21.8 trillion. Of that, approximately 48%, or $10.4 trillion, was held in U.S. mutual funds. In terms of ubiquity, the United States has approximately 90 million mutual fund shareholders. Nearly half of all U.S. households (51.8 million households) own stocks through mutual funds. That is, approximately 77.7 million Americans invest in equities through stock mutual funds.
There are more than 4000 individual equity mutual funds in the United States with more than $4 trillion in assets. With holdings of approximately 25% of outstanding U.S. stock, the bloc voting power of mutual funds can sway election outcomes on matters from board directorships and executive compensation to shareholder governance and social issues. Notwithstanding the number of mutual funds in total, their power is very concentrated. In 2005, the top 5 mutual fund families had about 37% of all fund assets, the top 10 had about 48%, and the top 25, had 71%.
The growth and power of mutual funds corresponds closely to the initiation of the 401(k) and other defined contribution retirement plans. Since the launch of these vehicles, the percentage of U.S. household assets held in mutual funds has increased from 2.7% to 22%. As of year-end 2006, there were $2.7 trillion in 401(k) plan assets, 51.9% of which were invested in equity mutual funds. This is up from just $385 billion in 1990. Additionally, mutual funds of all types, account for 53% of the 403(b) market. Presently, nearly two-thirds of fund investors invest through employer-sponsored retirement plans.
-Adapted from Jennifer S. Taub, “Able but Not Willing: The Failure of Mutual Fund Advisors to Advocate for Shareholders’ Rights,” Journal of Corporation Law, Vol. 34, Issue 3 (2009).
Reader Comments (1)
Jennifer S. Taub again trancends normal thinking to bring things to terms that can be understood.
If you get a chance also read the complete "Able but not willing....." paper she won awards for and delivered in person at Cambridge U several years ago, warning us of just what would and has happened
I can't wait for the additional blogs which will follow!