CHAPTER 12 Nonbank Financial Institutions 303 has been mutual funds that specialize in debt instruments, which first appeared in the 1970s Before 1970, mutual funds invested almost solely in common stocks Funds that purchase common stocks may specialize even further and invest solely in foreign securities or in specialized industries, such as energy or high technology Funds that purchase debt instruments may specialize further in corporate, government, or municipal bonds or in long-term or short-term securities Mutual funds are held by households, financial institutions, and nonfinancial businesses Mutual funds have become increasingly important in household savings By the beginning of 2007, mutual funds made up over $750 billion, or about 30% of Canadians financial wealth Today, close to 50% of Canadian households hold mutual fund shares The age group with the greatest participation in mutual fund ownership includes individuals between 50 and 70, which makes sense because they are the most interested in saving for retirement Interestingly, 18 to 30 is the second most active age group in mutual fund ownership, suggesting that they have a greater tolerance for investment risk than those who are somewhat older The growing importance of mutual funds and pension funds, so-called institutional investors, has resulted in their controlling a large share of total financial sector assets They are also the predominant players in the stock markets, with over 70% of the total daily volume in the stock market due to their trading Increased ownership of stocks has also meant that institutional investors have more clout with corporate boards, often forcing changes in leadership or in corporate policies Particularly controversial in recent years has been a type of institutional investor called sovereign wealth funds, state-owned investment funds that invest in foreign assets (see the FYI box, Sovereign Wealth Funds: Are They a Danger?) Mutual funds are structured in two ways The more common structure is an open-end fund, from which shares can be redeemed at any time at a price that is tied to the asset value of the fund Mutual funds also can be structured as closed-end funds, in which a fixed number of nonredeemable shares are sold at an initial offering and are then traded like a common stock The market price of these shares fluctuates with the value of the assets held by the fund In contrast to the open-end fund, however, the price of the shares may be above or below the value of the assets held by the fund, depending on factors such as the liquidity of the shares or the quality of the management The greater popularity of the openend funds is explained by the greater liquidity of their redeemable shares relative to that of the nonredeemable shares of closed-end funds Originally, shares of most open-end mutual funds were sold by salespeople (usually brokers) who were paid a commission Since this commission is paid at the time of purchase and is immediately subtracted from the redemption value of the shares, these funds are called load funds Most mutual funds are currently no-load funds; they are sold directly to the public with no sales commissions In both types of funds, the managers earn their living from management fees paid by the shareholders These fees amount to approximately 0.5% of the asset value of the fund per year Mutual funds are regulated by a variety of agencies As securities distributed by investment dealers and financial advisers, they fall within provincial jurisdiction As services provided by financial institutions, they fall under the Bank Act, Trust and Loan Companies Act, Insurance Companies Act, etc., and are the responsibility of OSFI Regulations require periodic disclosure of information on these funds to the public and restrictions on the methods of soliciting business