THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 335

CHAPTER 12

Nonbank Financial Institutions

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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.