Ideal economic conditions and an increased emphasis on retirement savings led to significant structural change in the fund industry in the 1990's and transformed it into the largest financial service industry, according to a recent study issued by the Investment Company Institute of Washington, D.C.

High employment rates and low interest and inflation rates brought the industry five times the amount of new assets it attracted in the 1980's, according to the study. Overall, assets grew 21.4 percent on an annual basis for the decade.

Although it did not break any new ground, the study, released last month, concisely describes the evolution the industry has undergone in the last decade.

How investors purchased their funds was the greatest change the industry underwent in the 90's, said Brian Reid, the author of the study and an assistant vice president and director of industry and financial analysis for the ICI. Most significantly, direct sales channels were supplanted by the end of the decade by third party and so-called non-traditional methods of distribution, said Reid.

Non-traditional channels like fund supermarkets, fee-based financial advisors, wrap programs, 401(k) plans, banks and variable annuities cut the traditional direct channel's share of new sales from an estimated 62 percent in 1990 to 43 percent in 1999, the study said.

"Many of sales now are coming through a non-direct source like a retirement plan or through a supermarket," Reid said. "So, increasingly, direct marketed funds have shifted to non-traditional methods of distribution."

A growing emphasis on retirement savings in the early 90's and a shift away from defined benefit plans had an enormous impact on fund distribution, he said. Retirement assets held in mutual funds climbed from $200 billion in 1990 to $2.4 trillion in 1999, the study said.

Mutual funds became the primary investment choice offered in IRA's and 401(k) plans. Assets invested in mutual funds in the 401(k) market climbed from $67 billion in 1990 to $777 billion in 1999, according to the study. Fund assets in IRA's rose from $141 billion in 1990 to $1.2 trillion in 1999.

Variable annuities are another retirement product that developed in the previous decade and allowed funds to be sold through the insurance channel, the study said. Assets held in annuities exceeded $800 billion at the end of 1999, according to the study.

Other non-traditional channels like fund supermarkets, fee-based advisors and wrap programs have evolved as a result of the changing needs and demands of investors, Reid said. All of the channels developed out of investors' desires for a product that offers the advantages of mutual funds with additional benefits, like investment advice, choice and consolidated statements, he said.

Fund supermarkets were introduced in 1992 and reached an estimated $500 billion in assets by 1999, according to the study. Mutual fund wrap programs, another product launched in the 90's, provide advice for a fee based on the total assets held instead of for the traditional sales load. Wrap programs had $94 billion in assets under management by late 1999, according to the study.

In order to offer the same fund through a variety of channels, fund companies were compelled to add multiple share classes, according to the study. By the end of the decade, the average intermediary-sold fund had three share classes, according to the study.

The 90's also produced a variety of new investment products. Index funds became a mainstream product in the 90's and experienced significant growth, according to the study. The number of index funds increased from 15 in 1990 to 193 in 1999 with a total of $383 in total assets, the study said.

Similarly, funds of funds increased in popularity, climbing from 16 funds with $1.4 billion in assets under management in 1990 to 213 funds with $48 billion in 1999, according to the study.

In the beginning of the new century, the industry has been trying to keep up with investors' demands for personalized investment products that offer choice and flexibility, like separate accounts, according to Reid.

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