The history of mutual funds

Mutual funds really captured the public's attention(SEC), the passage of the Securities Act of 1933
in the 1980s and '90s when mutual fundand the enactment of the Securities Exchange
investment hit record highs and investors sawAct of 1934 put in place safeguards to protect
incredible returns. However, the idea of poolinginvestors: mutual funds were required to register
assets for investment purposes has been aroundwith the SEC and to provide disclosure in the
for a long time. Here we look at the evolution ofform of a prospectus. The Investment Company
this investment vehicle, from its beginnings in theAct of 1940 put in place additional regulations that
Netherlands in the eighteenth century to itsrequired more disclosures and sought to minimize
present status as a growing, international industryconflicts of interest. (For further reading, see
with fund holdings accounting for trillions of dollarsPolicing The Securities Market: An Overview Of
in the United States alone.The SEC.) The mutual fund industry continued to
In the Beginning Historians are uncertain of theexpand. At the beginning of the 1950s, the
origins of investment funds; some cite thenumber of open-end funds topped 100.
closed-end investment companies launched in theIn 1954, the financial markets overcame their
Netherlands in 1822 by King William I as the first1929 peak, and the mutual fund industry began to
mutual funds, while others point to a Dutchgrow in earnest, adding some 50 new funds over
merchant named Adriaan van Ketwich whosethe course of the decade. The 1960s saw the
investment trust created in 1774 may have givenrise of aggressive growth funds, with more than
the king the idea. Van Ketwich probably theorized100 new funds established and billions of dollars in
that diversification would increase the appeal ofnew asset inflows.
investments to smaller investors with minimalHundreds of new funds were launched throughout
capital. The name of van Ketwich's fund, Eendragtthe 1960s until the bear market of 1969 cooled
Maakt Magt, translates to "unity creates strength".the public appetite for mutual funds. Money flowed
The next wave of near-mutual funds included anout of mutual funds as quickly as investors could
investment trust launched in Switzerland in 1849,redeem their shares, but the industry's growth
followed by similar vehicles created in Scotland inlater resumed.
the 1880s.Recent Developments In 1971, William Fouse and
The idea of pooling resources and spreading riskJohn McQuown of Wells Fargo Bank established
using closed-end investments soon took root inthe first index fund, a concept that John Bogle
Great Britain and France, making its way to thewould use as a foundation on which to build The
United States in the 1890s. The Boston PersonalVanguard Group, a mutual fund powerhouse
Property Trust, formed in 1893, was the firstrenowned for low-cost index funds. The 1970s
closed-end fund in the U.S. The creation of thealso saw the rise of the no-load fund. This new
Alexander Fund in Philadelphia, Pennsylvania, inway of doing business had an enormous impact
1907 was an important step in the evolutionon the way mutual funds were sold and would
toward what we know as the modern mutualmake a major contribution to the industry's
fund. The Alexander Fund featured semi-annualsuccess.
issues and allowed investors to make withdrawalsWith the 1980s and '90s came bull market mania
on demand.and previously obscure fund managers became
The Arrival of the Modern Fund The creation ofsuperstars; Max Heine, Michael Price and Peter
the Massachusetts Investors' Trust in Boston,Lynch, the mutual fund industry's top gunslingers,
Massachusetts, heralded the arrival of the modernbecame household names and money poured into
mutual fund in 1924. The fund went public in 1928,the retail investment industry at a stunning pace.
eventually spawning the mutual fund firm knownMore recently, the burst of the tech bubble and a
today as MFS Investment Management.spate of scandals involving big names in the
State Street Investors' Trust was the custodianindustry took much of the shine off of the
of the Massachusetts Investors' Trust. Later,industry's reputation. Shady dealings at major fund
State Street Investors started its own fund incompanies demonstrated that mutual funds aren't
1924 with Richard Paine, Richard Saltonstall andalways benign investments managed by folks who
Paul Cabot at the helm. Saltonstall was alsohave their shareholders' best interests in mind and
affiliated with Scudder, Stevens and Clark, anwho treat all investors equally.
outfit that would launch the first no-load fund inConclusion Despite its recent troubles, the story
1928. A momentous year in the history of theof the mutual fund is far from over. In fact, the
mutual fund, 1928 also saw the launch of theindustry is still growing, opening up new markets
Wellington Fund, which was the first mutual fundaround the world.
to include stocks and bonds, as opposed to directThe first Korean mutual fund, the Mirae Asset
merchant bank style of investments in businessPark Hyun-joo Fund, was launched in Dec 1998.
and trade.Today there are 20 trillion Korean won (about
Regulation and Expansion By 1929, there were 19US$19.32 billion) invested in Korea's funds. In the
open-end mutual funds competing with nearly 700U.S.
closed-end funds. With the stock market crash ofalone there are more than 10,000 mutual funds,
1929, the dynamic began to change asand if one accounts for all share classes of similar
highly-leveraged closed-end funds were wiped outfunds, fund holdings are measured in the trillions of
and small open-end funds managed to survive.dollars. Despite the launch of separate accounts,
Government regulators also began to take noticeexchange-traded funds and other competing
of the fledgling mutual fund industry. The creationproducts, the mutual fund industry remains
of the Securities and Exchange Commissionhealthy and fund ownership continues to grow.