Mutual funds only really caught the attention of American investors in the 1980s and 1990s, when investors in these funds reached record highs and made incredible returns. They are now common investments and form the heart of individual retirement accounts. However, the idea of pooling assets for investment purposes has been around for centuries.
Here we examine the evolution of this investment vehicle, from its beginnings in the Netherlands in the 19th century to its status as a global industry, with funds held worth billions of dollars in the United States alone.
- The first modern mutual fund was launched in the United States in 1924.
- The oldest mutual fund still in existence is MFS's Massachusetts Investors Trust (MITTX), also established in 1924.
- The exchange-traded fund, a modern variation, has taken the market by storm since the Great Recession of 2007-2009.
The first mutual funds
Historians are uncertain about the origins of investment funds, although many consider the Dutch to be the early innovators who created the first closed-end investment companies.
Subhamoy Das, in his economics textbook “Perspectives on Financial Services,” traces the emergence of mutual funds to the Dutch merchant Adriaan van Ketwich, who established an investment trust in 1774. “Van Ketwich probably believed that diversification would attract investors with minimal investment. The name of van Ketwich's fund, Eendragt Maakt Magt, translates to 'unity creates strength',” the book explains.
Other examples followed, including an investment fund launched in Switzerland in 1849 and similar vehicles established in Scotland in the 1880s.
The idea of pooling resources and spreading risks through closed-end investments took hold in the United States in the 1890s. The Boston Personal Property Trust, established in 1893, was the first fund closed-end in the United States. According to Collins Advisors, the investments were primarily in real estate and the vehicle today could be described as a hedge fund rather than a mutual fund.
The creation of the Alexander Fund in Philadelphia in 1907 was an important step toward what we call the modern mutual fund. The Alexander Fund had semi-annual issues and allowed investors to make withdrawals on demand.
The arrival of the modern fund
The creation of the MFS Massachusetts Investors' Trust in Boston marked the arrival of modern mutual funds in 1924, according to Bianco Research. The fund was opened to investors in 1928, eventually giving rise to the mutual fund company known today as MFS Investment Management. State Street Investors' Trust was the custodian of the Massachusetts Investors' Trust.
The year 1929 saw the launch of the Wellington Fund, which was the first balanced fund, including both stocks and bonds. The Vanguard Wellington Fund (VWELX) still exists today and claims to be America's oldest balanced fund.
The total amount of U.S. financial assets in mutual funds, as of the third quarter of 2023, according to the Federal Reserve Bank of St. Louis.
Regulation and expansion
In 1929, there were 19 open-ended mutual funds competing with nearly 700 closed-end funds. With the stock market crash of 1929, the dynamic began to change: highly leveraged closed-end funds were wiped out and small, open-ended funds survived.
Government regulators also began to take an interest in the burgeoning mutual fund industry. The creation of the Securities and Exchange Commission (SEC), the passage of the Securities Act of 1933, and the enactment of the Securities Exchange Act of 1934 were all intended to protect investors from unscrupulous or reckless traders. Mutual funds are now required to register with the SEC and provide full disclosure of their holdings and performance in the form of a prospectus.
The Investment Company Act of 1940 put additional regulations in place that require more disclosures and minimize conflicts of interest.
The mutual fund industry has continued to grow. By the early 1950s, the number of open-ended funds exceeded one hundred. In 1954, financial markets finally overcame their pre-1929 peak and the mutual fund industry began to expand in earnest, adding some 50 new funds over the course of the decade.
Hundreds of new funds were launched throughout the 1960s, although the bear market of 1969 cooled the public's appetite for mutual funds for a time. Money flowed out of mutual funds as quickly as investors could redeem their shares, but the sector's growth then resumed.
Recent Developments in Mutual Funds
In 1971, William Fouse and John McQuown of Wells Fargo created the first index fund, a concept that John Bogle would use as the basis on which to build The Vanguard Group, a mutual fund powerhouse known for its low-cost index funds.
The 1970s also saw the rise of no-load funds. This lower-cost investment option had a huge impact on the way mutual funds were sold.
The Great Bull Market
The 1980s and 1990s saw an unprecedented bull market and previously obscure fund managers like Max Heine, Michael Price and Peter Lynch became household names.
The bursting of the tech bubble in 1997 and several scandals involving big names in the sector took a toll on the sector, as did the Great Recession of 2007.
The rise of ETFs
In the 21st century, a new variation of mutual funds has emerged: exchange-traded funds (ETFs).
These new funds, with their ultra-low expense ratios and ease of trading, have left a huge mark on the investment industry. More than $7 trillion is now invested in these funds, and most of it has been paid out since the Great Recession receded.
What is the advantage of mutual funds?
Mutual funds allow you to benefit from the experience of a team of full-time professional wealth managers, without having to monitor the markets and study trading strategies yourself. In exchange for a percentage of assets under management, these funds manage client assets according to a predetermined investment strategy.
What is the advantage of index funds?
Index funds are mutual funds that track the performance of a specific benchmark, rather than evaluating specific investments. Because they have lower management fees, these funds tend to beat active management strategies over the long term.
What is the advantage of exchange traded funds?
Exchange-traded funds, or ETFs, are similar to mutual funds, but they trade on the market like a stock. Mutual funds can only be traded once per day, after the market closes.
Despite the mutual fund scandals of 2003 and the global financial crisis of 2008-2009, the history of mutual funds is far from over. In fact, the industry continues to grow. In the United States alone, there are more than 10,000 mutual funds, and when all share classes of similar funds are taken into account, fund holdings are measured in the trillions of dollars.
Despite the launch of separate accounts, exchange-traded funds and other competing products, the mutual fund industry remains healthy and fund ownership continues to grow.