Mutual funds didn't really capture the attention of American investors until the 1980s and 1990s, when investors in them hit record highs and realized incredible returns. They are now mainstream investments and form the core of individual retirement accounts. However, the idea of pooling assets for investment purposes has been around for centuries.
Here we look at the evolution of this investment vehicle, from its beginnings in the Netherlands in the 19th century to its status as a global industry, with fund holdings accounting for trillions of dollars in the U.S. alone.
Key Takeaways
- The first modern mutual fund was launched in the U.S. in 1924.
- The oldest mutual fund still in existence is MFS’ 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 of the origins of investment funds, although many look to the Dutch as the early innovators who created the first closed-end investment companies.
Subhamoy Das, in his economics textbook "Perspectives on Financial Services," traces an early appearance of the mutual fund to Dutch merchant Adriaan van Ketwich, who created an investment trust in 1774. "Van Ketwich probably believed thatdiversificationwould appeal to investors with minimal capital. The name of van Ketwich's fund, Eendragt Maakt Magt, translates into 'unity creates strength,'" the book explains.
Other examples followed, including an investment trust launched in Switzerland in 1849 and similar vehicles formed in Scotland in the 1880s.
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U.S. Innovations
The idea of pooling resources and spreading risk using closed-end investments found its way to the U.S. by the 1890s. The Boston Personal Property Trust, formed in 1893, was the firstclosed-end fundin the U.S. According to Collins Advisors, the investments were primarily in real estate and the vehicle might today 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 know as the modern mutual fund. The Alexander Fund featured semiannual 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 the modern mutual fund in 1924, according to Bianco Research. The fund was opened to investors in 1928, eventually spawning the mutual fund firm 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) is still in existence today and claims to be America's oldest balanced fund.
$18.1 Trillion
The total amount of U.S. financial assets in mutual funds, as of Q3 2023, according to the St. Louis Federal Reserve.
Regulation and Expansion
By 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 as highly leveraged closed-end funds were wiped out and small open-end funds survived.
Government regulators also began to take notice of the fledgling 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 all were designed to safeguard investors from unscrupulous or reckless operators. Mutual funds are now required to register with the SEC and to provide full disclosure of their holdings and performance in the form of a prospectus.
The Investment Company Act of 1940 put in place additional regulations that require more disclosures and minimize conflicts of interest.
The mutual fund industry continued to expand. At the beginning of the 1950s, the number of open-end funds topped 100. In 1954, the financial markets finally overcame their pre-1929 crash peak, and the mutual fund industry began to grow 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 appetite for mutual funds for some time. Money flowed out of mutual funds as quickly as investors could redeem their shares, but the industry's growth later resumed.
Recent Developments in Mutual Funds
In 1971, William Fouse and John McQuown of Wells Fargo established the first index fund, a concept that John Bogle would use as a foundation on which to build The Vanguard Group, a mutual fund powerhouse renowned for low-cost index funds.
The 1970s also saw the rise of the no-load fund. This lower-cost investing option had an enormous impact on the way mutual funds were sold.
The Big Bull Market
With the 1980s and '90s came an unprecedented bull market and previously obscure fund managers likeMax Heine, Michael Price, and Peter Lynch became household names.
The collapse of the tech bubble in 1997 and several scandals involving big names in the industry took their toll on the industry, as did the Great Recession of 2007.
The Rise of the ETF
In the 21st century, a new tweak to the mutual fund has emerged: the exchange-traded fund (ETF).
These new funds, with their ultra-low expense ratios and ease of trading, have made a huge mark on the investment industry. Over $7 trillion is now invested in these funds, and most of it has poured in 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 the 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 index, rather than evaluating specific investments. Because they have lower management costs, these funds tend to beat active management strategies in the long run.
What Is the Advantage of Exchange-Traded Funds?
Exchange-traded funds, or ETFs, are similar to mutual funds, but they trade on the market just like a stock. Mutual funds can only be traded once a day, after market close.
The Bottom Line
Despite the 2003 mutual fund scandals and the global financial crisis of 2008-09, the story of the mutual fund is far from over. In fact, the industry is still growing. In the U.S. alone there are more than 10,000 mutual funds, and if one accounts for all share classes of similar funds, 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.
