HISTORY OF MUTUAL FUNDS
Mutual fund is one of the most attractive investment instruments today, which has evolved through the years. The fund is known for its simplicity, diversity, accessibility, and liquidity not only in developed countries, but also in developing nations. But once upon a time, this concept was not popular in the economy. This article will outline the evolution of mutual funds.
Initial Years of Mutual Funds
There is uncertainty as to when and where mutual fund originated. Some historians traced its beginnings in the Netherlands in 1822, when King William I launched the closed-end investment firms, which is considered the first mutual funds. But others attributed it to Dutch merchant Adriaan van Ketwich in 1774 who created the investment trust and which might have given the king the idea. The merchant probably stipulated diversification would escalate the appeal of investments to smaller investors with little capital. Ketwich’s fund, Eendragt Maakt Magt, was translated as unity creates strength.
Still in 1822, the concept of Investment Diversification was properly integrated in the mutual funds, which was the main attraction of mutual funds as small investors could also allocate their small funds in a diversified way to minimize risks.
The next series of near-mutual funds in 1848 included an investment trust introduced in Switzerland and was followed by similar vehicles made in Scotland in the 1880s. Gathering resources and spreading risk through closed-end investments rooted in the Great Britain and France, then it arrived in the United States in 1890s. The Boston Personal Property Trust, created in 1893, was America’s first closed-end fund. Then, the Alexander Fund in Philadelphia in 1907 led to the evolution of modern mutual fund. The said fund’s features include semi-annual issues and let investors withdraw on demand.
Modern Day Mutual Fund, Regulation, and Expansion
The modern day mutual fund existed in 1924 upon the establishment of the Massachusetts Investors Trust that went public in 1928. As of now, the fund is called the MFS Investment Management, which was managed by the State Street Investors. The institution began its own fund in 1924 along with Richard Pane, Richard Saltonstall, and Paul Cabot. Saltonstall was also linked with Scudder, Stevens and Clark that launched the first no-load fund in 1928. In 1928, the Wellington Fund was the first mutual fund that included stocks and bonds.
About 19 open-ended mutual funds that competed with almost 700 closed-end funds in 1929. Its dynamics began to change during the stock market crash in 1929, as highly-leveraged closed-end funds were erased while small open-end funds were able to survive the crash.
Also, government regulators noticed the mutual fund industry. In the United States, the Securities and Exchange Commission (SEC) was established, the Securities Act of 1933 was passed, and the Securities Exchange Act of 1934 was enacted to protect investors. The SEC mandated mutual funds to give disclosure through prospectus. The Investment Company Act of 1940 imposed additional regulations and aimed to reduce conflicts of interest.
The number of open-end funds reached 100 as early as 1950s. The industry began to grow in earnest, adding around 50 new funds throughout the decade. In 1960s, the aggressive growth funds emerged as more than 100 new funds were created and billions of dollars in new asset flowed. Hundreds of new mutual funds were introduced in 1960s, but the 1969 bear market diminished the fund’s appeal. Because of that, money flowed out as quickly as investors could claim their shares. But the mutual fund industry recovered and its growth later continued.
The no-load fund emerged in 1970s, which made a huge impact on the way these funds were sold and gave a major contribution to the industry’s success.
In 1971, Wells Fargo Bank’s William Fouse and John McQuown created the first index fund, which was John Bogle’s foundation for establishing The Vanguard Group. This mutual fund powerhouse was popular for low-cost index funds.
The bull market mania in the 1980s and 1990s occurred, as well as previously obscure fund managers including Max Heine, Michael Price and Peter Lynch became prominent. Mutual fund’s leading gunslingers, these three personalities became household names and money streamed into the retail investment industry.
The eruption of the tech bubble and a bunch of scandals dwindled the industry’s reputation. However, shady transactions at major fund companies showed mutual funds are always not benign investments administered by folks, who have their shareholders’ best interests in their priorities.
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