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3/13/2015

ABriefHistoryOfTheMutualFund

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ABriefHistoryOfTheMutualFund
ByJamesE.McWhinney
By
JamesE.McWhinney

AAA|

Mutualfundsreallycapturedthepublic'sattentioninthe1980sand'90swhen
mutualfundinvestmenthitrecordhighsandinvestorssawincrediblereturns.
However,theideaofpoolingassetsforinvestmentpurposeshasbeenaround
foralongtime.Herewelookattheevolutionofthisinvestmentvehicle,fromits
beginningsintheNetherlandsinthe18thcenturytoitspresentstatusasa
growing,internationalindustrywithfundholdingsaccountingfortrillionsofdollars
intheUnitedStatesalone.
IntheBeginning
Historiansareuncertainoftheoriginsofinvestmentfundssomecitetheclosed
Historiansareuncertainoftheoriginsofinvestmentfundssomecitethe
closed
endinvestmentcompanieslaunchedin
endinvestmentcompanies
launchedintheNetherlandsin1822byKingWilliamI
theNetherlandsin1822byKingWilliamI
asthefirstmutualfunds,whileotherspointtoaDutchmerchantnamedAdriaan
vanKetwichwhoseinvestmenttrustcreatedin1774mayhavegiventhekingthe
idea.Ketwichprobablytheorizedthatdiversificationwouldincreasetheappealof
investmentstosmallerinvestorswithminimalcapital.ThenameofKetwich's
fund,EendragtMaaktMagt
fund,
EendragtMaaktMagt,translatesto"unitycreatesstrength".Thenextwave
,translatesto"unitycreatesstrength".Thenextwave
ofnearmutualfundsincludedaninvestmenttrustlaunchedinSwitzerland
ofnearmutualfundsincludedaninvestmenttrustlaunchedin
Switzerlandin
in
1849,followedbysimilarvehiclescreatedinScotland
1849,followedbysimilarvehiclescreatedin
Scotlandinthe1880s.
inthe1880s.

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Theideaofpoolingresourcesandspreadingriskusingclosedendinvestments
soontookrootinGreatBritain
soontookrootin
GreatBritainand
andFrance
France,makingitswaytothe
,makingitswaytotheUnitedStates
UnitedStatesin
in
the1890s.TheBostonPersonalPropertyTrust,formedin1893,wasthefirst
closedendfundinthe
closedendfund
intheU.S.
U.S.ThecreationoftheAlexanderFundinPhiladelphiain
ThecreationoftheAlexanderFundinPhiladelphiain
1907wasanimportantstepintheevolutiontowardwhatweknowasthemodern
mutualfund.TheAlexanderFundfeaturedsemiannualissuesandallowed
investorstomakewithdrawalsondemand.

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ThecreationoftheMassachusettsInvestors'TrustinBoston
ThecreationoftheMassachusettsInvestors'Trustin
Boston,
,Massachusetts
Massachusetts,,
heraldedthearrivalofthemodernmutualfundin1924.Thefundwentpublicin
1928,eventuallyspawningthemutualfundfirmknowntodayasMFSInvestment
Management.StateStreetInvestors'Trustwasthecustodianofthe
MassachusettsInvestors'Trust.Later,StateStreetInvestorsstarteditsownfund
in1924withRichardPaine,RichardSaltonstallandPaulCabotatthehelm.
SaltonstallwasalsoaffiliatedwithScudder,StevensandClark,anoutfitthat
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3/13/2015

ABriefHistoryOfTheMutualFund

wouldlaunchthefirstnoloadfundin1928.Amomentousyearinthehistoryof
wouldlaunchthefirstnoloadfund
in1928.Amomentousyearinthehistoryof
themutualfund,1928alsosawthelaunchoftheWellingtonFund,whichwasthe
firstmutualfundtoincludestocksandbonds,asopposedtodirectmerchant
bankstyleofinvestmentsinbusinessandtrade.

Governmentregulatorsalsobegantotakenoticeofthefledglingmutualfund
industry.ThecreationoftheSecuritiesandExchangeCommission(SEC),the
passageoftheSecuritiesActof1933
passageofthe
SecuritiesActof1933andtheenactmentofthe
andtheenactmentoftheSecurities
Securities
ExchangeActof1934putinplacesafeguardstoprotectinvestors:mutualfunds
ExchangeActof1934
putinplacesafeguardstoprotectinvestors:mutualfunds
wererequiredtoregisterwiththeSECandtoprovidedisclosureintheformofa
prospectus.TheInvestmentCompanyActof1940
prospectus.The
InvestmentCompanyActof1940putinplaceadditional
putinplaceadditional
regulationsthatrequiredmoredisclosuresandsoughttominimizeconflictsof
interest.(Forfurtherreading,seePolicingTheSecuritiesMarket:AnOverview
interest.(Forfurtherreading,see
PolicingTheSecuritiesMarket:AnOverview
OfTheSEC.)
OfTheSEC
.)

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RegulationandExpansion
By1929,therewere19openendedmutualfundscompetingwithnearly700
By1929,therewere19openendedmutualfunds
competingwithnearly700
closedendfunds.Withthestockmarketcrashof1929,thedynamicbeganto
changeashighlyleveragedclosedendfundswerewipedoutandsmallopen
endfundsmanagedtosurvive.

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Themutualfundindustrycontinuedtoexpand.Atthebeginningofthe1950s,the
numberofopenendfundstopped100.In1954,thefinancialmarketsovercame
their1929peak,andthemutualfundindustrybegantogrowinearnest,adding
some50newfundsoverthecourseofthedecade.The1960ssawtheriseof
aggressivegrowthfunds,withmorethan100newfundsestablishedandbillions
aggressivegrowthfunds
,withmorethan100newfundsestablishedandbillions
ofdollarsinnewassetinflows.
Hundredsofnewfundswerelaunchedthroughoutthe1960suntilthebear
marketof1969cooledthepublicappetiteformutualfunds.Moneyflowedoutof
mutualfundsasquicklyasinvestorscouldredeemtheirshares,butthe
industry'sgrowthlaterresumed.
RecentDevelopments
In1971,WilliamFouseandJohnMcQuownofWellsFargoBankestablishedthe
firstindexfund
first
indexfund,aconceptthatJohnBoglewoulduseasafoundationonwhichto
,aconceptthatJohnBoglewoulduseasafoundationonwhichto
buildTheVanguardGroup,amutualfundpowerhouserenownedforlowcost
indexfunds.The1970salsosawtheriseofthenoload
indexfunds.The1970salsosawtheriseofthe
noloadfund.Thisnewwayof
fund.Thisnewwayof
doingbusinesshadanenormousimpactonthewaymutualfundsweresoldand
wouldmakeamajorcontributiontotheindustry'ssuccess.
Withthe1980sand'90scamebullmarketmaniaandpreviouslyobscurefund
managersbecamesuperstarsMaxHeine,MichaelPriceandPeterLynch
managersbecamesuperstarsMaxHeine,MichaelPriceand
PeterLynch,the
,the
mutualfundindustry'stopgunslingers,becamehouseholdnamesandmoney
pouredintotheretailinvestmentindustryatastunningpace.Morerecently,the
burstofthetechbubbleandaspateofscandalsinvolvingbignamesinthe
industrytookmuchoftheshineoffoftheindustry'sreputation.Shadydealingsat
majorfundcompaniesdemonstratedthatmutualfundsaren'talwaysbenign
investmentsmanagedbyfolkswhohavetheirshareholders'bestinterestsin
mind.
Conclusion
Despitethe2003mutualfundscandalsandtheglobalfinancialcrisisof2008
2009,thestoryofthemutualfundisfarfromover.Infact,theindustryisstill
2009,
thestoryofthemutualfundisfarfromover.Infact,theindustryisstill
http://www.investopedia.com/articles/mutualfund/05/mfhistory.asp

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3/13/2015

ABriefHistoryOfTheMutualFund

growing.IntheU.S.alonetherearemorethan10,000mutualfunds,andifone
growing.IntheU.S.alonetherearemorethan10,000mutualfunds,andifone
accountsforallshareclassesofsimilarfunds,fundholdingsaremeasuredinthe
trillionsofdollars.Despitethelaunchofseparateaccounts
trillionsofdollars.Despitethelaunchof
separateaccounts,
,exchangetraded
exchangetraded
fundsandothercompetingproducts,themutualfundindustryremainshealthy
funds
andothercompetingproducts,themutualfundindustryremainshealthy
andfundownershipcontinuestogrow.
Forfurtherreading,seeAdvantagesOfMutualFunds,
Forfurtherreading,seeAdvantagesOfMutualFunds
,DisadvantagesOfMutual
DisadvantagesOfMutual
Fundsand
Funds
andTheABCsOfMutualFundClasses
TheABCsOfMutualFundClasses.
.

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