Fund History -Learn to Earn_ A Beginner’s Guide to the Basics of Investing and Business.
The earliest mutual fund on record was started in 1822 by King William I of the Netherlands. The idea spread to Scotland, where the thrifty Scots took an immediate fancy to it. The Scots were regarded as a frugal lot, who frowned on frivolous purchases. They managed to save enormous quantities of money, which could be invested in the newly created funds.
Eventually, the inhabitants of the United States got wind of mutual funds, but they didn’t catch on here until the end of the nineteenth century. In those days, mutual funds were called “stock trusts”—the earliest on record being the New York Stock Trust launched in 1889. The stock trusts evolved into “investment companies,” which were popular in the 1920s.
The first homegrown mutual fund to describe itself that way was the Shaw Loomis-Sayles fund. It appeared on the scene in November 1929, just weeks after the stock market crashed. This was bad timing by the organizers, because stock prices continued to drop until they finally hit bottom in 1932. By 1936, after the dust had settled, half the funds in the country (still called “investment companies”) were out of business.
Investors learned an important lesson: When stocks go down in a heap, funds go down with them. It still applies today. The best fund manager on Wall Street can’t protect you in a crash, whether it’s the Crash of 1929, 1972–73, 1987, 1990, or a future Crash of 2000, 2010, or 2020. Whether you do the investing or a professional does it, there’s no such thing as a crash-proof portfolio.
Eleven years after the Crash of 1929, Congress passed a key piece of legislation, the Investment Company Act of 1940. This law, still on the books today, takes the mystery out of mutual funds. It requires that each fund describe itself in detail, so investors know exactly what they’re getting and how much they have to pay to get it.
Every mutual fund registered in the United States (more than six thousand at present count) has to explain its overall strategy and tell you how risky that is. It has to explain how the money is invested. It has to reveal the contents of its portfolio, listing the biggest holdings by name and how many shares it owns in each.
It has to reveal the management fee, plus any extra fees levied by the management company. It has to report on its gains and losses in previous years, so everybody knows exactly how well or how poorly it has performed in the past.
Along with all these rules that force it to tell the whole truth and nothing but the truth, a fund must also follow strict rules on investing. It can’t risk more than 5 percent of its customers’ money on a single stock. This guards against its putting too many eggs in one basket.
Meanwhile, government watchdogs at the Securities and Exchange Commission (SEC) keep up a constant surveillance, so the funds that might otherwise be tempted to break the rules are held in check by the fear of getting caught. Overall, the fund industry does a good job policing itself, and it maintains a good relationship with the SEC’s tough watchdogs.
Recently, with the support of the SEC, the various groups of funds have undertaken a worthy project. They are trying to eliminate the gobbledygook in their brochures and cut down on the legalese that often goes on for many pages, which few investors ever read. Much of this legalese is put there because the government requires it, but it ends up wasting time, confusing investors, and costing them money. The bill for printing all these pages is paid out of the assets of the fund.
The goal of this new campaign is to produce simpler and shorter explanations that people can understand without having to go to law school. The companies that run funds and the shareholders who invest in funds will both be better off if this campaign succeeds.
After the long period when the public avoided them, mutual funds came back into favor in the late 1960s, when they were sold in neighborhoods across the country by teachers, shopkeepers, clerks, you name it, working part-time on weekends and at night. This led to a poor result, because millions of investors got into funds just in time for the bear market of 1969–73, the worst since the Crash of 1929.
In this extended losing streak for stocks, the prices of some mutual funds dropped 75 percent—more proof that there’s no safety in numbers when it comes to owning shares in a fund. Stunned by their losses, distraught investors made a mad dash for the exits, selling their shares for far less than they had paid, depositing the proceeds in savings accounts, and promising themselves to hang up the phone the next time they got a call from a fund salesman.
For nearly a decade thereafter, it was hard to get anybody to invest money in a stock mutual fund. High-quality funds were left sitting alone as if they had bad breath. Smart fund managers could find plenty of great stocks to buy, and at bargain prices, but without clients, they had no money to buy them with.
As the stock market revived in the 1980s, so did the mutual fund industry. It’s been going gangbusters ever since, with 5,655 funds and counting, and more than thirteen hundred new funds created in the past two years alone. Every other day brings another fund: bond funds, money-market funds, and stock funds, to add to the more than twenty-one hundred stock funds that already exist. If this hectic birthrate keeps up much longer, we’ll soon have more stock funds than stocks.