March 21, 2024, marked a milestone in the investment management industry. It has been 100 years since the first mutual fund was created! The fund that created a $60 TRILLION1 industry is the Massachusetts Investors Trust (MIT). “IS” because the fund is still in existence as part of the MFS Funds. Mutual funds simply pool investors’ money to be invested in stocks, bonds, cash, or other securities. Mutual funds helped democratize investing from Wall Street fat cats to the general public. Mutual funds became the investment of choice, especially with the advent of modern-day retirement accounts, such as 401k, 403b, 457, IRAs, etc.
It all started in the Roaring Twenties. Wall Street was the wild-wild west with little to no regulation and questionable practices. The decade was marked with optimism, a booming stock market, and people wondering how they can get in on the action. The lowly mutual fund served a perfect need. The idea of the mutual fund offered liquidity, transparency, and professional investment management at a reasonable cost. Even as the 1929 stock market crash and the Great Depression ensued, MIT endured.
It didn’t stop there. As the country recovered from the Great Depression, MIT founders actively participated in federal regulation development. The result was the Investment Company Act of 1940, which became the founding legal framework for all publicly available pooled investment vehicles. Much of MIT’s ethical principles made their way into the Act. The Act covered governance, liquidity, and fund distribution to name a few. The Act was replicated around the world as other countries adopted pooled investment vehicles.
Prior to mutual funds, investors only had a few options, purchasing individual stocks or purchasing a “closed-end fund.” Closed-end funds have similarities to mutual funds but had a questionable history in the Roaring Twenties. After the establishment of the Act, closed-end funds were forced to conform to the regulation and clean up their act.
The Act spawned other legislation, opening new and different investment vehicles. The Real Estate Investment (REIT) Act of 1960 allowed for a mutual fund structure for real estate investment. Rule 2a-7 was created to govern a specific type of mutual fund called a money market, given the paramount stability objective. More recently, Exchange Traded Funds (ETFs) were created under the 1940 Act. The U.S. financial markets, with accompanying regulations have become the gold standard for global financial markets.
The MIT seed grew into a juggernaut of a global industry, helped democratize investing, and form regulation that is the envy of the world. MIT’s founders are probably looking down proud they left world off better then when they found it. MIT, Happy Birthday!
1 https://www.grandviewresearch.com/industry-analysis/mutual-fund-assets-market-report
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