On this day in economic and financial history...
The Massachusetts Investors Trust (NASDAQMUTFUND: MITTX ) , the first mutual fund in market history, was organized on Mar. 21, 1924 by Edward G. Leffler. The fund's signature characteristics -- redeemable daily at current values and offering new shares on a regular basis -- continue to define the mutual-fund market to this day. Leffler, an ardent teetotaler and Prohibition supporter, saw the relatively low risk of professionally managed, pooled liquid investments as the antidote to the rising exuberance of the Roaring '20s, which was then still more cultural than financial; the Dow Jones Industrial Average (DJINDICES: ^DJI ) had at this point gained a relatively modest 50% since its 1921 lows. The greater liquidity and accurate valuation of mutual funds also presented an apparent advantage over closed-end funds, which used leverage instead of share issuance to add value to their portfolios.
Leffler devised this investment vehicle while working on Boston's State Street, which has been a hotbed of money-management innovation for nearly a century. In fact, a mere four months later, the notable financial-services firm State Street (NYSE: STT ) was incorporated to provide what's typically considered the second mutual-fund offering in market history. Fidelity, the longtime home of superinvestor Peter Lynch and one of the largest mutual-fund administrators in the world, is also based in Boston's financial district (though not on State Street).
Leffler created another mutual fund a year and a half later, and between his two funds and State Street's offering, the mutual-fund industry had all it needed for a foundation. Several other Boston-based investment companies established their own funds throughout the Roaring '20s, but these stock-like vehicles at first failed to catch on. By the end of 1929, there were only 19 mutual funds with $140 million in assets under management, compared to 162 closed-end funds, which had roughly $2.6 billion in assets.
The leveraged closed-end funds soared during the boom years, but their characteristic leverage proved to be a major drawback when the market crashed. The pioneering mutual funds bettered the Dow's performance during the early phase of the Great Depression -- Leffler's two funds lost a respective 75% and 81%, and State Street's mutual fund lost 71%, versus the Dow's 89% implosion. Closed-end funds, on the other hand, ended the bear-market slide with their shares worth 35% less than the value of their underlying assets. From the start of the crash to the onset of World War II, mutual-fund assets grew to $450 million, while closed-end funds shrank to an aggregate net asset value of about $780 million.
More recently, mutual funds have continued to grow and are now one of the most popular investment vehicles for millions of American investors. In 2011, 44% of all American households -- more 52 million of them -- owned mutual funds. That year, according to the Investment Company Institute, nearly 8,700 mutual funds held roughly $11.6 trillion in assets -- nearly half of the nearly $24 trillion held in mutual funds worldwide. The MIT fund, that granddaddy of them all, continues to modestly outperform the indexes. For its most recent five years (up to its 89th anniversary in 2013), the MIT fund beat the Dow with a 21.1% gain to the index's 17.4%.
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