It has come to seem as common as a light bulb, but neither its inventors nor the events surrounding its creation are much remembered:
On March 21, 1924, a shoe salesman named Edward G. Leffler and met with two stockbrokers Hatherly Foster Jr. and Charles H. Learoyd in downtown Boston to sign some some papers. And thus was born the first mutual fund. There were imitators within a few months, and the offspring include names known to almost every household with a few thousand dollars to invest Fidelity Investments, the Vanguard Group and T. Rowe Price Associates Inc.
Seventy-three years since its invention, the mutual fund has revolutionized the way people manage their money. It has made investing easy, maybe too easy, since mutual funds can go down as well as up.
People used to save by putting money in a savings account at a bank or a savings and loan. They collected interest in modest, predictable amounts. There was finite risk, because federal agencies insured some or all of what was deposited. What savers owned was cash.
Now, more people have turned to the stock market to save. They own slivers of companies. They gamble that their investments will increase in in value over time, in bolder but less predictable jumps. The 15-year bull market made people believers: Except for two short interruptions, the stock market has climbed since August, 1982. Thanks to mutual funds, you can boast of owning a portfolio of blue chip stocks, Asian companies or high technology firms.
"It is an essential part of your life to have a mutual fund," says Daniel Pierce, chairman of Boston-based Scudder, Stevens & Clark, one of the country's oldest mutual fund firms. "There is just every reason in the world to be investing." Or that is the message the industry wants everyone to hear, and it has has come across loud and clear.
Sixty-three million Americans invest in mutual funds, according to the Investment Company Institute, a Washington-based trade group that represents the mutual fund industry. Ten years ago, the figure was about 20 million.
The assets managed by the industry have swelled to $3.6 trillion, 80 times the total in 1976. It took the industry 68 years to break the $1 trillion mark, three years to reach $2 trillion and less than one year to pass $3 trillion. So far this year, people have invested an average of $513 million a day.
"The numbers are mind-boggling," says Peter Lynch, who came to public attention as the manager of Fidelity Investment's Magellan Fund. "People are very satisfied with the product." They will be loyal and satisfied, that is, until performance doesn't match their expectations, or until the fund managers fail to shelter shareholders from an enormous market drop.
More than any other firm, Boston-based Fidelity popularized the mutual fund, especially among small investors. It attracted clients in the 1970s with a national advertising campaign and by offering toll-free numbers.
Maybe its best advertisement was Lynch himself. He took control of Fidelity's Magellan Fund in May 1977, which had $20 million in assets, and increased its value to $14 billion by the time he retired in May 1990. During his tenure, the fund earned an average of 29.23 percent a year, beating the Standard & Poor's 500-stock index's 15.81 percent return. In the process, he helped make Magellan and Fidelity household words.
Leffler and his associates in 1924 were like many other inventors: in creating first mutual fund, they were refining and improving on ideas that had been around for decades.
The ideas go back to the 1800s, when Boston sea captains about to set sail began leaving money and property in the hands of trustees who managed and invested the assets until the captains returned. Later in the decade, investment companies came into being, to pool money from individuals in "closed-end" funds that invested in public utilities, railroads and oil companies.
The closed-end funds were "closed" because they sold a fixed number of shares on the open market. The value of the stock was determined by supply and demand. Like every other transaction in the free market, the price would fluctuate.
Leffler had sold everything from pots and pans to shoes. He believed that an unlimited number of clients should be able to buy an investment fund. When a client wanted to withdraw, he could redeem his shares and receive his money, whether the amount was less or more than his original investment. Leffler also realized that the more investors in the fund,the faster it could grow.