The History of Mutual Funds

The History of Mutual Funds

The mutual fund was born from a financial crisis that staggered Europe in the early 1770s.

The British East India Company had borrowed heavily during the preceding boom years to support its ambitious colonial interests, particularly in North America where unrest would culminate in revolution in a few short years.

As expenses increased and revenue from colonial adventures fell, the East India Company sought a bailout in 1772 from the already-stressed British treasury. It was the “original too big to fail corporation ” and the repercussions were felt across the continent and indeed around the world.

At the same time, the Dutch were facing their own challenges, expanding and exploring like the British and taking “copy-cat risks” in a pattern that has drawn parallels to the banking crisis of 2008.

The first mutual fund

Against this backdrop, a Dutch merchant, Adriaan van Ketwich, had the foresight to pool money from a number of subscribers to form an investment trust – the world’s first mutual fund – in 1774. The financial risk to the mainly small investors was spread by diversifying across a number of European countries and the American colonies, where investments were backed by income from plantations, an early version of today’s mortgage-backed securities.

Subscription to the closed-end fund, which Van Ketwich called “Eendragt Maakt Magt” (“unity creates strength”), was available to the public until all 2,000 units were purchased. After that, participation in the fund was available only by buying shares from existing shareholders in the open market. The fund’s prospectus required an annual accounting, which investors could view if they requested. Two subsequent funds set up in the Netherlands increased the emphasis on diversification to reduce risk, escalating their appeal to even smaller investors with minimal capital.

Van Ketwich’s fund survived until 1824 but the vehicle he created is still a hallmark of personal investing more than two centuries later with an estimated $27.86 trillion US in global assets in July 2013. In Canada alone, mutual funds represent $920 billion.

The early mutual funds spread were of the closed-end variety, issuing a fixed number of shares. They spread from the Netherlands to England and France before heading to the U.S. in the 1890s.

The first modern-day mutual fund. Massachusetts Investors Trust, was created on March 21, 1924. It was the first mutual fund with an open-end capitalization, allowing for the continuous issue and redemption of shares by the investment company. After just one year, the fund grew to $392,000 in assets from $50,000. The fund went public in 1928 and eventually became known as MFS Investment Management.

The growth of Canadian mutual funds

Four years later, in 1932, the first Canadian fund, Canadian Investment Fund Ltd. (CIF), was established and by 1951 had assets of $51 million. It changed its name to Spectrum United Canadian Investment Fund in November 1996 and to CI Canadian Investment Fund in August 2002.

The growth of mutual funds and their impact on investing in general was nothing short of revolutionary. For the first time, ordinary investors with minimal capital could pool their resources in a professionally managed, diversified basket of investments, rather than going the more expensive route of buying individual stocks of varying risks. This was considered a giant step in the democratization of investments for the average person.

The first major sign of growth and popularity of mutual funds in Canada took place in the early 1960s when total assets doubled from $540 million in 1960 to more than $1 billion by the end of 1963. But the largest influx into mutual funds in Canada came during the 1990s when double-digit interest rates that had lured Canadian savers into GICs tumbled and investors moved into investments with the potential for higher returns.

Interest rates and mutual fund sales had a direct correlation in the 1990s. In May 1990, the Bank of Canada rate, on which financial institutions base their interest rates, stood at one of its highest levels ever – 14.05 per cent. From that point, the rate began a steady decline, hitting 6.81 per cent at the beginning of 1993 and 4.11 per cent at the end of the year.

As the bank rate fell, mutual fund sales surged, jumping 140 per cent from the end of 1992 to the end of 1993 as strong markets sent assets climbing to almost $114.6 billion. The Bank rate dropped to 3.25 per cent in January 1997 before slowly climbing to five per cent in January 2000.

Mutual funds clearly represented the fastest-growing segment of the Canadian financial services industry during the 1990s and through the turn of the century with the value of assets under management increasing by 1,700 per cent from $25 billion in December 1990 to $426 billion by December 2001. These assets were managed in about 1,800 different mutual funds held in more than 50 million unit holder accounts.

In 2008, global markets were rocked by a financial crisis, triggered by an over-extended U.S. housing market and marked by financial sector collapses and bailouts similar to the European crisis that spawned the original mutual fund.

Canada escaped largely unscathed compared to other countries, particularly the U.S. thanks to tighter mortgage rules and a regulated banking system. Canadian mutual funds survived, too, and after a brief downturn continue to thrive as a popular and valued savings device for Canadian investors.

The mutual fund advantage

Mutual funds offer Canadians a superior means of accumulating wealth through access to a broad range of personalized investment solutions based on sound investing principles.

Mutual funds include:

• Professional portfolio management
• Streamlined and convenient administration
• Risk management through diversification
• Innovative solutions that meet a range of investment objectives and evolving investor needs
• Opportunities for foreign and domestic investment that may not otherwise be directly accessible to investors
• Liquidity, enabling investors to respond to changes in their personal circumstances
• Access to investing for all types of people, including those who prefer to invest small amounts at regular intervals
• Choice of purchase methods and fee structures, including full service, fee-for-service and do-it-yourself
• Accountability and fairness to investors through industry regulation and transparency

The growth of the industry & IFIC

To meet the growing regulatory and trade needs of the mutual fund industry, the Canadian Mutual Funds Association (CMFA) was established in 1962. Original members of the CMFA were individual mutual funds themselves, not fund management companies as is the case today.

In April 1963, the CMFA published a Code of Ethics and Regulation for its members. Ten years later, it formally incorporated with a mandate to engage in and support activities conducive to high ethical standards and efficiency of administration and operations within the Canadian mutual funds industry. In 1976, the CMFA changed its name to The Investment Funds Institute of Canada (IFIC).

Since then, IFIC has played an integral role in the regulatory development of the mutual funds industry in Canada, proactively influencing and advancing industry issues within the regulatory framework, while increasing members’ efficiencies, knowledge and proficiency. IFIC provides a consistently high level of service to enable dealer and manager members to work together in a co-operative forum to enhance the integrity and growth of the industry and strengthen investor confidence.