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How the Mutual Fund Industry Got its Wings

The mutual fund industry was far from an instant success.

Massachusetts Investors Trust, the first open-end mutual fund, took four months after it opened for business in March 1924 to make its first sale - six shares to a suburban Boston banker, according to a history of the fund which MFS Investment Management of Boston published in 1974. One year later, Massachusetts Investors Trust had a mere 200 shareholders.

Indeed, mutual funds as a whole were slow to catch on. With the exception of a boom in the 1960s, those outside the industry for a long time viewed the mutual fund industry as a small, sleepy place.

John A. Carey, portfolio manager of the 71-year-old Pioneer Fund of Boston, recalls how a lawyer friend in 1979 scoffed when Carey told the lawyer he had taken a job in the mutual fund industry.

"This was regarded as a real backwater," said Carey.

Not any more.

After a slow, uneven start, mutual funds have become ubiquitous in the U.S. More than 77 million investors now own a stake in the securities markets through mutual funds, according to the Investment Company Institute. The mutual fund industry has grown from the sale of Massachusetts Investors Trust's modest six shares 75 years ago to more than $5.5 trillion in assets.

Success was not inevitable. Luck and hard work account for the mutual fund industry's achievements.

"The growth of the business is much more due to favorable external factors than the internal brilliance of management," said A. Michael Lipper, chairman of Lipper, Inc. of New York. "The things that have worked in its favor are remarkable."

The theme of the ICI's general membership meeting this week - Continuing a Tradition of Integrity: Preparing for the New Millennium - will be forward looking. More than 1,000 industry executives will gather in Washington to hear prognostications about the future of mutual funds.

The industry's past, however, demonstrates its strengths, exposes its weaknesses and gives clues to its future. Mutual Fund Market News examined the history of mutual funds on the occasion of the ICI's meeting in an effort to identify key factors which have accounted for the mutual fund industry's success and which are likely to have an effect on its future.

The Bull Market

On Aug. 12, 1982, the Down Jones Industrial Average closed at 776.92. Despite a memorable but short-lived crash in October 1987, the market has gone up more or less steadily ever since. The Bull Market has created wealth both for individuals who invested in mutual funds and for mutual fund companies themselves.

"Prosperity has been good for everybody," said Elizabeth Bramwell, a portfolio manager who has been able to build an $800 million money management firm, Bramwell Capital Management of New York, in the past five years. "It has been good for artists. It has been good for musicians... It has been good for mutual fund companies."

Assets in the mutual fund industry generally have risen as the market has gone up. Mutual funds held approximately $297 billion in assets as of Dec. 31, 1982, according to the ICI. The total dipped slightly, to $293 billion in 1983, but assets have risen each year since.

Increasing assets under management in a business paid based on a percentage of assets under management, has made for a profitable industry. The average mean of pre-tax income margin for publicly-traded money management firms was nearly 32 percent from 1993 through 1998, according to a report last month by Putnam, Lovell, de Guardiola & Thornton, an investment banking firm of San Francisco. For privately-held firms, profit margins have in some instances exceeded 70 percent, the Goldman Sachs Group said in a report last year.

Today's prosperity is in stark contrast with the 1970s," a period which Barry Barbash, in a 1997 speech he made while serving as director of the SEC's Division of Investment Management, called, "The Woeful Years." The Dow Jones Industrial Average stood at 800.36 when the markets opened on Jan. 2, 1970. When the bell rang to close the New York Stock Exchange on Dec. 31, 1979, the DJIA stood at 838.74, an increase of about five percent in 10 years.

Mutual funds made even less progress than the DJIA. Excluding money market funds, mutual funds had net redemptions in seven of the 10 years from 1970 through 1979, according to the ICI. Stock and bond fund assets under management essentially stood still during that same period, inching up $48.3 billion on Dec. 31, 1969 to $49 billion ten years later. Low-margin money market funds, which did not exist in 1969, had $45.5 billion in assets as of Dec. 31, 1979.

"In sick markets, mutual funds will be sick," said John Bogle, founder and senior chairman of the Vanguard Group of Valley Forge, Pa. "The industry looks bulletproof but believe me, no industry is bulletproof."