1

History of Mutual Funds Origin can be traced to Boston at the beginning

of the 20th century– Boston law firm formed the trust divisions to

manage the assets of wealthy Boston families.– The first US ‘open-end’ fund was offered to

public in Boston in 1924.

Fund growth stymied during 1929-30.

Securities Act of 1933 - full disclosure in all public securities offerings.

2

History of Mutual Funds (Cont’d) 1940: Investment Company Act

– established standards for fund promotion, reporting, product pricing, and portfolio investing.

1950-60s: Industry experience growth.

1970s: Stock market declined. Difficult to sell stock fund. Investors interested in short-term or income-oriented investments

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History of Mutual Funds (Cont’d)

1970s: Money market funds were created and became the savior of the industry.

1980s: High interest rate atmosphere. Banks were legally prevented from paying more than 4% - 5% interest. MM assets exceeded either stock or bond fund assets.

1990s: Spectacular growth in mutual fund industry. $800b in 1987 to $5t in 1999.

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History of Mutual Funds (Cont’d)

Factors behind the rapid growth:– Bull market in U.S. stock.– Tax-advantaged retirement vehicles– attractive mutual fund products– enhanced services to fund shareholders.

Distribution channels & pricing structures:– Broker - Dealers are the traditional

distribution channel

5

History of Mutual Funds (Cont’d)– Front-end load declined from 81/2% in

1960 to ~4% now.

– Currently broker-dealer may charge ‘back-end’ load. The load declines based on the length of investment.

– Annual distribution fee 12b-1paid by the fund to the distributor. Range is from 25 bp to 75bp.

6

History of Mutual Funds (Cont’d) Direct marketing of funds:

– MMF spurred direct marketing– ‘no-load’ funds. Charges are low- around

2%-3% and 12b-1 around 25bp.

Retirement Plan:– Attractive service providers to plan

sponsors of 401(k) and other defined contribution plans.

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History of Mutual Funds (Cont’d)– Employees can choose to contribute in specific

funds. Fund Co provides disclosure documents and educational materials to each employee.

– In most cases sales loads may be waved and service fees may be negotiated .

Banks and Insurance Cos :– Glass-Steagall prohibition? Banks found ways

to offer their own or other’s funds to their customers.

– Insurance Co- joint venture with funds to offer variable annuities