This 100th Anniversary is Truly Worth Celebrating

Edward Leffler's invention led to a $56 trillion industry

Ric Edelman: It's Thursday, March 21st. On today's show, it's the 100th anniversary of the most profound invention in the history of investing. It's the 100th anniversary of the mutual fund. The very first mutual fund in the US was born in 1924, the Massachusetts Investors Trust, and that fund still exists today offered by MFS. 

Until this fund was launched, there were only two ways that ordinary individuals could invest in the stock market. You could buy individual stocks, but you had to buy round lots of 100. If the stock was $5, you needed 500 bucks. That was a lot of money in 1924. You also paid big commissions to the brokers, and all you got was one stock. 

If you wanted to diversify, to lower your risks, say, by buying 10 stocks, you needed $5,000, and that was a whole lot of money in 1924. The only other way to invest with smaller amounts was to invest in a pooled investment, an unregulated fund where promoters charged exorbitant fees and bought highly speculative investments, often filled with self-dealing and conflicts of interest with no disclosures, little liquidity, no reporting. 

You never really even knew what it was you were investing in. And there were no regulations to protect you. This was a big problem, and somebody realized of that fact itself. He on came Edward Leffler. He was a trustee at MFS and he conceived of the idea of a fund that was transparent and ethical. Among other innovations, it would guarantee investors the right to sell their shares back to the fund at any time based on the value of the fund's holdings.  

It took Edward Leffler three years to get his idea to the marketplace. Every firm he asked rejected the idea. Finally, a small brokerage firm in Boston said yes. So Charles Leroy and Heather Lee Foster Jr., of the firm Leroy Foster and Company, joined with Edward Leffler, and the three of them established the Massachusetts Investors Trust 100 years ago today on March 21st, 1924. The fund was a sensation for the first time you could invest a small amount of money you could add to your account at any time. 

You always knew what companies the fund was investing in, and you could sell any or all of your shares at any time based on current market prices. Lots of copycats quickly came to the market, and these were all proving so popular and so successful that Congress finally realized that it needed to codify the conduct, so it passed into law the Investment Company Act of 1940, 16 years after the Massachusetts Investors Trust was invented. The Investment Company Act of 1940 is still the governing legislation for the entire mutual fund industry today. And the Massachusetts Investors Trust was the first one. And made it all possible. The fund initially invested in 45 companies and 36 of them are still in business today. 

Today, the Massachusetts Investors Trust invests in 69 companies and it's managing more than $6 billion for investors all across the country. MFS has also grown nicely as well. Overall, that mutual fund firm is managing $600 billion in assets, but that's nothing. Today, a full century after the founding of the first mutual fund, the fund industry is managing a total of $56 trillion. That includes $11 trillion in 401k plans and IRAs. Half, we're talking about all the money that's being invested for retirement in the US. All told, there are now 15,000 mutual funds trading in the US, another 15,000 trading in the rest of the world. 

The United States has mutual funds holding $40 trillion in assets for 120 million Americans. More than half of all US households. And we've seen a lot of big improvements, most notably the invention of the ETF, the Exchange Traded Fund, a technological improvement over the mutual fund. I mean, after all, for as good a job as Edward Leffler did, he created that fund when wall street did business with pen and paper. Today, we have computer technology and that's what the ETF world takes advantage of. So, whereas mutual funds offer a price only once a day at the end of the trading day, when they can add up the value of the prices of all the stocks in the fund and come up with a net asset value, ETFs can calculate this on the fly throughout the trading day. 

So instead of you only getting one price per day of your mutual fund, with ETFs, you get the price all day long throughout the trading day. And because we're using computer technology, ETFs are cheaper to operate than mutual funds as well. And because they operate under a little bit different set of tax rules and investment rules, ETFs are far more tax efficient than mutual funds as well. 

It's not that mutual funds are bad or that Edward Leffler's invention was no good, it's that the ETFs have simply made big improvements on what was originally, all by itself, a great idea. So as you save for your future, tip your hat, raise a glass, and give a moment of thanks to Edward Leffler. Without him, your financial future would not be as secure as it will be. Ed Leffler, thank you.  

On tomorrow's show, ultra bright light, plus the astonishing digital asset that's bigger than the New York Stock Exchange – and you've never heard of it. 

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