Modern Portfolio Theory and Investment Analysis, 9th Edition

25

Mutual Funds

Mutual funds have existed for over 200 years. The first mutual fund was started in Holland in 1774, but the first mutual fund did not appear in the United States for 50 years, until 1824. Since then the industry has grown in size to $24 trillion worldwide and over $11.6 trillion in the United States. The importance of mutual funds to the U.S. economy can be seen by several simple metrics:¹

1. Mutual funds in terms of assets under management are one of the two largest financial intermediaries in the United States.
2. Almost 50% of American families own mutual funds.
3. Over 50% of the assets of defined contribution pension plans and individual retirement plans are invested in mutual funds.

In the United States, mutual funds are governed by the Investment Company Act of 1940. Under law, mutual funds are legal entities that have no employees and are governed by a board of directors (or trustees) who are elected by the fund investors. Directors outsource all activities of the fund and are charged with acting in the best interests of the fund investors.

Mutual funds tend to exist as members of fund complexes or fund families. There are 16,506 funds in the United States. Of these, 8,684 are open-end funds, which are distributed by 713 fund families.² Funds differ from each other by the type of securities they hold, the services they provide, and the fees they charge. The sheer number of funds makes evaluation of performance important. Data, transparency, and analysis become ...