Seeking Alpha
Long-term horizon
Profile| Send Message|
( followers)  

Mutual funds were first introduced in the U.S. by MFS Investment Management in 1924. Although not public until 1928, the MFS Massachusetts Investors Fund provided a way for select investors to pool their money together. The idea behind creating it was to allow a group of small investors access to a range of stocks and fund managers that would otherwise have been out of their price range. Over the past 88 years, tens of thousands of mutual funds have come into and gone out of existence

Below is a chart of the oldest active mutual funds by date of inception.

Fund NameYear of InceptionGrowth of $10,000Current AUM
MFS Massachusetts Investors Fund (MITTX)1924$ 18,440,921.42$ 3.6B
Putnam Investors Fund (PINVX)1925$ 17,874,046.38$ 1.4B
Pioneer Fund (PIODX)1928$ 107,905,422.96$ 6.5B
Century Shares Fund (CENSX)1928$ 8,914,548.48$ 189.9M
Vanguard Wellington Fund (VWELX)1929$ 6,680,492.35$ 61.4B
CGM Mutual Fund (LOMMX)1929$ 9,163,847.31$ 468.9M
Fidelity Fund (FFIDX)1930$ 23,018,909.95$ 5.4B
Dodge & Cox Balance Fund (DODBX)1931$ N/A$ 12.6B

The Great Depression

The impact of the Great Depression on long-term fund results is immense. The two funds started in the roaring part of the roaring twenties (MITTX and PINVX) have basically doubled the total returns of the two funds created during the bubble years (CENSX and LOMMX). The impact of the crash of 1929 is reinforced by the inspiring returns of the Fidelity Fund, which got started just after the crash. What a difference a year makes.

This brings up an incredibly important topic of debate.

Time In the Market Vs. Timing the Market

When it comes to market timing there are many people for it and many people against it, and both camps tend to have strong feelings about their views. Forecasting the ebbs and flows of the market can result in higher returns, but few are successful. Historically, a few good days account for a large part of total returns, and this is typically viewed as the main reason to invest passively.

If volatility and investors' emotions were removed completely from the process, it is clear that passive, long-term investing without any attempts to time the market would be the superior choice. In reality, however, just like with a garden, a portfolio can be cultivated without compromising its passive nature. Historically, there have been some obvious dramatic turns in the market that have provided opportunities for investors to cash out or buy in, and for some the rewards are worth the added risks.

The Value of Active Management

Unfortunately, there is no way to compare the long-term performance of these funds against the old S&P 90. However, a quick visual comparison of the above funds against the S&P 500 since its inception in 1957 suggests that basically all of thes funds have tracked the broad market index over the long haul, with varying degrees of success.

The one really obvious exception to this is the Pioneer Fund, which has just destroyed the competition since inception. Closer study reveals that almost all of this outperformance was created during WWII, making PIODX the "Daddy Warbucks" of the mutual fund world. Results both before and after the war were closer to industry standards.

This is a really important point for consideration. The above funds have had more than 80 years to realize the value of active management, and that should have compounded into measurable results over time. When you take into consideration the thousands of funds that closed their doors in the interim, the fact that only one of these funds trounced the index bodes very poorly for the value added of active management over really long periods of time.

Asset Allocation

The legendary Vanguard Wellington and the Dodge and Cox Balanced funds are two of the most successful balanced funds in history. Both funds typically have 60% invested in stocks and the other 40% invested in bonds or cash. The Vanguard fund has effectively kept pace with the all-equity S&P 500 index since the 1970s. However, the fund's absolute returns compared to its all-equity historical counterparts of the late 1920s are far behind.

I think its important to focus on the relative importance of asset allocation over active or passive management. If you only remember one thing from this article, it's that, statistically speaking, asset allocation will account for a far greater amount of your long-term results than active management decisions. Over effectively long periods of time it pays to assume the market risk of stocks over bonds.

Summary

It's been 88 years since the invention of the mutual fund investment vehicle. Since then, the mutual fund industry has revolutionized the financial industry, giving access to small investors who otherwise would have never had the opportunity to partake in the market's economic expansion. The eight funds in the table above are the longest-lived and feature some of the most successful funds of all time. These trailblazers run the gamut from very small boutique funds to a $60 billion giant. They highlight the importance of the Great Depression and the WWII in shaping our nation, as well as basic investment principles like active vs. passive investment and asset allocation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: What Are The Oldest Mutual Funds? Lessons In Active Management And Asset Allocation