Mutual Funds Capitalize on Opportunities Created by Tax and Banking Laws
Collection of the Museum of American Finance
100 Years of Mutual Funds
Mutual Funds Capitalize on Opportunities Created by Tax and Banking Laws
By Matthew P . Fink
This year marks the centennial anniversary of the first mutual fund , Massachusetts Investors Trust . With mutual fund assets now totaling over $ 27 trillion and more than 116 million Americans owning mutual fund shares , it is currently the nation ’ s largest financial industry . As Senator Ed Markey noted , mutual funds are “ a genuine American success story .”
Frequently cited factors for the success of these funds include public confidence engendered by investor protections in the Investment Company Act , as well
Massachusetts Investors Trust certificate of interest , issued to trustee L . Sherman Adams , July 1924 . as the development of new mutual fund products and services to meet changing investor needs . But there is also a less-recognized factor — funds taking advantage of opportunities created by tax and banking laws , including the Revenue Act of 1936 , Section 11 of the Glass-Steagall Act of 1933 and the Revenue Act of 1978 .
Creating the Mutual Fund “ Brand ”: The Revenue Act of 1936
Companies that issue their shares to the public and use the proceeds to acquire portfolios of securities became popular in the United States in the early 1920s .
All of these companies were “ closedend funds ,” funds that issue shares on a one-time basis , with the shares then trading at premiums or discounts from the value of their portfolios . At the height of the 1929 bull market the average closedend fund was trading at a premium of 47 %. Many closed-end funds employed leverage by issuing bonds and preferred stock . In a rising stock market leverage increases fund performance , and in a falling market leverage hurts performance . Many closed-end firms were managed by securities firms ; observers warned that these firms could dump questionable securities into their funds .
In the mid-1920s a new type of investment company , known as an “ open-end fund ” or mutual fund , was introduced in Boston . The first three mutual funds
28 FINANCIAL HISTORY | Fall 2024 | www . MoAF . org