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Originally published Sunday, March 15, 2009 at 12:00 AM

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Your Funds

First fund's 85th birthday shows why mutual funds will survive

Syndicated columnist Chuck Jaffe writes that most of the oldest funds have somehow died off long ago, but the first mutual fund, Massachusetts Investors Trust, is still adding to its 85-year-old legend.

Syndicated columnist

As the first mutual fund nears its 85th birthday, plenty of critics and observers wonder if the traditional fund is worthy of the milestone or if it's being fitted for a tombstone.

For clues, they might want to look at the birthday child.

On March 21, 1924, the paperwork to create the first open-end mutual fund — the Massachusetts Investors Trust — was filed; the fund began taking money in July of that year, but it was more than a twinkle in the eye of its managers when they floated the concept.

Their idea was simple: professional management and diversification at a reasonable price.

Most of the oldest funds have somehow died off long ago, but the Massachusetts Investors Trust, run now by MFS Investment Management, is still adding to its legend.

The fund (MITTX) has survived everything from the Great Depression to the creation of the Securities and Exchange Commission to the start of fund rankings and ratings through the evolution of exchange-traded funds, the Internet bubble, the bear market of 2000 and now to a downturn bordering on being Great Depression II.

Mostly, what the fund has done well, is be "average."

A $1,000 investment in 1924 into the Massachusetts Investors Trust would be worth roughly $1.2 million today; a $10,000 investment would be about $11.5 million.

That's an annualized average return in the high 8 percent range, less than the 10 percent most people think they should get from holding stocks, but enough to turn a little bit of money into a lot.

Living proof

For all of the turmoil and record-tarnishing of the last decade, the fund is living proof that small amounts of money, invested conservatively with a focus on brand-name and blue-chip, dividend-paying stocks — without leverage or tricks — can provide a solid basis for an investment portfolio.

"For us, it's a matter of getting rich slowly and preserving capital," says Kevin Beatty, current co-manager on the Massachusetts Investors Trust.

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"What we are in the business of doing is taking shareholder money and investing it so we can beat the S&P 500.

The typical fund investor would be happy with that.

"The average investor needs to have a place where they can be invested and live with it over time," says Leonard Goodall, who has run the No-Load Portfolios newsletter for nearly 25 years.

"They're not going to be traders and they're not going to be timers. They may not be fully invested in stock funds the way they were a decade ago, and they might be more interested in target-date funds that do it all for them, but they will be invested in traditional mutual funds."

Beatty notes that the investment hurt most by the current downturn is the hedge fund, which has failed miserably to live up to its big-money-in-any-conditions reputation.

Trading vehicles

And while exchange-traded funds have some cost and liquidity advantages, they're trading vehicles bought and sold on commission, which makes them an expensive choice for the small guy trying to set aside little bits of money on a regular basis.

Moreover, according to Morningstar, since the first ETF was launched in 1989, the ETF industry collectively has produced a net loss for investors, meaning that all the trading has generated profits only for the management firms.

Where the mutual fund is likely to change going forward is with more focus on what the manager can and should do.

The Massachusetts Investors Trust, for example, remains fully invested in all conditions; the decision of how much to have in blue-chip stocks, therefore, rests with the shareholder or financial planner determining the overall portfolio asset allocation, rather than with the fund manager.

During the market downturn, some fund investors have said they wish managers would do more to sidestep trouble.

In the end, it's a decision about what kind of "professional management" an investor wants for their "reasonable price."

"More than most other types of investments that might replace it, the mutual fund has delivered long-term on the contract between managers and shareholders and, while the current period is a bad one, I believe we'll look back over time and say that good funds really did deliver on their promises over time," says Russel Kinnel, director of fund research at Morningstar.

"We'll see changes to funds and types of funds — there's always something new, and some of the old ideas will go away — and investors will have to understand which funds really are best for them, but the mutual fund isn't going anywhere."

Copyright 2009, MarketWatch

Chuck Jaffe is a senior columnist at MarketWatch. He can be reached at cjaffe@marketwatch.com or Box 70, Cohasset, MA 02025-0070.

Copyright © 2009 The Seattle Times Company

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