History of Mutual Fund Returns

The Growth of the Mutual Fund Industry

The modern mutual fund industry was born in Boston. There were just ten mutual funds by the end of the 1920's. The industry did not experience much growth during the Great Depression and World War II, but rapidly expanded during the post-war years. Risky, high-growth funds investing in technology were popular during the 1960s, hauling in billions of dollars. There were over 200 mutual funds by 1969. A bear market beginning that year temporarily stalled industry growth. The 1970's ushered in another era of growth, eventually resulting in the more than 10,000 mutual funds available today.

Global mutual funds seek growth opportunities with companies located around the world.world map image by Attila Toro from Fotolia.com

The Massachusetts Investors Trust is considered the first modern mutual fund. The fund has been an actively managed mutual fund since its inception in 1924. The fund's average annual total return, with sales charges, is 8.87 percent. Total return includes the reinvestment of dividends, interest, and capital appreciation. The fund survived the Depression years, World War II, the growth years of the 1950s and 1960s, bear markets, market crashes, and recessions. The best performing year in the fund's history was a 52.88 percent return in 1954 (reference 2). The worst performance was a 32.81 percent loss in 2008. The average annual return over the fund's life is 10.10 percent. The average annual return for the decade ending Dec. 31, 2010 was just 0.75 percent (reference 3). The fund lost money in only one decade, the Depression years of the 1930's. The conservative fund of large blue chip companies reflects the returns of domestic stock mutual funds during the 20th century and the first decade of the 2000's.

The Templeton Growth Fund was established in 1954 with the goal of investing in companies wherever fund managers saw growth opportunities throughout the world. The average annual total return since inception is 12.46 percent. Average returns do not illustrate the volatility investors experience over the years. The worst performing year was 2008, with a 43.47 percent drop. The best performing year over the past two decades was a 32.85 percent return in 2003. The average annual return for the decade ending Dec. 31, 2010 was 3.62 percent (reference 4). Individual investors' total return varies greatly depending upon initial investment date and market conditions from purchase date forward.

Index mutual funds were introduced by John Bogle, the mastermind behind the Vanguard Funds. His rationale was that it was difficult, if not impossible, for investors to make money long-term with actively managed funds. Actively managed funds have one or more managers researching, buying, selling and supervising fund holdings. The cost of managers, fees, trading costs and other expenses sap 1 to 2 percent or more from yearly returns. Bogle believed keeping costs to a minimum allowed the best chance for investors to make money in the market. The Vanguard 500 Index Investor, using the Standard & Poor's 500 Index as its benchmark, was the first of many index funds. The fund's best year saw a 33.19 percent return in 1997; the worst year was a 37.02 percent loss in 2008. The fund's average annual return since inception in 1975, as of Dec. 31, 2010, is 10.62 percent. Its annual return for the decade ending Dec. 31, 2010 was 1.31 percent (reference 5).

Index fund returns should closely mirror the performance of their benchmark index. The performance of actively managed funds varies widely and depends on a host of variables. Manager expertise in choosing securities is important. A fund that trades a lot will have higher expenses than a fund with low turnover. History indicates that during any 20-year period since 1929 stock market returns were positive. A mutual fund should reflect market returns for its benchmark index, or the fund will disappear. Poorly performing funds are terminated by the investment company. Research reveals actively managed stock fund average returns are about 2 percent less than broad stock market performance.