Posted on January 7th, 2008 in money, Investments, MF, Mutual Funds.
Contrary to popular thinking, Mutual Funds as a business model did not originate in the USA. But like most ideas, it got refined and became pre-eminent in the US by a series of very powerful marketing initiatives as well.
In July of 1774, an Amsterdam broker by the name of Abraham van Ketwich invited subscriptions to a negotiatie named Eendracht Maakt Magt. The negotiatie would invest in bonds issued by foreign governments and banks, and plantation loans in the West Indies. Investors were promised a dividend of four percent with adjustments depending on the annual investment income of the portfolio. The initial plan was for the negotiatie to be dissolved after a 25-year period (closed end for 25 years!!!), when the liquidation proceeds from the portfolio would be distributed among the then remaining investors. Subscription was open to the public until all 2000 shares were placed, when participation in the fund would only be possible through purchasing shares from existing shareholders in the open market.
According to Berghuis (1967), it is considered the first “mutual fund”.
It is interesting to read the prospectus of Voordeelig en Voorsigtig
…. to spread as much as possible monies over good and solid securities. Because nothing is completely certain but subject to fluctuations, it is dangerous for people to allocate their capital to a single or a small number of securities. Not everyone has the opportunity to invest his money in a variety of securities (…).
For the sum of 525 Guilders one can participate in this negotiatie (…), which will be profitable with sufficient certainty. No one has reason to expect that all securities in this negotia tie will cease to pay off at the same time, and the entire capital be lost. If one had reason to fear such general bankruptcy, one never ought to invest any money.”
The embedded lottery should not detract from the major innovation of Eendracht Maakt Magt: it offered investors an opportunity to participate in and trade a diversified portfolio of securities. Because the prospectus allowed little flexibility with respect to the fund’s investment policies, it is unlikely that Van Ketwich aimed to attract investors by offering superior returns through professional portfolio management.
Eendracht Maakt Magt simply repackaged existing securities, which were already traded in the Amsterdam market. The negotiatie was likely aimed at smaller investors, who would be unable to achieve this level of diversification on their own account. The bonds in its portfolio had a face value of 1000 guilders, and replication of the portfolio by purchasing these securities in the open market was only feasible for investors of considerable wealth. Eendracht Maakt Magt created an opportunity to obtain portfolio diversification in portions of 500 guilders.
