Chapter 10 - Investment Companies

There are basically two different ways in which to invest. You can personally select and purchase individual securities bonds, preferred stocks, common stocks, or warrants from the thousands of issues of marketable securities available. Or you can delegate the entire business of security selection, supervision, and trading by buying shares in an investment trust. These trusts or investment companies make a profession of investment management. Their supervisory staffs work full time in an endeavor to find diversified and attractively priced securities, to purchase them on the best terms, to review constantly tile list of security holdings, and to sell when either the condition of the market or deteriorating trends in individual issues may dictate. These trusts collect all dividends and interest on the securities held and distribute this income to trust shareholders quarterly. They also distribute, each year, any capital gains that may have been realized. These investing companies operate under the supervision of the Securities and Exchange Commission by virtue of the Investment Company Act of 1940.

Closed-end Funds

There are two types of investment trusts closed-end and open-end (better known as a mutual fund). The essential difference between the two is that the closed-end company has a fixed capitalization. Capital is raised by selling a specified number of shares of common stock (in some cases bonds and preferred stock as well). The proceeds create one big investment fund. The fund so created is then invested in a (presumably) well-selected and diversified list of marketable securities. The income these securities produce, and any capital gains realized, will be distributed to trust shareholders in ratio to their holdings after deduction of costs for accounting, custody of securities, investment supervision, and research, etc. There are a number of well-known closed-end investment companies whose shares are actively traded on major exchanges. These include Adams Express Company, Alleghany Corporation, Atlas Corporation, Equity Corporation, General American Investors, Lehman Corporation, and Tri-Continental Corporation. Some of these have broadly diversified market holdings. Adams Express, Lehman Corporation, and Tri-Continental are examples of such. Others diversify less and have heavy or even controlling investments in particular companies. Alleghany Corporation is an example of this with very large share holdings in New York Central, Missouri Pacific, and Investors Diversified Services.

Closed-end shares enjoy active trading markets. Their investment results in a given year and the security portfolio at the year end are customarily given in the annual report distributed to all stockholders. Very often closed-end investment company shares will sell in the market at a discount from actual asset value per share of securities owned.

Open-End Trusts Called Mutual Funds

While the closed-end funds we've just described are well known to investors and have done a highly creditable job of portfolio management, they are overshadowed by their more numerous brethren the mutual funds. A mutual fund starts out in the same way as a closed-end one with capital shares, sold on subscription, to create a fund or reservoir of capital. But after the original money is raised, the mutual fund lives up to its billing as "open-end" by constantly selling more shares. It also offers to redeem its shares if holders wish to sell. Each business day some additional shares may be sold, and some outstanding shares may be redeemed (customarily at a net price equal to the market value of all securities owned by the trust, divided by the number of trust shares outstanding, on a particular day or time of day). On balance, the sales of mutual funds have far outpaced redemptions so that in April, I960, there were about 170 mutual funds in business with total assets of over $15 billion.

Rapid Rise of Mutual Funds

Mutual funds have grown rapidly for three main reasons: (1) they fill the need for a professionally managed investment program; (2) commissions paid have provided incentive for aggressive selling on a nationwide basis; and (3) in general, they have done a good job in sound management of security portfolios, in the provision of satisfactory dividend income and, frequently, attractive capital gains. Part of all this growth and popular success must be attributed to the fact that the decade 1949 to 1959, in which greatest progress was recorded, happened to correspond with the longest and lushest bull market in history.

Marketing and Marketability of Mutual Funds

How do you go about buying mutual fund shares, and where can you buy them? Most brokers and investment dealers sell mutual funds. These dealers include firms that are members of major stock exchanges, as well as smaller regional dealers and over-the-counter houses. If you will look on the financial page of any big city newspaper, you will usually find among over-the-counter securities a tabulation of mutual funds. This tabulation will list two figures for each fund. The first figure given (usually at the left) is the "asset value" of the fund or the price you would receive if you turned in a share for "redemption." The second figure is the offering or sales price. This is the price you would actually pay a broker or dealer for shares on a given day. This offering price may include a sales charge varying in amount from 3% to 8½% of the "asset value" of the share. (A few funds make no charge at all and sell their shares at net prices.)

Commissions on Mutual Funds

This charge, or commission, is designed to cover the costs of advertising, promotion, and selling of the fund and includes a specific commission allowance to the broker or salesman from whom you buy your shares. Many large funds do not rely on brokers or dealers for sales distribution but have their own staffs of salesmen who sell shares for one trust organization exclusively. United Funds and Investors Diversified Services operate in this way.

Further, it is important to note that the commission, if any, charged in connection with the purchase of a mutual fund is a "round-trip" one. There is customarily no further or additional charge made when or if you redeem your shares later on. Mutual funds are of course marketable securities, but their market is unique in that the selling does not represent transfer of shares from one holder to another but redemption of the shares by the trust itself. If you want to buy shares in a closed-end trust, you have to make your purchase in the open market from another holder; but if you want to buy shares in an open-end trust, your purchase is in effect made from the trust itself.

Kinds of Mutual Fund*

Mutual funds themselves differ widely according to the purposes they aim to serve and the investment policies which guide them. There are roughly six main varieties: (1) balanced funds providing broad, general diversification among all classes of securities, (2) bond funds, (3) common stock funds, (4) growth funds, (5) income funds, and (6) funds which specialize in investment in particular industries.

Obviously, in considering the mutual funds most suitable for your own purchase, you must keep in mind your own personal needs. If you are along in years and want a maximum income for retirement, then "income" funds are indicated. The general funds do a fine job of diversified investment for safety and income; growth funds may place you in a position to increase your capital in dynamic industries, although they will usually produce a lower current income. Specialized funds have become quite popular, and some have performed excellently. Chemical Fund, Television and Electronics Fund, and Atomic Development Mutual Fund are interesting examples of the specialized variety. In any event, you will want to get the prospectus descriptive of a fund before deciding. Read it over. See what securities have been purchased, dividends paid, and sales and commissions charged. There are also available for your examination certain charts and reports on the actual performance of many funds. These reports are usually available at brokers' offices. They tabulate past results, but merely because a trust had done well in the past is no assurance that it will continue to do so.

Advantages of Mutual Funds

Mutual funds are attractive because they can be tailored to your own needs. Here in a single package, even in a single stock certificate, is presented to you a complete investment program. Diversification to the extent desired is available, with some funds spreading their resources over several hundred different issues. Constant supervision by trained professionals tends to assure superior performance in selection of securities and, when necessary, the weeding out of issues no longer serving their original purpose. Income is conveniently paid quarterly by check. All the buying and selling is done in one place, and you have no details or bother in connection with it. Moreover, the simplification of investment records appeals to many. If, for instance, you own shares in 25 different companies, there are 100 dividend checks a year to deposit and record; 25 annual reports and dozens of interim ones mailed you each year; plus proxies, prospectuses and, on occasion, subscription rights and share reclassifica-tions. A single investment in a good mutual fund can thus reduce the "paper work" in your investments.

Mutual funds are not attractive to market traders. They primarily attract long-term investors. Perhaps one of the main and less heralded virtues of the mutual fund is that it discourages trading in and out of the market. In this way, it may serve to insulate you from costly errors and the ownership of inferior securities. Mutual fund shares may not soar like some gaudy speculative favorites in the market; but neither are they likely to leave you holding a hopeless security whose market price has tragically faded.

Mutual funds appeal to thrifty, serious-minded investors who prefer to leave investment decisions to the experts. Through outright purchase, or by steady investment out of income on a monthly payment plan, fund investors aim to build a second income, increase their capital, defend against inflation and insulate themselves against the possible perils and pitfalls of market trading.

Mutual Fund Management Companies

Before leaving the subject of mutual funds, we should say something about the companies that manage them. A mutual fund management company usually performs two functions from which it derives income. Such a company is a sales agency for a given fund (or funds) distributing the shares either through its own selling organization or through brokerage, investment houses and security dealers. For this sales distribution the management company will retain a certain percentage of total sales commissions. The management company also acts as investment advisor to the fund on a fee basis. Customarily this fee (paid quarterly) amounts to ½% a year of the total asset value of the fund.

Because sales of funds have burgeoned and total assets rocketed in recent years, some of these management companies have done exceedingly well; and indications are that income of these companies, particularly from investment advisory fees, will continue to increase. Further, many mutual funds today are not sold just as a security but often under contractual plans involving continuous payments over many years (sometimes coupled with life insurance protection). These contractual plan sales tend to increase the stability of income from sales commissions flowing to management companies.

Public Offerings

For many years these investment management companies were privately held and most of them still are. During the 1950's, however, public offering was made of the shares of a number of management companies. The market gains in some issues were spectacular. For example, Investors Diversified Services shares rose from $1 in 1948 to over $1,000 in 1960. Investors have been attracted to these management issues primarily because of their past, and indicated future, growth. Cash dividend payouts have not been particularly generous, but many of these management companies have displayed a growth rate of 15% or more annually, compounded.

The Principal Mutual Funds As of November 1, 1960

Aberdeen Fund
Advisers Fund  Fund
Affiliated Fund
American Business Shares
American Investors Fund
American Mutual Fund
American Research & Development
Associated Fund Trust
Atomic Development
Axe-Houghton A
Axe-Houghton B
Axe-Houghton Stock
Axe Science & Electronic
Axe Templeton Canadian
Blue Ridge
Boston Fund
Broad Street Investment
Bullock
California Fund
Canadian General Fund (1954)
Canadian Fund
Canadian Investment
Capital Life Insurance
Century Shares
Chase Fund, Boston
Chemical Fund
Colonial Energy Shares
Colonial Fund
Commonwealth Income
Commonwealth Investment
Commonwealth Stock
Composite Bond & Stock
Composite Fund
Concord Fund
Consolidated Investment Trust
Corporate Leaders Trust Fund
Crown Western Dividend
Delaware Fund
Delaware Income
De Vegh Mutual
De Vegh Investment
Diversified Growth Stock
Diversified Investment
Diversified Trust Shares
Dividend Shares
Dow Theory
Dreyfus Fund
Eaton & Howard Balanced
Eaton & Howard Stock
Electronic Investment
Energy Fund
Equity Fund
Eurofund
Fidelity Capital Fund
Fidelity Fund
Fiduciary Mutual Investment
First Investors Fund
Florida Growth Florida Mutual Fund
Founders Mutual Franklin Custodian (com.)
Franklin Custodian (pf) Fundamental
Futures Investment General Capital
General Investment Trust
General Securities
Group Securities
Growth Industry Guardian
Hamilton, H-C7
Haydock
Imperial Capital
Imperial Growth
Income Foundation
Income Fund, Boston
Incorporated Income
Incorporated Investment
Institutional Shares
International Resources
Investment of America
Investors Group
Investors Research
Investors Trust of Boston
Istel Fund
Johnston Mutual Keystone (Canadian)
Keystone Custodian
Knickerbocker
Lazard Fund
Lexington Income Trust
Lexington Ventures
Life Insurance Investment
Life Insurance Stock
Loomis-Sayles Canadian
Loomis-Sayles Mutual
Managed Funds
Massachusetts Investment Growth
Massachusetts Investment Trust
Massachusetts Life Fund
Missiles Jets & Automation
Mutual Income Foundation
Mutual Investment
Mutual Securities of Boston
Mutual Shares
Mutual Trust
National Investment
National Securities
Nation-Wide Balance
New England
New York Capital (Canada)
Northeast Investment
Nuclear Chemical & Electronic
One William Street
Oppenheimer
Penn Square
Peoples Securities
Philadelphia
Pine Street
Pioneer
Price T R Growth
Puritan Fund
Putnam, George
Putnam Growth
Quarterly Distribution Shares
Scudder (Canada)
Scudder, Stevens & Clark
Scudder, Stevens & Clark (com.)
Selected American
Shareholders
Smith, Edson B.
Soverign
Southwestern
State Street Investment
Stein, Roe & Farnum Balanced
Stein, Roe & Farnum Stock
Sterling Investment
Television-Electronic
Texas Fund
Townsend U. S. & International
Twentieth Century
United Accumulation
United Continental
United Fund (Canada)
United Income
United Science
Value Line Fund
Value Line Income Fund
Value Line Special Situation
Wall Street Investment
Washington Mutual
Wellington Equity
Wellington Fund
Whitehall
Winfield Growth Industrial
Wisconsin

Resume

1. Investment companies are among the fastest growing financial institutions.

2. They can provide a complete investment program in a single certificate.

3. By diversification and continuous professional supervision, they have in general provided investors with a sound medium for dividend income and capital growth.

4. They tend to insulate the individual from costly errors and encourage long-term holding rather than speculate market trading (which for many uninformed individuals may prove disastrous).

5. There is a mutual fund for every purse and purpose, and you can build holdings through systematic monthly purchase.

6. Management companies' shares present an interesting medium in which to speculate on the future growth of mutual funds.

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