Open-End vs. Mutual Firms

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Undoubtedly, the word "mutual" has sales value, for it is associated with savings banks and certain life insurance companies. In a number of ways, open-end companies are no more mutual than the ordinary commercial bank or industrial enterprise. This does not detract from their merits, but uninformed investors may misunderstand the implications of the word.

David Schenker, who testified at the Congressional hearings on the Investment Company Act and was counsel to the Securities and Exchange Commission in the preparation of its report on investment trusts and investment companies, stated the theory out of which the acceptance of the term undoubtedly arose:

"Our concept of an investment company is that it is a mutual enterprise. The stockholders being on a parity, there ought not to be any conflict between the security holders of that type of institution. This ought to be a mutual enterprise, with one class, simple structure, no different than a bank, no different than an insurance company, no different than any other type of financial institution. They are all partners in a common venture. They all stand to gain or lose. There is no overreaching. There is no necessity for protection in situations where the common stock is under water and the funds really belong to the common stockholders."

Open-end companies are management companies, and as defined in the Investment Company Act, have two main traits:

1. Shares of open-end companies are offered continuously at prices, which will net the fund amounts equivalent to the net asset value of each share outstanding at the time of sale. The price per share to the public or investor includes a commission to the underwriter, which is known as the load, cost of acquisition, cost of distribution, or distribution charge.

2. Open-end companies agree to redeem or repurchase their outstanding shares on short notice by paying the investor in cash the net asset value per share of his stock.

Open-end companies are classified, as already outlined, into three broad groups:

1. Common stock funds invest largely in a diversified list of common stocks. Investment policy varies, but the most important shifts usually are made among different groups of common stocks and individual issues rather than shifts from common stocks into cash, bonds, or preferred stocks. "Special situations" are of little significance; in this respect, they differ from a number of closed-end companies.

2. Balanced funds attempt to provide a complete portfolio and invest more of their funds in bonds and preferred stocks. Less emphasis is placed on capital appreciation possibilities and more on stability.

3. Specialty funds may be broken down into three general classifications: The first type is the industry class, which mainly invests in common stocks of a single industry, such as aviation, chemicals, railroad equipment, or banks. The second type is made up of class-of-security funds, i.e., investments are confined to bonds or preferred stocks, or to special classes of stocks, such as low-priced common stock or second-grade railroad bonds. The third type consists of funds that concentrate investments in geographical areas: Canada, South Africa, Europe, Texas, or New England. The stocks owned represent equities of companies that operate in these areas.

Investors can choose where to invest their money, but it is always advisable to diversify among a large number of industries and companies. So-called "mutual" investment companies might not always be what they seem at first blush, so investors will do well to consult a financial adviser before investing heavily in any single fund or corporation.

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