When you get into the investment world, what should you expect from your securities, expenses and income? Of course that depends on how you mix these together, but there are a few things you should know about each.
What securities do investment companies own? Common stocks (except for special funds restricted to bonds and preferred stocks and to a lesser degree, balanced funds), have always constituted by far the largest part of the portfolios of investment companies.
Blue chips are a most important characteristic of both open-and closed-end investment companies, with a few exceptions. From this fact flow important consequences. The predominance of industrial companies in the market is also noteworthy, and the number of public utility and oil securities stands out prominently.
The investor in investment company shares must pay his pro-rata part of the cost of management, which appears as an operating expense in the company's accounts.
Costs of management fall into three general classes: investment supervision, fees for professional services, and miscellaneous expenses.
In the case of open-end companies, as a rule expenses of management are paid to a company or group that has a management contract. The prevailing fee is .5 percent per annum of the average net asset value of the fund, generally determined quarterly. In a number of instances, provisions are made for a reduction of the management fee when the net assets exceed a certain amount, say $50 million.
In closed-end companies, the cost of supervision and management is part of the compensation of officers and other employees. In some instances, a group of investment companies retains a research organization to provide statistical material, analyses of securities or industries, and advice. At times, engineers or economists are employed for special services.
For both open and closed-end companies, aggregate expenses have averaged between 15 and 18 percent of annual gross income from dividends and interest. In terms of average net assets, expenses have hovered between .5 and .75 percent of the total, with a trend toward lower expenses.
According to the provisions of the Investment Company Act, a majority of the directors of an open-end investment company must be independent of the company's sales distribution organization. The law requires that at least 40 percent of the directors of all regulated investment companies must be persons who are neither officers nor investment advisers of the company. Although those identified with investment banking or sponsor firms have been prominent as board members, in recent years a number of important industrialists and bankers, as well as economists, have been elected directors of investment companies.
The income, which a shareholder may expect to receive, is determined by the return obtainable from securities owned. Except for specialty or balanced funds, the dominant factor is the average return on common stocks. Unless a portfolio is heavily concentrated in one or two groups, or the securities chosen have done far better than the market as a whole, it will be difficult to exceed the average return on industrial common stocks of the largest companies.