Familiarizing Yourself With The Investment Industry

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Knowledge about the investment industry, how it works and where you can find information about it are critical to your knowledge as an investor.

As with so many industries, the investment company industry has its trade association, now known as The Investment Company Institute. Its predecessor, The National Association of Investment Companies was founded in 1941; and by September 1960 it had a membership totaling 150 open-end and 26 closed-end investment companies. The Institute is voluntary, and has no such enforcement powers as does the National Association of Securities Dealers over its membership. Nevertheless the Institute, through its membership, certainly can be credited with encouraging the maintenance of high standards of responsibility in the industry and promoting public confidence in it.

The major functions performed by the Institute are representing its membership, which consists of the mutual funds and their shareholders, in matters of legislation, taxation, regulation, and public information; acting as a medium through which the membership may make its views known to government authorities and to the general public; and acting as a central clearing house where any persons and agencies may acquire information about the investment company industry in the United States.

A number of periodicals publish news and comments on investment companies. A number have special columns regularly devoted to investment company developments, and several feature computations of investment company quarterly results. An increasing number of newspapers also publish news items concerning investment companies. In addition to the news and quotations of open-end investment companies that appear in an increasing number of daily newspapers, several syndicated columns by financial writers have appeared as the importance of the subject to investors has gained recognition. The writers have not hesitated to voice their criticism and to make suggestions to the industry, which they believed would be helpful to investors.

Investment companies and sponsors of funds advertise freely. In consequence, newspapers and periodicals should be careful not to slant the material in favor of investment companies and leave themselves open to criticism. I have in mind the unfortunate caption that appears from time to time: "X Investment Company Assets Increase." The caption is correct, but the reader often finds in the second paragraph that the per share net asset value has declined. This figure is more important to the shareholder than the increase in assets arising from the sale of additional shares. It is a rise in the net asset value per share that should be given most prominence.

Similarly, investment companies should not attempt to gloss over unfavorable periods or examples of poor decision. The intelligent shareholder will accept errors of judgment from which no one is exempt, yet will resent a lack of frankness.

Prices of open-end securities are determined by their net asset value. Open-end securities are not listed on any national securities exchange, but bid-and-asked prices may be found in the financial pages of leading newspapers. Quotations are changed twice a day in most instances, the "asset value" being determined by dividing the current market value of the company's assets, less liabilities, by the number of its own shares outstanding. Holdings are redeemed at the asset value. The offering, or asking price, is the price the investor pays for his shares. It is usually net asset value plus a sales charge or commission, generally about 8-8.5 percent of the offered, or asked, price.

On the other hand, the price of closed-end shares, many of which are listed on a national security exchange, is determined by supply and demand, as are the prices of all other securities except mutual fund shares.

As always, investors need to inform themselves of changing market trends and read beyond the headlines to make sure they know exactly how their investments stand.

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