Diversify to Grow -- An Historical Look at SBICs

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Looking for a strategy to grow your investments? This piece from the 1960s demonstrates how Small Business Investment Companies (SBICs) and mutual fund management companies are a good way to build and diversify your growth stock portfolio.

Since most SBICs are venture capital minded, they are basically speculative in nature. Their portfolios are made up of younger companies with their greatest growth potential ahead. This gives investors a safe way to participate in the glamour issues of the day. At the same time, it reduces risk through diversification and professional management.

While the majority of SBICs will place their capital in any attractive area without regard to industry, some seek to concentrate in specific industries such as real estate, electronics, or other new technological areas. Generally speaking, SBICs should give investors a diversified portfolio of possible rapidly growing situations.

Similar in certain aspects to SBICs are mutual fund management companies. These should not be confused with mutual funds. They are managers of the funds, with their chief sources of income coming from the management services they provide.

Few investors seem to be aware of the existence of some sixteen publicly held mutual fund management companies, most of which have come to the market in the last two years. During this short period of their existence, they have experienced an outstanding growth record, comparable to any of the growth industries. That's why management company shares were priced at high earnings multiples 30 to 40 times 1959 earnings.

A number of factors have brought about their subsequent decline in market evaluation, with most shares, as of March 1961 available at about 15 to 20 times estimated 1961 earnings. Among them are adverse effects from a falling stock market, low level of new mutual fund share sales, and growing criticism of their contractual relationship with mutual funds. However, the current market evaluation has overlooked the excellent growth potentials of the industry in favor of the troubles which may beset the group at some future time.

The basic growth prospects of management companies is, of course, based on the continuously excellent growth potentials of the mutual fund industry which is expected to keep outgrowing its competitors for savings because of its basic advantages of diversification and professional management. With its net assets estimated by Oppenheimer analysts to expand at 15 percent compounded for the next five years, the industry should still be one of the fastest growing areas of the United States economy.

In examining mutual fund management companies, expert analysts utilize five "salient yardsticks" which they consider essential to the evaluation of an equity investment: (1) quantitative earnings growth; (2) qualitative earnings growth; (3) management; (4) sociology of stock ownership; and (5) timing and value.

Of special importance is, of course, the earnings growth pattern. Accounting for the major portion of management company income were the management fees which it considers are more desirable than earnings from distribution activities, the latter being the other main source of revenues.

Management company earnings are made more attractive by the fact that there may never be a need for new equity money, or even retained earnings. This is a service industry with virtually no plant or equipment required for operation.

New products and investment vehicles are constantly being introduced. The important thing is to do your homework before you invest, and decide what looks right for your portfolio.

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