Review of Objectives | Objectives in Practice

REVIEW OF OBJECTIVES

To illustrate differences in the prospectus business objectives and investment poli­cies of representative investment companies, statements con­tained in prospectuses and other official material published by investment companies are cited.

The Adams Express Company

Consider this company's prospectus buiness objectives. Under its Articles of Association, the company has very broad powers of investment as well as authority to lend money and underwrite securities. According to its statement of policy, the company may invest in any type of security. It is not restricted with respect to the proportion of its investment in bonds, pre­ferred stocks, and common stocks; the percentage of its assets invested; the percentage of voting securities of any one issuer; nor with respect to investments in companies for the purpose of exercising control or management.

The company policy is to limit its investment in any one com­pany to not over 25 per cent of its gross assets at the time and not to concentrate investments. When existing conditions ap­pear to make it advisable, the company may concentrate invest­ments in one industry or group of industries with a view to protecting the value of its assets.

The company may buy and sell real estate to the extent of not more than 5 per cent of the assets of the company at the time, but the policy is not to conduct such operations. The same holds true with regard to authorized activities in the commodities markets. Adams Express has acted as an underwriter of securi­ties in the past. It may borrow money and issue debt securities, but it has had no indebtedness since 1948, with one inconse­quential exception.

Affiliated Fund, Incorporated

The investment objectives of the company are long-term capital and income growth. Primarily, it is a common stock fund, although it is authorized to invest in other types of secu­rities. Normally, long-term investments are made in stocks of seasoned companies. The Fund sells stocks, which seem to be overpriced and reinvests the proceeds in other securities that appear to offer greater values.
Affiliated Fund seeks to obtain better-than-average results by the use of borrowed money when common stock prices appear to be low. Conversely, borrowed money is eliminated after a substantial rise in the prices of common stocks. Funds are not borrowed unless immediately thereafter there is an asset cover­age of at least 400 per cent, provided however, that such cover­age may be less if reduced as a result of changes in the value of the company's investments. At all times, however, the com­pany complies with the provisions of the Investment Company Act, pursuant to which asset coverage must be at least 300 per cent of all borrowings. Affiliated Fund borrowed funds some years ago, but it has not followed the practice since 1950.

Atlas Corporation

Note this company's prospectus business objectives. This is a closed-end, non-diversified management Investment Company. It has power to engage in a broad range of activities. Its practice has been to invest substantial but varying portions of its capital in special situations, when opportunity offered, rather than to keep all or a major part of its funds in a diversified portfolio. Examples of special situations include reorganiza­tions, the financing of new capital issues, and investment in enterprises under circumstances, which gave promise of realiz­ing ultimate profits by correction of temporarily unfavorable circumstances.

At one time, Atlas had approximately two-thirds of its total assets invested in Barnsdall Company. Large investments were made at other times in Utilities Power and Light Corporation and in Radio-Keith-Orpheum Corporation. More recently, prin­cipal holdings have been in uranium and aviation.

The practice of investing in special situations has led to greater emphasis on realization of profits through capital ap­preciation than through dividends and interest.

Atomics, Physics, and Science Fund, Incorporated

Observe this company's prospectus business objectives. This company was founded in 1956 as Atomic Development Mutual Fund, Incorporated. The Fund may invest in govern­ment securities and securities of companies participating in activities resulting from applications of modern atomic science. The policy of the Fund is to invest in two broad types of atomic development securities.

The first type includes securities of companies whose princi­pal gross revenues and net earnings, if any, are derived from some field directly or integrally related to atomic research and its technological applications. The second type includes securi­ties of companies, already established in other fields, which are acquiring nuclear know-how. Fund policy restricts investments in the latter type of security to not more than 40 per cent of the total amount invested by the Fund in atomic development securities.

Commonwealth Investment Company

The objectives of the company are reasonable income, con­servation of principal, and long-term growth of principal and income. These objectives are sought through a broadly diversi­fied group of common stocks, preferred stocks, and bonds. Investments are not limited to well-known companies that cur­rently enjoy wide favor. The company may, in addition, invest in securities that are less well known but which appear to be reasonably valued. The company is a balanced fund and empha­sizes that its activities represent a balanced investment pro­gram.

Commonwealth Investment Company has followed the prac­tice of owning a relatively large number of individual securities.

Dividend Shares, Incorporated

Major emphasis is placed on relatively high income through broadly diversified investments, primarily in common stocks. The company's policy is not to concentrate its holdings in any particular industry or group of industries, although it may do so under unusual economic or market conditions.

Group Securities, Incorporated

This company divides its investments into separate funds, as follows: The Common Stock Fund, the Capital Growth Fund, Fully Administered Fund, Institutional Bond Fund, and Gen­eral Bond Fund. It also includes the following subdivisions: Automobile Shares, Aviation Shares, Building Shares, Chemical Shares, Electronics and Electrical Equipment Shares, Food Shares, Industrial Machinery Shares, Railroad Bond Shares, Railroad Equipment Shares, Steel Shares, Tobacco Shares, and Utilities Shares.

The basic purpose of the group securities structure was to permit group investing to be more closely applied to the per­sonal objectives of the investor.

Earlier in 1961, sponsors proposed the merger of twelve of the fourteen special industry funds into the existing Common Stock Fund and the merger of two bond funds into the existing General Bond Fund. The stock funds to survive were Aviation and Electronics, Petroleum, Capital Growth, and Fully Admin­istered. The special industry funds merged had combined net assets of approximately $42 million.

Apparently, only the stock funds that had a degree of popu­larity with the investing public were retained as separate entities.

Investors Mutual (1959)

Look at this company's prospectus business objectives. This company was organized in 1940 by Investors Diversified Services, Incorporated, of Minneapolis, Minnesota. The company is the largest balanced fund, an effort having been made consistently to keep about one-third of the assets of the fund in bonds and preferred stocks and two-thirds in common stocks. Emphasis is placed on reasonable income, preservation of value, and long-term appreciation possibilities.

The hazard Fund, Incorporated

The management believes that long-range policy emphasizing equity investment will be the most rewarding to the investor. This is based on confidence in the growth of the United States, its industries, and its technology. An added growth factor is the custom of companies in varying degree to finance capital re­quirements through the retention of a portion of earnings. No rigid policy will be followed with regard to the portfolio repre­sentation of equities and bonds and preferred stocks. Although The Lazard Fund is primarily an equity fund, at times manage­ment may favor a greater degree of investment in senior securities.

The Fund guards against excessive diversification, and al­though it is not intended to be a "special situation" fund, sub­stantial rather than scattered individual investments will be favored.

The closing paragraph in the section of the prospectus en­titled "Investment Objectives and Policies" is noteworthy: "Al­though it is believed that application of the investment policies stated herein will contribute to the reinvestment objectives of the Fund, nevertheless, because of the risks inherent in any investment in securities, there can be no assurance that such objectives will be met”.

Oppenheimer Fund, Incorporated

Note this company's prospectus business objectives. This open-end, non-diversified management investment com­pany has a number of unusual features stemming from its objec­tives and policies. The primary objective is maximum growth of principal through investments deemed most promising by management. The Fund intends to invest its assets ordinarily in common stocks, which in the best judgment of management offer better-than-average growth possibilities. However, the Fund can also invest in commodities and foreign exchange and may borrow for leverage purposes as well as make short sales of securities, foreign exchange, and commodities.
The Fund is designed for investors who do not seek current income but are willing to take a greater-than-average risk in order possibly to obtain greater capital appreciation over a period of years.

The George Putnam Fund of Boston (1958); the Putnam Growth Fund (1957)

These funds have the same managers and sponsors. The ob­jectives set forth are interesting.

The fund listed first was organized in 1937. It is designed to provide a well-rounded investment program. Its purpose is to provide a balanced investment composed of a well-diversified portfolio of selected bonds and stocks. The declaration of trust requires that at least 25 per cent of the company's assets must be invested at all times in obligations and preferred stocks or must be held in cash. Within these limits, the trustees vary the proportion invested in each type of security to meet their ap­praisal of the outlook.

The Putnam Growth Fund was organized in 1957. Its purpose is to seek for its shareholders maximum long-term growth of capital consistent with a prudent yet aggressive investment policy. The trustees believe that aggressive, full-time manage­ment is essential to the attainment of the Fund's objective. Shares of the Fund are designed for the common stock holdings of individuals and institutional investors and do not represent a complete investment program. Investment emphasis focuses upon well-managed, aggressive companies in rapidly expanding industries, and the common stocks of these rapid-growth com­panies, under most conditions, constitute the major portion of the Fund's investments.

The One William Street Fund, Incorporated

This is a diversified open-end investment company. The Fund is designed to meet the needs of investors for a comprehensive investment program under experienced management in the convenient form afforded by a single security. The Fund en­deavors: (1) to achieve reasonable growth of capital through selective participation in the long-term progress of American business and industry and (2) to provide a fair and reasonable current return on capital invested.

The investment policy of the Fund is to retain maximum flexibility in the management of its portfolio, without restrictive provisions as to the proportion of one or another class of securi­ties which may be held. The Fund's investment policy is based on the confidence of its board of directors in the long-term expansion and prosperity of American business. At the Fund's inception, it was anticipated that its portfolio would generally consist of common stocks, since equity securities normally afford shareholders the greatest opportunity to participate in the growth of American industry. Purchases and sales may be made as considered advisable and not for trading purposes.

The Fund's policy is not to concentrate investments in any one industry beyond 25 per cent of the Fund's net assets. Mar­ketable securities only will be purchased.

At the end of 1961, the per share net asset value was $15.41; a year earlier the per share net asset value was $12.91, after adjustment for the special distribution of 22 cents per share of net realized gains early in 1961. The initial offering was made at $12.50 per share in May 1958. Expectations probably had been too high, and during 1960 approximately 2,076,650 shares were repurchased, whereas 1,709,516 shares were issued, including 239,601 shares as a portion of the capital gains distribution.

The management announced a modification of policy in the 1960 Annual Report. Whether or not the operations of a com­paratively new fund in a difficult period induced the shift in policy, an increasing proportion of the Funds' assets was de­voted during 1960 to investment in a number of smaller comparties which, it was stated, "appear to offer above-average growth prospects."

OBJECTIVES IN PRACTICE

The foregoing statements on prospectus business objectives and policies were chosen to indicate the approach of different types of investment company managements. It will be observed that however the statements may vary in other respects, they uniformly disavow the purpose of trading the market. Policies are rooted in the objective of long-term investment.

Policy statements are naturally put in terms of broad gen­eralization rather than specific delineation. The nature of the enterprise militates against sharply defined outlines, for man­agements do not wish to confine themselves too rigidly. There are no hard and fast rules to differentiate "trading" from "long-term investing." Even the definition of a "chemical" company has a measure of elasticity. A "reasonable combination" of in­vestment objectives means different things to different persons.

Several companies restrict their investments to panels of ap­proved securities, the names of which are published in the prospectus. Usually, such securities are selected with regard to the size of the company, type of industry, dividend record, marketability, and other factors. No special advantage seems to flow from this arrangement. The investor, it is true, has more specific knowledge of the securities in which his funds may be invested. Nevertheless, it seems best to allow management of a non-specialized investment company a broad scope in the choice of securities.

The investor must view statements of objectives in the light of the foregoing and make allowance for the difficulties in being more precise. The two most vital differences in policy are (1) the distinction between diversified and non-diversified com­panies and (2) the distinction between balanced and common stock funds. Diversified and balanced funds are likely to be less volatile, i.e. to fluctuate less widely, than non-diversified or common stock funds. This is not to say that one group is more or less desirable than the other. The investor must decide which type meets his own needs.

The foregoing prospectus business objectives summaries (essentially a sampling which does not purport to be complete) show the extremely broad range available to the investor who wishes to choose an investment company according to his own objectives. Nothing is more important than for the investor to know what he is doing. Other­wise, misunderstanding and disappointment are inevitable. True, stated company objectives are often mere outlines whose significance is really determined by the manner in which those outlines are filled in. Performance can be tested properly only against the avowed purpose set forth by the investment com­pany itself.

The Securities and Exchange Commission has deemed it necessary to propose an amendment to the Investment Com­pany Act, having become dissatisfied with the way the provi­sions concerning objectives and policies have been working. It has proposed that the act require an investment company to state as matters of basic policy, which generally could not be changed without the consent of the shareholders, the extent to which the investment company intends to invest in particular types of securities.

The proposal would enlarge the policy statement contained in most prospectuses in the past by requiring a clearer recital, which presumably would include the types of securities to be selected for investment, objectives as to income and capital ap­preciation, geographical areas of investment, and policy with reference to investment for control or active management. The proposal does not seem to be drastic. The likelihood that flexi­bility in management will be curtailed seriously by the proposal seems remote. A sufficiently broad outline of policy in the regis­tration statement and prospectus can be used. It is doubtful, on the other hand, that the proposal in itself can achieve more than a slight step toward the goal, for the evidence is not over­whelming that investors have been deceived or that major policy changes outside the framework of the statements on policy objectives now in use have been made without authority.