Types and General Performance of Investment Funds

Key Insight

Investment funds provide a structured option for investors, primarily through 'mutual funds' (open-end funds), which are redeemable at net asset value and actively sell shares, and 'closed-end' companies, characterized by a fixed number of nonredeemable shares that fluctuate in the open market. All significant funds operate under the regulation of the Securities and Exchange Commission (SEC). The industry was substantial, totaling 383 registered funds with $54.6 billion in assets at the end of 1970, split into 356 mutual funds holding $50.6 billion and 27 closed-end funds with $4.0 billion. Funds are further classified by their portfolio composition, such as 'balanced funds' which hold a significant portion (typically one-third) in bonds, or 'stock-funds' primarily invested in common stocks, and by objectives like income generation, price stability, or capital appreciation, also known as 'growth'. A key difference for investors is the sales method: 'load funds' levy a selling charge, generally around 9% on minimum purchases, whereas 'no-load' funds forgo this charge, covering costs through standard investment-counsel fees.

Collectively, investment funds have historically served a useful purpose by encouraging savings and protecting individuals from costly stock market errors, providing income and profits that aligned with the overall returns from common stocks. The average individual investing solely in fund shares has generally performed better than those engaging in direct common-stock purchases, even when considering that funds' actual performance might not exceed the broader market and can involve higher costs. This advantage largely stems from shielding investors from more speculative and potentially riskier direct investment opportunities. An analysis of the overall fund industry's performance, specifically ten large stock funds between 1961 and 1970, revealed results comparable to the Standard and Poor’s 500-stock composite average, and notably superior to the Dow Jones Industrial Average (DJIA).

The aggregate performance of these funds relative to the S&P index showed some improvement in the second half of the decade, with gains slightly lagging S&P from 1961 to 1965, but marginally surpassing it from 1966 to 1970, though individual fund results varied widely. Investors face the challenge of selecting funds likely to deliver above-average results. While considering comparative past performance over a period of at least five years can be prudent, especially when the market is not experiencing a significant overall uptrend, exceptionally favorable results achieved during major bull markets may indicate that fund managers are taking undue speculative risks. Given that fund managers and other financial professionals collectively administer a large segment of marketable common stocks, their combined decisions substantially influence stock average movements and, consequently, the aggregate performance of their funds.