POLICIES

Investors should make sufficient allowance for differences in objectives when measuring the results or, as they are generally called, the “performance” of investment companies. The most obvious need is recognizing the distinction between common stock funds and balanced funds. The latter maintain a substan tial part (at least 35 per cent) of their assets in bonds and preferred stocks of investment quality. In consequence, when common stock prices rise rapidly, balanced funds are not able to improve their net asset value in the same degree as common stock funds, other things being equal. Conversely, when com mon stock prices fall substantially, a balanced fund should be able to show a greater measure of stability.

A clear line of distinction must be drawn between investment companies with a one-class-of-stock capitalization and those employing bonds and preferred stocks in their capital struc tures. As the purpose of leverage is to accelerate the gains accruing to common stocks by the use of senior funds, common stocks of leverage-type investment companies may be expected to advance more rapidly in a rising stock market than stocks of investment companies with only common stock outstanding. In a falling stock market, the net asset value of common stock of a leverage-type investment company will decline more rapidly. Certified Financial Planner - Read More.