"The reduced loads charged on substantial purchases of fund shares benefit some investors. For a few very large investors the benefits can be substantial. However, the relatively slight reductions available at the initial breakpoints are far beyond the reach of most investors." A fund of this type would, of course, be in a position to take advantage of breakpoints not available to investors in it. I respectfully submit, therefore, that the concept has merit, and that abolition of the concept would not be in the public interest. Very truly yours, Hon. JOHN SPARKMAN, DONALD F. FRENCH. VALICENTI, LEIGHTON, REID & PINE, Chairman, Committee on Banking and Currency, DEAR SENATOR SPARKMAN: As suggested in your letter of July 24th, in lieu of testifying personally, I am submitting on behalf of United Funds, Inc., a series type of investment company, a written statement commenting only on one of the recommendations in the SEC Report to Congress, namely, the recommendation with respect to series companies. I appreciate that this statement will be printed in the record and considered by all members of the Committee. I will be happy to supply additional copies if you need them. Thanking you for your courtesies, and with best wishes, I am, Sincerely, MITCHEL J. VALICENTI. MEMORANDUM RE INVESTMENT COMPANIES ISSUING SHARES IN "SERIES" This memorandum presents to the Senate Committee on Banking and Currency the views of United Funds, Inc., an investment company issuing shares in classes or "series," with respect to the recommendations made as to series companies on pages 330-332 of the Report of the Securities and Exchange Commission on the Public Policy Implications of Investment Company Growth. It should initially be stated that United Funds supports the recommendation made in the Report that the Investment Company Act of 1940 (the "Act") be amended to prevent the imposition of a sales load on exchanges by holders of one class for shares of another class. United finds that it is the general practice of series companies to waive sales load on such exchanges and can see no objection to codifying the practice. The main recommendation in the Report is that existing series companies be prevented from creating new series in the future and that no new series company be permitted to register under the Act. The Report fails to state the advantages of a series type of fund. It is respectfully submitted that there are many alvantages and benefits to shareholders of series companies which Congress should not overlook, and that the only disadvantage mentioned in the Report may be overcome by an amendment to the Act. United's experience shows that the advantages, actual and potential, of series companies are as follows: 1. The creation of a new fund by adding a new series to an existing fund does not incur the heavy expenses involved in the creation of a new investment company. The creation of a new investment company necessarily requires the preparation of a charter, by-laws, registration statement under the Act, registration statement under the Securities Act of 1933 and all supporting documents, including investment advisory and underwriting contracts, custodian agreements. share certificates and appropriate instruments for various privileges and serv ices supplied to shareholders such as reinvestment plans, withdrawal plan, etc. There are also heavy printing, legal and accounting expenses. Few of these expenses are entailed in the creation of a new series of an existing company. Thus, a series company is able to adapt itself quickly and easily, and at little expense, to the changing needs and desires of investors and to create new vehicles whereby these needs and desires may be served. 2. Inasmuch as in a series company one prospectus describes several classes of shares, each with a different investment objective, it is far easier for a prospec tive investor to choose a mutual fund with the investment objective best suited for his purpose. It is necessary for such investor to study only one prospectus, rather than several, in which much of the material is repetitive. Similarly, an investor considering transferring his investment from one class to another has an easier time making a decision. For example, United presently has four classes of shares having combined assets of approximately $22 billion. These classes are designated Income Fund, Accumulative Fund, Science Fund and Bond Fund. An investor at any time can transfer his investment from one fund to another without any sales charge. Thus, in bearish times he can transfer to the Bond Fund, and in bullish times to any of the three equity funds available in one corporate entity. 3. There are substantial annual savings in state franchise taxes. For example, in 1966 United paid state franchise taxes of $50,025. If each series had been separately incorporated, the same tax would have been $150,095. The 1966 franchise tax savings to the shareholders of United amounted to $100,070. 4. There are substantial savings in the costs of calling and holding meetings of shareholders. While these costs cannot be precisely estimated, it is obviously more expensive to prepare and print separate proxy statements for each class of shares and to hold separate meetings, rather than one proxy statement and one shareholder meeting covering all classes. 5. Similarly, there are substantial savings in operating expenses. If a fund having four series of shares had to operate as four separate corporations, there would be four times as many board meetings. Legal, accounting, reporting to federal and state authorities, and all kinds of administrative and paper work would be duplicated unnecessarily. This makes the cost of investing heavier and, ultimately, the mutual fund investor pays for this. 6. A series company lends itself better to combining the assets of the various classes of shares in negotiating a scaled-down schedule for advisory fees or custodian fees. United has taken advantage of this and pays a scaled-down management fee based on the combined assets of all four series, thus reducing the expense ratios of all its funds, large and small. 7. In the event that volume discounts on brokerage fees charged by members of national securities exchanges become a reality, such volume discounts might well be available to series companies for purchases of the same security by several series, which discounts might not be available to separate corporations. The only disadvantage of series companies cited in the Report is that, under Section 13(a) of the Act, any change in the investment policy of a single series must be submitted, in some of these companies, to the shareholders of the entire company. We submit that this minor disadvantage is easily taken care of by a simple amendment to Section 13(a) of the Act, requiring that in a series company. any such change of investment policy of a single series must be submitted to and approved by the holders of a majority only of that series. This amendment would do no more than reflect the current policy of series companies which, even when a vote of the holders of a majority of the entire company has been required in this area, have as a matter of policy also required a class vote on the question. Similarly, United would support an amendment to the Act which would require a class vote on any amendments to the basic governing documents of such companies which must be passed upon by shareholders. Naturally, each series company must comply with the provisions of the appropriate state law in connection with such amendments, but there is no reason why an additional requirement could not be imposed in the Act requiring such a class vote, which requirement would be in addition to any state law requirements. Once again, such a provision would only reflect the existing practice of the series companies. Finally, we point out that the proposals of the Report would not benefit shareholders of existing series companies, but would only prevent the future creation of new series and increase the expense ratio of a series of funds managed by a single sponsor. Our suggestions would benefit shareholders of existing series companies as well as shareholders of series companies created in the future. We have engaged in correspondence with the Securities and Exchange Commission with a view to working out a compromise in this area satisfactory to both sides, and we have received encouragement from the SEC staff that a compromise is possible in this area without forbidding new series companies. Respectfully submitted. UNITED FUNDS, INC. MANHATTAN, MONT., May 31, 1967. Hon. MIKE MANSFIELD, U.S. Senate, Washington, D.C. DEAR SENATOR MANSFIELD: I am writing in regard to the SEC Mutual Fund Bill. I am definitely against it for survival. Please communicate my views to the committee who will handle the bill. I am an investment salesman and have sold many front end load programs. I have less than 2 dozen people who resent these. Many are pleased with them because there is no incentive to keep up a level load nor a penalty if they let it drop. They are glad that they are more or less forced to invest for their future needs and nearly all have set up programs with a definite goal. It fits them fine and they like it! If the sales charge is reduced, it will mean I'll have to take a pay cut. Who in the U.S. has had to take a pay cut recently? No one! Why do they single us out for this demotion? I also sell real estate and took it on the chin in 1966 by being singled out by a government agency to supposedly stop inflation. Maybe I should get a government job. Please send me a reply to this letter. THOMAS S. VELTKAMP. KANSAS CITY, Mo., August 9, 1967. Hon. JOHN SPARKMAN, Washington, D.C. DEAR SENATOR SPARKMAN: At the recent hearings it had been our hope to have time to call attention to the good investment results experienced by the great majority of contractual planholders. Circumstances so foreshortened the time allowed that we were not able to do so. We offer this letter and exhibit as a brief summary of the kind of showing that would have been made had time permitted. The exhibit enclosed is a study of the status as of August 31, 1966, of all contractual plans to acquire United Accumulative Fund shares sold by Waddell & Reed, Inc., the sponsor, in the period from 1949, when the plans were first offered, to August 31, 1966. The over-all record of all such plans is as follows: Number of plans sold_____ Number of plans with realized or unrealized gains (89.7 percent of plans sold ) ‒‒‒ Total payments as of Aug. 31, 1966 Total amount of gain as of Aug. 31, 1966_. Total Amount of Loss as of Aug. 31, 1966 (12.3 percent of amount paid) 239, 250 214, 480 $579, 963, 925 $163, 171, 175 $3,710, 196 The amount shown as "Gain" includes appreciation and the value of shares acquired through reinvestment of dividends and distributions. As the record reflects, the success of a long-term savings program depends upon two elements-time and the commitment of money. Where time and money have been committed, the contractual plan has clearly demonstrated its usefulness as evidenced by the following records for the periods from ten to seventeen years: As an interesting human interest story, we enclose a photocopy of a letter from J. F. Stephens of Houston, Texas, telling of his experience with a $2,500 contractual plan. Sincerely yours, CORNELIUS ROACH. P.S.-If it is in order, we respectfully request that our letter and exhibits be included in the Record of the Hearing. HOUSTON, TEX., July 26, 1967. DEAR MR. ROACH: I thought this might be interesting to you. In May of 1949 I started a $25 monthly ($2,500.00) Periodic Investment plan to purchase United Accumulative Fund. I began sending in double payments and finished the plan in about 3 or 4 years. This plan was to be the educational plan for my daughter Patricia who, we expected, would start college in Sept. 1960. On Sept. 1, 1960 the plan contained 953,797 shares (at 12.59) worth $12008.31. However Patricia did not want college. She had married in High School and was starting to raise a family. Now-7 years later-Patricia is a widow with 4 children and wants to start college. The question-where is the money to support her and the children and pay for college. Fortunately, I had not disturbed the plan and it now contains 1,301,206 shares of United Acumulative Fund (at 18.44) worth $23,994.24 and it will do the job for us-and we are happy. Sincerely, J. F. STEPHENS. STATEMENT SUBMITTED BY HENRY C. WALLICH, PROFESSOR OF ECONOMICS, YALE UNIVERSITY CAN THE MUTUAL FUND BUSINESS BE IMPROVED? The economics of mutual funds reach far. Judgments must take into acount distant ramifications and allow for exceptions if they are to avoid being contradicted by particular instances. It is safe to say, however, that the growth of mutual funds has on the whole been beneficial to their holders and to the economy. The issue before your Committee, as I see it, is improvement, not reform. Holders have benefited, for the most part, by a good rate of return. In times when inflation falsifies the true return on fixed dollar claims, mutual funds have made it easier for the small investor to hold common stocks and have given him shelter against this form of loss. Mutual funds protected him against some of the risks of stock ownership by offering a degree of diversification that he could not have easily and cheaply attained on his own. The economy has benefited by an increased demand for equities. While the stock market does little in the way of providing capital for business, it does indirectly encourage business investment if it lowers the cost of capital. A high priceearnings ratio for common stocks is the analogue of a low interest rate on bonds. It enables businessmen who are alive to their cost of capital to reach out farther for investment opportunities than they could at a higher cost of capital, even if they do no new stock financing. With price-earnings multiples almost doubling compared with the late forties, this cheapening of investment funds must have stimulated business investment in plant and equipment, even though bond rates and mortgage rates are probably higher because money has gone into stocks. In promoting this trend toward a lower cost of capital for business, the growth of mutual funds can claim a share. The spread of stock ownership through mutual funds has improved the distribution of income and of wealth. It has strengthened the foundations of our private enterprise system, even though we are still far from a true People's Capitalism. These are important achievements. Mutual funds have been good also to the securities industry. This, too, is grounds for satisfaction. The industry is a valuable part of the American economy. Its welfare is important, as is the personal welfare of the individuals that draw their living from jobs in the industry. Nevertheless, a reader of some of the literature that is building up around these hearings is bound to feel some concern over the role that consideration of 82-865 0-67-pt. 2- -34 welfare of the securities industry may play in any new legislation. It is in the nature of things that a large part of the literature should be coming from the industry. They must defend their interests, and they are doing so very ably. But this should not obscure the fact that the chief objective is welfare of the mutual fund investor and of the entire economy. Without implying criticism, it is pertinent to recall what the role of Government has been whenever it has concerned itself with competition in an industry that is not perfectly competitive. It has started out to protect competition, and ended by protecting competitors. Some such danger seems to loom in the present case. Hopefully, and quite probably, the securities industry will ultimately benefit from an improvement in mutual funds legislation through broadened public acceptance, greater stability, enhanced competitiveness. But the issues cannot be discussed principally from the point of view of how they would affect the industry. Areas for improvement If ownership of mutual funds is predominantly good, it is pertinent to ask why changes should be proposed. At least temporarily, these changes could in some cases lead to persons not buying shares they would otherwise have bought. One answer is that investors may believe themselves to be buying something that in fact they are not buying, such as superior market performance. This applies particularly to the advisory fee. A second is that even very desirable results may be bought at too high a price. This applies, I believe, particularly to the sales load or sales charge, and to the front end load. Finally, a desirable activity may produce side effects, that are not desirable. This applies to the heavy trading activity, to the resulting speculative climate accompanied by potential market instability, and possibly the excessive absorption of human and material resources into stock market activity. I shall take up these matters in the foregoing order. Advisory fee The Securities and Exchange Commission believes that the advisory fee paid by mutual funds to their investment advisers is in many cases too high, and recommends that it be subjected to standards of reasonableness. The Commission bases its case partly on comparisons with the cost of other ways of investing in common stocks, and partly upon the failure of economies of scale to be reflected in many of the fees. The industry, through various spokesmen, has replied that the fees actually charged are lower than the Commission thinks, do not compare unfavorably with competing media, and do reflect economies of scale. The difference here is partly one of presentation of statistics, partly of proper choice of comparisons, partly even of semantics. In my view, the Commission's way of summarizing the complex facts is substantially right in terms of what it is proper to compare and what data to use. Neither side, however, seems to have considered the conclusion that seems to emerge from the studies of technicians that the true value of investment advice is on average virtually zero. This follows from the "random walk hypothesis" that thas become familiar through numerous academic writings of recent date. The random walk hypothesis, strictly speaking. has been discussed and empirically tested principally with respect to the influence of past movements of the stock market upon subsequent movements, i.e. with the effect that chartists believe themselves to be exploiting. The evidence strongly suggests that there is no such influence of past movements. The random walk hypothesis can be extended to all past events on somewhat restrictive assumptions that in practice are likely to be met only in part. The theory is supported, however, by frequent findings that randomly selected port folios on average tend to do as well as or better than the average of mutual funds. The random walk hypothesis says that, in a perfect market, all past events that could possibly influence the price of a stock have already been discounted by the market and that the next move is therefore entirely unpredictable. The chances of an upward or downward move, to be sure, need not be equal. If there is a long run upward trend, as there appears to be in the stock market, the 1 See Paul H. Cootner, editor, The Random Character of Stock Market Prices, MIT Press, 1964. 2 For econometric studies of mutual fund performance, see Irwin Friend and Douglas Vickers, "Portfolio Selection and Investment Performance," Journal of Finance, September 1965, pp. 391-415; William F. Sharpe, "Mutual Fund Performance," Journal of Business, January 1966, pp. 119-138; George W. Douglas, Risk in the Equity of Markets: An Empirical Appraisal of Market Efficiency, Yale Ph. D. dissertation, 1967, especially pp. 45-53. |