Making Performance Distinctions

by David Jenyns on August 15, 2008

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. 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 structures.

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.

Some years later, oil stocks lost favor, and their prices declined materially.

The framers of the Investment Company Act regarded a change in general policy as a matter of great importance.

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