A mutual fund "sales charge" is included in the cost of shares in most mutual funds. To an investor who understands words better than figures, a selling charge is like taxes—something to be avoided, if possible. To a more analytical investor, the ques­tion is "Where can I get the best net over-all results? In a company with or without this charge?"

Before examining the practical effect of a sales charge, let us make clear that among American investment companies there are pronounced differences in both the method and the fees for buying and selling their shares, and a large mi­nority of these companies have no sales charge.

Closed-End

Except in the mutual funds, when an investor tells his broker or dealer he wants to buy shares of corporate stock, normally the broker uses his contacts with other brokers, in either a stock exchange or the over-the-counter market, to locate an owner willing to sell the stock desired. Similarly, when an owner desires to sell, his broker finds a buyer. Or­dinarily the company that originally issued the stock has nothing to do with this transaction, except that afterward, the broker sends in the old owner's certificate for the issuing company to cancel and to replace with another certificate naming the new owner. Both seller and buyer of stock must pay a broker's fee.

The stock markets, especially the stock exchanges, are or­ganized primarily for speedy handling of large orders, at fees, which are moderate compared to the dollar amount of the order. For a small buyer, not anxious for instantaneous action, the system is cumbersome and expensive. The small­er the order, the higher a broker's fee in comparison to the size of the order.

Up to the middle 1920's, all American investment com­panies allowed their shares to be bought and sold in the same manner as just described for other companies. Those investment companies that still continue this practice are called "closed-end." This label means that after a company has sold its original batch of stock, the issuing of stock by the company is closed; also, the company ordinarily does not buy back any of the stock it has issued. Here are some of the peculiarities of closed-end investment companies, in contrast to a mutual fund.

1. Some closed-end companies have fancy financial struc­tures. In one of them an investor can take his choice among bonds, two classes of preferred stock, common stock, and finally he can buy an option, called a warrant, to buy com­mon stock. However, several of the closed-end companies have only common stock outstanding, and the trend is in that direction.



2. On common stock in a closed-end company, the market price per share bears no automatic relationship to the company's asset value. The price may be higher or lower than the asset value, depending on the consensus of opinion in the market at that time. Newspapers publish the bid and asked prices, but not the asset value per share of closed-end companies, so if a buyer wants to know how much premium or discount is in the price, he must make special inquiry.



3. In a closed-end company, when an investor uses its past-performance record as a guide to future results, he needs to make careful allowance for the fluctuating gap between asset value and market price. Suppose a man bought stock at $7 a share, and he can sell now for $22, more than three times his cost. He bought at a discount of 30 per cent, the asset value then being $10. Now the price in­cludes a 10 per cent premium over the asset value of $20. When he looks to the future, is the premium going to keep on rising, so that the price will continue to rise faster than asset value? Or will the premium disappear, and die stock again sell at a discount? A man's reaction to this premium-discount element in the price depends upon how much of a gambler he is.



4. With rare exceptions, a closed-end company pays capital-gain dividends in cash only. To offset this, at ir­regular intervals a company may invite its stockholders to buy additional shares at a price below the current market price. A stockholder unable to take advantage of such an offer is out of luck.



5. A closed-end company offers no arrangements for in­ stallment buying of its stock, or for periodic withdrawals. Some brokers offer a plan for monthly purchases of any listed stock, including closed-end investment companies, but this is a primitive arrangement compared to the mutual-fund plans.



6. A closed-end company may issue new shares once in a while, but its growth in assets is slow compared to an open-end company with a large number of local representa­tives continuously selling new shares. In principle, this has no effect on a company's performance; but practically, it ap­pears that the comparatively slow growth potential of a closed-end company gives its managers less incentive to make a good showing, and it does not tend to attract able, am­bitious men to join its management. The truth of this was admitted when, in 1958, the managers of the closed-end company with probably the best reputation of any in the group launched a new mutual fund with much fanfare.



7. In general, being a shareholder in a closed-end com­pany is a curious mixture. Theoretically a company's assets may be just as well diversified and skillfully managed as in the best mutual fund. But the method of pricing its shares brings in a complication and speculative aspect not present in mutual funds; and in the companies with the more fancy financial structure, the speculative risk is still greater. The writer, being of the timid type, is opposed to an investment with more complexity and speculation than is necessary for first-class results.

Open-End or Mutual Fund

When the phrase "open-end" was first used, apparently it meant merely that a company was continuing to issue addi­tional shares of its stock, and to redeem shares, and that the total number of shares outstanding might rise or fall. But the meaning of "open-end" has grown to include all of the laws, regulations, and customs that distinguish what are now the principal group of American investment companies from the older type called "closed-end," as well as from other corporations aside from investment companies. "Open-end" is a legal expression; "mutual fund" is the popular label with the same meaning.

To anyone familiar with investing in such forms as a U.S. savings bond, a bank savings deposit, a savings and loan association membership, or a life-insurance policy, the idea of "open-end" is so commonplace that he may think, "Of course! Why not?" But in corporate stock, the standard prac­tice has been quite the opposite, as explained above. The first open-end investment company was started in 1924, and not until 1942 did this type begin the growth that has raised the number of companies and the assets of the group to be several times as large as in the closed-end group.

In the great majority of mutual funds, the price on a share sold to an investor includes a sales charge, usually around 8 per cent of the price. This charge replaces the usual broker's commission or dealer's fee on other stocks. On a small purchase, the selling charge on a mutual fund may be smaller than the fee an investor pays on other stock of the same dollar amount. When a stockholder wishes to dis­pose of his stock, a mutual fund redeems its shares at net asset value. A few funds charge a fee of around 1 per cent, but most of them make no charge. On other stocks, a seller must pay a broker's fee at the same rate as when he bought.

In 1958, more than a score of mutual funds had no sales charge, and in several others the charge was less than 3 per cent. Thus if an investor thinks it is foolish to pay a selling expense, he can pay little or none, and still gain many of the advantages of owning shares in a mutual fund, taking his choice among balanced funds and several varieties of common-stock funds.

Another way to lower the selling charge is to place large orders, for the charge drops on a sliding scale, usually start­ing at $25,000.

Aside from investments, when an article is offered for sale, customarily the price is set high enough to include the expenses connected with selling it When a housewife buys food in a supermarket, there may be no salesman, strictly speaking, but she must pay the store for the expense of bringing the various items to her community, storing them, and displaying them in an attractive manner in a convenient location. The store does not state this expense separately, but necessarily it is included in the price she pays.

A life-insurance company sets its premium charges high enough to cover the expense of selling. In the first few years of an "ordinary" insurance policy, this bidden sales ex­pense is a much greater percentage of the total premium than the sales charge is in the offering price of the mutual fund shares.

Thus there is nothing peculiar about a price being set high enough to cover selling expense. The unusual feature of mutual funds is that the Securities and Exchange Commis­sion, an agency of the U.S. Government, has a rule that if the price asked by a mutual fund or its dealers is higher than net asset value, then the prospectus and any sales literature issued by the fund must state exactly what that extra charge is, so that any investor who bothers to read carefully is re­minded of it Apparently nowhere else in American business does a selling organization tell a customer how much is added to cover the cost of selling.

All, or nearly all, mutual funds invite their shareholders to take capital-gain dividends in the form of additional shares rather than in cash. In those offers, a fund communicates directly with its stockholders, not through a dealer, and it prices the new shares at net asset value. When a stockholder elects to take income dividends in the form of additional shares, usually the fund charges the same price as for shares bought through a dealer. But some funds offer to reinvest in­come dividends in new shares at net asset value. By taking advantage of these invitations to reinvest, a stockholder may find, after not many years, that a large portion of his shares were obtained without paying a sales charge.

When a man buys stock, expecting to hold it for only a few years, the wisdom of paying a selling charge is more doubtful. But a moderate difference between the investment performances of two funds can amount to more than the sales charge even in a period as short as five years.

An investor wanting the convenience of buying and selling through local representatives naturally must choose a fund that these local people are willing to represent; and this generally involves a sales charge. For other funds, an in­vestor must use mail, phone, or wire.

The main guide to future results in a mutual fund lies in its over-all performance record in recent years. In the stand­ard form of performance table, showing the results of buying a fund's shares on a certain date, the purchase cost must include the sales charge, if any, and its effect is automatically reflected in the results shown. So if an investor's main con­cern is to select a fund with one of the best records, these standard tables and charts give him a fair comparison among companies, without his even bothering to notice which of the funds has a sales charge.

In comparing performance records, an investor runs into an interesting situation. Most of the companies with fine records reach that standing in spite of having typical sales charges. So in spite of all the fuss raised about selling ex­pense, our suggestion is that an investor select a fund primar­ily on the basis of its performance record, and doesn't worry about sales charges.