What Is a Capital Share?
Capital shares are a share class offered by a dual-purpose fund. In a dual-purpose fund, investors can invest in either capital shares for gains or income shares for dividends.
- Capital shares are a share class offered by a dual-purpose fund.
- In a dual-purpose fund, investors can invest in either capital shares for gains or income shares for dividends.
- Dual-purpose funds were introduced in the 1960s and gained popularity in the 1970s, though many dual-purpose funds closed in the 1980s after new tax rules changed tax obligations for the funds.
- By the 1990s, most dual-purpose funds were completely phased out.
- These shares can be classified as "high risk" and should be balanced by more tepid, less volatile offerings.
Understanding Capital Shares
Capital shares typically attract investors seeking capital growth. They are one type of share class offered in dual-purpose funds. Dual-purpose funds were introduced in the 1960s and gained popularity in the 1970s with fund offerings from some of the industry’s top money managers.
Popular versions of these funds included the American Dual Vest Fund, managed by Haywood Management; the Gemini Fund, managed by Wellington Management; Income & Capital Shares Inc., managed by John P. Chase Inc.; the Leverage Fund of Boston, managed by Vance, Sanders & Co.; and the Scudder Duo Vest fund, managed by Scudder, Stevens & Clark.
Many dual purpose funds closed in the 1980s after new tax rules from the Internal Revenue Service changed the tax obligations for the funds. By the 1990s, most dual-purpose funds were completely phased out.
Dual-purpose funds were structured as closed-end funds with two types of shares offered. Similar to mutual funds, they represented portfolios of pooled securities that traded on exchanges. Mutual fund companies could structure each class of shares at their discretion, deciding on individual fees and expenses by share class.
Another unique feature of dual-purpose funds was their holding period. These funds had a specified duration in the market with a target liquidation date. At the target date, dual-purpose funds would return the principal to investors.
Growth investing is similar to value investing, but value investments trade on "underpriced" companies, not necessarily those that are new or emerging.
Capital Shares vs. Income Shares
Income shares represent the second type of share class in dual-purpose funds. These shares could be referred to as preferred shares. Income shares of the fund targeted income investors seeking distributions and dividends. They entitled investors to distributions and dividends paid from the fund.
While the majority of dual-purpose funds focused primarily on equities and income stocks, they also held some fixed income and cash from which interest distributions were made.
Income shares received distributions and dividends throughout the duration of the fund. At expiration, the fund returned principal. These shares were also preferred, which made them the first priority at the target maturity date.
Capital Share Investing
As the name suggests, capital shares focused on capital gains appreciation. These shares benefited the most from rising prices and active management. Most dual purpose funds had flexible management styles that allowed fund managers to choose securities from a broad universe. Capital shares could also be referred to as common shares.
Capital shares offered benefits through long-term investment. While they did not pay dividends, they did return capital and capital gains to investors at the maturity date.
Growth Investing Today
An investment style that focuses on increasing capital is called a growth strategy. Investors who follow this strategy will invest in companies that are usually young companies or newly formed, which the investor thinks will return above-average rates once the company is firing on all cylinders.
One can argue that most investing is growth investing because investors choose to place their money in companies or securities that will increase over time. However, growth investing is categorized by investment in growth-specific companies. These are risky investments, as the companies haven't had time to be tested and usually lack a proven financial history.
Growth investing requires that investors choose aggressive companies such as small-cap tech companies or unproven biotech companies. again, growth investing is considered a fairly risky approach to investing and should constitute the most offensive, aggressive parts of an investor's portfolio.
What Is a Closed-End Mutual Fund?
A closed-end fund is a mutual fund that offers a fixed number of shares through one initial public offering (IPO) to raise capital for the initial investment. The shares offered to trade on stock exchanges. However, no new shares will be created and therefore, no new money would flow into the fund.
What Is a Hybrid Fund?
What Is the Difference Between a Closed-End Fund and an Open-End Fund?
An open-end fund will issue new shares when investors choose to buy into it. This differs from a closed-end fund, which will not see new shares issues irrespective of investor interest. If an investor wants access to a closed-end fund, they would need to purchase those shares on the open market.
What Are Some Growth Investing Tips?
One of the most important parts of growth investing is making sure you are appropriately balanced for your strategy. Investors looking to invest in a growth strategy should consider a company's future earnings potential, profit margins, return on equity (ROE), share price performance, and historical earnings. A 100 percent growth portfolio is considered extremely aggressive, which is why most investors have portfolios that balance growth with value picks as well.
The Bottom Line
Capital shares are offered by a dual-purpose fund, where investors can choose between shares for gains or income shares for dividends. However, over time, these types of funds have become less attractive when compared to the ease and low cost of growth strategy exchange-traded funds. These types of investment strategies are considered fairly aggressive and should be considered an offensive part of an investor's portfolio, and are typically balanced with other securities that carry less risk.