Capital Share

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.

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.

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.

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.