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Subject: Making Money In The Mutual
Date: Wed, 11 Nov 92 12:52:31 EST
Message-ID: <7.1992Nov11.125231@AmeriCast.com>

11/11/92


TITLE Making Money In The Mutual ICI Endorses Proposals For In-
terval Fund

But Not Everyone Sees The Need For Periodic Redemptions Doug
Rogers The Investment Company Institute plans to support a propo-
sal before the Securities and Exchange Commission to create a new
class of funds: interval funds.  The proposal would create two
types of funds that at periodic intervals could repurchase or
redeem their shares. Both types would include those structured as
open-end funds and closed-end funds.  But the ICI, a national as-
sociation of the mutual fund industry, has expressed opposition
to one of the fund types, which it says is confusing to inves-
tors.  "The institute supports the proposals to permit closed-
end and open-end interval funds, although we believe that several
modifications are necessary," Craig Tyle, the institute's vice
president for securities, said in a letter to the Securities and
Exchange Commission.  He urged that the proposal involving so-
called daily extended payment funds be withdrawn. These proposed
funds would allow daily redemptions but would send checks off to
shareholders only periodically.  The other type of interval fund,
which the ICI endorses, could repurchase or redeem only on a
predetermined day. Therefore, there would be less potential for
investors to confuse these funds with traditional mutual funds,
Tyle said.  Tyle noted that the ICI previously had urged the SEC
to take action to relax the division between open-end mutual
funds, which redeem daily, and closed-end funds, which do not
redeem their shares but trade on stock exchanges.  "If the
current dichotomy between open-end and closed-end funds is re-
laxed, investors will have the opportunity to invest in products
that contain some of the attributes of both structures," the
letter said.  Tyle said that investors in traditional open-end
funds have the assurance that they can redeem their shares on a
daily basis and receive proceeds equal to the net asset value of
their shares within seven days.  Consequently, open-end funds are
restricted in how much they can invest in illiquid securities.
They also are forced, as a practical matter, to hold cash that
might otherwise be invested.

In contrast, Tyle said that since closed-end funds do not offer
redeemable shares, they may invest in less liquid securities and
do not need to maintain cash to cover potential redemptions.
However, investors in closed-end funds cannot liquidate their
holdings at net asset value and must look to a secondary market
for liquidity.  Having regular redemptions would keep exchange-
traded funds' prices close to NAV.  The ICI's comment letter also
proposed that the new open-end interval funds be prohibited from
calling themselves mutual funds.  In addition, the ICI recommend-
ed that the new interval funds be required to inform potential
investors of their limited redemption and repurchase rights.
While few participants in the mutual fund industry see much wrong
with introducing interval funds, some question the need. Cather-
ine Gillis, editor of Morningstar Closed-End Funds, argues that
if investors want regular redemptions, they can simply invest in
open-end funds. If they want the opportunity of buying assets at
a discount, they can purchase closed-end funds, as many of them -
particularly stock closed-end funds - trade at discounts to NAV.
Closed-end funds that convert to interval funds - if that is
eventually allowed - would give shareholders who bought at a
discount a chance to cash out of the fund at the higher NAV. But
the shareholders who remain would be in a smaller fund where ex-
penses are spread over a smaller base, Gillis notes. In addition,
The fund might end up with a loss from having to sell securities
at an unfavorable time to meet the redemptions.  ***

The Investor's Business Daily Mutual Fund Index of 20 diversified
growth funds has made a powerful uptrend in the past five weeks
and has been outperforming the Standard & Poor's 500-stock index
for the past 11.  The index also is 12 days into its latest move
above its 200-day moving average. The 50-day moving average ap-
pears only days away from intersecting the 200-day average, which
it crossed beneath May 22. The last time the 50-day moving aver-
age crossed above the 200-day average was in Feb. 22, 1991, when
the index was at about 189.  The index's relative strength line,
which measures how the 20 funds are performing against the S&P
500, is at a 31-week high.  The index is down about 5.8% from its
all time high of 246 set on Jan. 15 this year, and up about 11.5%
from the year's low of 207.98 set on June 18.

This article is copyright 1992 Investors Business Daily. Redis-
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