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 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. Shares of the funds 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 principal to investors.

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.

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 first priority at the target maturity date.