Can a mutual fund invested primarily in bonds protect its shareholders against inflation? Robert A. G. Monks, chairman of the Boston Company, a 120-year-old fiduciary firm here, claims that a new fund cleared this week by the Securities and Exchange Commission (SEC) will accomplish that fancy trick. In face, the fund was originally to be named "Inflation Protected Income." The commission apparently deemed that title too strong, however, and the fund was renamed "Income and Price Index Fund."
Some months of delay in approval of the fund, the forcefully spoken executive says, was due to a jurisdictional question between regulatory agencies in Washington. Should the fund be regulated by the SEC or the Commodity Futures Trading Commission? The SEC won the dispute.
"This fund." Mr. Monks holds, will give investors a very serious opportunity to protect their capital against inflation and deflation."
That's a big claim in today's inflationary environment. With inflation running around 13 percent, not even the new $10,000, six- month money-market certificates offered by banks and savings and loan associations can keep up, despite saying interest of a bit more than 12 percent. Stock prices certainly haven't kept up with inflation in the last decade. Nor have bond yields.
To support its claim, the investment management company has done computer simulations of its proposed investment strategy for the fund for the years form 1969 through 1978, and they beat the wholesale price index (renamed last year the producer price index). It didn't quite top that index in the first few years, but the simulated fund's net asset value rose faster than wholesale prices in the more recent years. The fund's original proposed prospectous noted in large type: ". . . the results of the simulation should not be construed as depicting the likely performance of the fund in the future. . . ." The SEC, however, did not even allow a reference to this simulation in the final prospectus. This prospectus will make comparisons between a Department of Commerce commodity index and the nation's inflation record.
In any case, Mr. Monks lists a few basic characteristics of the investment strategy:
1. It will invest 85 percent of the shareholders money in investment-quality bonds.
2. The remaining 15 percent of the funds will be put into money-market instruments.
3. It will buy "a proxy for the wholesale price index." It will do so by purchasing futures contracts for some 16 commodities whose prices have risen in the past in close proximation to that price index.
"Don't fight inflation -- buy it." Mr. Monks says.
This third purchase is possible because of a quirk of the futures markets. Mr. Monks explains that the fund can put up only 7 to 10 percent of the value of a contract as "earnest money," and that amount can be posted in Treasury bills. By this leveraging technique, the fund can use $1,000 to buy $850 in bonds, $150 in money-market instruments, and around $500 in commodity futures.
Futures, of course, are volatile. They go down as well as up. But, Mr. Monks notes if commodities go down in price, usually bond prices will be going up. It will be an indication of slowing inflation.Or, vice versa, if commodity prices are going up as inflation increases, interest rates will be rising and the price of outstanding bonds declining.
"What we have ended up with here is a hedged package," he says. "It is the first fund of this kind filed with the SEC."
The fund is being sold initially by two underwriters -- Shearson Loeb Rhoades and Thomson McKinnon Securities Inc. Mr. Monks hopes they make an initial sale of at least $50 million. The sales charge will be 7.5 percent of the amount invested.
The fund will be managed by the Boston Company Income Securities Advisors Inc., a wholly owned subsidiary of the Boston Company. The group manages more than $5 billion in money.