What it means
The dual-purpose fund split a single portfolio into two claims. Income shares collected essentially all the dividends and interest the portfolio earned; capital shares collected essentially all the price appreciation.
The structure let one fund serve two clienteles. Investors wanting regular cash flow bought income shares, while investors wanting growth bought capital shares, each paying for exactly the return stream they valued.
These funds were closed-end. They issued a fixed number of shares in an initial public offering, after which the shares traded on an exchange at market prices that could differ from the daily net asset value.
They also had fixed lives. Each fund carried a stated maturity date when it would wind up and return capital to shareholders according to the fund's terms.
Well-known examples included the Gemini Fund, the Scudder Duo Vest fund, the Leverage Fund of Boston and the American Dual Vest Fund. In their day they were a mainstream way to tailor income versus growth.
The structure died of tax changes. Shifts in IRS rules in the late twentieth century removed the tax logic that made splitting income from gains attractive, and the funds disappeared by the 1990s.
The idea did not vanish entirely. Modern income funds, preferred share classes and split-capital structures abroad echo the same notion of separating cash flow from appreciation.
For a reader of older financial documents, the term matters mostly as history. Income shares explain how fund sponsors once productized the choice between income now and growth later.
In practice
Real-world examples.
Example
A 1970s investor wanting retirement income buys the income shares of a dual-purpose fund. She receives the portfolio dividends while forgoing the capital gains, which belong to the capital shareholders. Her quarterly cheques arrive without her having to sell anything.
Example
A young investor in the same fund buys capital shares instead. He receives no dividends along the way but claims the appreciation when the fund reaches its maturity date. His result depends on how far the portfolio has risen by then.
Example
A researcher reading a 1975 annual report sees the fund trade at a premium to net asset value. Like any closed-end fund, market price and NAV could drift apart. She notes that investors were paying for the income stream itself, not just the underlying securities.
Formula
Calculation
A simplified split illustrates the deal. Suppose a dual-purpose fund portfolio worth $10,000,000 earns 4% a year in dividends and appreciates 6% a year.
Income shareholders receive the 4% distribution stream, which is $400,000 a year ($10,000,000 x 4%). If there were 1,000,000 income shares, that would be $0.40 per share each year. Capital shareholders receive none of it.
Capital shareholders, by contrast, accumulate the appreciation of about $600,000 a year ($10,000,000 x 6%), realised at wind-up. Income shareholders receive their stated residual according to the fund's terms.
The trade is clear in the arithmetic: the income shareholder gave up the 6% growth for the 4% cash flow, and the capital shareholder did the reverse. Whether either came out ahead depended on what the market actually did over the fund's fixed life.Case study
Seen in the real world.
The following is an illustrative and fictional case. In the late 1980s, fictional schoolteacher Margaret Ellis inherited a brokerage statement showing shares of a dual-purpose fund's income class. Her broker explained the design. Her shares had paid steady quarterly distributions for years, which was exactly why her father had bought them to fund his retirement. The statement also showed the fund's maturity date approaching.
At wind-up she would receive the income-share residual, while the capital shareholders, strangers she would never meet, would collect the portfolio's growth. Margaret noticed her shares traded slightly below net asset value on the exchange. Her broker noted that closed-end funds often did, and that selling early meant accepting that market price rather than NAV. She held to maturity and received her distribution stream plus the final payout. The fund itself was never replaced, because by then the tax logic behind dual-purpose funds had already disappeared.
Watch out
Common mistakes.
- Assuming income shares still exist in US markets. Dual-purpose funds were phased out by the 1990s after tax rule changes; the term is now mostly historical.
- Confusing income shares with preferred stock generally. The label overlaps informally, but the specific meaning is the dual-purpose fund share class.
- Ignoring the closed-end discount. Market prices of these shares could diverge from net asset value, so selling early could cost or benefit the holder.
Questions
People also ask.
What did income shares pay?
Essentially all the dividends and distributions the fund portfolio generated, while capital shares took the appreciation.
Why did dual-purpose funds disappear?
Changes to IRS tax rules removed their tax appeal, and the funds were phased out by the 1990s.
What is the modern equivalent?
Income funds and vehicles that emphasise distributions, which pursue steady cash flow without splitting one portfolio into two classes.
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