A Stop to the Swap?

So many trinkets were attached to a minor tax bill passed by Congress last October that the measure became known as "the Christmas Tree Act of 1966."

As far as some investors and mutual-fund salesmen are concerned, one of the uglier ornaments was a rider tightening up Section 351 (a) of the Internal Revenue Code. It ruled out the establishment of any exchange funds or--as they are more commonly known--swap funds that had not been registered with the Securities and Exchange Commission before last Jan. 1.

Designed for the stockholder with a large interest in a single stock and a distaste for capital-gains taxes of up to 25%, the swap enables him to pool his shares with similar owners of other stocks and profit from diversification. So successful has the idea been that 26 swap funds are now operating, and 13 more were registered before the cutoff.

Fast Rise. Even in the vast and fast-growing mutual-fund business, the swaps have had a remarkable rise. The first was organized less than seven years ago by Denver Banker William M.B. Berger, 41, who had the bright--and right--idea that Section 351 (a), which had been drawn to allow the tax-free transfers of property to a new corporation in exchange for stock, could also apply to individual stockholders. His Centennial Fund drew 191 investors, who pooled securities worth $25,800,000. Berger's idea has been widely copied. Boston's Vance, Sanders & Co. operates four funds currently worth $311.2 million. Pittsburgh Fund Manager John F. Donahue, 42, a West Point graduate and onetime SAC pilot, will, with six new funds registered before the cutoff date, soon be overseeing 13 swaps with a total of $500 million in them.

In all, some 24,000 people now have nearly $1 billion worth of "deposits" in such funds. Studying twelve swap funds, the Wall Street firm of Arthur Wiesenberger & Co. found that their average per-share value declined 7% last year v. a 1.2% drop for capital gains-type funds and a 2.8% decline for growth funds. The participants scarcely mind. They range from moguls down to Sears, Roebuck employees retiring with large blocs of stock, and they are mostly interested in postponing that capital-gains bite while diversifying under professional management.

Big Ticket. While depositors now in swaps will continue to enjoy their benefits, no newcomers can be admitted after April 30. The newly forming funds, as a result, are being swamped. "We're doing a really big business now," says Roger S. McCollester, national manager of mutual-fund sales for Dean Witter & Co., "because investors feel this is the last train out of the station."

Brokers like McCollester insist that the Government is making a mistake by ending the swaps on the grounds that they are depriving the U.S. of capital-gains tax revenue. Left to their own devices, the professionals maintain, stockholders are not likely to sell the stocks and pay the tax; moreover the Government collects whenever fund managers sell off some shares to pay costs or make portfolio changes. The brokers, of course, are also sorry to lose "big ticket" business. The average swap-fund transaction involves $85,000 in stock and a $2,975 commission v. the average commission of about $80 for all transactions on the New York Stock Exchange.

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