Published online by Cambridge University Press: 16 September 2009
This article explores the development of the closed-end investment trust in both the UK and the US, in the context of the investment management strategies adopted and whether they provided value-added services for investors. Although US investment trusts of the 1920s boom years were heavily influenced by their earlier UK counterparts, they differed from British investment trusts in a number of key ways, in particular, size, capital structure, tax and accounting practices, management, and costs. These differences led to their relatively much worse performance in the stock market crash of the late 1920s and early 1930s. This poor US trust performance led directly to the creation of the US open-ended ‘fixed trust’, marketed as an antidote to the generally poor management of conventional closed-end investment trusts. As confidence in mutual funds slowly returned in the United States, open-ended funds were gradually given more flexibility, but US investment trust companies, with share prices at a steep discount to liquidation value, and partly blamed for the crash, were encouraged to convert to mutual fund status by the 1936 Revenue Act. By 1944, open-end funds had overtaken investment trusts in terms of asset size, a phenomenon that did not occur in Britain for another 30 years.
Cet article explore le développement des sociétés d'investissement fermées au Royaume-Uni ainsi qu'aux Etats-Unis, dans le contexte des stratégies adoptées de gestion des portefeuilles, et si elles ont fourni des services à valeur ajoutée pour les investisseurs. Bien que les sociétés d'investissement américaines des années 1920 de prospérité furent lourdement influencées par leurs contreparties britanniques plus tôt, elles différaient des sociétés d'investissement britanniques de plusieurs manières principales, en particulier la taille, la structure du capital, les pratiques en matière d'impôts et de comptabilité, la gestion, et les coûts. Ces différences ont conduit à leur performance relativement plus mauvaise dans le crash du marché boursier de la fin des années 1920 et du début des années 1930. Cette pauvre performance des sociétés américaines a conduit directement à la création du ‘fixed trust’ ouvert américain, lancé sur le marché comme une antidote à la gestion généralement pauvre des sociétés d'investissement fermées conventionnelles. Tandis que la confiance dans les fonds communs de placement mutualistes revenait lentement aux Etats-Unis, les fonds ouverts ont graduellement reçu davantage de flexibilité, mais les compagnies de société d'investissement américaines, avec des cours d'actions à un décote forte à la valeur de liquidation, et en partie blâmées pour le Crash, furent encouragées à se convertir en statut de fonds mutuel par la loi sur les revenus de 1936. D'ici 1944, les fonds ouverts avaient rattrapé les sociétés d'investissement en termes de taille de capitaux, un phénomène qui ne s'est pas produit en Grande Bretagne pendant encore 30 années.
Dieser Artikel beschäftigt sich mit der Herausbildung geschlossener Investitionsgesellschaften in Großbritannien und den USA vor dem Hintergrund der ergriffenen Investitionsmanagementstrategien und mit der Frage, ob sie eine Werterhöhung für Investoren mit sich brachten. Obwohl die US-amerikanischen Investitionsgesellschaften der Hochkonjunkturzeit in den 1920er-Jahren deutlich durch die ihnen vorausgehenden britischen Pendants geprägt wurden, unterschieden sie sich jedoch von diesen britischen Investitionsgesellschaften in mehrerlei maßgeblicher Hinsicht – insbesondere in Bezug auf Größe, Kapitalstruktur, Besteuerungs- und Buchführungspraktiken, Verwaltung und Kosten. Diese Unterschiede führten zu ihrem relativ deutlich schlechteren Abschneiden beim Börsenkrach der späten 1920er- und frühen 1930er-Jahre. Dieses schlechte Abschneiden der US-Investitionsgesellschaften führte direkt zur Schaffung des US-amerikanischen offenen ‘Fixed Trust’, der als Gegenstück zum im Allgemeinen schlechten Management herkömmlicher geschlossener Investitionsgesellschaften angeboten wurde. In dem Maße, in dem das Vertrauen in Anlagefonds wieder in die USA zurückkehrte, erhielten offene Investitionsgesellschaften nach und nach mehr Flexibilität, jedoch wurden US-Investitionsgesellschaften, deren Aktienkurse stark verbilligt waren oder den Liquidationswert erreicht hatten, und die teilweise für den Börsenkrach verantwortlich gemacht wurden, durch den Revenue Act von 1936 dazu ermutigt, in einen Anlagefondsstatus überzugehen. Im Jahre 1944 hatten dann offene Fonds andere Investitionsgesellschaften in Bezug auf Größe des Anlagekapitals überholt – ein Phänomen, das Großbritannien erst 30 Jahre später erreichte.
Este artículo explora el desarrollo del fondo de inversión cerrado (‘closed end investment trust’) tanto en Reino Unido como en EEUU, en el contexto de las estrategias de gestión de inversión adoptadas y si éstas proveen servicios de valor añadido a los inversores. Aunque los fondos de inversión de EE.UU durante el boom de los años 20 estuvieron influenciados por los fondos británicos previos, diferían de los fondos de inversión británicos en varios aspectos importantes, en particular, en tamaño, en estructura de capital, en normas de impuesto y de contabilidad, en gestión y en costes. Estas diferencias les llevaron a una actuación relativamente mucho peor durante el crack bursátil a finales de los años 20 y principios de los 30. Esta pobre actuación de los fondos de EE.UU llevó directamente a la creación del fondo fijo de inversión abierto de EE.UU (US open-ended ‘fixed trust’), comercializado como antídoto para la mala gestión de los fondos de inversión cerrados. Mientras la confianza en los fondos mutuos (‘mutual funds’) volvió lentamente a los EE.UU, los fondos de inversión abiertos se hicieron paulatinamente más flexibles, pero las compañías de fondos de inversión de EE.UU, con sus acciones cotizando por debajo de su precio de liquidación, y en parte culpadas por el crack, fomentaron la conversión de estos a la categoría de fondo mutuo con la Ley de 1936. En 1944, los fondos de inversión abiertos ya habían superado a los fondos de inversión en términos de tamaño del activo, un fenómeno que no ocurrió en Gran Bretaña hasta 30 años más tarde.
1 See the web page http://biz.yahoo.co/edu/mf/sm_mf9.sm.html, accessed 25 February 2009.
2 The London Financial Association and the International Financial Society, both founded in London in 1863, were also aimed at financing industry and modelled on the Crédit Foncier of France. See, for example, Cassis, Y., The emergence of a new financial institution: investment trusts in Britain, 1870–1939’, in Van Helten, J. J. and Cassis, Y. (eds.), Capitalism in a Mature Economy: Financial Institutions, Capital Exports and British Industry 1870–1939 (Aldershot, 1990), pp. 139–58Google Scholar.
3 See K. G. Rouwenhorst, ‘The origins of mutual funds’, Working Paper no. 04–48, 12 December 2004, International Center of Finance, Yale School of Management.
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5 McKendrick, N. and Newlands, J., F&C: A History of Foreign & Colonial (London, 1999), p. 26Google Scholar. The failure of the newly floated Overend, Gurney Bank in 1866 had led to a loss of confidence in the public company. The chairman of the trust, Lord Westbury, had, as attorney-general, carried through the Fraudulent Trustees Bill in 1857 and the Bankruptcy and Insolvency Bill in 1861.
6 Guildhall Library, MS 18000, File 1223.
7 The Times, 20 March 1868, p. 10.
8 Scratchley, On Average Investment Trusts, pp. 52–3.
9 The Economist, cited in McKendrick and Newlands, p. 37.
10 Scratchley, On Average Investment Trusts, p. 16.
11 McKendrick and Newlands, Foreign and Colonial, p. 42.
12 Scratchley, On Average Investment Trusts, p. 16.
13 Ibid., p. 4.
14 Ibid., p. 6.
15 Ibid., title page.
16 Prospectus, Guildhall Library, MS 14235.
17 Share Investment Trust Minute Book, 6th annual meeting of trustees, Guildhall Library, MS 24335.
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20 Scratchley, On Average Investment Trusts, p. 21.
21 McKendrick and Newlands, Foreign and Colonial, p. 50.
22 McKendrick and Newlands, Foreign and Colonial, pp. 47–55.
23 Balogh and Doblin, Report on Investment Trusts in Great Britain.
24 Cassis, La City de Londres 1870–1914 (Alençon, 1987), p. 110.
25 The Economist, 4 February 1893, p. 131.
26 Cited in McKendrick and Newlands, p. 65.
27 Bankers Magazine, cited in Cassis, ‘Investment trusts in Britain’, p. 141.
28 The Economist, 23 May 1896, p. 653.
29 The Economist, Investment Trust Supplement, 1937, p. 1. There is some disagreement as to the number of British investment trust companies in existence in the late nineteenth and early twentieth centuries. Balogh and Doblin, Report on Investment Trusts in Great Britain, cite 70 in 1900, 110 in 1920 and 210 in 1939 (p. 15).
30 Cassis, ‘Investment trusts in Britain’, p. 143.
31 Balogh and Doblin, Report on Investment Trusts in Great Britain, p. 7.
32 The Economist, Investment Trust Supplement, 1937, p. 2.
33 Chamberlain, L. and Hay, W. W., Investment and Speculation (New York, 1931), p. 94Google Scholar and Balogh and Doblin, Investment Trusts in Great Britain, p. 1.
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36 Chamberlain and Hay, Investment and Speculation, p. 107.
37 M. Rottersman, ‘The early history of mutual funds', www.fundexpenses.com/root/data/Book/Early_History_of_Mutual_Funds.htm
38 Financial Chronicle, 27 July 1928.
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43 See McKendrick and Newlands, Foreign and Colonial, p. 87. The Edge Act was blamed for allowing the multiple leverage common to American investment trust structures of the 1920s. See Grayson, T., Investment Trusts, their Origin, Development and Operation (New York, 1928)Google Scholar.
44 The Times, 3 September 1925, cited in Withers, H., Hints about Investments, 2nd edition (London, 1926), p. 239Google Scholar.
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49 The Economist, 30 June 1931.
50 A Report on the Origin, Scope and Conduct of the Study, Nature and Classification of Investment Trusts and Investment Companies, and the Origin of the Investment Trust and Investment Company Movement in the United States: Securities and Exchange Commission, US House document, 75th Congress, 3rd session, no. 707, report part II, chapter IV, p. 276.
51 Balogh and Doblin, Report on Investment Trusts in Great Britain, p. 9.
52 Allen, E. D., ‘Study of a group of American management-investment companies, 1930–36’, Journal of Business of the University of Chicago, 11.3 (July 1938), pp. 235 and 245CrossRefGoogle Scholar.
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58 Ibid., p. 30.
59 Ibid.
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61 Scratchley, On Average Investment Trusts, p. 36.
62 Ibid.
63 The Economist, Investment Trust Supplement, 1937, p. 2.
64 Ibid.
65 Ibid.
66 Chamberlain and Hay, Investment and Speculation, pp. 96–7.
67 Ibid., p. 96.
68 Smith, E. L., Common Stocks as Long-Term Investments (New York, 1924)Google Scholar.
69 Ibid., p. 117.
70 Allen, ‘Study of American management-investment companies’, p. 244.
71 Allen, ‘Study of American management-investment companies’, p. 245.
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74 McKendrick and Newlands, Foreign and Colonial, pp. 200–1.
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76 Investor's Monthly Manual, April 1925, p. 172.
77 Leland R. Robinson, Wall Street Journal, 14 December 1925.
78 Cited in Rottersman, The Early History of Mutual Funds. Blue chips, as defined by B. Graham and D. Dodd, Security Analysis (1934), p. 311, were ‘a select list of highly popular and exceedingly expensive issues’. The term became commonly used in the Wall Street stock market boom of the late 1920s when such stocks were trading on high price-earnings multiples.
79 I. Fisher, in North American Review (1929), cited in Withers, H., The Quicksands of the City (London, 1930), p. 216Google Scholar.
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82 Scratchley, On Average Investment Trusts, p. 6.
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84 McKendrick and Newlands, Foreign and Colonial, p. 47.
85 For a comparison of attitudes of American and British investors to income and capital gain in the nineteenth and twentieth centuries, see Rutterford, J., ‘From dividend yield to discounted cash flow: a history of UK and US equity valuation techniques’, Accounting, Business & Financial History, 14.2 (2004), pp. 115–49CrossRefGoogle Scholar.
86 Scratchley, On Average Investment Trusts, p. 37.
87 For a fuller discussion of reasons for the preference for equity in the United States compared with the United Kingdom, see Rutterford, ‘From dividend yield to discounted cash flow’.
88 Investor's Monthly Manual, May 1919, p. 235.
89 Williams, Investment Trusts in America, p. 43.
90 Chamberlain and Hay, Investment and Speculation, p. 122.
91 Balogh and Doblin, Report on Investment Trusts in Great Britain, p. 37.
92 Ibid., p. 16 and Cassis, ‘Investment trusts in Britain’, p. 141.
93 Bullock, The Story of Investment Companies.
94 For example, the Share Investment Trust trustees in the 1870s met monthly (Guildhall Library, MS 14235, minute book) and the board of the National Mutual Assurance Company, which invested in bonds and in investment trusts, met weekly (Guildhall, Library, MS 34570).
95 It was not until the 1930s that managers and actuaries were allowed onto the boards of British investment trusts companies in any significant numbers. See Chamberlain and Hay, Investment and Speculation, chapter 11,
96 Cassis, ‘Investment trusts in Britain’, p. 152.
97 Guildhall Library, MS 34570, board papers of National Mutual Assurance Company, letter from Mr Curzon, 27 October 1929.
98 Guildhall Library, MS 34570, board papers of National Mutual Assurance Company, memorandum from J. M. Keynes, 1930.
99 Chamberlain and Hay, Investment and Speculation, 1, p. 98.
100 Dowrie and Fuller, Investments, p. 244.
101 Ibid., p. 246.
102 Ibid., pp. 128–9.
103 Leibson, I. B., Investment Trusts – How and Why (Boston, 1930)Google Scholar.
104 P. W. Garrett, in Barron's Weekly, 31 August 1931.
105 Graham and Dodd, Security Analysis, p. 311.
106 Allen, ‘Study of American management-investment companies’, pp. 242–3.
107 Chamberlain and Hay, Investment and Speculation, 1931, p. 100.
108 Ibid.
109 Chamberlain and Hay, Investment and Speculation, p. 246.
110 Ibid., p. 126.
111 The Economist, 21 March 1931, p. 620.
112 A substantial number of reports were produced by the Securities and Exchange Commission as a result of these investigations, including Balogh and Doblin, Report on Investment Trusts in Great Britain, but also, A Report on the Origin, Scope and Conduct of the Study, Nature and Classification of Investment Trusts and Investment Companies, US House document, 75th Congress, 3rd Session, no. 707, and Investment Trusts and Investment Companies. Letter from the Chairman of the Securities and Exchange Commission transmitting a report on commingled or common trust funds administered by banks and trust companies, US House document, 76th Congress, 2nd Session, no. 476.
113 Standard Statistics, cited in Chamberlain and Hay, Investment and Speculation, p. 126.
114 The Economist, 21 March 1931, p. 620.
115 Allen, ‘Study of American management-investment companies’, p. 242.
116 Ibid.
117 The Economist, 21 March 1931, p. 621.
118 Ibid.
119 The Economist, 2 May 1931, p. 950.
120 Balogh and Doblin, Report on Investment Trusts in Great Britain, p. 41.
121 Although, by the outbreak of World War II, fixed trusts outnumbered flexible trusts in Britain. See Burton, H. and Corner, D. C., Investment and Unit Trusts in Britain and America (London, 1970), pp. 254–5Google Scholar.
122 See Rutterford, ‘From dividend yield to discounted cash flow’, p. 135.
123 Balogh and Doblin, Report on Investment Trusts in Great Britain, p. 52.
124 Unit trusts were required to disclose their portfolios unlike investment trusts. See Burton and Corner, Investment and Unit Trusts. It was not until the Companies Act 1948 that investment trusts were required to disclose net asset value, and even then it was only in a footnote to the balance sheet. See McKendrick and Newlands, Foreign and Colonial, p. 106.
125 Allen, ‘Study of American management-investment companies’, p. 254. See also, A Report on Fixed and Semifixed Investment Trusts: Securities and Exchange Commission, US House document, 76th Congress, 3rd Session, no. 567, 1940.
126 Allen, ‘Study of American management-investment companies’, p. 240.
127 Allen, ‘Study of American management-investment companies’, p. 253.
128 For example, the Investment Company Act limits holdings in other investment companies to under 3% and allows bank borrowing only if senior securities have 300% asset coverage.
129 Association of Investment Trust Companies.