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Learning from one another's mistakes: investment trusts in the UK and the US, 1868–1940

Published online by Cambridge University Press:  16 September 2009

Janette Rutterford
Janette Rutterford
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Abstract

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.

Résumés

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.

Abstrakte

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.

Resúmenes

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.

Type
Articles
Information
Financial History Review , Volume 16 , Issue 2 , October 2009 , pp. 157 - 181
Copyright
Copyright © European Association for Banking and Financial History e.V. 2009

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References

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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).

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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.

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117 The Economist, 21 March 1931, p. 621.

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119 The Economist, 2 May 1931, p. 950.

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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.