Investment Trusts

At the height of the 1929 investment trust boom people were eager to pay $1 for the privilege of having $1 invested in their behalf by Wall Street banking houses. The extra $1 did not actually go to the investment bankers. But in the open market people scrambled to buy investment trust stocks for a price which was twice the value of the assets behind them. Assumption was that any banker worth the name could, in a trice, make at least 100% on money entrusted to his care. When it was belatedly discovered that banker-managed investment trusts could lose money just as fast as any individual investor, a terrific public revulsion occurred. One result was the quick growth in the first years of Depression of the so-called fixed trust, an institution in which securities were bought & sold by an inflexible formula. In its early form the fixed trust offered a virtual guarantee that securities would be sold for less than their purchase price because the trust agreement usually provided that stock could be disposed of only after dividends had stopped. Meantime, general management trusts were so unpopular that their stocks frequently sold at 50% of their asset value, indicating that people were eager to take $1 for something worth $2 just to get it away from the bankers. By last week, with reports in from most major management trusts for 1935, it was possible to survey a record which included three years of declining markets, three years of Recovery.

At the year's turn, the net asset value of the 15 U. S. management trusts for which comparable figures are available stood 33% below the figure at the end of 1929. This was after adjustments for capital changes such as bond or stock retirements. During the same period the Standard Statistics stockmarket average, which includes 90 issues, showed a net decline of 36.9%. At first glance it would appear that investment trust managers did somewhat better than a blindfolded investor who picked his purchases by sticking a pin in the stock tables.

However, the trusts had, on the average, nearly one-fourth of their assets in the form of bonds, which declined very little, or cash, which declined not at all. This stabilizing factor kept trust assets from diving to the full depths reached by the stockmarket averages but also retarded their recovery. And the inescapable conclusion was that on their common stock holdings, investment trust managers as a whole would have done better to buy the list of shares in the Standard Statistics averages and take a six-year vacation.

Aside from providing small investors with an opportunity to obtain broad investment diversification, an investment trust's only justification is a record better than the market averages. U. S. management trusts as a whole have provided employment for hordes of bright young college graduates, a good living for their managers and plenty of commissions for their banking sponsors. Otherwise they have failed to justify their existence.*

Among big trusts, some of the most conspicuous exceptions to this generalization are:

Atlas Corp. is the biggest U. S. trust ($103,929,000) and the most successful (asset value of its common stock has tripled since 1929). President Floyd Bostwick Odium entered Depression loaded with cash, kept liquid until bargains were plentiful, then bought other trusts by the dozen at heavy discounts from their asset value. Thus, in effect, he bought securities not at Depression lows but far below. Last year he cashed in on his paper profits to the extent of $11,000,000. Common stock dividends were initiated last September with a 30-c- payment, boosted fortnight ago to 40-c-.

President Odium is a great believer in "special situations." At the year end Atlas' special situations included Radio-Keith-Orpheum Corp. and Utilities Power & Light, in both of which Mr. Odium is heavily committed. But Mr. Odium does not like any "situations" which involve control. Last week in San Francisco he finished negotiating the sale of American Trust Co., a $271,800,000 institution which came with one of the trusts he picked up during Depression. Worked out by G. (for George) Parker Toms, astute Atlas West Coast representative, the deal will give Atlas some $10,000,000 in cash, return control of American Trust to elated San Franciscans.

General American Investors, jointly managed by the Manhattan banking houses of Lehman Brothers and Lazard Freres, showed a decline of only 1% in net asset value in the last six years against the average trust record of 33%. General American is one of the few big trusts that has called the stockmarket's major turns with any real success.

Lehman Corp. sold 1,000,000 shares of stock in 1929 for a flat $100,000,000 in cash. During Depression it found the most profitable use for its funds to be investments in its own stock, which sold at big discount from asset value. More than 300,000 shares were thus retired, and though Lehman's total assets are now only $62,700,000, asset value per share of common stock was more than $116 at the year-end as against $111 on the first day of business.

Mayflower Associates showed an actual gain in net asset value in the six years since 1929. Under the personal management of Robert Earll McConnell, a highly successful mining and patent promoter who gets a cut from the trust's profits, Mayflower goes in for special situations even more heavily than Atlas. It made a tremendous profit on Rhodesian copper stocks early in Depression, has always kept a large part of its resources in cash or Government bonds to catch a bargain when it flits by. Though total assets are more than $13,700,000 Mayflower stock is inactive.

*Into the history and methods of U. S. investment trusts the Securities & Exchange Commission is now probing deeply. On the basis of its report, investment trusts may be brought under strict Federal supervision, perhaps on the ground that they are quasi-fiduciary institutions.

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