TRUSTEES ON TRIAL
By NICHOLAS DAVENPORT
THE law governing the powers of investment for trustees has re- mained substantially unchanged for seventy years and at long last a Government White Paper on its proposed amendment has been published, to the great delight of the Stock Exchange. The essence of the Government proposals is to allow trustees first, to invest in a much wider range of fixed- interest sterling securities, includ- ing mortgages on property. the debentures of UK companies and the London issues of the World Bank; secondly, to invest up to half their funds in the equity shares of large UK companies, in the units of authorised unit trust companies and in tile shares of building societies. Why the stock markets should regard this as an occasion for selling gilt-edged on a fall and buying equity shares on the top of a 50 per cent, rise is past my understanding. It may be twelve months before the amendment becomes law and before dilly- dallying trustees decide that it is worth while to cut a capital loss and reduce the immediate income of their trust funds through a switch from gilt- edged to equity shares. The more enterprising trustees have long since gone to the Courts to vary their power of investment, and most new trusts have the usual wide investment clause. But some scribe has worked out that the White Paper could affect gilt-edged holdings of some £500 million. Perhaps—but spread over five years, if I know anything about the family lawyer.
The White Paper has some curious ideas about the practice of investment. Of course fixed- interest securities are hopelessly unrewarding in periods of inflation when money loses its value, but it is very improbable that a trust can maintain its real position by holding only half its capital in equity shares. Since 1938 the Financial Times index of equities has done little better than keep pace with the 240 per cent, rise in prices, while gilt-edged has fallen by 32 per cent. Thus a trust fund under the White Paper rules would have deteriorated substantially in real terms since 1938. Since 1949 it would have done better, for equities have advanced, according to the index, by 217 per cent., but the restrictions upon the choice of equity shares make it unlikely that the trustees will ever come off as well as the Financial Times index.
Under the new rules written advice has to be taken—except in the case of an institutional trust company—from a 'competent professional finan- cial adviser' and stockbrokers, accountants and bank managers are named as examples. I would have thought that stockbrokers know too much and accountants and bank managers know too little for practical investment selection. Trusts have to take longish views and only a professional economist is capable of naming industries for long-term investment. And if he were an econo- mist of the high intelligence of Keynes he would be changing his opinion every six months and driving the trustees to distraction. Far better leave the trustees to use their own common sense after reading a weekly journal like the Spectator.
There is also a clause in the White Paper which to me does not make sense. The trustees can invest in equities provided not more than 10 per cent. of the fund or £250, whichever is the greater, is invested in any one company. If the fund were as small as £2,500 it would be much too risky to invest 10 per cent, in one company. If the fund were as large as £250,000 and £125,000 were put
into equities it would be impossible to find 500 different equity shares with good long-term pros- pects and it would be quite impracticable for the trustees to manage such a portfolio even if it could be built up to such a size. The draughtsman of this paper could not have had much practical experience of investment.
For the rest the paper follows the conventional investment lines—that the company selected for equity holding must be large—with a paid-up capital of £1 million—and must have paid divi- dends in each of the five preceding years. This addiction to the 'blue chips' will mean some heavy losses for the trust funds. Consider what happened in market values over the years to such 'blue chips' as Imperial Tobacco, Coats, Courtaulds, Vickers, Cunard, etc. As the Financial Times remarked, whereas it was hitherto possible to lose half the capital of a trust by investing in gilt-edged, it is now possible to lose the lot by investing in the wrong equities.
The White Paper may reassure trustees that they are under no obligation to revise their port- folios but, believe me, from now on they will be on trial and will have to give an account to their beneficiaries of their wisdom or lack of it in the choice of equity shares. It is a terrifying prospect for them! They can now never afford to go to sleep after making their decisions. As everyone knows, equity shares go up and down and if a trust falls in when they are down there will be the devil to pay. Some ardent beneficiaries will want to know why the trustees failed to sell at the top or buy at the bottom.
A firm of brokers has been unwise enough tc publish in its investment letter a charming fairy story which tells the truth about cyclical move- ment in equity shares. If a fund of £10,000 had been locked away in the Financial Times index at the end of 1949 it would now be worth £31,784: but if it had been sold out at the top in 1951, bought back at the bottom in June, 1952, sold out again in July, 1955, bought back in Novem- ber, 1956 (Suez), sold out in July, 1957, and bought back in February, 1958 (after the Thorneycroft slump), it would now be worth no less than £56,836! As the broker's story went, this fantastic capital increase of over 51 times was only secured because a good fairy rang a bell every time the market touched the high of a bull market or the bottom of a bear market. No trustee can be expected to be innocent enough to have the guidance of a good fairy. The trouble is that with- out even a wicked fairy intervening, some trustees will buy at the top and sell at the bottom. I fore- see a wholesale resignation of trustees when the trustee law is finally changed.
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