UNIT TRUSTS AS INVESTMENTS
By HARTLEY WITHERS Utsar TRUSTS, or Fixed Trusts as they were originally called, have been opportunely invented to help investors to solve their problem in a time of exceptional difficulty. This problem is at all times the same—that of getting the highest possible income, consistent with safety, from the securities in which the investor's money is placed.
In Victorian days, the solution was comparatively easy, for it was found in what used to be called the " sweet sim- plicity " of the Three per cents., furnished by- Consols, which then formed the bulk of the British debt, and for 6o years, from 1836 to 1896, showed amazing steadiness in price, in spite of the frequent crises and occasional wars that afflicted this period. In fact, towards its end the price of Consols rose to a point that induced Goschen to carry out his conversion scheme in 1889, by which the rate of interest was reduced first to 21 and later to 21 per cent.
This change, and other contributory causes, such as rising taxation and cost of living, made investors stray into fields in which higher rates were to be found, with the inevitable accompaniment of greater risk ; but nevertheless the great majority of British investors still regarded either " the Funds " or municipal debts or the prior charges—debenture and preference stocks—of railways and leading industrial companies, as the only securities with 'Which they could sleep in peace. Ordinary shares and stocks were looked upon as speculative, which they necessarily are, and therefore as dangerous and not quite respectable.
This prestige, enjoyed by well-secured fixed-interest stocks, was shattered by the War. Owing to it, unfortunate investors who • had bought Consols at prices ranging from roo to 114 saw them fall below 5o. Their money income, of course, was punctually paid to them, but it was cut into first by -the rising income tax, which soared from is. 2d. to 6s. in the pound, and secondly by the terrific rise in the cost of living. Owing to this latter cause, any income that was left to the investor by the tax-gatherer bought him less than half, in goods and services, of what it provided when he went shopping in pre-War days. Moreover, while he was thus rewarded for his apparent prudence in confining himself to securities which had been considered first rate, he saw his friends who had ventured into industrial ordinary shares enjoying the greatly increased incomes that rising prices poured into the pockets of companies engaged in shipping, shipbuilding, coal-mining and many other kinds of industrial enterprise.
Here was proof enough to show that, at least in times of rising cost of living, ordinary shares, if one were clever or lucky enough to hold the right ones, served one better than fixed-interest stocks. And so they came into fashion as investments and no longer were thought to be disreputably speculative. Investigation into their merits showed that, if held in sufficient number to bring in the law of averages, they paid better at all 'times than fixed-interest stocks, and the investigators hit on the reason. This is, that the directors of well-managed companies never pay away all the profits in dividends, but regularly put part of them to reserve, so building up more earning-power for the future, and, in the case of successful companies, ensuring higher dividends and greater capital value for ordinary shareholders in future years.
But, then, how was the average investor, who had not vast sums at his disposal, to provide himself with the necessary holding of a large enough number of shares to make sure that the misfortunes of some of his companies might be counter- balanced by the growing prosperity of the rest ? Any single company might obviously go wrong, as holders of British railway stocks, once regarded as the most solid induitlial investments, have discovered to their cost. It is literally a case of safety in numbers. But numbers of securities could, until the advent of the Unit Trusts, only be acquired by those who had large bank balances available.
This problem was solved for small investors by the Unit Trusts, which lay in a stock of widely diversified securities and split this fund up into units which they sell to the public in any amounts that suit the means of the buyer. By this method investors with only a few pounds to place can acquire an interest in a large number of industrial and commercial ordinary shares, so securing the benefit of the law of averages in a manner that had hitherto been possible only to the wealthy.
And it is not only small investors who have been benefited by the development of the Unit Trust movement. Large investors also have found in it advantages and conveniences. The securities bought by the various Trusts are held on account of the unit-holders by a trustee of first-rate standing, always, in the case of those Trusts which are members of the Unit Trusts' Association, one of our leading banks or insur- ance companies. This trustee collects the dividends due on the securities and makes a half-yearly distribution to each unit-holder of the portion of the income which is due to _him or her. The trustee also furnishes the necessary evidence of the payment of income tax ; and in this way large investors are saved a good deal of detailed bother by the receipt, in one payment, of income from many channels, with one income-tax certificate covering the whole collection.
Moreover, another advantage that affects all classes of investors lies in the fact that Unit Trust units can always be easily disposed of, on terms which reflect their true value in the market. In this respect they compare very favourably with the stocks of the old-fashioned Investment Trusts, which are often difficult and sometimes impossible to buy or sell and, when dealt in, may change hands at prices which may be above or below their true " break-up " value. Unit- holders, on the other hand, have the right to call on the company that manages the Trust to pay them at any time the price that would be realised by the sale of their portion of the securities in the Fund.
Perhaps, however, the most conspicuous safeguard of the interests of those who invest in Unit Trusts is the existence, already mentioned, of the trustees of high standing, who hold the securities and distribute the income. It is true that legally they may be only custodians and have no further responsibility ; but in fact no bank or insurance company would be so imprudent as to act as trustee to a Fund consisting of improper securities and managed by unprincipled adven- turers, eager to exploit the investing public. The Unit Trusts, at least those that are members of the Association, are thus subjected, before they start and during their operation, to expert scrutiny such as is most unfortunately absent in the case of ordinary companies, formed under the so-called protection of the Companies Acts.
These reasons have marked their creation as a most salutary development, that has saved much public money from being poured down speculative sinks, has brought much business to the Stock Exchange and has, in recent times of stock-market demoralisation, given steady support to security prices, by appealing to real investors, who show their confi- dence in British industry by buying in times of depression.
I should perhaps add that I am personally interested in the success of the movement, being chairman of a company that manages Unit Trusts ; but my statement of their merits will, I think, be fully endorsed by any fair-minded critic who is in a position to judge it.
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