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

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 , 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.
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... This paper also adds to the burgeoning literature on historical asset management practices (Rutterford and Hannah 2016;Morecroft 2017;Morecroft and Turnbull 2019). This literature includes studies of the asset management practices of life assurance companies in other countries such as Australia (Keneley 2006(Keneley , 2012, Denmark, France, Germany, and the Netherlands (Bennet et al. 1984); research on the investment practices of banks (Baker et al. 2009); pension funds (Avrahampour 2015); investment trusts (Hutson 2005;Rutterford 2009;Chambers and Esteves 2014;Rutterford andSotiropoulos 2016, 2017;Sotiropoulos et al. 2021); and research on the asset management style developed by influential figures such as John Maynard Keynes (Chambers and Dimson 2013;Chambers et al. 2015). ...
... This paper also adds to the burgeoning literature on historical asset management practices (Rutterford and Hannah 2016;Morecroft 2017;Morecroft and Turnbull 2019). This literature includes studies of the asset management practices of life assurance companies in other countries such as Australia (Keneley 2006(Keneley , 2012, Denmark, France, Germany, and the Netherlands (Bennet et al. 1984); research on the investment practices of banks (Baker et al. 2009); pension funds (Avrahampour 2015); investment trusts (Hutson 2005;Rutterford 2009;Chambers and Esteves 2014;Rutterford andSotiropoulos 2016, 2017;Sotiropoulos et al. 2021); and research on the asset management style developed by influential figures such as John Maynard Keynes (Chambers and Dimson 2013;Chambers et al. 2015). ...
... Ten-year average annual returns on debentures and equities compared to their percentage holdings by life assurance companies, 1871 to 2011. Sources: Stocks and Shares: 1871-1899:Grossman (2002), 1900-2009: Dimson et al. (2011) 2010: Barclays Capital (2011. Corporate Bonds:Coyle and Turner (2013). ...
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What shapes and drives capital market development over the long run? In this paper, using the asset portfolios of UK life assurers, we examine the role of regulation, historical contingency, and political reactions to events on the long-run development of the UK capital market. Government response to events such as war, hegemony-secured peace, and the wider macroeconomic environment was the ultimate determinant of major changes in asset allocation since 1800. Furthermore, when we compare the UK with the United States, we find that regulation played a limited role in shaping the asset portfolios of the UK life assurance industry.
... They are important because the latter fund -introduced in 1776 by bankers in Utrecht -defined a possibility to invest a portion of assets in Eendragt Maakt Magt, which is considered as a fund-in-fund investment today. His third fund, Concordia Res Parvae Crescunt founded in 1799, is equally important to note as its prospectus stated that the fund would invest in undervalued securities, trading below their intrinsic value, which makes Concordia Res Parvae Crescunt the first actively managed fund lead by the same principles as some of the most successful and best-known funds today(Mosselaar, 2018).Foreign and Colonial Government Trust was, furthermore, the first British investment trust, founded in 1868 by Phillip Rose(Rutterford, 2009). Some of the benefits of investment funds widely known today were recognized in the trust's prospectus. ...
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... These Scottish and English trusts served as a guiding star for the early investment trusts in the United States, which experienced a boom in 1920s with the number of trusts exploding from 160 in 1926 to approximately 750 in 1929, just before the Wall Street Crash. investment trusts in the Unites States had a different management style than those in Britain, often focusing on achieving extraordinary returns by being highly-leveraged and relying on risky investment strategies such as market-timing and stock-picking(Rutterford, 2009). The failure of most of these trusts after the stock market crash revealed the need to increase supervision and transparency of investment funds.The first regulation introduced in 1933 was Securities Act, known as "truth in securities", and was enacted to regulate the registration and issuance of new securities to the public. ...
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Artificial intelligence is neither a new concept nor a completely new research topic. However, advances in data availability and accessibility of high computing power - combined with important achievements in the development of machine learning algorithms - have enabled an exponential growth of the field. By implementing artificial intelligence, investment fund management companies could see major benefits such as cost reduction and improved decision making across all of their departments. The main obstacles in leveraging artificial intelligence are data quality, lack of skilled personnel and maturity of existing technology infrastructure. In order to enable implementation of artificial intelligence in the investment funds sector, issues of auditability of machine learning models, bias of goal-directed models as well as potential implications for financial stability have to be properly addressed and regulated. Regulatory agency should aim to foster financial innovation, safeguard consumers and provide a simple and understandable regulatory framework at the same time.
... largely on the timing of the issue and the individual preferences of the managers. A major change, however, was the switch from trust status to corporate status which took place in the 1870s and 1880s (Rutterford 2009). ...
... This was before the period of high inflation post WW1 and before equities were shown to have outperformed bonds in the long term by Smith (1926) for US common stocks and by Raynes, Chief Actuary of Legal & General, for the UK in 1928 (Rutterford 2009). Post WWI, however, there is significant variation in IT portfolios' holdings of ordinary shares, with some ITs holding more than 50% in ordinary shares and others almost nothing. ...
... This article contributes to the growing literature on investment trusts (i.e. Chambers & Esteves, 2014;Hutson, 2005;Rutterford, 2009). We provide a demand-side story for the eventual collapse of the world's first closedend equity trust. ...
... Similarly to Eendragt Maakt Magt, one of its main features was a diversification in bonds (Chambers & Esteves, 2014). In contrast to these investment vehicles, Société Générale launched the world's first-ever equity trust in 1836 (Rutterford, 2009;Van de Velde, 1943). In this section, we explore the reason why Belgium became the first country to construct such a financial innovation and what made this company special. ...
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... Between 1885 and 1895, preference shares went from 12.2% to 24.2% of total capital in issue and listed on the LSE 11 . By the 1900s, it was common to see capital structures of one-third ordinary shares, onethird preference shares and one-third debentures 12 14 . This widening of the types of security available to include lower return, lower risk alternatives arguably attracted more cautious types of investor who might previously have been reluctant to dabble in the financial markets. ...
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Foreign and Colonial, p. . 85 For a comparison of attitudes of American and British investors to income and capital gain in the nineteenth and twentieth centuries, see J. Rutterford, 'From dividend yield to discounted cash flow: a history of UK and US equity valuation techniques
  • Kilborne
Kilborne, 'American investment trusts', Harvard Business Review, . (), p. . 84 McKendrick and Newlands, Foreign and Colonial, p. . 85 For a comparison of attitudes of American and British investors to income and capital gain in the nineteenth and twentieth centuries, see J. Rutterford, 'From dividend yield to discounted cash flow: a history of UK and US equity valuation techniques', Accounting, Business & Financial History, . (), pp. –.
From dividend yield to discounted cash flow
  • See Rutterford
See Rutterford, 'From dividend yield to discounted cash flow', p. .
American investment trusts
  • Kilborne
The investment of life assurance funds
  • May