SERIOUS SITUATION

Evening Post, Volume CXVIII, Issue 34, 9 August 1934, Page 8

SERIOUS SITUATION

WOEKING OF THE TRUSTS

BRITISH PRINCIPLES NOT

,m lowed

The members of the Commission stated that they had decided, afte» considerable anxious thought, to adojt the unusual course of making an 'ntcrim report on certain matters and facts, becau&e they believed that the situation which they revealed was sufiiciently serious to warrant) tpecial consideration by the Government, with a view t& deciding whether or not urgent action- should bo taicon. "The Order of Reference," said the Commission, "requires us to inquire into and report on, inter alia, 'The financial structure of financial investment and trust companies, and a 3 to ivhothor any additional legislative provision should be made to afford investors a greater measure of protection for 'their capital money and other interests in such companies'; and 'The desirability of regulating in the public'interest the formation and operation pf trust companies and investment companies dealing in company shares, Government, local body, and other forms pi! secuvitj-.' ' "In the couise of our inquiiics into concerns of this clasp, wo have gathered much information relating to a group ot companies which inclmles invests inent trusts and affiliate^ of various tj'pcs. ■These companies, mostly regis-Ttu-ed in Auckland, have bocu foimed tnid operated by a roinpaialively small gioup of persons. Tho names of these persons -appear freely in the lists of members and directors of these companies, and there is little room for doubt that the common ownership and control thus evidenced has made possible ana has facilitated developments and transactions that call for close scrutiny. "Investment trusts are a characteristically British, development, and have had 4 king history in Great Britain. Of icccnt years, more especially since the war, the investment-trust idea has spread to other countries, more c&peeiaJly to tho United States. Tho establishment of investment trusts in New Zealand is very recent, and fow, if any, ot the companies whose affairs we have investigated arc more than four or five years old. "When transplanted to other conntries, the investment-trust idea has frequently been modified in such a way as to violate the principles which are laid £.—-v as axiomatic in Gieat Biitairi, ana to make the investment trust a sourco of grave potential danger instead of an instrument of financial progress. "This applies especially to certain of the trusts which have been established in New Zealand and Australia; Had all such investment trusts followed closely the British model, there would have been, no need for this interim report. ■ "The economic functions of the investment trust may be described briefly as follows: — 1: It combines the small units of investment of individual investors into a large aggregato or pool. 2. This pool is invested in a wide ■ range of securities. 3. The individual investor in tho trust receives a return from the earnings of the securities purchased out of the pooled funds, in the proportion that his investment in the trust bears to the total pool. ,4. The diversification of securities held by the trust enables risk to be reduced in a manner not possible to the small individual investor. 5. By expert management, it is possible to derive a higher rate of roturn than would be possible to tho individual investor who could only effect a corresponding reduction of risk by investing in "gilt-edged" securities, such as Government bonds, bearing a low rate of interest. "These may bo described as the 'ideal' economies possible under a wisely-managed investment trust, but it must be clear that they depend upon a considerable measure of skill in management, a high degree of integrity iv

directors, .strict,; conformity to a pro-perly-devised-'''policy -of investment diversification^!,'1 and,', .adequate safeguards by way iof-audit and the election of trustees. *■ -If,'is essential that operations stioujd bis purely financial in nature, and that the funds should not be used to obtain, control ;Or. management of other business enterprises, uor used to financo undertakings in which thoso who control the trust aro inter'r ested. '•..;;•' '' ';

"Investment trusts' are of many types, whietijnay bo classified in various ways; but for our purposes ,it is. sufficient to 'distinguish-; twd types, 0n1y. ..[ These are the British or management type, and the contractual type.' .The formeris exemplified by the New.'Zealand, Investment Trust (Wellington), and tho latteV by the Investment Executive Trusti of New Zealand, Ltd. (Auckland), the Dominion Executivo Trust (Dnnedin), and the Gold and General Investment Trust (Christchurch).