Evening star. [volume] (Washington, D.C.) 1854-1972, 1931-04-03
INVESTMENT TRUST
BUYS FOR YIELDS.
Leverage Held Big Factor in
Success of Trading
Corporations.
Special Dispatch to The Star.

Special Dispatch to The Star.
NEW YORK, April 3-An exhaustive
survey of investment trusts in this
country just published by the Standard
Statistics Co. of New York, points out
that the success of the old-line British
investment trusts has been due in large
measure to the Leverage" on the COM
mon stock afforded by their capital
structure, and to their habit of buying
strictly on yield basis.
The factor of leverage" on junior
shares Of investment trusts, having
senior capital outstanding, is one of
the features of these instruments about
which the public is most confused.
Many apparently find it difficult to
comprehend how it is possible for shares
of an investment trust to appreciate or
depreciate, as the case may be, faster
than does the market itself. To IL
luStrate how this happens, take the fol-
lowing example:
Suppose a trust is capitalized with
100000 shares of preferred stock, en-
titled in liquidation to 500 per share,
and 100000 shares of no par common.
Assuming that the common has a
liquidating value of $50 per share, then
the net assets of this trust amount to
$15,000,000. Assume the value Of these
assets increases 10 per cent, or $780,
500, 900. AS the preferred is limited to
$500 per share in liquidation, it fol-
lows that the $500 900 is the property
of the common stockholders. The in
crease in the value of the common has
amounted to $500 900, or 80 per cent
more than it's previous value, on an in
crease of only 10 per cent in total as
sets This constitutes leverage"
In situations where no preferred
stock or debentureS exist, the per cent
increase or decrease in the common
share depends entirely on the aggregate
movement of the underlying securities
in the portfolios, presuming that the
contents of these portfolios remain
constant.
Many American investment trusts
have been created with capital set
ups patterned to closely conform to the
British units. However, this practice
has been followed only up to a given
point. The outstanding difference be-
tween the British and the American
trusts is that the former have per-
sistently arranged their portfolios
automatically always Rave been at
tracted to localities and situations
where depression exists. Their sue
cess, be it noted has been more
matter of logic than magic. It. boiled
down, is simply process of p2rsistently
buying in bear markets and selling in
bull markets.
American arrangements, until re-
Gently did not take this cue. Instead
they inclined to breathe optimism
while their cousins were exhaling and
inhaling cynicism. Unhappily, the
doubters were correct, as witness the
fact that most British trusts last year
paid their regular dividends and put
away fair sums to surplus, while Ameri-
can trusts by an overwhelming ma
jority, showed enormous losses.
The American investment trusts be-
lieved that they could establish, as they
did establish for a period, profits on
trading which made mere interest re-
turns appear inflinitesimal. Across the
ocean. however, the trusts adhered to
the principal of assuring senior money.
Their age-old theory, once again, proved
its soundneSs.