Before 1889 the only stock that a trustee might buy, unless otherwise instructed by the Trust Deed, was Consols. By the Trustee Act, 1893 (which did not extend to Scotland), his choice was extended to:
1. Other British Government securities.
2. Real or heritable securities in Great Britain or Ireland.
3. Stock of the Banks of England or Ireland.
4. India Government stocks.
5. Any securities with interest guaranteed by Parliament.
6. Metropolitan Board of Works or London County stocks, or Debenture stock created by the Receiver for the London Police District.
7. Debenture Guaranteed and Preference stocks of any railway company in Great Britain or Ireland that has paid 3 per cent. on its ordinary stock in each of the ten years before the investment.
8. The stocks of railways and canals in Great Britain or Ireland leased for not less than two hundred years at a fixed rental to any railway included under 7, g. Debenture stocks of Indian Railways sterling paid or guaranteed by the Secretary of State in Council of India.
9. Debenture stocks of Indian Railways sterling paid or guaranteed by the Secretary of State in Council of India.
10. Certain Indian Railway Annuities.
11. Indian Railway ordinary stocks with a dividend guaranteed by the Government.
12. Debenture guaranteed or preference stocks of British water companies which have paid 5 per cent. during each of the ten years before the investment.
13. The stocks of municipal boroughs with a population exceeding 50,000 or of any County Council.
14. Stocks issued by Commissioners incorporated by Parliament to supply water and having compulsory power to levy rates over an area with a population of 50,000, provided that during the previous ten years the rates levied have not exceeded 80 per cent. of the rates authorized.
15. Any securities authorized for the investment of cash under the control or subject to the order of the High Court. Its list includes mortgages of freehold and copyhold estates in England and Wales and debenture guaranteed rent-charge preference stocks of railways in Great Britain or Northern Ireland that have in ten previous years paid a dividend on ordinary.
By the Colonial Stock Act, 1900, the Act of 1893 was made to include Colonial Stocks, if the colony:
(a) Provide for payment out of its revenue of any sums payable to stockholders under any judgment decree rule or order of a Court in the United Kingdom;
(b) Satisfies the Treasury that adequate funds will be made available for this purpose, and
(c) Formally expresses its opinion that any legislation injuring the stockholder or involving departure from the original contract with him would properly be disallowed.
The Metropolis Water Act, 1902, made Metropolitan Water Stock a trustee security, under the 1893 Act.
The Housing Act, 1919, included local bonds under that Act and mortgages of rates granted by local authorities authorized to issue local bonds under it.
The rough summary given above is a shortened version of the particulars given by the Stock Exchange Official Intelligence. It is not, of course, intended as a complete guide to trustees, who will always be well advised to invest, as such, only with the assistance of legal instruction. The Trustee Act of 1925 has consolidated previous legislation on the subject, but as far as a layman can understand its meaning, has made only two important alterations. It has restricted investments in Indian loans and guarantees to those that have interest payable in sterling and it has permitted investments in (otherwise suitable) bearer securities as long as they are deposited for safe custody and collection in the hands of a banker. Changes made with regard to investments in real property do not concern us here.
The principles on which the securities permitted as investments to trustees were selected under the Act of 1893 are evident and reasonable. They aimed at including debts of the British Government or of bodies which were subject to its control or at least could be watched by it at close quarters. Even so, the inclusion of the ordinary stocks of the Banks of England and Ireland was a curious anomaly, since one would have expected that Parliament would have aimed above all at securing a certain income for beneficiaries under trusts, and the stocks of these great banks have been liable to fluctuation in dividend.
The inclusion of colonial stocks merely with the condition that the borrowing colonies should go through certain formalities that (inevitably) imply no Imperial control over their finances, was a departure which sent British trust funds over seas to countries of abounding economic promise, with a tendency to experiment, that might develop along lines which would not be in accordance with the canons of British financial statesmanship. It was a departure dictated by political sentiment, which, as French holders of Russian debt have discovered to their cost, is an untrustworthy guide in the selection of securities as investments. The sequel was an enormously rapid expansion in the debts of the Dominions quoted on the London Stock Exchange.
Any Act of Parliament which says that certain securities may be taken is bound to produce anomalies because it at once becomes possible to point to investments which are left out but are quite as good as some which are officially approved. In such matters it is impossible to draw a line which will not lay the drawer open to criticism of this kind. The wealth that was poured into the laps of the Dominions by the high prices at which they sold, during and after the war, the food and materials that are their staple products has done something to put solid assets behind the debts that they built up so fast, but the pace of debt creation, especially by the Australasian States, has nevertheless hardly slackened. And political developments in India and the measure of self-government accorded to her population has given a different aspect to the obligations issued in its name.
These considerations make it very important for investors not to be misled by a belief that because a stock is a trustee security it is, therefore, absolutely safe. As far as a trustee is concerned it is safe, from the point of view of his own pocket—if the debtor should default, the beneficiaries under the trust would: have no case against the trustee, who had invested according to the Act. But the trustee is the only party to the transaction to whom safety is secured. He is fully entitled to this safety, for he performs a difficult, responsible, and generally thankless task, and is apt to be looked on by the beneficiaries, whose interests he protects, as a tiresome nuisance.
It is often argued, sometimes even by stockbrokers who ought to know what security means, that "the British Government could never let a debtor default whose debts were included among trustee investments." But what if the debtor could not or would not pay? The contingency may be, and is, most remote, but if it happened, does it seem probable that the Treasury would take over the liability? Trustee securities ought to be judged as severely, on their own merits, as if the Trustee Acts did not exist, by anyone except trustees who considers an investment in any of them. A trustee, seeing that the Acts have been specially passed for his guidance, may well consider that his conscience is as safe as his pocket in following their instructions, but for anyone else to think that he cannot go wrong with a trustee security is a very unsafe assumption.
Nevertheless this assumption is so general that there is a strong argument for the abolition of the dangerous delusion on which it is based by a revision of the Trustee Acts and a return to the old restriction to British Government securities. If people will insist on believing that the Government hall-marks a security as unimpeachable by including it among trustee investments, it is only reasonable for the Government to confine this hall-mark to the only debts over which it has real control, namely its own.
There is another very good reason for doing so, which is the imperative need for reducing the burden of taxation by conversion of the British debt on to a lower interest basis. If investments by trustees were confined in future to British debt, this restriction would evidently tend to raise the prices of the securities in which British debt is expressed and so would hasten the process by which the largest item in our national expenditure, and the only one which cannot be touched by any ordinary measures of economy, can be brought down by a rise in the market value of British credit.
It need hardly be said that the restriction could not be made retrospective, obliging all trustees who held securities other than those of the British Government to dispose of them. It is only suggested that future investments by trustees should be confined to the stocks which really give the assurance which is now so often assumed where it does not in fact exist. If this were done it would be very many years before any real difficulty would be experienced by trustees in supplying themselves with stock. In 1889 when they were confined to Consols, the, whole amount of Consols in existence was £552 millions. The British debt, other than Treasury bills and other forms of "floating" debt, amounted on December 31, 1925, to £7,016 millions.
It is true that beneficiaries under trusts would receive a slightly smaller income than their trustees would otherwise have been able to earn for them; but this is no great hardship to inflict on them, in view of the greater security that would be given to them, the privileged position that they enjoy in having their property taken care of for them under the eye of State regulation and the great advantage to the nation as a whole that would be secured by a reduction of the debt charge. Moreover, it would always be in the power of anyone who was leaving funds in trust and disliked the limitation on trustees' power of investment, to confer greater freedom on them by the terms of the trust deed. At the time when trustee securities were so dear—in the middle nineties—that it was difficult to get a yield of 2½ per cent. on them, a fashion was introduced of drawing trust deeds with wide investment powers, and there is no reason why this tendency should not be extended.
India and the Dominions would have no legitimate cause to feel aggrieved, in view of the much greater burden of war debt and after-war depression that the British tax-payer has had to shoulder; and the fact that the Australian Commonwealth and one of the Australian States have lately borrowed in New York has weakened still further the already weak power of supervision that was exercised over Dominion borrowing by the London market. Moreover, our Dominions have a very definite advantage over all other oversea borrowers, which will be made clear when we come to consider the question of Public Debts Abroad.
In the meantime, trustee securities have a certain prestige as such, and consequently are, like British Government stocks, a "fancy article" which many investors must have and many others think that they ought to have, because of the halo of sanctity which is believed to surround them. To the practical investor who wants to buy securities for intrinsic value only, the fact that a fancy price is put on an article by a law or convention which does not add one half-pennyworth to their security, is a reason for not buying trustee securities, unless overwhelming arguments can be produced in favour of doing so, in any particular case.