WALL STREET: The Prudent Man

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The fever that swept over Benny Hall Jr. brought some strange, upsetting symptoms. A $110-a-week printer in Detroit, Benny had lived contentedly for years in a $7,000 frame house, saved a nest egg of $5,000 with the help of his thrifty wife. One day in 1950 Benny Hall grew restless, excited, preoccupied. For a week or so afterward, at breakfast he riffled distractedly through the back pages of his morning newspaper. Finally he confessed to his wife:”I’m interested in the stock market.”

Benny sought out a broker, told him of his yen to invest—though he hardly knew a stock from a bond. Having met hundreds of Bennys, the broker knew just what to do. Benny, he said, should invest in shares of a mutual fund. By last week Benny Hall’s investment of $5,000 had grown to $20,000 without his putting in another penny. With his nest egg bigger than he had ever hoped, Benny has used his salary and the returns from the sale of his house to buy a $30,000 home, plans to take his wife on a grand tour of Europe.

Last week some 4,000 investors a day, with a similar desire to see their money grow, were plunking $10 million daily into mutual funds, which offer an almost irresistible lure: the chance to make a profit with a minimum of risk and worry. The investor entrusts his money to an organization that invests it in dozens—sometimes hundreds—of U.S. companies, spreading his risk as wide as the economy. Even more important, he also buys savvy in the stock market, letting the fund managers do his buying and selling for him. Says a St. Louis businessman who gave up making his own investments: “I’m going to stop worrying about stocks and take life easy. Let those boys do it.”

“These Are My Hogs.” Mutual funds sing a melodious song: cash in on a growing economy and build a valuable hedge against inflation. They have taken the specialized world of Wall Street and put it within reach of every man with enough money to buy a fund share, which is kept low-priced, usually between $10 and $15.

In the last decade, the funds have become the fastest-growing, most competitive and most controversial phenomenon of the U.S. financial world. Ten years ago they had fewer than a million shareholders with $1.5 billion invested. Last week they had nearly 3,900,000 with $14 billion invested in more than 200 different funds.

The shares are bought by maids and wealthy dowagers, by doctors and factory workers, by labor unions and clergymen. No amount is too large (many investors put in upwards of $250,000) or too small. A Maine farmer sent $5 “from the chickens I sold” to one fund, later followed it with a bigger check and a note explaining “These are my hogs”; by the time he had gone through his barnyard, he had invested $6,500, which has leaped in value to $14,000. Big investors also flock to the funds: such schools as Massachusetts Institute of Technology, the University of Oklahoma, and Texas Christian University have invested part of their endowments. The funds have been copied abroad in Great Britain, West Germany, Switzerland, Mexico. Ten years ago, most people had never heard of mutual funds; now, the term is a household word.

Fish-Bowl Policy. The fund that has done more than any other to put shares in the household sugar bowl is Massachusetts Investors Trust, oldest and big gest of the mutual funds and the one that set the pattern for all the rest. M.I.T is a child of Boston, which has raised the handling of O.P.M. (other people’s money) to the status of a fine art. The art was born of an 1830 court decision, the “Prudent Man Rule.” In settling a suit charging a trustee with negligence in investing in common stocks, the judge held that a trustee for someone else’s money need only “conduct himself faithfully and exercise the sound discretion” in investments that a prudent man would. This meant that Boston trustees could prudently buy into common stocks, fear no suits from clients even if they lost every penny.

For Massachusetts Investment Trust the prudent man is Chairman Dwight Parker Robinson, 59, a prow-chinned, rock-ribbed New Englander whose family roots go far back into Massachusetts history. Tall (5 ft. 11½ in.) and lean, he guides the $1.5 billion investment of M.I.T.’s 203,000 shareholders (plus the $219 million of 67,000 investors in M.I.T.’s Growth Stock Fund) with such calm and confidence that he sleeps as soundly as he invests. As the boss of the world’s biggest fund, he is the first to admit that there are no exact rules for investment. Says he: “Investment is not a science. It is a matter of human judgment.”

M.I.T.’s good judgment laid the base for the public’s extraordinary confidence in the entire industry. When M.I.T. was founded in 1924, it startled the financial world with a brand new idea. Until then, the investment field had been dominated by “closed-end” investment companies; they sold a specific number of their own shares that were traded in the open market, concentrated on quick profits. M.I.T. shunned the lure of the fast profit, concentrated on long-term gains. More important, it threw out the closed-end idea by continually selling shares to anyone who wanted to buy, redeeming them when anyone wanted out at the net asset value per share on the day they sold (for M.I.T.: $14 per share last week).

When the 1929 crash came, the closed-end shareholders were forced to dump their shares in a sinking market at prices that had no relation to their real value. Their companies went down to disaster—while the mutual funds rode out the storm. The debacle of the closed-end trusts was helped by all sorts of financial jiggery-pokery; in some companies, officers unloaded their own holdings of shaky stocks on the trusts.

M.I.T. helped put an end to all that. Despite howls from the financial world, it opened its books and portfolio of stocks to the public, setting the pattern for the “fishbowl” policy under which the whole fund industry now operates. Instead of fighting New Deal legislation aimed at regulating investment-company practices, it recognized the need for regulation, helped the New Deal frame the laws. So similar were M.I.T.’s bylaws to the Investment Company Act of 1940, which laid the ground rules for the funds, that M.I.T. had to change only a few commas.

Huge Appetite. M.I.T.’s aggressive leadership spawned a whole line of imitators and variations: ¶ The unrestricted common stock funds such as M.I.T., which like to keep a balance between dividend and growth stocks. ¶ The growth funds, which are concerned not with dividends but with long-term capital gains (M.I.T.’s own growth fund). ¶ The balanced funds (Philadelphia’s Wellington Fund), which keep their money in both stocks and bonds and shift the balance as the market changes. ¶ The income funds, liked by elderly or retired investors, which concentrate on high-yielding stocks (Manhattan’s National Securities).

¶ The frankly speculative funds (Townsend Growth and Keystone 8-4 funds), which warn the investor that the risks are greater, along with the rewards.

Says M.I.T.’s Robinson: “Within their range, mutual funds can fit the need of almost any investor.” They can also find a host of critics. Many critics charge that the funds, along with other institutional buyers, have needled the roaring bull market to artificial highs, that their constant buying, chiefly of blue chips, has helped create the present shortage of stocks. The funds’ answer: they hold only 3.4% of all stock on the New York Stock Exchange, and do not hoard it; they turn their shares over faster than the exchange as a whole.

More important is the charge that, in a falling market, millions of panicky, inexperienced shareholders would redeem their shares, forcing the funds to liquidate huge blocks of stock and collapse the market. But Robinson cites the record to show that just the opposite has always occurred: more fund investors turn in their shares in a rising market, fewer in a falling market, thus making the funds a balancing force. This may be the shareholder’s form of profit-taking, but it is more likely a sign of his confidence in the funds; when the market is uncertain, he feels safer with his money in mutual funds, but when he thinks it is heading for the sky, he succumbs to the temptation to take his money and get into a more lively stock.

The Very Model. Few men are better suited to present the public image of trust and integrity fostered by the funds than Dwight Robinson. He is the very model of a Proper Bostonian, from his steel-rimmed spectacles and dark, conservative suits—he always wears a vest in the office —to his clubs (Union, Longwood Cricket) and his finely polished sense of discretion.

He is mild in manner, mellow in voice, retiring with all but his closest friends. He is an Overseer of Harvard, like his father before him, and a conscientious do-gooder who actively aids many a fund drive and charitable organization. Though he makes more money ($402,389 last year) than all but a handful of men in U.S. industry, he lives modestly, thriftily drives a 1955 Oldsmobile. He speaks and eats sparingly, never smokes, has a single drink of Scotch each evening (with an occasional “dividend”).

Robinson runs his life on a prearranged schedule as exact as a balance sheet. In his 15-room stucco home in Brookline, he rises at precisely 7:05 each morning, hops onto his Exercycle for a 15-minute ride. He breakfasts alone over the Boston Herald, drives himself to work. At 9:30, he enters M.I.T.’s modern offices on the 25th floor of Boston’s John Hancock building, the city’s highest, from which he has an eagle’s view of what he considers God’s Own Country: the gold-domed State House, the Common, the sparkling Charles River Basin.

Endless Flood. All day Robinson pores over financial statements, reads market letters and industry reports, tries-to keep a knowing eye on the management of dozens of corporations. M.I.T. usually votes with management, but does not hesitate to fight when necessary for -its stockholders’ rights. The trust battled with Sewell Avery’s management of Montgomery Ward in 1948, eventually sold its 104,000 shares of stock when he did not quit.

Robinson is out of the office by 4:30, dines at 7 with his wife, a Boston girl (Mary Helen Gass) whom he married in 1943 when he was 43. The Robinson house is so well ordered—Mrs. Robinson keeps two maids—that guests may be asked in advance at what time they would like a drink.

“They’re Gentlemen.” An expert sailor since boyhood (he rode out Hurricane Carol in 1954 in his 34-ft. cutter the Mari-bee), Robinson runs a tight, well-disciplined ship at M.I.T. As lean as Robinson himself, it has only 47 employees, from Robinson down to the cook who prepares meals for the trust’s small dining room. Like most mutual funds, M.I.T. devotes itself entirely to the job of deciding what to buy and sell; it does not handle the selling of its own shares or even its money. M.I.T.’s bookkeeping is done by Boston’s Second Bank-State Street Trust, the job of selling its shares by Boston’s Vance, Sanders & Co., the leader in a new industry that has sprung up just to sell shares in the funds.

Though virtually all its trustees and officers invest in the market on their own (Robinson himself owns stock in a dozen companies), M.I.T. sternly forbids them to deal in whatever stocks they are handling for the trust. None of them would think of asking another what stocks he owns. “The thing about the people at M.I.T.,” says a New Orleans broker, “is that they not only have high-grade management. They’re gentlemen.”

M.I.T.’s gentlemen constantly carry on a detective-like search for the clues and facts that point the way to a good investment. Seven industry specialists follow their own beats in M.I.T.’s portfolio of 123 stocks in search of a company’s strengths and weaknesses. To get firsthand information, M.I.T.’s specialists and trustees last year traveled a quarter of a million miles, interviewed 3,000 corporate executives. Robinson himself frequently travels to inspect industries, sits on the boards of several companies in which M.I.T. owns stock, e.g., Texaco, Inc., Illinois Central Railroad.

“Ride It Out.” Every investment decision and matter of importance is left to Robinson and the other four trustees, with help from the six-man advisory board. In the tradition that the trustee shares in the rewards he brings to others, they are among the best-paid men in U.S. industry. Vice Chairman Kenneth Isaacs, Robinson’s righthand man and the president of the Growth Stock Fund, made $360,989 last year. The junior trustee made more than $100,000.

Once the trustees have taken a vote, the job of buying or selling stock is turned over to longtime Market Trader Almore Thompson, who works through more than 200 brokerage houses. In order not to upset the market in a stock that has captured M.I.T.’s interest, Thompson often executes orders over a period of several weeks or disperses them widely. M.I.T. never puts more than 5% of its assets into one company, or more than 25% into one industry. Since it buys for the long pull, it is not bothered by short-term fluctuations. “When the market turns down,” says Dwight Robinson, “we just try to ride it out.”

Quirk of Fate. Robinson joined M.I.T. in 1932, eight years after a stock salesman named Edward Leffler teamed up with Boston Broker Charles Learoyd to form the trust. Leffler thought that the ordinary investor usually bought the wrong stock, should have help in investing. At first the financial world laughed at him for his radical new ideas: the redemption feature of the fund and the disclosure of portfolio. He bowed out of M.I.T. six months later, and in came Boston Banker Merrill Griswold, an early buyer of M.I.T. shares who became M.I.T.’s first chairman.

Robinson walked into M.I.T.’s offices and suggested that Griswold and the trustees needed a research staff to back up their own investment judgment. He had the right background. True, he had been born in Seattle, but only by a quirk of fate (his engineer father had taken his family there while working on a construction job). He was indisputably a Boston product. He had gone to Noble & Greenough and Harvard (1920), taken a dutiful fling at engineering, gone back to Harvard Business School to study finance, put in his time in a Boston investment banking house. The trustees hired him.

40,000 Shares. Easygoing, brilliant Merrill Griswold and sober, diligent Dwight Robinson made a crack team. With his flair for drama, Griswold pulled Massachusetts Investors Trust through a major test in 1932. Despite the fund’s respectable performance in the crash, the idea persisted that it could not handle a run on its shares. When a Boston bank was forced to cash in 40,000 M.I.T. shares held as collateral, it called up Griswold, advised him that it would deliver the blow gently by selling over a period of several weeks. Snapped Griswold: “Send them in this afternoon.” M.I.T. redeemed $200,000 worth out of its cash reserve (still kept for that purpose)—and the financial world got the point.

In Washington, Griswold persuaded the New Dealers to accept the “conduit theory” of taxation, which looked on the funds as a “conduit” for investors, freed the funds from paying federal tax so long as they distributed their capital gains and at least 90% of their dividend income to shareholders. Since the funds pay out all their earnings, this in effect frees them from paying taxes. In return for this concession, Griswold and the funds agreed to back other business tax proposals that President Roosevelt wanted. Griswold also helped draft the regulatory laws for the industry that came out of the ’30s.

In Boston, Robinson went to work on M.I.T.’s portfolio. It needed some fixing.

In 1931 the trust listed the market value of its stock at just half of what it had paid for it. M.I.T. slimmed its portfolio from 128 to 77 stocks, concentrated in defensive stocks (utilities, foods, tobacco, etc.), better able to withstand the Depression. By 1933 Robinson and his staff saw light ahead, and M.I.T. began switching out of defensive stocks and into railroads, automobiles, mining and steel. With a poker player’s eye, Robinson could look at a company’s present and guess its future. He personally researched the Texas Co. (now Texaco, Inc.), persuaded the trustees to buy 15,000 shares. The trust kept on buying until it had put $9,400,000 in Texas Co.; today the shares are still in M.I.T.’s portfolio—at a market value of $44 million.

As investors continued to pour their money into M.I.T., the trust moved into first place among the nation’s mutual funds in 1936, with assets of $130 million (v. $15.1 million in 1930). Despite its bullish position, M.I.T. sailed through the sharp market break of 1937 with hardly a change in its portfolio; it simply put new cash into Treasury notes as a defensive measure. In that year, Dwight Robinson was rewarded for his work by being moved up to trustee. In 1954, when Merrill Griswold moved up to honorary chairman of the advisory board, Robinson slipped into his chair to guide M.I.T. through its greatest period of growth. In four years the fund has nearly doubled in size.

M.I.T. bought heavily into steel after the war, when most other funds shunned it as a prince-and-pauper industry, saw its hopes for steel realized when the value of its investment grew from $65 million to $142 million. When the recession began in 1957, M.I.T. reckoned that it would be brief. It stayed in growth stocks throughout, now needs little portfolio shifting for the economic recovery.

Occasionally, the hard trading instincts of M.I.T.’s trustees have softened ever so little. The trustees once decided that the liquor industry was a good investment, decided to try whisky stocks. When Vance, Sanders got wind of the plan, it was horrified. A partner gathered up the cards of 1,200 M.I.T. shareholders, walked into a trustee meeting and threw them on the table. They represented Baptist institutions, Christian Scientists, Catholic convents, and other investors who might take a dim view of liquor—even in their portfolios. The trustees hastily backed down.

Giant Challengers. The mutual fund industry has waxed so prosperous that several giants have grown up to challenge M.I.T.’s supremacy. Many of them have gathered several mutual funds under their wing. The other top fund managers: ¶ Investors Diversified Services, Inc., of Minneapolis, handles five different mutual funds. The biggest: Investors Mutual, Inc., a balanced fund with assets of $1.4 billion. Scholarly I.D.S. President Joseph Fitzsimmons likes to quote Don Quixote to explain his investment philosophy (” ‘Tis the part of a wise man not to venture all his eggs in one basket”), but he keeps all his sales eggs in one basket by having I.D.S. sell all five funds itself, a practice unique among investment companies. ¶ The Wellington Fund, of Philadelphia, is a balanced fund with assets of $925 million and 275,000 stockholders. Launched in 1929, it is still run by President Walter Morgan, one of the founders, also has a second fund (Wellington Equity Fund), with assets of $41 million. Wellington topped all the funds in new sales over the past four years.

¶ Investors Management Co., of Elizabeth, N.J., runs one balanced and two common stock funds with total assets of $711 million. The shares of all three are sold by Hugh W. Long & Co., which did such a fine job that Hugh Long is now president of all the funds. ¶ Continental Research Corp., of Kansas City, Mo., manages four U.S. funds (including an income and a science fund) and participates in the management of a Canadian fund; it has 145,000 shareholders and total assets of $634 million. Founded in 1950 to take over management of the United Fund series, it is run by Cameron Reed, who concentrates on administration and sales from his Kansas City office, and New York Broker Chauncey Waddell. ¶ Lord, Abbett & Co., of Manhattan, was brought into the fund field in 1932 by Andrew J. Lord, who was killed when his horse threw him in 1946; it is now run by humor-loving Harry I. Prankard, 56, the author of several books on accounting. It manages one balanced and one common stock fund with assets of $580 million (Affiliated Fund and American Business Shares), is now concentrating on consumer-industry stocks.

The biggest funds are not necessarily the best performers. Over the past ten years the average fund has increased about 300%. M.I.T.’s gain over that period: 365%. Thus $1,000 invested in M.I.T. shares ten years ago would be worth $3,650 today v. $1,417 if it had been placed in a savings bank at $%. But many a smaller fund that has less to invest, and thus can get in and out of the market more easily, has done much better. Among the top performers in each fund category, the best record of all was turned in by Boston’s Keystone 8-4 Fund, with assets of only $31 million. It recorded a 508% gain (see chart).

Nevertheless, some critics insist that buying a mutual fund is just buying a piece of the Dow-Jones industrial average, point out that the top five common stock funds just kept pace with the averages in the seven-year bull market. But Broker Arthur Weisenberger, the Boswell of the industry, whose brokerage house puts out the definitive yearbook of the funds, argues that an investor could pick a slow mover even in the stocks in the blue-chip Dow-Jones averages. Only 14 of the 30 stocks have done as well as the 229% gain in the averages in the last ten years.

Hefty Charge. For years brokerage houses avoided the funds like the plague, fearful that they would hurt regular brokerage business. But most of them have come around. Main holdout: Manhattan’s huge Merrill Lynch, Pierce, Fenner & Smith, which has never even deigned to mention the funds’ existence in its financial letter.

The biggest attraction of the mutual fund to dealers and salesmen alike is the hefty “load” charge, or commission, usually 71% to 81% (compared with the 1% commission for round-lot purchases on the New York Stock Exchange). Many a customer howls when told of it. But the funds have a quick rejoinder: they argue that the charge includes the cost of selling out as well as buying, is the price of broad diversification and professional management. If an investor with $4,200 (the average size of a mutual fund holding) tried to buy a diversified portfolio of stocks on the New York Stock Exchange, claim the funds, he would easily have to pay 8% to get in and out of the market.

Buying a Hat. Attracted by such fancy pickings, an army of more than 20,000 full-time and part-time mutual fund salesmen, ranging from schoolteachers to bartenders, are selling fund shares. Many of them know no more than their customers about the market, depend on a fast spiel and reams of charts to do their selling. Yet a good part-time salesman can make $10,000 or $15,000 a year in commissions, full-time salesmen up to $25,000. Says Miss Irma Bender, a top fund salesman for Cleveland’s Joseph, Mellen & Miller: “I tell prospects that investing in funds is as easy as buying a hat.”

The funds have become so popular that they have blossomed with all kinds of new plans. The most controversial plan—and one that M.I.T. has shunned—is the contractual plan, under which a customer signs for regular monthly payments over a period of years (usually ten). The catch is that an investor who puts in $1,200 for the first year of a $100-a-month ten-year contractual plan is docked for about $500, or half the entire ten-year commission, in the first year. If the investor drops out in the first year, he loses most of his $500. The funds claim that this big “front-end load” is an incentive to steady saving, but some funds think that such juicy commissions are completely unjustified. Says John Dalenz, vice president of Calvin Bullock, Ltd.: “Why not give those salesmen a blackjack and let them take your entire wallet?”

Another plan that draws ire is the regular withdrawal plan, which pays an investor a certain amount each month out of his investment. While the fund rises, the investor may earn more than enough money for his payments, but if it does not rise he may find that he eventually exhausts his cash—though some salesmen neglect to point out this peril. M.I.T. has finally decided to offer a withdrawal plan, taking pains to make the terms clear to the buyer.

Battle for the Dollar. The funds have made life rougher for the banks and insurance companies by quadrupling their share of the savings dollar since 1948 (to 5.3% today). The funds have lured so many insurance salesmen (along with their fat list of customers) that some insurance companies now threaten to fire any man found selling mutual funds on the side.

The insurance industry is hotly debating whether to fight back by adopting the variable-annuity plan proposed by Prudential’s Carrol Shanks (TIME, March 18, 1957), but the annuities have run into nothing but trouble. The funds won a big victory in March when the U.S. Supreme Court backed their argument that insurance companies should register with the SEC to sell variable annuities, a prospect that has dampened the ardor of many insurance firms, which do not relish more Government regulations.

Out of the East. No one doubts that by luring people’s savings into stocks the funds have broadened the base of corporate ownership. Two-thirds of all mutual fund holders live outside the Eastern Seaboard; about a third do not own other stocks, would probably not otherwise put their money into the market. Since nearly half the sales of funds are to professional and executive people, the industry feels that it has hardly begun to tap the broad mass market of potential investors. Estimates are that in ten years the funds will have assets of more than $50 billion—three times the current level—and 5,000,000 investors.

Whether or not the funds fulfill their hopes depends largely on the state of the U.S. economy. So confident of the future are M.I.T. and Dwight Robinson that they have shifted M.I.T.’s portfolio into the most bullish position since the beginning of World War II. Says Robinson: “I think that the economy is going to grow substantially and have some real opportunity for investors in common stocks in the next decade. Population is increasing. Industry is moving ahead. Government spending is not going to cease. I don’t see how the economy can fail to have a big expansion—and the mutual fund industry with it.”