The fund was so comprehensively devastated that it missed the whole recovery of Wall Street at the end of 1970. Compared to other mutual funds, IIT's results were almost comically bad: even the Enterprise Fund, which dropped by 32% in 1969, managed to survive 1970 with a drop of only 2.3%. Quite a number of US funds made small increases in 1970, and the average loss in net asset value was only about 1 %.
x
IIT dropped by a staggering 26.7% during 1970.
Over ten years, after all the boasting, after all the glowing promises made to the customers, IIT managed to show an increase of just 29.8% on its original value. This is so inferior to the performance of regulated US funds that there is no point in
comparing them. It is actually less than the increase in the Dow Jones index, which went up by 36.2% in that time. It is scarcely half the increase recorded over those ten years by Standard and Poor's 500-share index, which went up by 58.6%.
So much for 'the best investment advice that two billion dollars can buy'. You would have done twice as well leaving your money to random stock market forces, than entrusting it to IIT - and this does not take account of the sales load! You
1
At the time of writing, Wiesenberger's figures for 1970 had not been published.
would, in fact, have done enormously better to have left your money in one of those savings bank accounts about which Bernard Cornfeld used to sneer so eloquently.
But if you were in IIT, you were luckier than if you were in the Fund of Funds.
By August 1970, the 'assets' of the Fund of Funds had been whittled away by redemptions and by falling investment value, so that the fund had fallen to $364 million of the $623 million with which it began the year. Of that $364 million, about half was accounted for by the purely notional values ascribed to the Natural Resources Account. And another $28 million was in unsaleable shares of another IOS fund, International Property Investments.
At this point, the new management of IOS acted 'prudently and decisively', in the words of Henry Buhl. The natural resources investments, the ipi shares, and $17 million in cash, were simply removed from FOF, and put into a new company, Global Resources. Global Resources shares, it was announced, would be distributed eventually to FOF investors. But Global shares would not be redeemable. It was to be a closed-end company.
And what, when they appeared, would Global shares be worth? Assets with an alleged value of $217 million were shifted into Global Resources on August 7. The next day, Henry Buhl warned FOF investors that they must not 'realistically anticipate short-term cash equivalents of values realistically determined by the board to be fair'. Insofar as the syntax was decipherable, this seemed to mean: don't expect the company actually to be worth $217 million on the market.
The net asset value of the Fund of Funds crashed at once to S7.44. This was not only one of the fastest descents in mutual fund history: it took the Fund down to less than three-quarters of the $10 at which Cornfeld and Cowett launched it in 1962. At the end of 1970, FOF investors were being advised by executives at IOS hq that the best thing to do if they needed to raise a little cash was to nip round to the Banque Troillet, across the Rhone. There they might be able to sell in advance their rights to Global Resources at a couple of dollars a share - to be paid if, and when, the new shares should appear.
If you were in IIT, you would mostly have done better to leave your money in a savings bank. If you were in the Fund of Funds, you would have done better to keep your money in an old sock. Or better still, to have spent it yourself before IOS got hold of it.
The only way an investor was likely to get any benefit out of IIT or the Fund of Funds was to get out when prices were artificially high, which effectively meant taking gains at the expense of other investors. Fund of Funds investors, especially, who saw through IOS's propaganda in early 1970 could well have come away with some profit - assuming they had been in the fund long enough to beat the charges and the load.
Over the IOS years, the salesmen sincerely and consistently predicted to their prospects that a lump sum put into an IOS fund would increase by three times in ten years. Even at the end of 1969, neither fund was anywhere near meeting that achievement. After the crisis of 1970 exposed the true, speculative nature of IIT and FOF, the prediction became an absurdity.
The records of some of the small funds, especially those which invested in North America, are also deplorable. Venture Fund (International) was launched in April 1969 at $10 a share, and a section was entrusted to David Meid. The share value declined from the start, standing at $9.24 at the end of 1969. It was heavy with letter stock and special propositions, and it went down by 17.4% in 1970, ending the year at $7.63. (This was a $100 million fund.)
Regent Fund of Canada came under IOS management in 1963: during 1969, it lost 23.5% and another 12.3% in 1970. That left it with a feeble gain of about 50 % after seven years under IOS management. But its record was brilliant compared to that of the Canadian Venture Fund, which was launched at the end of 1968, and placed under Fred Alger's care. Canadian Venture declined 5.4% in 1969, and then in 1970 it went right over the edge, and fell 26.6% in the year.
The only relief in the IOS record is provided by the national funds. Cornfeld and Cowett never seriously got round to experimenting with new forms of investment outside North America - although the IOS Growth Fund, which was launched late in 1969 for the German market, was given some of the Arctic action, and suffered accordingly. The main German fund, Investorsfonds, launched at 20 d-marks a share in March 1968, was at 22.24 DM tw0 years later. By the end of 1970, however it was down 21% from that level, IOS's small Dutch fund ivm Invest actually grew by 11½% in 1970.
Fonditalia, started in November 1967 at $10, was still fractionally ahead of the game by the end of 1970, at $10.29. Fonditalia's growth, and forced investment in the narrow Italian market helped hold up the Italian market for a time while others collapsed: eventually, it was the huge size of Fonditalia's holdings in Italian companies which caused the Italian government to buy out 51 % of the IOS Italian operation in 1970. The government realized that a collapse of confidence in Fonditalia could have dire consequences on the economy and thought the best way to avert this was to take control of the operation.
It was the Equity Unit Account of the Dover Plan that put up the most respectable performance: at the end of 1970 it stood 133% above its 1963 launch level, a growth record which was way above the average of British unit trusts for the same period; they only rose 38% and this put the eua right up among the leaders. Once again, however, the comparison is complex. The eua is in some respects similar to a unit trust, but it is far from being exactly the same sort of animal. The eua is merely a notional division of the assets of the International Life Insurance company and the calculation of its value is left to ill It does not for instance include all the cash held by ili, and this exclusion would improve its performance in rising markets. It does not include any of the Dover Plan costs, nor any reserve for capital gains tax. The prices of British unit trusts, on the other hand, must be calculated in strict accordance with a formula laid down by the government.
Nevertheless on the whole the performance of the eua was good, though it was a volatile record which deteriorated sharply at the end. For its first two and a half years it had the unique advantage of premium-free dollar investment through the original Fund of Funds, then in its best years. The eua's most successful period however came when ili, fortuitously as it
1
Based on figures produced by the magazine Money Management and Unitholder.
turned out, had to stop investing in the dollar FOF. In 1967 and 1968 the London market rose very fast and the new Fund of Funds Sterling rose with it. Then, astutely, its managers liquidated large parts of the portfolio before the market broke.
After the FOF Sterling was abandoned because of its tax disadvantages, the eua began to go the way of the other IOS funds. As markets became more difficult the competing managers chased more and more speculative stocks. In 1969, the eua bought large chunks of the sad Venture Fund International, and latter-day Fund of Funds. It went into 'liquid real estate' with an office block in Nairobi. As a result the eua did worse than the unit trust average over the last two and three years to the end of 1970 and in 1970 itself it fell by 15.2% against the trusts' average decline of 5.7%. For early investors the falls were not yet large enough to wipe out the early gains, but for later investors, together with the heavy Dover Plan charges, they present a daunting obstacle.
After all the promises, it seems that the best account of the IOS investment operation is the one we were given by a yo
ung woman who worked for Cornfeld: 'If anyone was fool enough to put their money with us,' she said, 'that was their problem.'
There are several versions of the story of the customers' yachts. The version Cornfeld himself used to tell went like this: during the Twenties, the New York yacht harbour was a big spot on the sightseeing programmes. In the harbour were moored the yachts of all the rich bankers and brokers. 'That's Mr Morgan's yacht on the right,' the guide would declaim. 'The one next to it belongs to Mr Rockefeller - that one is Mr Dillon's.'
One day, an innocent tourist is said to have asked: 'Where are the customers' yachts?'
According to Professor Galbraith, the question should be addressed to Bernie Cornfeld in the form: where are the customers' girls? However, we stuck to the original, and asked Cornfeld, in 1970, to answer this question: where were his customers' yachts?
Mr Cornfeld considered for a moment.
'Well,' he said, 'somewhere up there in the Arctic, Frozen solid.
Chapter Twenty-four A Game of Strategic Withdrawal
In which Bernie sells out, and Ed Cowett plays backgammon. In which a young man gets on a train in Bangkok.
There is no neat end to the story of Investors Overseas Services. As long as there is a decent amount of the customers' money lying around in Geneva, people will be interested in it - and probably wrangling over it. Although we have followed some of the subsequent intrigues, the main part of our story deals with the boom and bust of IOS, and that story ends with the crash in 1970. Many things are possible - it may even be that someone will find enough oil in the Arctic to pay back the customers of the Fund of Funds. Maybe some investment giant will arise, and cause IIT and the other funds to perform genuine, as against imaginary wonders. It does not seem likely, as we close our account with a description of some of our characters as they stood in the first month of 1971.
There was no move to restore Ed Cowett to the IOS board, after his resignation, although he stayed on the payroll as a 'consultant' until the autumn of 1970. The management seemed to feel that he was the man who knew where most of the bodies were buried, and that they might need him in the event of any exhumations being required. Cowett moved into a new office just down the Rue de Lausanne, and started a new company of his own, called Emco. It was to advise private clients on taxation and investment problems. He said that he could not return permanently to America: there was too much 'moral degeneracy'. But he made plenty of visits: sometimes to spar with his old antagonists at the sec, or to play in the Bob Hope golf tournament at Palm Springs.
Cowett was claiming to be 'bust' but he still had the big house overlooking the lake, above the Pare des Eaux Vives, and he was still driving the blue Maserati. The Emco offices, in a converted apartment, are hardly squalid. There are long sofas, and deep armchairs, and the office equipment is all brand new. There is a telescope aimed out over the lake, and various pop art objects, such as a large gilded sandwich, are scattered around.
Against one wall stands a large, marble backgammon table. Bernie Cornfeld's fascination with backgammon never seemed to turn him into a very good player, but Cowett is said to be one of the best in the world. The key to backgammon, he says, is that it is 'a game of strategic withdrawal'.
One bookshelf is occupied by a row of volumes, each considerably larger and fatter than a
Britannica
section, all bound in blue with silver letters tooled on the spines. The letters say, 'IOS Ltd Public Offering of Common Stock, September 1969', and underneath, in smaller letters, 'Edward M. Cowett.' Copies of all the letters, contracts, minutes, accounts, prospectus drafts and telexes connected with the public offering were bound up to make these volumes. Their bulk gives an idea of the intellectual powers that were required to bring IOS to the market. At first sight, there seem to be seven of these volumes, but the seventh is only a dummy. It opens out into a backgammon set.
Cowett was still strategically withdrawing as 1971 opened, he was growing a new, and rather dashing black beard, and greeting the future with confidence. 'I am a natural optimist,' he said. 'You give me a glass and I'll never say it's half empty. To me it's always half full.' One of his main preoccupations was to liquidate his obligations over certain IOS shares: he was still haunted by the 600,000 shares which he had shifted from his family trust, and the King trust, and sold to Dean Milosis's little fund, Summit Associates, in May 1970. Cowett had only persuaded Milosis to take the shares at $2.35 by promising to arrange a resale, or else buy them back, at $2.95 within a few months. By mid-summer 1970 the price of IOS shares was hopelessly below $2.95. Cowett started to repurchase them, and wrote a cheque for $450,000 on the International Credit Bank. Unfortunately the cheque bounced.