07 Jun 2010 | History

Investment Trusts - Where it all Began 

Investment trusts have always appealed to a wide variety of people – and the motives for investing haven’t altered much over the years. Gill Hollis looks at some of the first subscribers to investment trusts.

To provide the investor of moderate means the same advantages as the large capitalists in diminishing the risk…by spreading the investment over a number of stocks.”

These words were drafted nearly 140 years ago when the Foreign & Colonial Government Trust (F&C) was set up in 1868. Although times were very different then, the reasons for investing, and the kinds of investors, were not so very different from today. The late 19th and early 20th centuries were periods of rapid industrialisation in Britain, with substantial fortunes being accumulated by entrepreneurs, and this new wealth needed to be invested. However, it was not only the very wealthy who had some savings to invest. The booming economy had created new opportunities in education and employment and it was also a period of increasing social mobility, which allowed a much wider variety of people the chance to prosper.

It so happened that this increased supply of British investment capital coincided with a massive demand for development capital from that period’s own emerging markets – North and South America, in particular, as well as Asia. Money was required to pay for some ambitious infrastructure projects – namely railroads, gas and electricity – and to lend to pioneer settlers. With wealth to invest and domestic interest rates low, overseas opportunities in developing countries were extremely attractive to British investors. But it posed one question – how should such investments be organised?

NEW THINKING

The answer was a new vehicle – and so investment trusts were born. By pooling their savings together, the smaller subscriber could invest in the same way as wealthier counterparts and thus investment became available to the wider middle classes.

The men who invented the first investment trust had clear objectives: that the shares should be available to all kinds of investors and that the risk should be diversified. The Scottish American Investment Company (SAINTS) back in 1873 had original investors that included an optician, a plasterer and a fish curer and, when The Edinburgh American Land Mortgage Company Limited was launched in 1878 (later taken over by British Assets), small shareholders were deliberately targeted.

It was an idea that would stick. The list of British Assets’ 46 founding shareholders in 1897 similarly reflected breadth of ownership. Although more than half of the initial investors were professionals, the remainder were categorised, rather quaintly, into manufacturing, trade, farming, mining – and women.

REDUCING THE RISK

F&C initially invested in 18 bonds issued by various governments and companies in countries as diverse as the USA, Austria, Chile, Spain, Turkey and Egypt. Individually, any of these investments may have been considered risky, but the overall spread of investments actually helped to diversify this risk.

Soon after, in 1873, Robert Fleming’s first trust was set up to invest in North American states, cities and railroads – although it ended up primarily investing in railroad mortgage bonds. Indeed, many of the early trusts invested in fixed income bonds secured by mortgages on the land, which helped to reduce risk further.

Another attractive feature of some of these early investment trusts was their tiered structure – which enabled them to offer gearing and different classes of shares or debentures that carried different levels of risk or return to match the individual investor’s needs. For example, the trusts from which the Alliance Trust originated, when consolidated in 1888, issued £30,000 of riskier equity capital to wealthy merchants and £165,000 of safer debentures, into which many local solicitors put their ‘widow and orphan’ clients – people who could ill afford to lose this kind of money.

Nevertheless, ordinary people were still taking something of a gamble – with little information about the portfolio; early subscribers relied quite heavily on the reputation and integrity of the founding directors. Records show that the fact that Robert Fleming’s original trust, which was based in Dundee, consisted of a board backed by “four of the best men in town” was vital to its success, attracting much local support.

THE CANNY INVESTORS

The Scots punched well above their weight in terms of early trust launches (for example, Scottish Mortgage, originally The Straits Mortgage and Trust Company Ltd, was formed in Edinburgh back in 1909). This partly reflected the booming industries in which Scotland excelled: heavy engineering, shipbuilding, fishing, whaling and textiles, giving them the means to invest. In particular, it was a golden age for Dundee – the American Civil War and associated demand for tenting and sandbags drove its burgeoning jute industry. Indeed, Robert Fleming's first investment trust and the major investment trust management group, Alliance, both owe their origins to the jute barons of Dundee.

Scottish lawyers and professional advisers were in a strong position to advise their clients on the new investment trust vehicles and, as many of the early investment trusts were set up by folk hailing from Edinburgh and Dundee, the early investment trust industry was very much concentrated north of the border. This is a feature which – although less marked – is still evident even today.

The maturity of many investment trusts is testament to the solidity of the original idea – and their core workings remain the same to this day. Although the types of investments they select have altered somewhat over the years, in both scope and location, they continue to offer advantages to modest and substantial investors alike.
 
Author: Gill Hollis
Gill Hollis is a freelance writer for several publications, including The Scotsman.

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