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Trustworthy investments

Not putting all your eggs in one basket is one of the most enduring cliches of investment.

The economic boom of Imperial Britain under Queen Victoria meant that a select few were becoming rich very quickly as a result of buying shares in companies that did spectacularly well. But stockmarket investments required considerable risk and personal capital.

Philip Rose, Samuel Laing and James Mackenzie came up with the idea of offering shares in a collective vehicle that would invest in shares, thereby spreading the risk.

In 1868, they launched the Foreign & Colonial investment trust. Its stated aim was “to provide the investor of moderate means the same advantage as the large capitalist in diminishing risk in stocks by spreading the investment over a number of stocks”.

Rose went on to form law firm Norton Rose which, like Foreign & Colonial, continues today as a leading City institution.

The Foreign & Colonial name is a reference to the stocks from around the world on which the Victorians speculated, often with wild success. The worldwide railway boom drew a lot of investment and one of the investments specified in Foreign & Colonial&#39s first schedule was the Egyptian Railway Loan.

In Scotland, some five years later, the 28-year-old Robert Fleming launched the Scottish American investment trust (known as Saints and still going) from wealthy Dundee. Flemings Bank today survives as a tributary of the JP Morgan Fleming brand.

Fleming&#39s proposition proved attractive to the recently enriched capitalists of Dundee&#39s textile industry, who were able to pool risk by investing in “the first Association in Scotland for investments in American railroad bonds, carefully selected and widely distributed, and where investments would not exceed one-tenth of the capital of any one security”. North American mortgages, too, were to generate massive profits for the Scottish investment trusts.

A test case (Sykes v Beadon) brought in 1878 forced investment trusts to become companies and, even though this was reversed on appeal, the company format proved congenial. The trust name was useful in attracting potential investors in times of no regulation and where huge gains were matched with high-profile scandals.

A unique hybrid creature resulted – both a stockmarket-listed company (all are listed on the London Stock Exchange) and at the same time effectively a mutual. As a company, it was also able to borrow money and this gearing has led to some of the controversies surrounding the trusts.

At the turn of the century, there were a total of 82 investment trusts in England and Scotland with capital approaching £70m. By 1932, when the Association of Investment Trust Companies was set up by Arthur Critchon, there were 202 companies in existence.

With the advent of the 1948 Companies Act, which meant that market values had to be disclosed, it slowly began to be possible to find out the net asset value or the difference in value between the share price and the underlying assets. Initially, these were laboriously calculated and different brokers would be able to provide estimates. They are now readily accessible in the press.

After World War II, investment trusts lagged behind their younger unitised brothers in general popularity. However, it should be pointed out that many fund management firms present the same investment flavours in both the unit trust and investment trust formats.

The public&#39s place was taken by institutional investors who saw investment trusts as a prudent way of accessing overseas markets, a speciality of the sector since its inception.

However, the increasing sophistication and resources of institutional investors has led to a diminishing reliance on investment trusts, which have in turn reoriented themselves at the retail market.

Nevertheless, institutional shareholders continue to account for the majority of shareholders and only 40 per cent of shares are currently held by retail investors.

The 1960s saw the birth of perhaps the most distinctive and controversial investment trust – the split-capital investment trust. This innovation was pioneered by Samuel Montagu at Dualvest. This tandem “father and son” arrangement, driven by the high tax regime of the day, split income and growth shares in a formula that has been refined and extended over the years.

Splits featured heavily in the 1972 investment trust boom in which £500m new money was raised. By 1976, investors had the choice of 23 different split-caps.

Given the amount of money they had just attracted, the crash of the 1972 and the ensuing bear market hit investment trusts particularly hard. Discounts widened dramatically, with the average investment trust trading at a discount approaching 45 per cent at several points in the decade.

Only with hostile takeovers from pension funds, unitisation of some funds and improving market conditions did the sector begin to recover.

However, the decade was not an unmitigated disaster for investment trusts, which benefited from their heavy involvement in North Sea oil.

Investment trusts, a quintessentially 19th Century invention, benefited from the market-friendly administration of Prime Minister Margaret Thatcher and her self-professed admiration for Victorian society.

Innovations were driven by the original pioneers. Foreign & Colonial introduced investment trust savings schemes and Saints launched a personal pension linked to investment trusts, both in 1984. The introduction of Peps in 1988 introduced a tax-privileged wrapper for investment trusts.

The decade&#39s other biggest ego, Robert Maxwell, had investment trusts firmly in his firing line as pension funds once again began their predications in the sector. In a move that grabbed headlines, in 1990, the Globe investment trust – the country&#39s biggest with assets of £1.2bn and a FTSE100 company – fell prey to a hostile takeover from the British Coal Pension Fund.

Restrictions on marketing and the lack of commission to intermediaries, which conferred Cinderella status, have been tackled with a high-profile generic advertising campaign and schemes to incentivise IFAs. Currently, some 394 investment trusts have a total of £67bn under management.


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