Imagine that a time machine dumps you in 1868 and you are forced to ply your trade as a financial adviser. Whilst you have the immense advantage of knowing how the world is going to turn out, it’s quite a long time before you’ll be able to invest in Microsoft or Google.
You could put your clients into Consols (government bonds) paying around 3%. Or you could go for something more exciting, like railroad stocks. But which ones? Will you go for the Chicago, Milwaukee & St Paul Railroad Company? Or Atchinson, Topeka & Santa Fe?
The idea of a managed fund offering a diversified portfolio of investments, like all the best inventions, seems to be so obvious in hindsight that it is surprising no-one had thought of it earlier. And perhaps they had. But while ideas are valuable, execution is everything, and Foreign & Colonial Government Trust, launched on 19 March 1868, was so well executed that it still survives and thrives today as Foreign & Colonial Investment Trust, with £4 billion in assets under management.
The sesquicentennial of the investment company industry (I know, I looked it up) is an opportunity to celebrate not just that original innovation but all the innovations in the industry over the decades. After all, investment companies would simply not still be around – and certainly not managing record levels of assets – without their remarkable capacity to reinvent themselves. In this edition of Spotlight, the current managers of the oldest investment companies discuss how they have changed to face the future.
"Investment companies would simply not still be around – and certainly not managing record levels of assets – without their remarkable capacity to reinvent themselves"
Nick Britton, AIC
A fresh challenge to investment companies – and indeed the whole active fund industry – has been the rise of passive funds. To justify their existence, investment companies must offer something different, and better. An example of a company that has done just that is Capital Gearing, whose manager Peter Spiller is the longest-serving in the industry and has provided a return of 229 times invested capital over the 35 years he has run the investment trust (an annualised return of 16.8%). Peter’s reflections on his ‘half-century in the City’ and the investment philosophy which has driven those spectacular returns can be read here.
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"Some of you have asked me before why certain investment companies (namely, offshore companies and REITs) can’t be held in tax-efficient life insurance wrappers, such as offshore bonds. From 1 January 2018, it has been possible to hold both REITs and non-UK investment companies in these wrappers."
Nick Britton AIC
Frostrow Capital: London Investment Seminar
Those based in or around London might be interested to know that Frostrow Capital is running an investment company seminar on Wednesday 16 May, with speakers including Nick Train of Finsbury Growth & Income Trust, Ben Rogoff of Polar Capital Technology Trust and James Dow of SAINTS (Scottish American).
I’ll be in Plymouth so I can’t attend, unfortunately, but if you want to go you should email Frostrow.
QuotedData investment company guide
Research firm QuotedData has produced a guide to investment companies offering an hour of structured CPD (endorsed by the CISI). The guide explains how investment companies differ from other funds, the types of investment company, and how to research investment companies. It can be accessed here.
Investment companies and insurance wrappers
This is old news, I’m afraid, but somehow slipped through the Spotlight net. But it is good news, so worth mentioning. Some of you have emailed or called me before to ask why certain investment companies (namely, offshore companies and REITs) can’t be held in tax-efficient life insurance wrappers, such as offshore bonds. This was due to a completely illogical quirk in tax law that has now been corrected, following successful lobbying by the AIC. From 1 January 2018, it has been possible to hold both REITs and non-UK investment companies in these wrappers. More details can be found on our website.
Nick Britton, Head of Training, AIC
Upcoming events around the UK
Click on the links for more information and to book
AIC workshop (Preston)
Time: 14.00 - 16.15
AIC workshop (Warrington)
Time: 09.45 - 12.00
AIC workshop (Bournemouth)
Time: 14.00 - 16.15
AIC workshop (Guildford)
Time: 14.00 - 16.15
AIC workshop (Lincoln)
Time: 14.00 - 16.15
AIC workshop (Leicester)
Time: 09.45 - 12.00
AIC workshop (Plymouth)
Time: 09.45 - 12.00
Frostrow London Investment Seminar
Time: 08.15 (registration) – 09.00 (start) – 13.00 (lunch). The seminar will be held at The Ned, 27 Poultry, London, EC2R 8AJ and speakers include Nick Train, Ben Rogoff and James Dow. To book, email firstname.lastname@example.org.
AIC workshop (Taunton)
Time: 09.00 - 11.15
AIC workshop (Bristol)
Time: 14.00 - 16.15
AIC workshop (Hemel Hempstead)
Time: 14.00 - 16.15
AIC workshop (London)
Time: 08.45 - 11.00
AIC workshop (Norwich)
Time: 14.00 - 16.15
Foreign & Colonial at 150
Q&A with Paul Niven, fund manager of the oldest investment company
Paul Niven, manager of Foreign & Colonial Investment Trust
What do you think is special about Foreign & Colonial Investment Trust?
The Trust’s most important attributes include its 150 year heritage, its scale and the sheer number of underlying investors. The Trust is very widely held with over 100,000 direct investors.
Because it’s overwhelmingly held by private investors, it’s still fulfilling our founder Philip Rose’s 150-year old vision of an investment product for “the investor of moderate means”.
How has the Trust managed to stay relevant over the past 150 years?
The Trust started out with a focus on emerging market bonds with investments spanning Europe, the Middle East, New Zealand, South America and North America at a time when Canada and the US were still considered to be “emerging markets”.
Over time, the portfolio has evolved and expanded to include, at certain points in its history, corporate bonds, equities and private equity. We have always cast our nets widely to look for new investment opportunities. We have gone from investing in the Amazon 150 years ago to investing in Amazon.com today.
"We have gone from investing in the Amazon 150 years ago to investing in Amazon.com today"
Paul Niven, Foreign & Colonial Investment Trust
The Trust has continued to evolve - how do you see its future development?
It is more global than at any point in recent history. About 95% of the portfolio is now invested overseas. We have the flexibility and resource to scan the entire global market across a whole range of growth opportunities spanning regions, market capitalisations and investment styles.
Inevitably we face challenges today that are very similar to those faced by our predecessors, from conflict to financial crises and, whilst we are not uniquely placed in history with regard to uncertainty, our longevity helps us put these challenges into perspective.
Looking ahead, I believe that the best growth prospects lie in equities for the foreseeable future.
If you could meet the founder, Philip Rose, what would you want to ask him?
Looking at his original vision, it would be interesting to know how he would feel about Foreign & Colonial Investment Trust today, compared to its inception in 1868. I think he would agree that we are continuing to fulfil his vision, by providing a diversified investment vehicle with a global focus that meets the needs of the smaller investor. While our approach and underlying investments have changed over the years, the Trust has remained focused on shareholder returns and has evolved to meet investor needs over generations.
Did you know?
Foreign & Colonial Investment Trust was set up in 1868 by a young lawyer called Philip Rose, alongside barrister Samuel Laing and Samuel Laing’s business partner James Thompson Mackenzie, who was also Deputy Chairman of the East Bengal Railway.
With the backing of influential politician Lord Westbury, Foreign & Colonial Investment Trust was launched on Thursday, 19 March 1868. Today, it has total assets of £3.9 billion across a range of globally diversified holdings.
Foreign & Colonial has paid a dividend every year over its 150-year history, and has grown its pay-out ahead of inflation every year without fail since 1970.
Over 150 years, how have the five oldest investment companies adapted to meet investors' needs?
19 March 2018 marks the 150th anniversary of the launch of the first investment company. Over 150 years, investment companies have helped investors meet their financial needs and navigated through tough times including two world wars, the great depression, the tech boom (and bust) and the global financial crisis, but how have they remained relevant for today’s investor?
The AIC has collated views from the managers of the five oldest investment companies, Foreign & Colonial Investment Trust (150 years), Dunedin Income Growth Investment Trust (145 years), Scottish American (144 years), JPMorgan American Investment Trust (136 years) and The Mercantile Investment Trust (133 years), to discover how these companies have continually adapted to meet investors’ needs.
To celebrate 150 years of investment companies, the AIC has also produced a new video, Changing times, one vision: 150 years of investment companies, exploring the sector’s strengths over 15 decades. Click on the image below to play the video.
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies, said: “Investment companies have been helping investors achieve their financial goals for 150 years. Their pioneering spirit has enabled investors to access growth opportunities in new markets and sectors around the world and has delivered strong and reliable dividends for income seekers.
“The fact that 23 investment companies have track records going back over 100 years shows how the sector has stood the test of time.
“It’s interesting too that investment companies are just as innovative today, with 17 investment companies launched since 2017 as the sector continues to adapt to meet investors’ needs.”
How investment companies have remained relevant
Paul Niven, fund manager of Foreign & Colonial Investment Trust, said: “The Trust was established 150 years ago with the purpose of bringing the advantages of a pooled approach to investing to the investor of ‘moderate means’ and its objective is as true today as it was on the first day it was founded. The key to the Trust’s success, having paid a dividend to shareholders in every year of its history and having increased dividends for 47 consecutive years, is that it has never stood still. It has continued to successfully evolve to ensure it remains relevant for investors of today.”
James Dow, co-manager of Scottish American, said: “Investment companies like Scottish American have remained relevant for 150 years by remaining true to sound investment principles. In Scottish American's case, our long-standing focus has been to invest in growing companies with robust cash flows which are overseen by boards with a strong commitment to paying dividends. This tried and tested approach has underpinned the Trust's long record of inflation-beating income growth for its shareholders. We expect this to continue long into the future.”
Ben Ritchie, lead manager of Dunedin Income Growth Investment Trust (DIGIT), said: “DIGIT started life under Robert Fleming in the 1870’s investing in North American railroad bonds. Today, close to a hundred and fifty years later, it invests predominantly in UK equities.
“Our ambition remains to provide a compelling combination of capital and income growth to our investors using the natural advantages of the investment trust structure. DIGIT is increasingly well positioned to meet the challenge of providing a relatively high and growing dividend in a world where yield is scarce.”
Garrett Fish, portfolio manager of JPMorgan American Investment Trust, said: “JPMorgan American Investment Trust was one of the original Emerging Markets investment vehicles when it launched in 1881, investing in three of the railroads that were being built to service the new growth economy that was the United States.
“Over time, the Company's name and investment objectives have changed to reflect the changing opportunities that investors face. The US is now home to some of the world’s biggest companies and most recognisable brands, with a stock market that provides access to the growth of the world’s largest economy and the chance to benefit from the strength of corporate America. It’s an exciting growth story.”
"In Scottish American's case, our long-standing focus has been to invest in growing companies with robust cash flows which are overseen by boards with a strong commitment to paying dividends"
James Dow, Scottish American
Guy Anderson, portfolio manager of The Mercantile Investment Trust, said: “Mercantile was founded the same year Greenwich was chosen as the world’s prime meridian, in 1884, when there was a wave of passion for science and innovation. This was reflected in the trust’s early investments which included railways, steam navigation and telegraph communications. While the focus of Mercantile’s investments has evolved over time, such that today it constitutes UK listed mid and small-cap companies, this passion for investing in innovation and growth remains. This is evidenced by today’s portfolio which includes many companies using advances in technology to both drive and profit from structural changes in their markets.”
Adapting to meet investors’ needs
James Dow, co-manager of Scottish American, said: “Another of the advantages of investment companies like Scottish American is the ability to reserve revenues. Whilst we expect all our investments to generate income across economic cycles, the Trust's revenue reserve provides another mechanism to support its dividend through thick and thin. This advantage has helped Scottish American maintain or grow its dividend every year since 1938. With rising numbers of people entering retirement and looking for a dependable source of income, we expect Scottish American's dividends to shareholders to remain as relevant as ever.”
Paul Niven, fund manager of Foreign & Colonial Investment Trust, said: “The development of Foreign & Colonial Investment Trust was truly innovative and has helped shape the investment industry today. Since its launch the closed-ended funds universe has grown substantially, with investment trusts now recognised as an ideal structure for those looking to make long-term investments.
“Our recent move towards a more global focus represents another significant evolution for the Trust. Diversification remains an important aspect of our approach and the Trust continues to be a core growth holding for many shareholders. A diversified approach with investments in listed equities and unlisted private equity across different geographies, sectors and styles means that we are well placed to continue to deliver on our dual objectives of growth in both capital and income over the longer term.”
Outlook for markets
Ben Ritchie, lead manager of Dunedin Income Growth Investment Trust, said: “Following a prolonged bull market a focus on capital preservation and resilience of income is likely to prove more relevant in the years ahead.
"We continue to seek diversification of income, retain a strong balance sheet with modest equity gearing and substantial revenue reserves and are continuing to focus our capital investment towards companies with greater sustainable growth prospects.”
"Following a prolonged bull market a focus on capital preservation and resilience of income is likely to prove more relevant in the years ahead"
Ben Ritchie, Dunedin Income Growth Investment Trust
Guy Anderson, portfolio manager of The Mercantile Investment Trust, said: “Our approach has translated into attractive returns over both the long and short-term, with Mercantile’s share price return totalling 870% over the past 20 years, and 93% over the past five.
“We remain committed to identifying and investing in those companies that have strong business models, are suitably financed and are well placed to succeed. We also anticipate that the favourable dynamics of mid and small-sized companies will continue to drive superior returns over the long term.”
Garrett Fish, portfolio manager of JPMorgan American Investment Trust, said: “The investment philosophy we employ in the management of JPMorgan American Investment Trust is founded on the belief that stock selection, grounded in proprietary fundamental research, a consistent valuation approach and disciplined portfolio construction should enhance long-term returns.
“Looking ahead, we do not see a material risk of a recession in the near term but continue to monitor a broad range of potential risks which could represent headwinds for US equity markets. The passage of the tax reform act removed one risk to the market but investors will have to monitor how the implications of tax reform, trade policy, inflation and rising rates play out and respond in a flexible manner.”
Paul Niven, fund manager of Foreign & Colonial Investment Trust, said: “Looking ahead, interest rate rises and potentially higher bond yields may create some challenges for risk appetite in 2018.
“However, inflation, while expected to rise, should remain relatively benign. We anticipate that it will prove another positive year for equities, which are unlikely to have reached peak prices just yet.”
150 years of innovation: panel video with Foreign & Colonial Investment Trust, Dunedin Income Growth Investment Trust and Scottish American. Click on the image below to play the video.
Evolution and opportunity
by Peter Spiller, Capital Gearing Trust
Peter Spiller, Investment Manager, Capital Gearing Trust
Congratulations to Foreign & Colonial Investment Trust on achieving 150 years. It helped to develop an industry that has served investors well - performance of closed-ended funds has been notably better than that of open-ended funds, at least over my half century in the City.
Interestingly, investment companies in the nineteenth century seem to have held plenty of bonds as well as equities, much like multi-asset funds today. In the twentieth century, exchange controls (restrictions on the movement of currency between countries), high inflation and high rates of tax put paid to such an asset allocation - equities were the only game in town. This flexibility perhaps suggests that active management worked effectively. It was also good news for investors because in the twentieth century, equities produced fabulous returns, around 6% above inflation.
In our judgement, the most successful investment companies going forward will be those that take advantage of the new opportunities that have opened up over the last 35 years, thus having an asset allocation that looks more like those that prevailed in the 19th century than the 20th. Obviously, investment companies are once again free from exchange controls and there are numerous opportunities to invest in either specific overseas market funds, or using the expertise of fund managers to analyse where the best opportunities lie, through a global fund.
But on top of that, entire new asset classes have sprung up. Hedge funds and private equity were not available 35 years ago, although investors should be aware of high fees of both classes. Infrastructure funds in PPI (Private Participation in Infrastructure), solar & wind power assets, loan funds, and property, both traditional and niche, all provide opportunities for diversification of equity risk and of income.
"The most successful investment companies going forward will be those that take advantage of the new opportunities that have opened up over the last 35 years"
Peter Spiller, Capital Gearing Trust
For me, though, the most significant newcomer to the universe of potential investments is the index-linked government bond market. These offer some protection from what looks like the main threat to savings over the next few years, namely resurgent inflation. And with the absence of exchange controls, the US Treasury Inflation Protected Securities market is easily available and is far better value than its UK equivalent.
"The most significant newcomer to the universe of potential investments is the index-linked government bond market. These offer some protection from what looks like the main threat to savings over the next few years, namely resurgent inflation"
Peter Spiller, Capital Gearing Trust
So generalist funds, which can pick and choose from all these choices look an attractive home for long-term savers. Over the 35 years of running Capital Gearing Trust, I have found that forecasting short term movements in the price of any asset class, especially equities, is a fool’s game. However, in the long run, values do revert powerfully towards the mean and therefore an asset allocation that is overweight good value assets, and underweight poor value, will over time produce higher returns with modest volatility.
The Daily Telegraph reports that £100 invested in Capital Gearing Trust in 1982, with the (modest) dividends reinvested is now worth £22,976. Conditions now are far less propitious than then – indeed the opposite end of the value scale for equities and bonds – and capital preservation looks more important until the prices of financial assets that have been inflated by quantitative easing return to more ‘normal’ levels.
If that sounds a bit gloomy, it certainly does not undermine the attraction of investment companies. Over the 35 years that I have run Capital Gearing Trust, almost all the exposure to equities and infrastructure have been through investment companies, including Foreign & Colonial.
They have produced far better returns than their underlying markets and I would just like to thank the boards and fund managers of the funds that we have invested in.