Foreword
By Annabel Brodie-Smith
Imagine the lights on top of the Tardis flashing as it lands on 19th March 1868 in a dimly lit Dickensian London street. The Doctor emerges as a horse and carriage rattles by and scurries off into the fog. He could have been on his way to meet Queen Victoria or the Prime Minister, Benjamin Disraeli, but he was actually on his way to meet Philip Rose who that day launched Foreign & Colonial Government Trust, the very first investment company. Foreign & Colonial Investment Trust, as we know it today, was launched for private investors, “to provide the investor of moderate means the same advantage as the large capitalist.”
If the Doctor returned next Monday he’d be in time for Foreign & Colonial Investment Trust’s 150th birthday party. He’d find a company which continues to meet private investors’ long-term financial needs and has grown to nearly £4bn. Read Foreign & Colonial manager Paul Niven’s answers to our questions on how the trust has evolved.
The Doctor today would also find a vibrant investment company industry of £173 billion in size with 400 investment companies investing in shares around the world but also new assets like property, private companies, debt and infrastructure.
Do watch our video, Changing times, one vision: 150 years of investment companies, to discover the story of investment companies.
Click on the image below to play the video.
This month we have brought together the views of the managers of the first five investment companies, the pioneers of the industry. We have investigated how these companies remain relevant for today’s investors and how they have adapted to meet investors’ needs.
Watch our video where I discuss this with the managers of the three oldest investment companies, Paul Niven, manager of Foreign & Colonial (150 years), Ben Ritchie, manager of Dunedin Income Growth (145 years) and James Dow, co-manager of Scottish American.
Our monthly investment journalist expert, Ian Cowie, looks at investment companies’ past and how history “can help us put the uncertainties of the present in perspective”. Whether it’s Brexit or Trump none of these presents such a threat to investors as the First World War, the Great Depression or the Second World War. “So any form of investment that survived all these crises – and more besides – is worth careful consideration, here and now.”
Finally, the legend that is Peter Spiller, the industry’s longest serving manager, who has been at the helm of Capital Gearing for 35 years, looks at how investment companies have evolved. This begins in the 19th century when investment companies held a mix of bonds and equities. In the 20th century equities came to the fore, before the rise of the new asset classes more recently. Peter believes that conditions now are far less favourable than 35 years ago: “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.”
Coming down to earth, it’s important I mention the new regulation, GDPR (General Data Protection Regulation) which comes in during May. We will be emailing you over the next few weeks to ask if you’d like to keep on receiving Compass from the AIC. If we don’t get your tick in the box we won’t be able to send you Compass after May. We promise to make it as easy as we possibly can to keep receiving Compass so please look out for that email.
Also research firm, QuotedData, has produced a guide on investment companies which explains how investment companies differ from other funds, the types of investment company, and how to research investment companies. It can be accessed here.
Finally, as the industry celebrates its 150th anniversary I’d like to thank you for your continued support and enthusiasm. Rather like the Tardis, it’s only when you step inside the investment company industry that you discover there’s a universe of opportunities waiting for you.
Happy birthday investment companies!
Annabel Brodie-Smith
Communications Director, AIC
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.
Foreign & Colonial at 150
Q&A with Paul Niven, fund manager of the oldest investment company
Paul Niven, fund manager, Foreign & Colonial Investment Trust
What do you think is so 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.
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 ahead, I believe that the best growth prospects lie in equities for the foreseeable future"
Paul Niven, Foreign & Colonial Investment Trust
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 fulfill 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.
Remaining relevant
Over 150 years, how have the five first 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.”
"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"
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.
The long game
In the face of uncertainty, Ian Cowie explains why investors can take comfort from investment companies' durability
Ian Cowie
History does not provide investors with a guide to the future but it can help us put the uncertainties of the present in perspective. For example, today the newspapers are full of speculation about whether Britain’s planned exit from the European Union will be beneficial or harmful to our economy, currency and stock market valuations.
On a global level, initiatives announced by Donald Trump, president of the United States of America, and Xi Jinping, president of China, provide their supporters and critics with reasons to be cheerful or fearful.
While these are all important issues and areas of potential anxiety, it can be said with some certainty that none of them presents the existential threat to investors’ capital that was posed by the First World War, the Great Depression or the Second World War. So any form of investment that survived all these crises - and many more besides - is worth careful consideration, here and now.
"Foreign & Colonial Investment Trust, which was formed in March, 1868, has not just survived the intervening 150 years of economic ups and downs, it has thrived"
Ian Cowie
More than a dozen investment companies whose shares are listed on the London Stock Exchange today were set up in the 19th century and about two dozen trading now are more than 100 years old. Foreign & Colonial Investment Trust, which was formed in March, 1868, has not just survived the intervening 150 years of economic ups and downs, it has thrived.
Compound interest - or the ability for income to generate more income and gains to grow on gains - can produce dramatic uplifts over long periods of time. Even so, it is interesting to note that £100 deposited in a typical building society account in 1868 would be worth about £257,000 today but the same sum invested in F&C at launch would have rolled up into a remarkable £10.9m.
Never mind the distant past, though, what about more recent history and the present? As an investment company shareholder for nearly 30 years, I have personal experience of how they prospered despite several stock market shocks during the intervening decades.
Like other forms of pooled funds, investment companies diminish the danger inherent in markets by diversification; they spread individual investors' money over dozens of different companies and/or countries to reduce our exposure to misfortune or failure in any of them.
"As an investment company shareholder for nearly 30 years, I have personal experience of how they prospered despite several stock market shocks during the intervening decades"
Ian Cowie
Unlike other pooled funds, investment companies have a closed-ended structure which means their managers are not forced to sell assets when prices are temporarily depressed to meet redemptions by people who wish to get back into cash.
That may sound like a technical point but it is a real problem currently afflicting one of Britain’s biggest open-ended funds, whose manager has recently suffered a series of setbacks and substantial outflows.
Investment companies’ closed-ended structure is a major advantage for medium to long-term investors seeking to ride out short-term volatility. Gearing - or the ability to borrow to buy when managers expect investment returns to exceed interest costs - and income smoothing - or holding back some returns in good years to maintain dividend payouts in bad years - are also important advantages that other forms of pooled fund do not enjoy.
That was why I chose investment companies, rather than their more heavily promoted rivals, when I began investing modest sums in the early 1990s. Then, as now, the outlook seemed fraught with political upheaval and economic stress on the horizon at home and overseas. As it turned out, the bursting of the dotcom bubble and the global credit crisis would dominate the next decade.
Only one of the investment company shares I bought more than 20 years ago is still in my portfolio. Following visits to China and Hong Kong, ahead of the handover of the latter to the former, I paid 60p per share in March, 1996, for what was then Fleming Chinese and 63p per share in June that year for Fleming Indian. Both are now listed as JPMorgan investment companies and I am still a shareholder in the latter, which is trading at more than 10 times the price I originally paid.
The past is not a guide to the future and share prices can fall without warning. Longevity - or the fact that investment companies have traded for more than a century - does not give any guarantees for investors but it does provide a reason to avoid excessive pessimism about the present.
Many investment companies have been through much worse before. While the future remains uncertain, history offers hope that shareholders in this tried-and-tested form of pooled fund can continue to survive and thrive.
Ian Cowie is a columnist at The Sunday Times
Evolution and opportunity
Peter Spiller, Capital Gearing Trust, on the development of the investment company industry over 35 years
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.
"Performance of closed-ended funds has been notably better than that of open-ended funds, at least over my half century in the City"
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 Daily Telegraph reports that £100 invested in Capital Gearing Trust in 1982, with the (modest) dividends reinvested is now worth £22,976"
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.
