Investment trusts: Celebrating 150 years of investing

This year marks 150 years since the launch of the world’s first collective investment fund, Foreign & Colonial Investment Trust. We look back at its history and highlight other funds that have celebrated their centenary.

Why is this important?

It’s a story about the democratisation and de-risking of investing for ordinary people who wanted to save for their futures. The trust represented a step-change in the way individuals could access the stock market. It was the forerunner for the thousands of pooled investment vehicles, such as investment trusts and their open-ended fund cousins, that exist today.

 But while 150 years ago you needed to have large capital sums to buy investments, today, with as little as £50 – or sometimes £25 – you can buy shares in an investment trust or units in an open-ended fund.

Your money is pooled with other investors’ money, giving you exposure to hundreds or even thousands of investments.

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The trust was established on 19 March 1868 with the purpose of “bringing stock market investing to those of moderate means”. Initial investments in Foreign & Colonial (F&C) Investment Trust ranged from as little as £100 to as much as £50,000.

In 1868 – a time when one old penny would buy a loaf of bread – £100 still represented a substantial savings pot and, for many, it was likely to represent their entire life’s savings.

A typical page of the shareholders’ register in the early 1880s includes an earl, a farmer, a “married woman”, a leather cutter, an army officer and a flax spinner. And these investors came from all over the land, from Devon to Edinburgh, from castles to terraced houses.

John Newlands, founder of consultancy firm Newlands Fund Research, an expert on investment companies and their history, says: “For any company to have traded, survived and grown for 150 years is a rare and indeed a stunning achievement, especially when the financial sector is sometimes accused of short-term thinking.”

How has investing changed since 1868?

The initial portfolio was made up of 18 “foreign and colonial” government bonds from Europe (Austria, Italy, Portugal, Prussia, Russia, Spain), Canada, South America (Argentina, Brazil, Chile, Peru), the Middle East (Egypt, Turkey), the USA, and New Zealand.

In the 1890s, the trust introduced exposure to corporate bonds and mortgages, and in the 1920s equities were added.

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F&C Investment Trust’s first recorded purchase of an ordinary share was Shell Transport & Trading in 1925. Ninety years later, this company is still in the portfolio as Royal Dutch Shell.

A glance at the companies that the trust invests in today shows how the financial landscape has transformed over the years. Alongside giants including BP and Unilever sit powerful newcomers such as Amazon, Facebook and Netflix, and rising star companies in developing markets.

Is F&C Investment Trust still relevant today?

At Moneywise, we think the F&C Investment Trust could make a good basis for a global diversified portfolio. It is a standalone fund that could cover all your investment needs, given the different portfolios within it.

Today’s portfolio gives investors exposure to 500 stocks around the world and the trust ranks ninth in the list of best performing global investment trusts over the past fi ve years to 1 February 2018, according to data from the Association of Investment Companies (AIC).

Its charges are cheaper than the average at 0.54% a year. However, the dividend yield is relatively low at 1.6%, which makes it less attractive to income investors. 

What is an investment trust?

Investment trusts, also known as investment companies, are companies that trade on the stock market – but their business is investing on behalf of their shareholders.

Investment trusts can be riskier than open-ended funds because their shares can trade at a premium or discount to the value of the assets they hold, known as the net asset value (NAV) [the difference between the price of the trust’s shares and the value of its underlying assets].

But over long time periods, their performance records are often much better than open-ended funds.

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Over 35 years to the end of December 2017, an investment in the average investment company is up 5,662% in comparison to 2,824% for open-ended funds, according to the Association of Investment Companies.

Q&A with Paul Niven, manager of Foreign & Colonial Investment Trust

Has the investment strategy changed in recent years?

In 2013, we decided to make the portfolio more global. Prior to that, a third of the portfolio was in UK equities. Today, there’s less than 6% in UK equities.

The focus on raising international exposure has been very positive.

How do you manage the investments?

I assemble and manage nine strategies for equity exposure. European equity exposure is managed within BMO (the asset management company behind F&C’s] but we have US growth and value portfolios with third party providers. Plus, there’s a multimanager slice managed by Rob Burdett and Garry Potter.

The move from UK to global caused income challenges so we have a global income portfolio too.

Our exposure to private equity – investments in companies that are not listed on a public stock exchange – is now about 6%, quite low by historic standards. The performance of our private equity holdings has exceeded that of the equities. Going forward, private equity exposure will rise to between 5% to 15%.

Who are your investors?

Fifteen years ago, the shareholder base was mainly institutional shareholders, such as wealth managers. Today, 90% of shares are held by retail [individual] investors.

We have a policy on the discount to NAV. We used to have a policy to buy back shares to maintain a discount of 10%. We ended 2014 a little wider than 10%; in 2015, it was a 7% discount; in 2017, 4%; and today it’s 3%.

The aspiration of the board remains to get to NAV [which would mean that the share price refl ects the true value of the assets].

What are the prospects for investors in 2018?

2017 was a fantastic year for equity investors. The big question for investors now is whether to take risk off the table.

Equities still look attractive compared to bank accounts and bond investments.

The global economic outlook is very positive, growth looks like it will be the best in Europe for 12 years and the earnings picture is good. Interest rates are low because inflation is low.

However, in 2018 we are likely to see central banks pulling back asset purchases. Therefore, I expect volatility in equity markets to pick up – you can expect returns to become choppier, but equity markets not to decline.

I expect higher stock market levels than we have today before the bull market [a market in which share prices are rising] ends.