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Investment trusts – lessons learned from history

‘It would be hard to imagine a worse financial crisis, spread over five years, than that of the Great War. Yet the investment trusts weathered it.’ George Glasgow.

Ian Sayers, Director General, Association of Investment Companies (AIC), looks at the ability of investment trusts to continue to pay dividends through times of crisis

There’s no doubt that the global financial system has been tested in the short 21st century that we have experienced so far, stretching the nerves of both advisers and their clients alike. First up was the dotcom bust at the turn of the century. Many investment company enthusiasts will recall the sage comments from the late, great fund manager Ian Rushbrook. Explaining at the turn of the century why he had not included any tech stocks in the portfolio of Personal Assets Trust, he said: ”To me, investing in the new economy is a flight into Never-Never Land – or bungee-jumping without a rope.” Many advisers will remember all too well the pressure to join that particular party. Of course, the bursting of the dot com bubble, it turned out, was just around the corner (although in usual Darwinian form, it didn’t stop the ‘quality’ new economy stocks from going on to dominate – as many fund portfolios across the collective investment universe today would testify).

Fast forward to 2006, not too far ahead of the global financial crisis and credit crunch, Rushbrook’s main concern was out of control consumer, corporate and government borrowing which he felt had become a prerequisite for economic growth. The world has once again moved on (and I for one would love to know what Mr Rushbrook would make of it today). But none of these events, of course, come close to the cataclysmic financial shocks which were brought to bear by the Great War, whose centenary was recently marked.

Some four weeks after the assassination of Archduke Ferdinand in Sarajevo, the Vienna Stock exchange suspended dealing, followed, one by one, by all the European Stock Exchanges: Paris and London were the last to fall, with London announcing on 30 July that there would be no financial settlements for a month. This month turned into five months, before the stock exchange reopened, under restricted conditions, on 4 January 1915 (the New York stock exchange did not open for 9 months). To compound the problems of American bankers, there was a severe run on the US banks from their own depositors.

The investment company sector is the only collective investment vehicle to have experienced all of these financial shocks and more, with the first investment trust, Foreign & Colonial, launched in 1868. So how did the sector fare during this period? In fact, not only did eight English and fourteen Scottish investment trusts maintain their dividends on their ordinary stock throughout WW1, but a further eleven, of which seven were Scottish, actually increased their dividends during the war years. In other words, over a third (37%) of the investment company sector continued either to maintain, or increase their dividends during the Great War, the worst financial crisis in memory. By 1914 the total assets of the 46-year-old investment company sector approached £90 million. There were 90 investment trusts in existence. Although the sector was relatively small, the soundness of the investment trust concept was becoming increasingly well recognized, the standing of the older investment trusts was demonstrated by the fact that their debentures had a credit rating second only to Consols, the undated British government security.

George Glasgow, financial author of the time, wrote: “It would be hard to imagine a worse financial crisis, spread over five years, than that of the Great War. Yet the investment trusts weathered it. Be it understood that I write of the maintenance of dividends of the ordinary stocks. The preference and debenture stocks never knew there was a war on. At one point towards the end of the war there did arise the spectre that in the case the war were lost the investment trust might one and all have to liquidate themselves and see their assets transformed into one vast unending war stock to pay for the defeat; but that spectre disappeared, and finally all was well.”

Some 26 AIC member companies were established before 1914 and are still around today, currently representing some £25.5billion between them. This equals almost a quarter (23%) of the investment company industry’s £114.5bn assets under management, illustrating both the long-term success and the durability of the closed-ended sector.

Just under half of the companies with 100 plus year histories have been able to increase their dividends for at least each of the last 30 years due to the structural advantages of the investment company sector (the ability to smooth dividends by holding some of the income in reserve for a rainy day). John Newlands, Head of Investment Companies Research at Brewin Dolphin, writes that the enduring trusts “have created portfolios that are as tough as ox hide.” It’s interesting to see that whatever life throws at the sector, it continues to adapt. One enduring theme continues to be the income story. And indeed, in a low interest rate world, that has been one of the challenges for advisers and investors alike in the short 21st century so far.

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