Inventive investors led the way

Inventive investors

We hear a lot about the need to diversify investments; the lesson involving eggs and a basket could become tedious if it weren’t so important. Even savings accounts may need to be spread if you’re placing money in excess of the limits for deposits covered by the Financial Services Compensation Scheme (FSCS). The need for care is also obvious when buying investments that fluctuate in value and can, in a worst-case scenario, become worthless with no recourse to the FSCS. It’s an age-old challenge.

Since the Medici Bank in Florence collapsed in 1494, it’s been clear that even the most prestigious companies can fail unexpectedly. The South Sea Company in 1720 was a famous investment bubble that inevitably burst. A century or so after that, the Joint Stock Company Act 1844 made it possible for people to own shares in a company, free of personal liability for its debts. This was a major boost for London’s already long-established stock exchange.

Failing companies, from banks to railway pioneers, were not unknown in Victorian times. Even after 1844, investors that made unfortunate choices could still face losses. There were also risks involved in buying bonds issued by governments around the world. In the 1860s, Philip Rose came up with the idea of a company that would buy and hold numerous investments for the benefit of its own shareholders.

In 1868, Rose created the world’s first collective investment vehicle, the Foreign & Colonial Government Trust1. Initially it bought and held government bonds but later changed its name to Foreign & Colonial Investment Trust. It also refocused on investments that its managers believed could provide better returns for its shareholders. It still operates today, holding shares in about 450 companies across global stock markets.

More lessons were learned by investors in New York’s Wall Street financial district in the late 1920s. Earlier in the decade US stock markets had boomed, but when the bull run finally ran out of steam, investors were all sellers and there were virtually no buyers. The Wall Street Crash of 1929 sent shockwaves around the globe. Concentration of investments in a few companies in a single country, investors were harshly reminded, was not a smart strategy.

Enter George Booth, who had earlier founded Municipal and General Securities2. He conceived a different pooled investment model, enabling more investors to participate by making his UK investment scheme openended. He would issue investors with units in his collective scheme and so, in 1931, the unit trust was born. Like investment trusts, unit trusts spread risk across shares and markets. As with investment trusts some 60 years earlier, many financial firms followed Booth into the unit trust market.

 


1BMO Global Asset Management
2M&G Investments