Abstract
The Foreign and Colonial Government Trust, an investment company (investment trust or closed-end fund), was instrumental in shaping today’s asset management profession. Overend Gurney, a bank, failed in 1866 so Foreign & Colonial as a pure investment institution with a long-term horizon offered savers an investment channel that was quite different from the deposit channel. Its pooled fund structure made investment available to a wide spectrum of society so middle-class and lower-middle-class individuals, not just the very wealthy, could access it – it made investing available to the burgeoning middle classes in Victorian Britain. With an unusual embedded lottery feature it retained an element of gambling. It invested globally in high-yield, emerging market junk bonds so was risk-seeking within a diversified portfolio.
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Notes
- 1.
The Foreign and Colonial Government Trust was an investment company. It was created in 1868 under trust law and only became incorporated as a company in 1879. At that date it had most of the recognisable features of an investment trust company. In US terminology this would be referred to as a ‘closed-end fund’.
- 2.
The name Foreign and Colonial Government Trust applied from 1868 to 1891 at which point it changed to Foreign & Colonial Investment Trust when its powers of investment were widened. The name ‘Foreign & Colonial’ has been used throughout the remainder of the book.
- 3.
The Napoleonic Wars killed off the Dutch unit trusts.
- 4.
Foreign and Colonial Government Trust, Prospectus March 1868 (Guildhall Library).
- 5.
Neil McKendrick and John Newlands A History of Foreign & Colonial Investment Trust (Chappin Kavanagh 1999) 26.
- 6.
Neil McKendrick and John Newlands A History of Foreign & Colonial Investment Trust (Chappin Kavanagh 1999) 26.
- 7.
John Turner, Banking in Crisis (Cambridge University Press 2014) 80.
- 8.
John Turner, Banking in Crisis (Cambridge University Press 2014) 80.
- 9.
Neil McKendrick and John Newlands A History of Foreign & Colonial Investment Trust (Chappin Kavanagh, 1999) 26. The authors quote a figure of £25 rather than the full obligation of £35 as the additional payment required from shareholders.
- 10.
Ashraf Mahate, Contagion Effects of Three Late Nineteenth Century British Banking Failures (Business and Economic History 1994).
- 11.
John Turner, Banking in Crisis (Cambridge University Press 2014) 81.
- 12.
John Turner, Banking in Crisis (Cambridge University Press 2014) 81.
- 13.
Marc Flandreau & Stefano Ugolini, The Crisis of 1866 (Graduate Institute of International and Development Studies, working paper 10, 2014).
- 14.
Neil McKendrick and John Newlands A History of Foreign & Colonial Investment Trust (Chappin Kavanagh 1999) 63.
- 15.
Neil McKendrick and John Newlands A History of Foreign & Colonial Investment Trust (Chappin Kavanagh 1999) 26.
- 16.
Andrew St George, A History of Norton Rose (Granta 1995) 45.
- 17.
Mary Millar, Rose, Sir Philip, First Baronet 1816–1883 in Oxford Dictionary of National Biography (Oxford University Press 2004).
- 18.
Neil McKendrick, The Birth of Foreign & Colonial: The World’s First Investment Trust (Foreign & Colonial 1993) 56.
- 19.
Thomas Nash, A Life of Richard Lord Westbury Vol 2 (London 1888) 189.
- 20.
Neil McKendrick, The Birth of Foreign & Colonial: The World’s First Investment Trust (Foreign & Colonial 1993) 55.
- 21.
Samuel Laing (see Thomas Seccombe, in the Oxford Dictionary of National Biography) was a lawyer, barrister, businessman, senior Liberal politician, civil servant and in his later years a prolific author. Born in 1812, a few years older than Rose, they were kindred spirits.
- 22.
Neil McKendrick and John Newlands A History of Foreign & Colonial Investment Trust (Chappin Kavanagh 1999) 12.
- 23.
Andrew St George, A History of Norton Rose (Granta 1995) 87.
- 24.
Andrew St George, A History of Norton Rose (Granta 1995) 88. The name of a military and knightly order of the Ottoman Empire, The Order of the Mejidie, was instituted in 1851 by Sultan Abdülmecid I.
- 25.
Andrew St George, A History of Norton Rose (Granta 1995) 88.
- 26.
Victor Morgan & W. Thomas, The Stock Exchange: Its History and Functions (Elek 1962) 93.
- 27.
Mary Millar, Rose, Sir Philip, First Baronet 1816–1883 in Oxford Dictionary of National Biography (Oxford University Press 2004). Disraeli was leader of the Tory Party and prime minister twice, first in 1868 and then between 1874 and 1880.
- 28.
Similar to his father, the eldest son, Philip Frederick Rose, was also close to the Conservative party and the Disraeli family. He sanitised source material about Disraeli in the official biography by Moneypenny and Buckle, published in 1920. Consequently, there was no mention of Disraeli’s financial problems, mistresses and marital difficulties (see Oxford Dictionary of National Biography).
- 29.
Neil McKendrick and John Newlands A History of Foreign & Colonial Investment Trust (Chappin Kavanagh 1999) 50.
- 30.
The lottery aspect was more than just an oddity because it materially influenced actual investment returns. Its impact on investment performance is discussed in detail later in the chapter.
- 31.
Andrew St George, A History of Norton Rose (Granta 1995) 98.
- 32.
Foreign & Colonial Government Trust, Minute Book (F&C Asset Management).
- 33.
By end 1872, the Government Stock Investment Company Limited was the only English investment company to have been established as a company rather than a trust. The first Scottish investment trust established as a company was the confusingly named Scottish American investment Company, dated April 1873. Confusing owing to a similarity of name with the Scottish American Investment Trust launched in February 1873.
- 34.
The Dundee Advertiser, 7 March 1879.
- 35.
Foreign and Colonial Government Trust, Plan of Consolidation, March 1879 (Guildhall Library).
- 36.
John Turner, Banking in Crisis (Cambridge University Press 2014) 88.
- 37.
Thomas A. Lee, A Helpless Class of Shareholder: Newspapers and the City of Glasgow Bank Failure (Accounting History Review 22/2, 2012.
- 38.
Richard Button et al., Desperate Adventurers and Men of Straw: The Failure of the City of Glasgow Bank (Bank of England Topical Paper, 2015).
- 39.
Generalising and making comparisons with the twenty-first century, Overend, Gurney was relatively specialised and London-centric so more akin to the failure of Lehman Brothers whereas the failure of the City of Glasgow Bank was the equivalent to the Royal Bank of Scotland.
- 40.
Marc Flandreau & Stefano Ugolini, The Crisis of 1866 (Graduate Institute of International and Development Studies, working paper 10, 2014). Ashraf Mahate, Contagion Effects of Three Late Nineteenth Century British Banking Failures (Business and Economic History 1994).
- 41.
University of Glasgow, City of Glasgow Bank (www.gla.ac.uk/services/archives, website accessed on 19 April 2016).
- 42.
Richard Button et al., Desperate Adventurers and Men of Straw: The Failure of the City of Glasgow Bank (Bank of England Topical Paper 2015).
- 43.
Richard Button et al., Desperate Adventurers and Men of Straw: The Failure of the City of Glasgow Bank (Bank of England Topical Paper, 2015).
- 44.
Neil McKendrick and John Newlands A History of Foreign & Colonial Investment Trust (Chappin Kavanagh 1999) 33.
- 45.
Victor Morgan & W. Thomas, The Stock Exchange: Its History and Functions (Elek 1962) 88.
- 46.
Victor Morgan & W. Thomas, The Stock Exchange: Its History and Functions (Elek 1962) 88.
- 47.
Andrew St George, A History of Norton Rose (Granta 1995) 95. This passage refers to a ‘Memoir’ written by Rose’s son Philip Frederick. Sadly, despite contacting Norton Rose Fulbright, the Bodleian and the British Library, I have been unable to find this document which may shed more light on this intriguing assertion.
- 48.
Victor Morgan & W. Thomas, The Stock Exchange: Its History and Functions (Elek 1962) 90.
- 49.
Alex Preda, Rational Investors, in Pioneers of Financial Economics Vol 1, ed. Geoffrey Poitras (Elgar 2006) 157.
- 50.
Alex Preda, Rational Investors, in Pioneers of Financial Economics Vol 1, ed. Geoffrey Poitras (Elgar 2006) 157.
- 51.
Queen Victoria Tries the Telephone (www.queen-victorias-scapbook.org, website accessed 19 April 2016). The story is recorded as follows: ‘In January 1878, Alexander Graham Bell demonstrated his new invention, the telephone, to Queen Victoria at Osborne House on the Isle of Wight. The Queen recorded in her journal that the telephone “had been put in communication with Osborne Cottage & we talked with Sir Thomas & Mary Biddulph, also heard some singing quite plainly” and that she found the whole process “most extraordinary”’.
- 52.
National Bureau for Economic Research, Chapter 13, Interest Rates (www.nber.org/databases/macrohistory/contents/chapter13).
- 53.
Marc Weidenmier, Money and Finance in the Confederate States of America (www.eh.net, website accessed 18 April 2016).
- 54.
The Economist, 27 March 1868.
- 55.
The Economist, 27 March 1868.
- 56.
The Economist, 27 March 1868.
- 57.
Andrew St George, A History of Norton Rose (Granta 1995) 87.
- 58.
John Newlands, Put Not Your Trust in Money (Association of Investment Trust Companies 1997) 127. The Argentinean rail network expanded from 836 km in 1870 to 9,400 km by 1890. Owing to advances in refrigeration technology, frozen beef was successfully transported from Argentina to France after 1877.
- 59.
Niall Ferguson, Civilisation (Penguin 2012) 127.
- 60.
Charles Jellicoe was appointed to estimate returns in 1868 and subsequently thereafter, to verify returns produced by Foreign & Colonial. He was a past president of the Institute of Actuaries. In 1868 he estimated an 8% return assuming no defaults. In 1875, Scratchley in his book, On Average Investment Trusts, calculated individual redemption yields on 16 of the bonds assuming a 20-year life for each bond shown in Table 3.1. The weighted average yield is higher than 8% so perhaps Jellicoe was being cautious with his initial estimate.
- 61.
The Economist, 27 March 1868.
- 62.
Neil McKendrick and John Newlands A History of Foreign & Colonial Investment Trust (Chappin Kavanagh 1999) 84.
- 63.
Neil McKendrick and John Newlands A History of Foreign & Colonial Investment Trust (Chappin Kavanagh 1999) 45.
- 64.
The Economist, 27 March 1868.
- 65.
Eendragt Maakt Magt can be translated as ‘unity makes strength’.
- 66.
Elaine Hutson, The Early Managed Fund Industry: Investment Trusts in 19thCentury Britain in Handbook of research on stock market globalization, ed. Geoffrey Poitras (Elgar 2012) Chapter 5. There is a particularly good table (5.1) on page 142 comparing the main aspects of the Foreign and Colonial Government Trust with Eendragt Maakt Magt.
- 67.
K. Geert Rouwenhorst, The Origins of Mutual Funds in The Origins of Value, ed. William Goetzmann & K. Geert Rouwenhorst (Oxford University Press 2005) 269.
- 68.
Neil McKendrick and John Newlands A History of Foreign & Colonial Investment Trust (Chappin Kavanagh 1999) 61.
- 69.
Foreign and Colonial Government Trust, Prospectus March 1868 (Guildhall Library). The 1868 prospectus hoped to raise £1 million and set the annual management charge at £2,500 which would have been 0.25%; in practice, a little over £0.5 million was raised so the annual fee was in the region of 0.5%.
- 70.
CH Walker Unit Trusts (unpublished PhD LSE Library, 1938). Walker describes this front-end charge as a ‘preliminary charge’ and it varied: it was 2.5% for the first issue of certificates, 1.5% for the next three issues and 2% for the fifth issue.
- 71.
Neil McKendrick and John Newlands A History of Foreign & Colonial Investment Trust (Chappin Kavanagh 1999) 40.
- 72.
Neil McKendrick and John Newlands A History of Foreign & Colonial Investment Trust (Chappin Kavanagh 1999) 40.
- 73.
CH Walker Unit Trusts (unpublished PhD LSE Library, 1938) 49.
- 74.
Neil McKendrick and John Newlands A History of Foreign & Colonial Investment Trust (Chappin Kavanagh 1999) 62.
- 75.
As late as the 1930s, women were not given occupations and were still classified by marital status on unit trust registers.
- 76.
Neil McKendrick and John Newlands A History of Foreign & Colonial Investment Trust (Chappin Kavanagh 1999) 42.
- 77.
K. Geert Rouwenhorst, The Origins of Mutual Funds (ICF Working Paper, 2004).
- 78.
PGM Dickson, The Financial Revolution in England (Macmillan 1993) 54 & 80.
- 79.
Richard Burns, comments on lotteries and drawn bonds (conversation, 14 January 2016).
- 80.
Arthur Scratchley, On Average Investment Trusts (Shaw 1875) 41.
- 81.
Arthur Scratchley, On Average Investment Trusts (Shaw 1875) 18/19.
- 82.
Arthur Scratchley, On Average Investment Trusts (Shaw 1875) 18/20.
- 83.
CH Walker Unit Trusts (unpublished PhD LSE Library, 1938).
- 84.
It is unclear what trading took place in certificates of Foreign & Colonial prior to 1879 when it became a quoted company. Prices were available as we can see from the Walker thesis and The Times newspaper. Hutson refers to the stock being listed on the London Stock Exchange, which is possible, but it wasn’t a company. It is probable that there was a grey market in the certificates. The question is perhaps more hypothetical than practical given that most holders of certificates would have held the investment for its yield and would not have expected to trade.
- 85.
CH Walker Unit Trusts (unpublished PhD LSE Library, 1938) 35.
- 86.
Foreign and Colonial Government Trust, Plan of Consolidation, March 1879 (Guildhall Library).
- 87.
Foreign and Colonial Government Trust, Plan of Consolidation, March 1879 (Guildhall Library).
- 88.
Foreign and Colonial Government Trust, Plan of Consolidation, March 1879 (Guildhall Library).
- 89.
CH Walker Unit Trusts (unpublished PhD LSE Library, 1938) 49.
- 90.
David Chambers and Rui Esteves, The First Global Emerging Markets Investor: Foreign & Colonial Investment Trust 1880–1913 (Explorations in Economic History 2013). This paper by Chambers & Esteves was the first forensic study of a British closed-end fund and it highlighted that Foreign & Colonial provided the first wholesale diiversified investment vehicle for the wider public.
- 91.
David Chambers and Rui Esteves, The First Global Emerging Markets Investor: Foreign & Colonial Investment Trust 1880–1913 (Explorations in Economic History 2013).
- 92.
David Chambers and Rui Esteves, The First Global Emerging Markets Investor: Foreign & Colonial Investment Trust 1880–1913 (Explorations in Economic History 2013).
- 93.
Foreign and Colonial Government Trust, Plan of Consolidation, March 1879 (Guildhall Library).
- 94.
Foreign & Colonial Government Trust AGM Reports for 1883 and 1884 (Guildhall Library).
- 95.
I was unable to confirm or validate a specific price at which the new shares began trading. Based on The Times from 27 August 1879, prices of £103.50 (preferred) and £88 (deferred) were quoted. This is the first mention of the new share classes. Implicitly therefore, the preferred shares were priced at £100 and the deferred at £85. The last reference to the old certificates appeared on 16 August when there was a sharp £3 rise in the price of the fifth issue of certificates, suggesting perhaps that the conversion was about to be formally announced.
- 96.
Donald Last, A Centenary Review 1868–1968 (Shenvel Press, undated).
- 97.
The Times 30 April 1879.
- 98.
My estimated returns cover a different time period and are a little higher than the returns in the paper by David Chambers and Rui Esteves, The First Global Emerging Markets Investor: Foreign & Colonial Investment Trust 1880–1913, Explorations in Economic History, 2013. They calculate a 4-year return of just below 26% for 1880–1883. The broader point is that the trust performed well in the period immediately after it converted to limited liability status and up to the time of Rose’s death.
- 99.
John Newlands, Put Not Your Trust in Money (Association of Investment Trust Companies 1997) 124, 128.
- 100.
David Chambers and Rui Esteves, The First Global Emerging Markets Investor: Foreign & Colonial Investment Trust 1880–1913 (Explorations in Economic History, 2013) estimate that from 1880 to 1913 FCIT Preference Shares produced a total return of 4.5% per annum with the Deferred Shares returning 6.9% per annum. Beating Consuls (by 2.2% p.a.) and with a better risk adjusted return.
- 101.
For completeness, it should be noted that the Jessel judgement was over-ruled on appeal in 1880 by the Submarine Cables Trust. This trust continued to operate very successfully under trust law until 1926. Nevertheless, virtually all British investment trusts adopted the legal structure of the limited liability company under Company Law after 1880.
- 102.
The Securities & Exchange Commission in the USA determined that investment trusts should be called investment companies in 1940. This was an eminently sensible decision because the word ‘trust’ is both misleading and confusing. It was used initially in 1868 partly because Foreign & Colonial had ‘Trustees’ but also as a marketing ploy to distinguish it from the word ‘company’ which had developed a bad name owing to the large number of bankruptcies. However, after 1879 virtually all trusts were companies and the use of the words ‘investment companies’ clearly distinguishes these entities from Unit Trusts. Unit Trusts are required to appoint an external entity to act as Trustee so this is accurate; Investment Trusts have no requirement to use a trust or a Trustee.
- 103.
K. Geert Rouwenhorst, Early Financial Contracts: Long Term Returns and Survivorship (presentation, Cambridge Judge Business School, 23 July 2015).
- 104.
Larry Neal, Venture Shares of the Dutch East India Company, in The Origins of Value, ed. William Goetzmann & K. Geert Rouwenhorst (Oxford University Press 2005) 175.
- 105.
K. Geert Rouwenhorst, Early Financial Contracts: Long Term Returns and Survivorship (presentation, Cambridge Judge Business School, 23 July 2015).
Bibliography
Primary Sources
F&C Asset Management retains some original source material from the late nineteenth century including Minute Books of meetings
The Guildhall Library, London is an excellent source of data such as information on company prospectuses, including the following:–Foreign and Colonial Government Trust, Prospectus, March 1868–Foreign and Colonial Government Trust, Plan of Consolidation, March 1879
Books
PGM Dickson, The Financial Revolution in England (Macmillan 1993)
Niall Ferguson, Civilisation (Penguin 2012)
Elaine Hutson, The Early Managed Fund Industry: Investment Trusts in 19th Century Britain, in Handbook of Research on Stock Market Globalization, ed. Poitras (Elgar 2012)
Neil McKendrick, The Birth of Foreign & Colonial The World’s First Investment Trust (Foreign & Colonial 1993)
Neil McKendrick and John Newlands, A History of Foreign & Colonial Investment Trust (Chappin Kavanagh 1999)
Victor Morgan and W. Thomas, The Stock Exchange: Its History and Functions (Elek 1962)
Thomas Nash, A Life of Richard Lord Westbury, Vol 2 (London 1888)
Larry Neal, Venture Shares of the Dutch East India Company, in The Origins of Value, ed. William Goetzmann and K. Geert Rouwenhorst (Oxford University Press 2005)
John Newlands, Put Not Your Trust in Money (Association of Investment Trust Companies 1997)
Alex Preda, Rational Investors, in Pioneers of Financial Economics Vol 1, ed. Geoffrey Poitras (Elgar 2006)
K. Geert Rouwenhorst, The Origins of Mutual Funds in The Origins of Value, ed. William Goetzmann and K. Geert Rouwenhorst (Oxford University Press 2005)
Arthur Scratchley, On Average Investment Trusts (Shaw1875)
Andrew St George, A History of Norton Rose (Granta 1995)
John Turner, Banking in Crisis (Cambridge University Press 2014)
Articles, Journals, Pamphlets, Websites, etc.
Richard Button, Samuel Knott, Conor Macmanus and Mathew Willison, Desperate Adventurers and Men of Straw: The Failure of the City of Glasgow Bank (Bank of England Topical Paper, 2015)
David Chambers and Rui Esteves, The First Global Emerging Markets Investor: Foreign & Colonial Investment Trust 1880–1913 (Explorations in Economic History, 2013)
The Dundee Advertiser
The Economist
Marc Flandreau and Stefano Ugolini, The Crisis of 1866 (Graduate Institute of International and Development Studies working paper 10, 2014)
Donald Last, A Centenary Review 1868–1968 (Shenvel Press, undated pamphlet)
Thomas Lee, A Helpless Class of Shareholder: Newspapers and the City of Glasgow Bank Failure (Accounting History Review 22/2, 2012)
Neil McKendrick, The Birth of Foreign & Colonial: The World’s First Investment Trust (Foreign & Colonial 1993)
Ashraf Mahate, Contagion Effects of Three Late Nineteenth Century British Banking Failures (Business and Economic History 1994)
Mary Millar, Rose, Sir Philip, first baronet 1816–1883 in Oxford Dictionary of National Biography (Oxford University Press 2004)
National Bureau for Economic Research, Chapter 13, Interest Rates (www.nber.org/databases/macrohistory/contents/chapter13)
Queen Victoria Tries the Telephone (www.queen-victorias-scapbook.org)
K. Geert Rouwenhorst, The Origins of Mutual Funds (ICF Working Paper, 2004)
K. Geert Rouwenhorst, Early Financial Contracts: Long Term Returns and Survivorship (presentation, Cambridge Judge Business School, 23 July 2015)
Thomas Seccombe, Laing, Samuel 1812–1897 in Oxford Dictionary of National Biography (Oxford University Press 2004)
The Times
University of Glasgow, City of Glasgow Bank (www.gla.ac.uk/services/archives)
CH Walker Unit Trusts (unpublished PhD London School of Economics Library, 1938)
Marc Weidenmier, Money and Finance in the Confederate States of America (www.eh.net)
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Morecroft, N.E. (2017). Philip Rose and the First Investment Company, 1868–1883. In: The Origins of Asset Management from 1700 to 1960. Palgrave Studies in the History of Finance. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-51850-3_3
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