George Booth and Ian Fairbairn: The First Unit Trusts, 1931–1960

Abstract

Unit trusts encouraged smaller savers and women to invest, despite the 1929 Crash, mainly into ordinary shares. Easy to understand, they contributed to a growing interest in equity investing, as indicated by the creation of the FT30 Index in 1935. The first unit trusts offered transparency in pricing, trusteeship and complete redeemability and were an antidote to the excesses of the 1929 Crash embodied by the Goldman Sachs Trading Corporation and other investment companies in the USA. Booth and Fairbairn of Municipal and General, a forerunner of the M&G Group, created and nurtured unit trusts through their extended 30-year, formative period in the UK and developed early ideas about ‘value’ investing. By contrast, mutual funds in the USA had a completely different, and much more rapid, pattern of development.

Annex: The Esmée Fairbairn Foundation

Whereas the book effectively stops around 1960, this Annex moves away from the specific subject of unit trusts and briefly explains the ownership of M&G (essentially the re-branded entity that was Municipal and General) up to the end of the twentieth century. The story is unusual in that a charitable foundation preserved M&G’s independence during a period when most other unit trusts groups largely disappeared and a number of independent asset manager organisations were taken over by large banks. Established in 1961 as a charitable trust, the Esmée Fairbairn Foundation (the ‘EFF’) had two purposes.⁹⁴ The first was to place, in trust, Fairbairn’s majority shareholding in M&G, thus preserving its independence. Second, the EFF served as a memorial to Ian Fairbairn’s deceased wife and reflected his own social conscience which had been a powerful influence throughout his life. Subsequently The EFF grew to become the sixth largest grant-giving family foundation in Britain,⁹⁵ It also enabled M&G to choose its own pathway because the Trustees could take an objective view of the interests of different stakeholders. In practice this meant M&G developed in a very different direction from most of its main competitors in the second half of the twentieth century. Establishing the trust had far-reaching implications so Fairbairn made a significant contribution in ways he could never have imagined, not just during his own lifetime but also for a long time afterwards. Talking in 2015 about the years since 1961 and the effectiveness of the trust and the work of the EFF, Ian’s nephew John said, ‘the old boy [Ian] would have been very pleased’.⁹⁶

Esmée Fairbairn had been killed in an air raid in 1944. Ian Fairbairn created the Esmée Fairbairn Trust in 1961, for philanthropic reasons, ‘he aimed to promote a greater understanding of economic and financial issues through education. He also wanted to establish a memorial to his wife, Esmée, who had played a prominent role in developing the Women’s Royal Voluntary Service and the Citizens Advice Bureau’.⁹⁷ Fairbairn, chairman and the largest shareholder, placed his personal 50.1% ownership stake into the trust which, therefore, had a controlling interest in M&G.⁹⁸ In 1961, Fairbairn was 65 years old and George Booth, the founder and previous Chairman, was 84 so they were both aware that the stewardship of the organisation had to move to the next generation and they also wished to preserve M&G’s independence.⁹⁹ In its first phase, the EFF used the income from the shares to support charitable causes. One of their first decisions by the Trustees was ‘to consider financing university fellowships in the field of investment matters’.¹⁰⁰ It was very active in supporting academic institutions and was a benefactor towards Cambridge University and the London Business School in the 1960s; and Kings College London in the 1970s by providing fellowships in Environmental Studies.¹⁰¹ It was also an important donor to the privately run University of Buckingham after the 1970s, supporting various initiatives: a Department of Economics; the Esmée Fairbairn Chair in Accounting and Financial Management; the construction of the Franciscan Building; undergraduate bursaries; the Ian Fairbairn Lecture Hall; the Chandos Road Building and the History of Art department.¹⁰² In 1999 when the EFF sold its shares in M&G, the scope of EFF’s activities were transformed when the foundation received more than £600 million, which, of course, forms the basis of its endowment fund today. Celebrating 50 years of the Esmée Fairbairn Trust in 2011, it announced that had donated more than £500 million to deserving causes over its lifetime, thus making a profound impact on British society.¹⁰³ Presently, the trust distributes between £35 and £40 million each year and has broadened its activities to address four main areas – arts (and heritage), young people, social change and the environment. In 2016, the foundation was exploring different methods of operation and according to the current chairman it actively seeks interest from deserving causes in an effort to become more proactive and ever more relevant meeting societal needs.¹⁰⁴ As the chairman remarked, perpetuity is a very long time, but the likelihood is that this foundation will continue to exist for the foreseeable future. The Fairbairn family, and subsequent Trustees of the EFF, should be proud of this philanthropic legacy.

The other interesting aspect of EFF’s ownership stake was its influence on the development of M&G after 1961. M&G was in charge of its own destiny, albeit through the Trustees of the foundation. The creation of a trust enabled M&G to remain independent for almost 40 years and during that time it rejected at least two takeover attempts, one of which was decidedly unsavoury. In 1999, when M&G finally relinquished its independence, it could do so on its own terms and choose an organisation which was a true partner who provided a good business and cultural fit. In 1961, the only other large shareholder in M&G was an investment bank, Kleinwort Benson, which held 35% of the equity.¹⁰⁵ This was increased to 42.5% in 1980 because M&G needed additional capital owing to financial difficulties.¹⁰⁶ Subsequently Kleinwort discussed purchasing M&G in the mid-1980s but the EFF Trustees politely rebuffed this friendly approach. Kleinwort sold most of their stake in 1986 (and the EFF reduced theirs to 33.3%) when M&G had a partial public offering of their shares.¹⁰⁷ Despite further appreciation in M&G’s value by 1999, Kleinwort would have been very happy in 1986: it had made a high return and a tremendous profit, over £50 million, on its small investment of £100,000 from 30 years earlier. In 1987, Alan Bond, the Australian entrepreneur, acquired a stake of 6.8% in M&G in a hostile attempt to buy the business.¹⁰⁸ Again, this suitor’s approach was declined. Alan Bond would have been an unfortunate owner: he went bankrupt in 1992 and was jailed on three occasions of which the longest sentence was for 7 years in 1997 for corporate fraud.¹⁰⁹ Inevitably, Bond would have been a disaster for M&G but Kleinwort may not have been much better despite the cordial relations that the two organisations had enjoyed for a very long time. In practice, not choosing Kleinwort Benson in the mid-1980s was a smart move: Kleinwort, including its asset management arm, subsequently disappeared inside a large European bank whereas M&G still lives. So at this juncture, by preserving M&G’s independence, the trust had behaved exactly as Fairbairn would have hoped when he established it in 1961.

With the enthusiastic agreement of both the EFF Trustees and M&G’s management, Prudential bought the business in 1999 for £1.9 billion. As discussed earlier in the body of this chapter (Chapter 7), operating as the asset management arm within the Prudential and known as ‘M&G Investments’, M&G has retained its name and probably much of its culture. Most if not all of its direct competitors from the second half of the twentieth century have lost theirs so M&G’s experience is atypical. Fairbairn found a way of dealing with the very difficult problem of inter-generational and organisational continuity by placing his shares into trust, it made M&G safe from unwanted takeovers and it preserved the essence of the entity that he had built from the beginning of the 1930s. His company remained independent for 30 years after his death in 1968, and more importantly, it enabled the Trustees, in conjunction with senior management at M&G, to choose their preferred partner and, to do it at a time that suited M&G. Fairbairn made a major contribution to the development of the asset management profession in Britain and incidentally, he established this trust. Owing to the passage of time, it is inevitable that the links between Fairbairn and other members of the Fairbairn family with M&G will diminish. Indeed, a visit to the website of M&G confirms that Fairbairn is barely mentioned.¹¹⁰ By comparison, the website of the EFF is very informative about Fairbairn’s life, values and hopes. The moral of this particular story could be that if being remembered by posterity is important, then building a foundation and not just a business might be best.