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Investment trusts 101 - The history of investment trusts, from colonial railroads to music streaming

Investment companies have evolved since their inception in 1868 and now offer access to all sorts of sectors

Hipgnosis Songs Fund Limited -

Investment trusts have been around for over 150 years.

The oldest is Foreign & Colonial Investment Trust, now trading as F&C Investment Trust PLC (LON:FCIT), founded in 1868 by Philip Rose.

At the time, only extremely wealthy people could afford financial advisers and ordinary people could not access overseas investments.

Rose was the first person in the world to set up a collective investment scheme, allowing individuals to get exposure on a range of assets by acquiring shares in a single company.

It floated on the London Stock Exchange and started trading in government bonds. As the trust became a success, many others popped up.

Dunedin Income Growth Investment Trust PLC (LON:DIG) and The Scottish American Investment Co PLC (LON:SAIN) were both founded and floated in London in 1873, followed by JPMorgan American Investment Trust PLC (LON:JAM) in 1881.

At their inception, investment trusts focused on land and infrastructure projects, for example railways in the US – which presented significant growth opportunities at that time and were popular among European investors.

Over time investments have changed and many shifted towards companies listed on stock markets.

In 1999, four-fifths of the total capital retained by investment trusts was invested in quoted equities, with the remaining one-fifth left to private companies, property or debt.

In just over twenty years that’s got a different look: slightly more than half of all their investments are in now listed companies, while another third is in the private sector.

This is largely a consequence of the closed-ended structure of trusts, which allows them to handle the sort of illiquid assets, like land or property, that tend to be avoided by open-ended trusts as they can take a longer to sell.

Being closed-ended means trusts have a fixed number of shares and so don’t need to sell off assets when investors want to exit - unlike open-ended investment vehicles.

Their nature has allowed investment trusts to shift towards the private sector over time, while open-ended funds more often focus on listed equities.

Another reason for the shift towards private investments is that ‘alternative assets’, a category essentially comprising any asset other than equities or bonds, can deliver attractive income for investors.

In the past decade initial public offerings (IPO) onto public markets have changed considerably. As technology develops, smaller ventures no longer need to float to raise capital and start off their projects. More often than not, firms don’t need to build warehouses or hire hundreds of specialists. 

Therefore, companies tend to join the market when they are already well-established businesses, meaning tomorrow’s potential ‘game changers’ are more likely hiding in private ownership.

One of the newest investment trusts focusing on unquoted companies is The Schiehallion Fund Limited (LON:MNTN), which was launched last year with an IPO of £361mln.

Another new kid on the block was Octopus Renewables Infrastructure Trust PLC (LON:ORIT), which stunned the market as it raised £350mln on its launch, timed immediately before last year’s elections in a moment of heightened uncertainty.

Significantly, sustainability and responsible investment have become increasing trends among trusts recently.

There are also other, more novel trusts out there too. For example, investors looking for a one in a million may check out Hipgnosis Songs Fund Ltd (LON:SONG) which makes money by investing in intellectual property rights within the music industry.

One would suppose the commonality between the monetisation of online copyright frontier and the American railroads of the nineteenth, is that neither opportunity would otherwise be available to ordinary investors without facilities like trusts.

“The first investment company – Foreign & Colonial Investment Trust – launched ‘to provide the investor of moderate means the same advantage as the large capitalist’,” said Annabel Brodie-Smith, communications director of the Association of Investment Companies.

“Investment companies still have the same purpose today, allowing private investors to hold a range of companies or other assets such as infrastructure and property in one company and spread their investment risk.”

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