But investment trusts, often dubbed investment companies or closed-ended funds, are one of the oldest types of investment vehicles, dating back to the 19th century.
So what are they and why are they still relevant?
Victorian invention
The first investment trust specialised in investing in government bonds and was established in 1868 by Philip Rose as the Foreign & Colonial Government Trust (now the Foreign & Colonial Investment Trust) in London.
Udit Garg, head of wealth management at Sun Global Investments, says: “Investment trusts were first established as a way of allowing investors of more moderate means the same access to the stock market as the much larger capital investors and organisations.”
Scotland, particularly Dundee, was a hotbed for trusts which flourished as the ‘jute boom’ took off; importing tons of jute from India and weaving products using whale oil.Pascal DowlingHe adds: “Early investments were elitist and access to the financial markets were so steep that ordinary people would have had to, perhaps, put in their entire life savings to access the portfolios.”
Pascal Dowling, partner at Kepler Partners, agrees.
“Investment trusts are a Victorian invention. Unfashionable though the word ‘empire’ is these days, it is fair to say they are a product of the wealth that British Empire generated, and a means to fund new schemes across the empire requiring vast sums of money to get off the ground,” he explains.
Investment trust boom
The F&C Investment Trust still holds its prominence in the industry as one of the world’s best-performing investment trusts, according to Mr Garg.
“The trust provided investors with a different way of accessing the stock market and the first portfolio was made up of 18 'foreign and colonial' government bonds from across the world, specifically in the more developed markets of Europe, South America, the Middle East, US and New Zealand,” he notes.
James Budden, director of retail marketing and distribution at Baillie Gifford, points out: “Baillie Gifford’s founders launched the Scottish Mortgage Investment Trust in 1909.
"Originally, the trust offered mortgages to rubber plantation owners in Malaysia who wanted to benefit from the boom in rubber caused by the Model T Ford motor car.”
Mr Dowling highlights how many investment trusts emerged in Scotland after the F&C Investment Trust was launched.
“Scotland, particularly Dundee, was a hotbed for trusts which flourished as the ‘jute boom’ took off; importing tons of jute from India and weaving products using whale oil – which was landed by the ton on the banks of the Dee – to oil the weaving machines,” he explains.
RDR
Historically, advisers had less of an incentive to recommend investment trusts to clients because they could receive commission on recommending open-ended funds, whereas this was not the case for investment trusts.
But the Retail Distribution Review, which came into force in 2012, removed commission bias from the system so that recommendations made by advisers are not influenced by product providers, resulting in greater transparency for retail investors.
Mr Budden explains that it was not structurally possible to earn commission on closed-ended funds in the same way as open-ended funds.
He adds: “On open-ended funds you could pay commission per unit.
"Closed-ended funds are listed companies on the stock market – you cannot create a share in the same way you can create a unit.”
Breaking new ground
Nick Britton, head of intermediary communications at the Association of Investment Companies, acknowledges: "The investment company industry, throughout its history, has continued to adapt to meet investors’ needs and, in the last decade, the infrastructure, debt and property sectors have evolved to satisfy demand for income."
"The investment company industry has continued to invest in groundbreaking opportunities including technology, biotechnology and healthcare, emerging and frontier markets, private equity and venture capital," adds Mr Britton.
Mr Garg shares the view that investments trusts are popular because of their ability to move with the times.
“Throughout its long history, [investment trusts have] been involved in groundbreaking investments, mainly technology,” he says.
Mr Garg adds: “This includes investing in railroads and natural resources, in addition to bonds, and with technology reaching greater heights this past decade, has shown to investors its drive to look ahead.”
By the end of the 19th century, there were 71 investment trusts in England and a further 11 in Scotland.
In comparison, at the end of January 2018, there were 389 UK investment companies with total assets under management of more than £174bn, says Alex Howe, head of investment trust sales at BMO Global Asset Management.
saloni.sardana@ft.com
