Buttonwood

A Victorian survivor

A tale of cats, Christie and copious chaps



WHEN the Foreign & Colonial Government Trust was launched in 1868, The Economist had its doubts. “The shape is very peculiar,” we worried, adding that “the exact idea upon which it starts has never been used before.” Some of the trust’s promises were “far too sanguine to ever be performed”. Nevertheless, we concluded that: “In our judgment, the idea is very good.”

That turned out to be one of this newspaper’s more successful forecasts. One hundred and fifty years later, the trust is still going strong, having delivered a compound annual return of 8.1%.

It now looks after a portfolio of £4bn ($5.7bn), rather than the £588,300 it raised at launch.

In its own way, the trust is an example of how much the financial sector has changed—and how much it has stayed the same. The idea of a pooled portfolio seems commonplace now, but at the time it was revolutionary.

This was the 19th century, when Britain was confident of its worldwide role. The first portfolio comprised 18 overseas bonds, some in markets, such as Argentina and Peru, not ruled by Britain (the foreign element) and some that were, such as New South Wales and Nova Scotia (the colonial). This diversity allowed the trust to offer an initial dividend yield of 6%; not bad given that the prevailing yield on British government bonds was 3.3%.

The 20th century saw not just the decline of empires but the rise of inflation, which made a bond portfolio hazardous to investors’ health. The fund moved into equities in the 1920s; its first holding was in Shell, the oil giant, and the shares are still in the portfolio today. A century after its formation, the fund was almost entirely invested in equities.

The most recent shift has been into private equity, with the hope that a long-term focus can deliver superior returns. The approach is more systematic than the fund’s occasional forays into unquoted investments in the past. A stake in a musical, “Cats”, bought in the 1970s, is still paying royalties today.

If the portfolio has changed hugely, one feature of the fund has stayed the same. It is an investment trust, or closed-end fund. Unlike a mutual fund, assets under management do not rise and fall in line with customer demand. Shares can be bought and sold only on a quoted exchange.

At times this structure has been unfashionable. In the 1970s and early 1980s the trust’s share price traded at a big discount to its asset value. Other trusts succumbed to takeovers and the sector seemed doomed to disappear. F&C was the first trust to introduce a savings scheme and the first to advertise in the press, and it gradually lured back private investors. The discount is now a modest 2%.

The investment-trust format has also given managers flexibility, as in the aftermath of the crash of 1987, when the fund was able to borrow money to buy shares on the cheap. Neither mutual funds nor the trendy modern alternative of exchange-traded funds (ETFs) can do this.

F&C has also favoured continuity. Between 1969 and 2014, just two managers (Michael Hart and Jeremy Tigue) were in overall charge of the fund. That must have allowed them to take a long-term view. Another incident in the fund’s history illustrates the theme. The only time the trust’s offices were raided by police was in 1926. They were looking for evidence about the disappearance of Agatha Christie, the crime novelist. Her husband at the time, Archibald, was a fund manager for the group. Mrs Christie turned up safe and well in a Harrogate hotel. Her soon-to-be ex-husband remained an F&C director until his death in 1962. Even at that date the group had on its staff one person who had served in the Boer War and another who had fought in the Battle of Omdurman of 1898.

Less happily, this sense of tradition meant the trust was an old boys’ club. The first female director was not appointed until 1988, 120 years after its foundation. And the group is only now dropping the word “colonial” from its company name, and adopting the shorter F&C. That should have been done long ago.

After 150 years the trust is now one of the better adverts for active management. It has beaten its benchmark over the past five years and increased its dividend for a remarkable 47 straight years. It has a modest annual fee of 0.37%.

There is another way in which things have changed, yet stayed the same. Given current high valuations, an equity portfolio will not deliver the same returns as in the past, but it will still beat bonds and cash. And, as we said in 1868, diversifying globally is a very good idea.

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