In 1863, 46,983 tons of raw jute – fresh from the deltas of the Ganges and Brahmaputra rivers – landed in Dundee. It was a 9,000 mile journey. And not a cheap one. But it made sense to the merchants and manufacturers paying for it.
Why? Whales. Dundee was a world leader in the production of whale oil, the one thing that really worked to lubricate jute pre-weaving. This happy combination (for the people rather than the whales) gave Dundee a stunning operational leverage to global economic growth.
Jute was cheap and tough – the best packing material contemporary traders had. So as global trade grew, it was used to carry everything – from grain in Europe, to coffee exported from the East Indies, and sand for the bags used in the American Civil War.
At the height of the industry’s success there were 62 jute mills in Dundee, and some 50,000 jute workers. All this made a lot of men very rich indeed.
And today’s investors can still benefit from the way those jute merchants invested their wealth…
The birth of the investment trust
So what did Dundee’s jute merchants do with their money? If you wander up to the West Ferry conservation area in Dundee, you can still where some of it went – the huge villas the jute merchants built, with their glorious views across the Tay, didn’t come cheap.
Those who want to nose around the oak staircases and the conical roofed turrets should visit the Savills website, where they can view a classic of the genre, Nyoora, on sale now for a mere £615,000. That’s less than it would cost to build it again today (Dundee isn’t what it was).
But this kind of thing barely made a dent in the fortunes of the jute merchants. They needed more diverse long-term homes for the rest of their money.
They found them in the beginnings of the investment trust industry – which they originally used as vehicles for investing in the foreign markets that their trading had made them expert in.
By the mid-1890s, the residents of Dundee had, between them, become some of the greatest exporters of capital in British history. They had £5m invested in various vehicles in the US by the late 1800s, for example (one of the more interesting was the Matador Land and Cattle Company, a firm that made a group of Dundee men the owners of 800,000 acres of Nebraska).
But in 1873, one-time jute merchant’s clerk, Robert Fleming, began to popularise a new method of overseas investment. He launched the first of many Scottish investment trusts – the Scottish American Company – to invest in US railroad bonds. The firm ended up involved in the successful post-crisis restructuring of various railroads. It made impressive returns for shareholders along the way.
Another well-known name, Alliance Trust, was launched in 1888 as a mortgage bank, taking investment from the well-off of Dundee and lending it to pioneer farmers in Oregon and Washington. By 1914 there were 29 trusts registered in Scotland with around £30m invested, mostly abroad.
A rising dividend for 30 years in a row
The extraordinary thing is that a good many of these trusts are still with us. 126 years on, Alliance Trust might not be the best performer out there, but it still exists; it is in the FTSE 250; and it is still based in Dundee.
Scottish American has transformed itself into a global income fund and moved an hour’s drive down the road from Dundee. It is now known as ‘Saints’. It’s run by Baillie Gifford, and is based in Edinburgh.
All in all, 26 investment trusts have now been around for 100 years. Of those, ten have raised their dividends every year for the last 30 years.*
As Brewin Dolphin’s John Newlands notes, thanks to careful investing in a “spread of quality companies”, this lot have “proved robust enough to survive every crash and global conflict in history and then move forward again”.
They’ve moved their main investments from mortgages to land to bonds to equities, and will no doubt move on again at some point. This is something they can do thanks to their closed end nature and the responsibility their directors have to their shareholders.
If you are looking for a long-term investment that will return an inflation-beating income, history hasn’t yet offered anything much better than this.
This obviously doesn’t mean that all investment trusts are worth buying all the time. The key thing to watch has long been the discounts on the shares. Because investment trusts are merely companies, the business of which is to invest in other companies, it is possible for their shares to trade at a premium or at a discount to the net asset value of their holdings.
The level of that premium or discount depends on market sentiment, on the firm’s borrowings (a trust can borrow money to invest), and on the liquidity of the investments it holds.
Historically, hefty discounts have been more usual. But today those discounts are lower than they have ever been: right now, 29% of trusts trade at a premium. That’s an uncomfortable number. In June 2007, the market’s pre-crisis peak, only 20% of trusts were on a premium. In 2009, at the market’s last bottom, 9% were.
This takes me to Personal Assets Trust (LSE: PNL), one of our favourite long-term holdings, but also the one currently dragging down our investment trust portfolio. At the recent AGM, the manager, Sebastian Lyon, noted that the fund shows a very clear historical pattern: it underperforms in “maturing bull markets”, and shows its best performance in weak markets.
Other signs this bull market is nearing an end? Lyon pointed to share buyback levels and merger and acquisition values both returning to their 2007 highs. He also noted falling trading volumes (volumes rise in the early parts of bull markets and fall towards their end).
On top of that, the initial public offering (IPO) market is a little like that of 1999. Back then, 83% of new issues in the US did not make a profit. Today, the number is 80%. We’ll be updating the investment trust portfolio in the next few weeks – my guess is that we’ll be keeping PAT.
*The trusts themselves aren’t the only legacy of this stunningly dynamic time in Scottish financial history. The Fleming fortune was later used to create what has become the Fleming Collection at the Fleming-Wyfold Foundation, now housed at a gallery on Berkeley Street. It remains the finest collection of Scottish art held in private hands.
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