Historian and former analyst JOHN NEWLANDS describes how Scotland’s first investment trust came to be formed – and why it happened in Dundee, still today a major centre for the trust sector.
Dundee today is a modern if small Scottish city, with a population just short of 150,000. Its civic motto – “One city, many discoveries” – is both a play on the name of the locally-built Royal Research Ship Discovery, which took Captain Scott to the Antarctic, and a reference to the city’s remarkable record of scientific, medical and industrial innovation. The ship itself is in the process of becoming the centrepiece of a £1bn waterfront regeneration scheme for Dundee, involving the Victoria & Albert Museum. Dundee’s history, on the other hand, might best be described as violent, chequered and bloody. Virtually every episode seems to have involved marauding forces from south of the English border.
A natural and relatively sheltered port, by the 12th century the city had become a centre for the import of wine, grain and timber. The main exports were hides and wool, the latter initially in the raw form but later being woven and dyed locally, marking the first steps towards a textile industry which became so dominant that the city gained the 19th century nickname of ‘Juteopolis’. By the mid-19th century, two developments had turbo-charged Dundee’s fortunes, turning the area into a trading and industrial powerhouse to rival any city in the British Empire at that time. The first step was the improvement and expansion of the city’s docks; the second, the Industrial Revolution, bringing with it inventions from the steam engine to John Kay’s flying shuttle to Edmund Cartwright’s power loom, transforming manufacture, travel and trade.
Dundee had always been superbly situated, in terms of maritime trading, with easy access to shipping routes to Scandinavia and the Baltic, Germany and the Low Countries, and northbound through the Pentland Firth and out into the Atlantic. There was one major snag. The harbour was too small for larger ships, on top of which it was prone to disruption as silt, carried down the River Tay, caused sandbanks to build up. In 1770, the harbour was remodelled by John Smeaton, who introduced water tunnels to channel the silt away from the riverside and out to sea. The development of the port gathered speed after 1815. Several new wharves and docks were built from the 1820s onwards.
By the mid 19th century Dundee was benefiting from all Scotland’s most successful industries, including shipbuilding, heavy engineering, fishing, whaling and most importantly its world famous textile business. By 1878, the Camperdown Works in Lochee, owned by Cox Brothers, had become the world’s largest jute works, with a 22-acre site, its own railway branch line and employing 4,500 workers. The finished material was ideal for lower-cost products such as sacks and bagging and, by way of an aside, is undergoing a renaissance in the 21st century, as an ideal substitute for environmentally harmful plastic shopping bags.
Although Dundee was prospering, few would have considered it as a possible ‘launch pad’ for an innovative financial fund. What was to become the SCOTTISH AMERICAN INVESTMENT TRUST was a pooled investment scheme, the first investment trust to be launched in Scotland, that offered shares in a broad spread of investments, such that ordinary investors could reap the benefits of diversification with just a modest outlay. It was designed to focus on the leading emerging market of the day, the United States. This was at a time, it is worth noting, before the invention of electric light, the telephone or the motor car.
One young man by the name of Robert Fleming – still not yet 30 – had the vision to see the potential of this new instrument, and the character and determination to persuade enough local business people to invest to get his venture off the ground. Despite coming from a deprived background and having left school at the age of 13 to work as an office boy on a starting salary of £5 per year, he had quickly attained a position of influence in Dundee’s textile industry. He was born in 1845 and began his life in Lochee in living conditions that can only be described as cramped, unhealthy and harsh. Conditions were so poor that five of Robert’s brothers and sisters died in childhood, from diphtheria – three in 1843, before he was born, and two in 1859.
The family moved into Dundee itself in 1846, initially in Ramsay Street, and then in 1853 to a tenement close to Brown Street School, where Robert and his brother John were pupils and were given a basic education. During the summer holidays, the boys spent much of their time in the far fresher environment of Glen Shee, where both their two grandfathers lived. The two boys loved their time at Glen Shee so much, according to the Fleming family archives, that even after they had started working, in an era of the six-day week the pair thought nothing of catching the train to Blairgowrie on late Saturday afternoon and then walking the last 11 miles to Dalrulzion (or 13 if they were going to Glenkilrie). On the Monday, they would make the same walk in reverse, in time to catch the dawn train back to Dundee.
Although Robert’s formal education ended at the age of 13, he had acquired a solid grounding in mathematics and bookkeeping, which served him well as his career developed. On leaving school he began work as an office boy with James Ramsay Jnr, a Dundee merchant based in the Cowgate, which that time was the commercial heart of the city. For his first year’s work Robert was paid the princely sum of five pounds. His early duties included walking around the town with a packet of banknotes to pay accounts. Two years later, he joined Cox Brothers & Co., working in the mercantile office, where he first came to the notice of Thomas Hunter Cox, the partner response for financial matters, with whom he would later work closely in the management of the Scottish American Investment Trust and its successor issues. As local historian Bill Smith pointed out, “Fleming could not fail to appreciate the sheer wealth, power and influence of the partners … a revealing insight into a very different world”.
Here the clerks maintained the firm’s journals and ledgers, recording not just every aspect of the business but of the investment portfolios, kept in lockable files, which the partners administered for the firm and for themselves. It was during his time at Cox Brothers that Fleming began to take an interest in stock market matters and, as his surviving notebooks reveal, to maintain a list of the new issues market, covering both British companies and the large number of issues in London from foreign corporations.
After the passing of the Companies Act of 1862, which greatly simplified the procedures for forming limited liability companies, there was a surge of new issuance, into what, to begin with, were buoyant market conditions. Robert, meanwhile, was earning £100 per year before he was 20 and, as he recalled in a letter years later, “seeing before me illimitable wealth”, he began to subscribe for new issues against the encouraging backdrop of rising markets.
All appears to have gone well initially but everything changed with the collapse of a leading London bank, Overend, Gurney & Co., on ‘Black Friday’ (11 May 1866). The shockwaves that followed took down many smaller firms, one of which was the Oriental Commercial Bank, in which Robert had invested the equivalent of several months’ salary. The bank began to return its drafts unpaid and, within a few more weeks, had been placed in the hands of the liquidators.
Having bought the bank’s shares part-paid, not only did Fleming have to sell all his other investments to meet the bank’s calls, but it took him five more years to pay the remaining balance. It was the toughest of early lessons and, he admitted many years later, “one of these experiences that one never forgets.”
Before the end of 1866, Fleming left Cox Brothers and joined the Dundee merchants, Edward Baxter & Son, as a clerk. By the time Robert entered his service Edward Baxter was 75, and still running the firm which, in addition to its extensive lending and investment activities in the US, involved the direct exporting of textile products to Dundee’s overseas markets, bypassing agents in Liverpool and London. Gaining the confidence of Baxter, who was a wealthy and influential local figure, as well as the American Vice-Consul in Dundee, was Fleming’s ‘big break’. Edward Baxter died in July 1871 at the age of 80, leaving net assets of just over half a million pounds, equivalent to more than £50m today. He had retired from business four months earlier, at which stage he had appointed his solicitor, David Small, as Factor and Commissioner, “to act for me in the management of my estates and generally to manage my affairs and conduct my business”. In the same document, Baxter recommended that Small should continue to employ “Robert Fleming my present Clerk and Book-keeper at such salary as he should consider reasonable”. Robert Fleming’s notebooks from this period suggest a continuous quest for self-improvement. He not only maintained his close study of the financial markets but read widely, attended as many talks and lectures as he could and resolved in his notebook “to study the art of conversation”, a skill in which he felt he fell short. During the winter, he frequently went to the theatre, and recorded attending two balls.
By 1872, Fleming, his early misadventures in the new issues market well behind him, was once more active in the financial markets, dealing both on his personal account and behalf of a number of clients, including two of his fellow clerks at Edward Baxter & Co. The scale of his transactions grew larger, to the extent that his stockbrokers’ commissions alone totalled £130 for the first ten months of 1872. Meanwhile, his desire to improve and learn was undimmed. His continuing studies of financial markets and any news reports thereof soon led him to the formation and success of the Foreign & Colonial Government Trust, which was regularly reported upon in the Scottish financial press.
Extract from the Money and Share Markets column of the Dundee Advertiser of 2 May 1971.
The clipping above, or one very similar, is likely to have triggered the ‘light bulb moment’ which led Fleming to propose a similar investment trust launch in Dundee. Not for him, though, the government stocks that made up F&C’s founding portfolio. Through his association with Edward Baxter, he had gained a close knowledge of US investments and built up a range of contacts on the other side of the Atlantic. Fleming’s brainchild, the Scottish American Investment Trust, was the result. He recalled:
“Dundee had not, up to that time been a financial centre, and we went to the printer in grave doubt of success with a proposed issue of £150,000. But such was the confidence in the Board, which consisted of four of the best men in the town – John Guild, John Sharp, Thomas Cox and Thomas Smith – that on the first day the British Linen Bank was flooded with applications, to such an extent that … it was decided to withdraw the prospectus and print a new one, with a capital issue of £300,000. This was also largely oversubscribed. … At the start, it took the form of a trust with a trust deed, the terms of which were printed on the back of bearer certificates of £100 each”.
Fleming knew that there was a great deal of money in Dundee looking for attractive investment returns. He also knew that the United States was not just the land of opportunity but desperately short of the capital to develop railroads, coal and iron companies and civic utilities. At the same time, his costly lessons following the collapse of Overend, Gurney seven years earlier had made him wary of incautious investment. He believed that only investments secured on a railroad’s land and equipment, i.e. mortgage bonds, should be acquired, and then only if that railroad was paying a dividend on its ordinary stock, or if the bonds were guaranteed by another railroad.
It says something about his personality and strength of character that he was able to persuade John Guild, a local merchant with interests in insurance and shipping, to become the trust’s first chairman and his former employer, Thomas Hunter Cox, one of the most prominent local figures of all, to become a trustee, along with two other leading businessmen, John Sharp and Thomas Smith. The first formal meeting of the trustees took place in Thomas Cox’s offices on 1 February 1873, when Fleming, let us recall, was still only 28. The minutes state that:
“It was proposed to consider the establishment of a Trust similar in principle to the Foreign & Colonial established in London by Lord Westbury … Mr Fleming had previously brought the subject under consideration of the gentlemen present individually, giving them a sketch prospectus of the nature of the business, and the working of the proposed trust”.
The trustees engaged Shiel & Small as their solicitors, where a further meeting took place on 5 February in Bank Street. Mr Shiel indicated that “The trust deed as it now stood was a very perfect one, resembling very closely the Foreign & Colonial trust deed which no doubt Lord Westbury had considered very carefully” The British Linen Company’s Bank was appointed as banker to the trust, while Robert Fleming himself became its secretary.
The prospectus described the intended issue of £150,000, in certificates of £100 each and paying interest of 6% per annum; any surplus income would be used either to redeem certificates or to purchase additional investments. The trust initially had a life of ten years. The new trust was to invest in: “The bonds of states, cities, railroads and other corporations in the US, but chiefly in the mortgage bonds of railroads.” Among other requirements, the annual general meeting was to be advertised in at least two daily newspapers published in Dundee and one in Edinburgh. Entry to the AGM was also to be strictly controlled: “no person shall be permitted to be present who does not produce his certificate … and shall vote in proportion to the value of the certificates produce by them”.
The launch of the trust was an immediate success, being oversubscribed by 60%. Rather than scaling down allotments, it was decided to increase the size of the issue – and, those involved with investment company documentation in the 21st century might note with astonishment, a revised prospectus was issued the same day. When applications closed five days later this, too, was oversubscribed, causing the Dundee Courier & Argus of 11 February 1873 to declare that “this splendid success is a remarkable indication of the estimation in which the Trustees are held … as well as the soundness of the project itself”.
The Cunard liner SS Abyssinia, in which Robert Fleming made his first transatlantic crossing. His original booking had been made in the RMS Atlantic, which struck rocks and sank off the coast of Nova Scotia with a loss of 560 lives. Abyssinia herself was destroyed after a fire in a cargo of cotton mid-Atlantic in 1891.
A Transatlantic Close Call
With the successful launch in the bag, and on the admirable principle that the only reliable source of information is personal original research, plans were put straight into force for Robert Fleming to visit the US and gain first-hand knowledge of the investment opportunities on offer. On 12 March 1873, Fleming left Dundee for London, where he spent a few days gathering information before heading back north to Liverpool, ready to make his first transatlantic crossing. He was armed with letters of introduction to key bankers in Boston, Philadelphia and New York. Thomas Cox had also written ahead to his New York advisers, the cumbersomely-titled Brown Brothers and Kidder, Peabody. As it turned out, Fleming had not only been provided with excellent references but endowed with a goodly measure of luck. He had originally intended to sail in another vessel, RMS (Royal Mail Ship) Atlantic, which sank with huge loss of life on 1 April 1873, having struck rocks off the coast of Nova Scotia.
Fleming reached New York on 26 March after a voyage of ten days. Three days later, the first of his numerous cables and letters was sent back to Dundee. These frequent communications either confirmed purchases made, to what must have been a pre-arranged plan, or asked for approval to invest, using a series of codewords. For example, in one of his letters Fleming recommended five separate railroad mortgage bonds, to which the Trustees replied by cable, “Letter 7th April  received: badajoz, talavero, inkerman, balaclava.” Each of these four words (all names of European battles) was a code for approval to purchase, typically $60,000 of stock, in a certain railroad security. Interestingly on this occasion Fleming’s fifth code word, waterloo, was missing from the reply from Dundee. This meant that his proposal to invest in the Missouri, Toledo, Wabash & Western Railroad had, for whatever reason, been turned down by the Trustees.
The first recorded investment made by the trust was $83,000 of First Mortgage Gold Bonds of the Cincinnati, Richmond & Fort Wayne Railroad, purchased through Maitland, Phelps & Co of New York. The price was 91 cents, with a 7% coupon, giving a yield of 7.7%.
The trust’s ten largest investments in July 1873
In the table above, which lists the ten largest investments which had been made as at 2 July 1873, the founding investment of Cincinnati, Richmond & Fort Wayne Railroad 7% Mortgage Bonds, which had been bought at 91, had advanced in price to 94. Eight of the ten holdings were railroad securities, one was a coal and iron company issue and one a civic bond. The total of $872,595 for the ten holdings represents some 55% of the total portfolio value of $1,577,495, the latter figure equating at the prevailing exchange rate to approximately £280,000.
The timing of the launch proved testing, to say the least. Just as the investment of the £300,000 raised was almost complete, the so-called ‘panic of 1873’ developed in the US, heralding the start of a depression that lasted for six years. Railroad stocks were badly hit, to the extent that several thousand miles of US railroad went into receivership in the next four years. Fortunately the Trust’s founding investments had been chosen with care. Fleming and the trustees had prudently chosen to ignore the bonds of new construction railroad branch lines, which were yielding between 9% and 11%. Instead, they had gone for the older, dividend-paying railroads running on established trunk lines. These safer bonds typically paid 7% – still a handsome premium on the returns available from domestic investment.
Early AGMs were held in Lamb’s Temperance Hotel (later simply Lamb’s Hotel) at 64, Reform Street, Dundee. The building was later used for many years as the head office of Alliance Trust. Since 1916 it has housed an upmarket coffee shop.
Looking back at the events of the previous year at the trust’s 1874 annual general meeting, held in Lamb’s Hotel, Reform Street, the trustees noted that:
“In its origin the panic of 1873 was largely due to an excessive construction of new railroads … with the collapse of the Houses engaged in financing these operations, Railroad securities of all classes were subjected to a test unprecedentedly severe. Under such circumstances, the trustees have gratification in being able to report that in no case has there been the slightest irregularity or delay in payment … the market value of the securities forming the trust fund has been more than maintained”.
The first issue, as it retrospectively became known, not only survived its difficult early years but led to a second issue in September 1873 and a third in October 1875. Each of the follow-on issues was for £400,000. Robert Fleming remained as secretary to all three trusts for 15 years, before turning his attention to London, where he formed the Investment Trust Corporation Ltd in 1888. Despite US market turbulence for much of 1870s, the ‘First Scottish’ paid 6% annually on the certificates of all three issues with monotonous regularity until 1879. Each issue accumulated reserve funds of £26,000, £37,000 and £16,000 respectively, while the investments of the first issue had become worth £350,000 over and above their £1,000,000 book value, despite the general economic depression of the time. This was a creditable achievement – although, Robert Fleming later admitted, some of the railroad bonds purchased in the early years had given him sleepless nights. The historian J. C. Gilbert was to describe the First Scottish’s overall performance in its early years as “a brilliant achievement … an example of the advantages to be derived from investment by experts”.
In 1879, the first major change in the trust’s history took place, not through voluntary action but because of a ruling in the English courts. In the case of Sykes v. Beacon (1878), Sir George Jessel, Master of the Rolls, ruled that investment trusts formed under trust deeds were “associations of more than 20 persons for the acquisition of gain”. They were therefore not legal, unless registered under the Joint Stock Companies Acts of 1862 and 1867. Although the ruling applied solely to trusts registered in England, the advice of eminent counsel in Edinburgh was that it was only a matter of time before the issue was tested in the Scottish courts. Urgent action was required. Fleming and the trustees put in motion the process of converting the trust issues to the limited company form. A complication was that, as the certificates were bearer instruments, the names and addresses of many of their owners was not known. The only way to proceed was to advertise widely in the local area, inviting the holders of all three issues to attend a meeting in Dundee – as ever, at Lamb’s Hotel – and hope for a majority vote.
The results of the proposed conversion were reported to shareholders on Wednesday 18 June 1879, when they were informed that:
“In consequence of litigation in the English Courts, the result of which seemed to point to the illegality of the present constitution of the Trust, the Trustees summoned an aggregated meeting of the holders of Certificates of all the Trusts, to consider the steps necessary to be taken toward the protection of their interests. A numerously attended meeting had been held on 11th March, when it was unanimously resolved to convert the Trust into a Joint Stock Company … the conversion has proceeded so far as to leave its completion no longer doubtful. Out of 2,967 Certificates outstanding, 2,907 have already been surrendered in exchange for shares in the First Scottish American Trust Company Limited and the outstanding 60 Certificates are expected to be converted at an early day.”
Moving Forwards As Limited Companies
The three trust issues were duly and separately registered as the First, Second and Third Scottish American Trust Companies Limited. The new articles of association gave the directors powers to authorise borrowing by the company, for the purposes of investment, not exceeding 10% of the capital of the company. However, no preference stocks or debentures were issued for over 30 years (unlike, for example, the Dundee land trust companies which eventually formed the Alliance group). Robert Fleming remained as secretary to all three companies, the offices of which stayed at 1, Royal Exchange Place, while the four founding trustees, all still going strong, became directors. The investment remit was still confined to the bonds or other obligations of the railroads, other corporations, states or municipalities, and of the US government itself.
Each of the directors was required to own not fewer than 30 shares in each of the three issues, meaning that each director had to allocate at least £9,000 to meet the requirements of his triple roles. This was a substantial commitment at a time when the Dundee Advertiser was offering “two self-contained dwelling houses of six apartments each” in Broughty Ferry, near Dundee and standing in substantial grounds, priced at £1,000 for the entire site. The day-to-day process of managing the investment portfolio, by now some 50 holdings, quickly resumed. As before, any adjustments were invariably either confirmed by, or made on the advice of, Fleming himself, who continued to visit the US at least once per year and sometimes more often. At the 1882 AGM, held at Lamb’s Hotel and reported in detail in the Dundee Advertiser of 26 May 1882, the chairman reported that things were going well:
“We are able to continue the rate of 8% to which the dividend was raised last year … we are also able to add £2,000 to the Reserve Fund. (Applause); that we have again lengthened the average date to which the bond run, to 23 years; (Applause) and that Mr Fleming sailed for New York six weeks ago … to investigate the merits of a number of profitable exchanges in our investments, with the view of improving the position of the Company … these exchanges have now been carried out. (Applause).”
Investment Backdrop in the US
In the 1880s, the US was very much a mixture of the modern and the ‘wild frontier’. The major cities were booming and yet, further out, it was literally still the era of the Wild West. Take 1881. On the one hand, the Standard Oil Company was being set up to host the fortunes of John D. Rockefeller. On the other, Wyatt Earp and Doc Holliday were shooting it out at the OK Corral. Just a few weeks before said gunfight, Sioux Chief Sitting Bull had finally surrendered to US troops at Fort Buford, North Dakota, after months of fighting, some taking place close, rather worryingly, it might be surmised, to the construction site of the Great Northern Railway that eventually ran from St Paul, Minnesota, to Seattle. This sort of tale gives credence to the story that an early representative of the other pioneering Dundee-based financial enterprise, Alliance Trust, came under bow-and-arrow attack while riding out on the Omaha Trail.
It was against this unsettled backdrop that the company’s portfolio had been created and against which it clearly needed the most careful and regular monitoring. An examination of the meticulously-maintained contemporary accounts, still accessible today in bound ledgers in the archives of Dundee City Council, strongly suggests that in Robert Fleming the directors had found the right man for the job. The impeccably presented annual reports, for instance, always included that rarity among 19th-century accounts, a narrative, written not by the chairman but by Robert Fleming himself. The chairman’s commentaries were published too, via the placing in the Dundee Advertiser of a verbatim transcript of every annual general meeting, including all the questions raised and a summary of their answers, these articles also being copied and retained in the relevant ledgers.
By 1886, the Company held 55 different investments, the identity of which, as was normal at the time, was not revealed in the annual accounts. On this occasion, unusually, an indication of the true asset value thereof was revealed. At that year’s AGM, it was reported that “a careful calculation of the present market price (after providing for the dividend now recommended) is equal to £169 5s 10d per fully paid share of one hundred pounds”. One director, Thomas Smith, had died earlier that year, being replaced in 1887 by William Ogilvy Dalgleish, who was the chairman of Baxter Brothers, marking the first boardroom change since the company’s formation.
Improving Market Conditions
Market conditions in the US had begun to improve and some of the higher quality railroad bonds were beginning to look, to use a current phrase, fully priced. As John Guild noted in his 1886 chairman’s remarks, this had been picked up in a recent Economist article, which suggested that the owners of railroad mortgage bonds were in danger of forgetting that in the fullness of time, repayment would be made at face value only. “In strictness”, Guild noted, “they ought to lay a certain proportion of interest aside each year to meet the shrinkage of the principal – this is just what we have all along recognised and acted upon … every penny of the £49,000 of reserve fund has been made up of surplus revenue.” As well as keeping back a proportion of interest received for a rainy day, the chairman also reported, the average date at which investments became repayable had been extended to 27 years, effectively locking in returns, on the assumption of no defaults, until June 1913.
This prudent policy – plus, of course, the focus upon US bond investment – goes some way to explaining the way that the effects of the 1890 Barings Crisis, often described as the most serious financial event for UK investors in the 19th century, seem to have caused barely a ripple of concern when described to shareholders at that year’s gathering in Lamb’s Hotel. Whereas other investment trusts, particularly those formed in London during the late 1880s’ ‘trust mania’, suffered significant losses and in some cases went to the wall, investors at the 1891 AGM were politely being told that:
“The market value of the investments does not show as well as it did – it is down about 2.% since last year … [however] the income is sufficient to pay the usual dividend of 8.% … and beyond that provides £1,000 to add to the Reserve fund. … Amidst the general disturbance of prices and insecurity in values, I think the shareholders of this Company need not distress themselves about the state of the share market, but quietly hold to a good investment which yields them a steady income with ample security”.
Robert Fleming was listed as company secretary for the last time in the 1890 accounts, after which he was described as advising secretary – and then, from 1897, simply as ‘London Correspondent’. Fleming’s trusted but hitherto unmentioned clerk, Adam Hunter, became company secretary in his place. Hunter, though a low-profile figure in the company’s history, assisted Fleming from the very start, succeeded him as company secretary in 1890 and later became a director, serving until 1936 – a mind-boggling 63 years after joining the company, presumably as a very young man.
The company might have been insulated from the main effects of the Barings Crisis but the depression that affected the US economy in the 1890s was a different matter. The first sign of major trouble came with the collapse of the Philadelphia and Reading Railroad in February 1893, leading to a run on the banks. This in turn caused a loss of confidence among European investors in US stocks, causing prices to fall. In the fallout, 500 American banks and 15,000 businesses closed, in addition to which the Northern Pacific Railway, the Union Pacific Railroad and the Atchison, Topeka and Santa Fe Railroad all failed.
The Company’s conservative borrowing policy meant that it did not suffer to the same extent as other, more highly geared, trusts in this period. The investment portfolio had been diversifed further to 80 holdings. The 1893 accounts merely make mention of “three defaults this year, of small amounts, but which we feel will ultimately be paid … we have been able to continue the 8.% dividend and propose, with your consent, to add £1,000 to the Reserve fund.” The following year, under the sub-header ‘a singularly fortunate company’, it was revealed that total income received over the past year had fallen by “£1,171, or 7s 10d on each share of £100”.
By 1895, although some of the effects of the depression had worked through, causing the dividend to have to be reduced to 7.%, the worst was over and US stock prices were on the turn. In an era when the disclosure of true net asset values was an infrequent event, the chairman Edward Cox declared that “compared with the high water mark of 1892, there was a depreciation [by mid-1895] of 10% of the capital”, a more than decent outcome following one of the worst economic crises in US history.
The mood of optimism, albeit always phrased in cautious terms, was maintained as the new century approached. The recovery was slower to come than had been hoped, judging by the 1897 accounts, which talked in terms of “as yet, few signs of visible improvement” in the US. The dividend, on the other hand, had been restored to 8.% and now £1,000 was to be committed to reserves, after a gap in such payments of two years. On this occasion a special visitor, Mr George Coppell, senior partner of Maitland, Coppell & Co., the Company’s New York bankers, was invited to Dundee to address the 1897 AGM, saying:
“My firm, as your bankers and agents in New York, has been connected with the Scottish American Investment Trust Companies from the very origin of their business … I wish the condition of [these companies] were at all symbolic of the actual conditions in the United States; but there must be something peculiar to the management of this Company which makes it able to present so favourable a statement and declare so handsome a dividend, both which are almost exceptional in these days”.
The three investment companies, in short, had withstood the US recession years remarkably well – so well, in fact, that the following year a shareholder, Mr A. M. Guild, found cause to take exception to the annual “indulging of blowing trumpets over the success of the Company” which, he said, had an unwieldy shape and suffered from difficulty in marketing which, he felt, was depressing the price. It might have been wise 25 years ago to denominate the shares at £100, he suggested, but these now stood at £176 and the units had outgrown themselves. Perhaps, he argued, it was time either to divide each £100 share into ten shares of £10 or, alternatively, to convert each share into £100 of stock, which would be tradeable in smaller amounts. To judge by the minutes, the directors were in no hurry to implement such a radical change. It was not until 1905 that the original 3,000 shares of £100 each were converted into £300,000 of stock.
Taking stock of the 27-year-old company’s position in early 1900, the investment portfolio of 99 fixed-interest securities by now had a remarkable average duration of 33 years. Total assets, as recorded on the balance sheet, were some £389,386, of which £387,938 was accounted for by the “Investments in Railroad and other bonds, &c.” The covering text on the other hand referred to the par value of the securities being £561,055, “which is equal to £196 4s 6d per fully paid share of one hundred pounds”. This tends to bear out a comment made in the Dundee press at much the same time, alluding to the directors’ known tendency to apply “ultra conservative valuations”.
The company’s ten largest investments in May 1900
A total dividend of 8.% was paid for the year, and another £1,000 placed into revenue reserves, which now totalled £67,000. The company was in robust shape, therefore, as the new century moved ahead – starting off, not for the first or last time in history, with a series of booms, busts, leading into war, plus, on this occasion, one of Donald Rumsfeld’s ‘unknown unknowns’, in the form of the San Francisco earthquake of 1906, which ruptured 296 miles of the San Andreas fault, destroyed 80% of the city, took more than 3,000 lives and led to the “Panic of 1907”. The earthquake turned into a market-wide sell-off in US investments, not to mention a currency crisis so serious it led to the creation of the Federal Reserve.
The earthquake was followed by five days of raging fires, and a wave of insurance claims totalling an estimated $235 million, equivalent to approximately $6.5 billion today, rippled back to the insurance underwriters’ floor in London. In time, this money re-crossed the Atlantic in the form of international gold flows, destabilising the exchange rate. This in turn caused the Bank of England to take defensive measures. When a stock manipulation scheme involving the United Copper Company failed, market fear set in and within three weeks the New York Stock Exchange had fallen 50% from its peak the previous year.
Back in the infinitely calmer surroundings of Lamb’s Hotel, Dundee, Edward Cox was able to tell shareholders in 1906 that “none of their Company’s investments were interested in any San Francisco undertaking, and in spite of the heavy falls in prices which followed that terrible disaster … the valuations of their securities showed a nominal fall of less than £4,000 from the record valuations last year”. The following year, a depreciation of 3.% was reported … “investors must be content with a dividend of 8 and three-eights per cent and the placing of £2,000 in the Reserve fund”.
In 1908, Robert Fleming returned from a trip to the US, presumably to make a first-hand analysis of how bad things really were. He told the Investment Trust Corporation, Edward Cox told the Dundee AGM, that America was “still as safe as a field for investment as any”. Mr Cox continued, “of course it is disappointing that the value of the Company’s securities has depreciated to the extent of 6.8% … but it is fully expected this depreciation will disappear before long.” Another major US financial crisis had come and gone, with no immediate impact beyond the temporary cessation of dividend increases. Investment valuations had fallen, certainly, but by far less than wider US equity markets and with every prospect of longer-term recovery. Moreover not a single portfolio default had occurred. The legend of Dundonian financial conservatism had been well and truly laid.
JOHN NEWLANDS is the author of Put Not Your Trust in Money, a history of the investment trust industry from 1868 to the present. The trust that Robert Fleming founded, now known as Dunedin Income Growth Investment Trust, will celebrate its 150th anniversary in 2023.