How investment funds survived the First World War

But although the sector was relatively small, the soundness of the investment trust concept was becoming increasingly well recognised. The standing of the older trusts was demonstrated by the fact that their "debentures" – a type of bond – had a credit rating second only to "consols", which are undated government gilts.

Then as now, investment trusts were known for maintaining their dividends – partly because they can hold money in reserve for the purpose.

In fact more than a third of the trusts managed to maintain or increase their dividends during the Great War. According to George Glasgow, a contemporary financial author, eight English and 14 Scottish investment trusts maintained the dividends on their ordinary shares throughout the First World War while a further 11, of which seven were Scottish, actually increased their dividends.

This is not to say that the war did not cause problems for the trusts. In its annual report for the year to January 1915 the Mercantile Investment Trust said: "In consequence of the prevailing conditions caused by the European war, it is not possible at the present time to make a reliable valuation of the investments of the company."

Investment trusts also helped the war effort by buying special government bonds called war loans and by selling or lending American shares or bonds to the Government, so that it could sell them to raise much-needed dollars (see letter below).

Investment activity was not entirely frozen during the war period. For example, the Murray International trust made investments in Brazilian Traction Light & Power Company preference shares and in Barcelona Traction Light & Power "prior lien bonds". John Newlands of Brewin Dolphin, the stockbroker, who has written a history of investment trusts, said electricity shares were "clearly the new technology stocks of the day”.

In the summer of 1916 the Scottish Mortgage trust spent £2,000 on Russian government bonds – money that had to be written off in April 1918 when the Communist government repudiated the debt of the Tsarist government. More successful were its short-term punts of £1,000 Russian state railway bonds (bought at £75 and sold at £82) and a similar quantity of Grand Duchy of Finland 4.5pc railway bonds, bought at £73.50 and sold a month later at £82.50. These transactions coincided with a successful Russian offensive against the Austrians in Galicia.

Many investment trust employees and indeed directors went off to serve in the war. All three sons of Robert Benson, who founded the Merchants Trust and whose family firm would merge to become Kleinwort Benson almost 50 years later, volunteered; miraculously, all three survived.

Mr Newlands added: “Having studied a number of the long-lived trusts in historical detail, I have been struck by the way that they have proved robust enough to survive every crash and global conflict in history and then move forward again.

"A minority of others fell by the wayside, of course. But I am convinced that by investing in a spread of quality companies, each one of which has been closely scrutinised prior to purchase, the enduring trusts have created portfolios that are as tough as ox hide. This is a message that is forgotten in the good times but is worth reminding investors when sentiment is at low ebb.”

Ian Sayers, the director-general of the Association of Investment Companies, the investment trust trade body, said: “It is a testament to the sector that 26 investment companies have been around for over 100 years, and some for a great deal longer.

"We all know investing is for the long-term: it doesn’t get much longer-term than this."

Additional reporting by Jenner Sheldrake

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