Lessons from the Past - Investment Trust Bubble (1888/9)

‘Enormous initial dividends were paid on these modern trust companies, with the result that in the nicely arranged match between founders and shareholders… the founders romped home while the shareholders were nowhere.’ The Bankers Magazine (1893)1

Investment trusts are pooled investment vehicles which aim to reduce risk by diversification. Like all investments, however, they are prone to periods of excess. The investment trust boom of 1888/9 shows how a low-risk sector of the stock market can be transformed into a high-risk one during buoyant market conditions, with important lessons for investors today.

Electric decade

The 1880s was a decade of economic expansion across the world, driven by low interest rates and technological change. The period saw important developments in the provision of electric power (thermal and hydroelectric), the first electric iron and electric lift. It provided drinkers their first glass of Coca-Cola and photographers their first Kodak box camera. It also saw the building of the first steel-skeleton skyscraper, as well as construction of the Eiffel Tower and Statue of Liberty.

During these years there were huge global capital flows with a substantial amount finding its way into Latin America, particularly Argentina, which was viewed as a high growth market at the time.

Investment trusts

The London stock market also boomed. A popular area of the market was the investment trust sector, with a plethora of new trusts launched to meet investor demand for higher yielding investments.

Investment trusts were first established in the 1860s as vehicles for investment diversification. The first trust, Foreign & Colonial, was launched in 1868 to bring share ownership to a broader range of investors.2 Investment trusts were investment companies listed on the London Stock Exchange that invested in different assets (bonds and equities) across different markets and sectors.


The new issue boom in the trust sector between 1887 and 1890 involved the flotation of 72 trusts on the London Stock Exchange, with 15 launched in 1888 and 35 in 1889.3 Some of the new trusts listed at this time included Nitrate & General Trust and The Spanish Railways Investment Trust.

The boom involved the creation of a new kind of investment trust which sought to boost returns by earning fee income from underwriting new issues, investing in illiquid securities and specialising in emerging markets, including Latin America. In other words the flotation of new trusts was associated with taking on much higher risk.

Founder shares

One feature of trust flotation in the 1880s was the issuance of founder shares. These were shares given to individuals in return for underwriting new issues or covering preliminary expenses of the issue. They were often allocated to well-connected figures in financial circles who were willing to put their names to flotations to help publicise them. Founder shares could provide huge profits from the dividends paid on them. They also encouraged trust management to take on more risk to boost short-term earnings to fund the large payouts to founder shareholders.

An extreme example highlights how lucrative they might be. The Trustees, Executors and Security Insurance Corporation paid £100,000 in 1889 on 100 founder shares which had a nominal value of £10, but were only partly-paid at £3. In other words, for a payment of £3 the founder shareholders received dividends of £1,000 – the annual dividend yield on the partly-paid shares was 33,333%!4

Although the issue of founder shares was not illegal, it was morally questionable. Huge sums went to the well-connected, dwarfing the dividends of ordinary shareholders. In modern day parlance, standards of corporate governance had lapsed during the greed of the bubble. It was a classic example of the rich and well-connected benefitting from bubble conditions in financial markets.


All booms come to an end. In the late 1880s, a political revolution in Argentina pricked the bubble in global stock markets. Barings, the British bank, was heavily exposed to Latin American securities and faced a severe liquidity shock. Although Barings was ultimately bailed out by the Bank of England, its troubles triggered a crash in global stock markets. There was significant capital flight from high risk markets like Argentina. Among investment trusts, those invested in Latin America were hit first, although all trusts were impacted eventually, with share prices falling 60-70%.

The crash caused a shake-out in the trust sector. In the wake of the crisis, many trusts had to suspend their dividends, some were forced into liquidation and others into merger. Of the 100 investment trusts estimated to have been in existence in 1890, 30 had disappeared before the end of 1890s, and 50 had been liquidated or merged by the 1920s.5

Conservatively-managed trusts, such as the Alliance Trust, Foreign & Colonial and the Scottish Investment Trust, survived the debacle and are still around today. However, the crash of 1889 dented the reputation of the trust sector for many years. Low risk investments had turned out to be high risk ones and the wealthy had benefitted at the expense of the ordinary shareholder.

Lessons for investors

The investment trust bubble of 1888/9 was a classic example of an investment fad or fashion during bubble conditions. At Stewart Investors we seek to avoid such fads by our questioning culture. Analysts are expected to challenge portfolio managers about the companies they hold in their portfolios.

The tendency of bubble conditions to result in lax standards of corporate governance is highlighted by the journey of investment trusts from low-risk to high-risk investments. The lesson is that even so-called low-risk assets must be re-appraised constantly to ensure corporate governance standards are being maintained.

The debacle highlights the importance of investing in conservatively-run companies with strong management teams and independent boards which are not drawn into risk-loving behaviour typical of boom periods.

Important information

This material is for general information purposes only. It does not constitute investment or financial advice and does not take into account any specific investment objectives, financial situation or needs. This is not an offer to provide asset management services, is not a recommendation or an offer or solicitation to buy, hold or sell any security or to execute any agreement for portfolio management or investment advisory services and this material has not been prepared in connection with any such offer. Before making any investment decision you should consider, with the assistance of a financial advisor, your individual investment needs, objectives and financial situation.

We have taken reasonable care to ensure that this material is accurate, current, and complete and fit for its intended purpose and audience as at the date of publication. No assurance is given or liability accepted regarding the accuracy, validity or completeness of this material and we do not undertake to update it in future if circumstances change.

To the extent this material contains any expression of opinion or forward-looking statements, such opinions and statements are based on assumptions, matters and sources believed to be true and reliable at the time of publication only. This material reflects the views of the individual writers only. Those views may change, may not prove to be valid and may not reflect the views of everyone at First Sentier Investors.

About First Sentier Investors

References to ‘we’, ‘us’ or ‘our’ are references to First Sentier Investors, a global asset management business which is ultimately owned by Mitsubishi UFJ Financial Group (MUFG). Our investment teams operate under the trading name of Stewart Investors which is part of the First Sentier Investors group.

We communicate and conduct business through different legal entities in different locations. This material is communicated in:

  • Australia and New Zealand by First Sentier Investors (Australia) IM Limited, authorised and regulated in Australia by the Australian Securities and Investments Commission (AFSL 289017; ABN 89 114 194311)
  • European Economic Area by First Sentier Investors (Ireland) Limited, authorised and regulated in Ireland by the Central Bank of Ireland (CBI ref no. C182306; Registered office: 70 Sir John Rogerson’s Quay, Dublin 2, Ireland; Company no. 629188).
  • Hong Kong by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. First Sentier Investors and Stewart Investors are business names of First Sentier Investors (Hong Kong) Limited.
  • Singapore by First Sentier Investors (Singapore) (Company no. 196900420D) and has not been reviewed by the Monetary Authority of Singapore. First Sentier Investors (registration number 53236800B) and Stewart Investors (registration number 53310114W) are business divisions of First Sentier Investors (Singapore).
  • Japan by First Sentier Investors (Japan) Limited, authorised and regulated by the Financial Service Agency (Director of Kanto Local Finance Bureau (Registered Financial Institutions) No.2611).
  • United Kingdom by First Sentier Investors (UK) Funds Limited, authorised and regulated by the Financial Conduct Authority (FCA ref no. 143359;  Registered office: Finsbury Circus House, 15 Finsbury Circus, London EC2M 7EB; Company no. 2294743).
  • United States by First Sentier Investors (US) LLC, authorised and regulated by the Securities Exchange Commission (RIA 801-93167).
  • In other jurisdictions, where this document may lawfully be issued, by First Sentier Investors International IM Limited, authorised and regulated in the UK by the Financial Conduct Authority (FCA ref no. 122512; Registered office: 23 St. Andrew Square, Edinburgh, EH2 1BB; Company no. SC079063).

To the extent permitted by law, MUFG and its subsidiaries are not liable for any loss or damage as a result of reliance on any statement or information contained in this document. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment products referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk, including loss of income and capital invested.


  1. Andrew Adams (ed.), The Split Capital Investment Trust Crisis, 10.

  2. Adams, Split Capital, 10.

  3. Adams, Split Capital, 11.

  4. Adams, Split Capital, 11.

  5. Elaine Hutson, The early managed fund industry: investment trusts in 19th century Britain, 11.