There is a reproduction of a map of Edinburgh in Ray Perman’s The Rise and Fall of the City of Money: A Financial History of Edinburgh that highlights the array of financial firms that dotted the city at the turn of the 20th century. The range of banks, asset managers and investment trusts that the city boasted at that time, some names familiar and some less so, provide us with certain insights into the past, present and future state of the Scottish financial sector.
Many of these institutions have since merged with competitors or simply crumbled into the winds of history, with their physical remains turned into hotels, shops, or eateries. The Edinburgh-founded North British and Mercantile Insurance Company, for example, occupied an incredibly grand palazzo on Princes Street, but after becoming a subsidiary of Commercial Union the building was bought by BHS and turned into a Brutalist horror. Rather than banknotes, pints and pub fare are now dispensed out of the former Union Bank of Scotland building on George Street (the company merged with Bank of Scotland) in its current incarnation as a Wetherspoons. Such examples are legion.
Concentration has been the name of the game in Scotland, both geographically (the relative importance of other financial hubs such as Glasgow and Dundee has declined) and with the manoeuvres of the nation’s major companies. Perman pointed Investors’ Chronicle to the example of the Scottish life assurance firms – there were nine of these when he reported on Scottish finance in the 1970s/1980s, but over the years the key players have been demutualised and sold off to bigger groups.
The final big Scottish life assurer to transact was Standard Life, when it merged with Aberdeen Asset Management in 2017 to create what is now known as Abrdn (ABDN). The outcome of the merger hasn’t exactly charmed the market.
Of course, concentration isn’t just a Scottish phenomenon. Spurred on by globalisation and the liberalisation of financial markets, it has been a factor experienced more widely over the decades. But the situation does leave Edinburgh, as a financial capital, in a bit of a perilous position compared with London. If something were to go wrong with Abrdn, say, then the pool of major players starts to look very thin indeed.
The banking crisis didn’t help. The decline of Edinburgh as a banking powerhouse can be laid at the feet of arrogant bank executives rather than on more abstract talking points. The rapid growth of Royal Bank of Scotland and Bank of Scotland in the years ahead of the financial crisis of 2008 turned out to be built on sand. The Royal Bank went for global stardom before its mighty fall, while Bank of Scotland scaled up to challenge the London banks and was found wanting.
Edinburgh’s denuded banking landscape is the most obvious sign of changing fortunes in recent times, and the crash conjures up thoughts of a previous Scottish financial disaster – which we will come to. But there are investment areas in which Scotland, informed and supported by a fascinating financial heritage, is still hard to beat.
The investment trusts
Firstly, and most uniquely, the investment trusts. For sheer longevity, it is these that stand out on the map in Perman’s book. While the life assurers may have crumbled, the trusts have stood firm.
As a refresher, an investment trust is a closed-ended investment vehicle with a fixed number of shares in issue. Investment trusts are public limited companies, traded on stock exchanges, and their shares can be priced at a premium or a discount to the net asset value of the company. Due to their structure they can hold illiquid assets, and can utilise gearing.
The longevity of the Scottish trusts is astounding, with many of the earliest companies still in operation after successfully adapting to economic and technological changes over the years. The first investment trust was the Foreign & Colonial Investment Trust (FCIT), founded in London in 1868, but it took the ingenuity of Scotsmen to drive things forward.
The Scottish American Investment Trust was the first investment trust in Scotland, founded by Robert Fleming in 1873 – it is now known as Dunedin Income Growth Investment Trust (DIG) and is managed by Abrdn. Shortly afterwards, Fleming co-founded the similarly named Scottish American Investment Company (SAIN), now managed by Baillie Gifford, with his compatriot William Menzies.
While Foreign and Colonial (and most mainstream investors at the time) invested in government bonds, Fleming saw opportunities for higher returns in American assets. The US was crying out for capital investment to help it develop railroads and utilities. Fleming seized the moment, and the trust turned its sights to railroad bonds.
He also understood how to appeal to more ordinary investors, at a time when only the wealthiest had portfolios, through offering them a pooled investment scheme that spread risk yet still offered the chance of high returns from the biggest and most exciting emerging market of the day (strange as it is today to think of the US in that way).
But it was not in Edinburgh that the young Fleming founded the Scottish American Investment Trust. Rather, it was over the River Tay in Dundee.
The boom in jute – a fibre that is taken from a vegetable plant – was crucial to Dundee’s huge textile industry of the time and makes Dundee central to the history of the Scottish trusts. The jute may have had to travel vast distances from Bengal, but that wasn’t an issue given the great opportunities on hand. Dundee became known as ‘Juteopolis’, and its success gave the merchant barons their significant wealth that was then ploughed into the early trusts to allow them to invest in overseas markets.
Alliance Trust (ATST) is another famous Dundee trust. Founded in 1888, the company is still part of the FTSE and still based in the city.
Back in Edinburgh, investor darling manager Baillie Gifford’s headquarters may have moved position on the map to now sit beneath Calton Hill, but their Scottish Mortgage Investment Trust (SMT), which launched in 1909, continues to go from strength to strength.
Perman sees a clear link between the activities of the early trusts and their modern stock market actions.
“The astonishing return made by Scottish Mortgage Investment Trust’s stake in Tesla is a direct descendent of those early trusts' investments in US railway securities – a realisation that pooled investment can enable investors to take punts on speculative assets that have high growth potential,” he said.
But for all the history and excitement, there are more practical matters at hand. Where is the company incorporated? Where is it managed? And we should note that these “legacy trusts” registered in Scotland don’t really invest north of the border, which may reasonably come as a surprise to investors.
These points were raised by Russell Napier, chairman of the Mid Wynd International Investment Trust (MWY) – another trust with its origins in Dundee and jute. He is also the founder of Edinburgh’s Library of Mistakes, which seeks to educate on matters of financial history and argues against the “unrealistic assumptions” that underpin much of our modern financial understanding. As the library’s website states, “a study of financial history may help to reduce financial madness”.
Napier questioned whether there is really much innovation going on with the Scottish investment trusts any more, given that most of them just seem to offer a vanilla inroad to global equities. He pointed to Personal Assets Trust (PNL) as an example of a Scottish trust that is doing something different, “a real star” which has differentiated itself with its asset allocation model.
Big beasts and boutiques
But Scotland can offer much more than the investment trusts. It is a leading centre of fund management more generally, with the big beasts such as Abrdn and Baillie Gifford buttressed by many smaller, boutique managers that have carved out positions in niche areas.
While Abrdn is still finding its post-merger feet, Baillie Gifford has a well-deserved reputation as a bona fide long-term Edinburgh success story. Carlyle Gifford and Colonel Augustus Baillie originally set up together to practice law, but quickly pivoted to investing in 1908. Opportunities in rubber turned into Scottish Mortgage, and the firm doesn’t seem to have looked back since.
It now has almost $500bn of assets under management. As well as its famous trusts, it offers investors a range of funds across categories that include emerging markets, smaller companies, and Japanese and Asian opportunities.
The legacy of the old investment house Ivory & Sime, another firm that appears on the map in Perman’s book but is no longer extant, and which emerged around a decade before Baillie Gifford, can be seen in the emergence of investment managers Aberforth Partners and Artemis Fund Managers.
One of the newer kids on the block is Amati Global Investors, a well-regarded manager established in Edinburgh in 2010. It offers an Aim-focused VCT, an IHT fund, a UK smaller companies fund, and has recently launched a strategic metals fund.
The Union and Darien
The Scottish National Party (SNP) argue that the Brexit vote – which a majority in Scotland opposed – provides justification for another independence referendum on whether Scotland should leave the United Kingdom. They say that the result of the 2016 vote has “dragged Scotland out of Europe against its will”, with Scotland locked out of key markets and foreign investment, and that the best economic route for a future independent nation would be to try to join the EU.
It wants to do things differently to those down south, in other words. Much like some of the early Scottish trusts. John Newlands raises the point in his booklet on the history of the Dunedin trust that, bearing in mind that contemporary Scotland can diverge on income tax and related matters, there were signs in the early days of the trusts of a different attitude by the Scots towards the treatment of dividends.
“It appears that in this instance, unlike their English counterparts, the Scottish trust sector established best practice from the start,” he notes.
But opponents of Scottish independence often point out that it was economic instability that was a major contributor to driving Scotland into the union with England in the first place, and raise the spectre that an independent Scotland could end up in such an unattractive position once more.
William Paterson’s ill-fated Company of Scotland hoped to create a trading colony on the Isthmus of Panama, as a means of connecting the Atlantic and Pacific. This was known as the Darien Scheme. Around a fifth of Scotland’s total wealth was tied up in the adventure, which saw colonies attempted between 1698 and 1700. Planning failures and the death of most of the colonists soon put an end to events, leaving the Scottish elite and many others financially devastated and far more inclined to support a union with England. Much like the financial crisis 300 years later, it was a seismic economic hit to the Scottish economy.
But, of course, the context in Scotland now is very different to the opening of the 18th century. The question of how independence would impact Scotland’s financial sector is nuanced, and different businesses have different opinions.
Law firm Herbert Smith Freehills said that it would be key for an independent Scottish government to be very clear on how it “manages the regulation and taxation of financial businesses and their customers, as well as on how quickly access to the EEA single market might be obtained”.
While most Scottish-registered investment trusts do have contingency plans, such as moving their domicile to England if thought necessary in the circumstances, the general feeling is that the issue is low down risk registers as there is no immediate threat of an exit from the union – despite rhetoric that may suggest otherwise.
One thing, at least, is clear when we look to the future of Scotland. It could certainly do with more Robert Flemings and innovative financial thinking, and less RBS-executive cum 2008-style leadership.
