Most scholarly and popular writing on asset management focuses on the evolution of the profession in the United States, where names like Benjamin Graham, David Dodd, and Warren Buffet are revered. In the United Kingdom, much of the historical emphasis has centered on the success of banks and the City of London as a global financial powerhouse. What is less known, however, is that innovative asset managers and asset management institutions have deep roots in Britain that in some cases precede their American counterparts.
Nigel Edward Morecroft's book, The Origins of Asset Management from 1700 to 1960: Towering Investors, fills this gap by providing an encyclopedic description of the evolution of asset management in the UK, highlighting how and why the profession grew and survived over 260 years. The book begins with a discussion of insurance companies as the first investment institutions in Britain, where liabilities were met by generating income from assets, namely through investment in government bonds. With the rise of life insurance companies, investment activity gradually moved toward longer-term investing, and with the insight of A.H. Bailey, began to diversify portfolios into higher yield assets such as mortgages, loans, property, overseas bonds, and small-scale equities, due in part to declining government bond yields throughout the nineteenth century.
Chapter 3 continues with a discussion of Philip Rose and his role at Foreign & Colonial. Established in 1868, Foreign & Colonial was the first investment company in Britain, and it endures today in the form of the Foreign & Colonial Investment Trust. Rose, trained as a lawyer, successfully navigated the evolving regulatory environment of the times, changing the legal status of Foreign & Colonial from a trust to a limited liability company (LLC) in 1879, a move which Morecroft argues saved the company from demise. As an LLC, Foreign & Colonial was able to adopt more flexible capital structures, creating a pooled fund invested in global bonds, mortgages, property, land, railways, and other asset classes, that was particularly accessible to the middle class. At the same time, innovations in Scottish asset management were happening under the influence of Robert Fleming, founder of the Scottish American Investment Trust (First Scottish, 1873–1890). Chapter 4 highlights the contributions of Fleming, a man from impoverished beginnings in the east of Scotland, who with a background in textiles had strong trading links with US industry. These links, along with the completion of the Atlantic telegraph cable, gave Fleming the ‘power of information’ to profitably invest in American corporate bonds. While risky, especially at a time when the US was recovering from civil war, the First Scottish portfolio outperformed UK government bonds by 6.5% over Fleming's 17-year tenure.
Morecroft then dedicates two chapters to the influence of John Maynard Keynes, discussing his roles as chairman and director of National Mutual Life Assurance Society (1921–1946), director of the Independent Investment Company (1924–1934), and asset manager for the Discretionary Fund at Kings College, Cambridge (1921–1946). While much has been written about Keynes, less is known about his role as an investment manager, though two chapters dedicated to this discussion is more than sufficient. The main contributions of these chapters are to highlight both the failures and successes of Keynes as an asset manager, particularly his switch from a market-timing strategy to ‘bottom-up’ approach after the Crash of 1929 and fallout with his partners at Independent Investment. Keynes’ particular insight was identifying equities as a natural home for institutional investors with a long time horizon and that a carefully selected and balanced portfolio of a few investments held in large units, as opposed to simplistic diversification, were key to successful asset management. In this sense, Keynes’ bottom-up philosophy is congruent with the principles of value-investing, a school of thought formalized by Americans Benjamin Graham and David Dodd in the 1930s, though Morecroft maintains that these approaches were happening in parallel across the Atlantic.
The book continues in Chapter 7 with a discussion of George Booth, Ian Fairbairn, and the first unit trusts at Municipal & General (1931–1960), which established a pooled fund invested in ordinary shares that was targeted at smaller investors, and in particular, middle-class women. Unit trusts were well established in the US at the time, but as a consequence of World War II and its aftermath, did not see meaningful growth in the UK for another 20 years. Nonetheless, investors in the First British Trust by Municipal & General would have earned 7% per annum from 1931 to 1951, outperforming cash, bonds, and inflation, demonstrating the wisdom of buying low after significant market declines and holding these investments over the long term.
Chapter 8 covers Ross Goobey and his contributions to the management of the Imperial Tobacco Pension Fund. Morecroft focuses on Goobey's insight into the anomaly of the equity-bond yield gap, in which Goobey astutely recognized that during inflationary periods, investment in real equities was preferred to fixed income. Slowly, from 1947 to 1955, Goobey convinced the pension fund to switch the portfolio entirely into equities, leading to unprecedented returns. From 1954 to 1961, the pension fund increased in value by 270%, outperforming the FT30 equity index by 70%. Goobey's investment philosophy rested on having a ‘wide spread’ across asset classes, with a preference for investing in small companies, as he hoped to capture as much of the overall market return as possible over the very-long term. In this sense, Morecroft likens Goobey's strategy to what we would today refer to as ‘smart Beta’.
The book concludes by giving a rosy summary of British asset management over the 260 years covered in the previous chapters. It is clear that Morecroft, an asset manager himself, has great fondness for the innovations of his predecessors, claiming that the early institutions were a check on the sometimes fraudulent behavior of the industry, and contributed to the public good by opening up savings to middle-income households and women, and facilitating urban developments in London and economic development in the US. While the achievements of these early innovators are no doubt meaningful, Morecroft has a tendency to downplay some of the failures. For example, his discussion of the ‘dubious practices’ of early unit trusts is framed through the impact this had on the reputation and growth of the industry, citing a lack of regulation as the main issue, and paying little attention to the real impacts this must have had on middle-class investors, the very people he claims benefited from the growth of asset management. In addition, in his early discussions of the insurance industry, Morecroft fails to critically discuss the deep roots of British insurance in the slave trade, save for a passing discussion of the South Sea bubble. Work by the historian Joseph Inikori (2002) estimates that 40% of the total UK marine insurance business, which laid the foundation for the life insurance companies Morecroft fondly describes in his early chapters, can be attributed to the slave trade.
In the last chapter of the book, Morecroft initiates a discussion around benchmarking that feels a bit out of place and leaves the reader with the impression that Morecroft is resentful of the passive management strategies of today when he states that, ‘these pioneering investors were not constrained by restrictive benchmarks or short-term measurement of relative performance … Today, benchmarks and performance objectives are much more sophisticated and specific, but do they serve the investment needs of clients better than these early offerings?’ Granted, the Nobel prize winning economist, Eugene Fama, did not begin to formulate the efficient markets hypothesis until the late 1960s, but it seems worth acknowledging that if asset management is the social good that Morecroft sees it to be, the average investor today is likely better off under a passive investment strategy that looks quite different from what these early pioneers had in mind.
In spite of some short-comings, Morecroft has delivered a rich history of asset management in Britain that provides a thoroughly deep dive into the origins and growth of the industry. While the prose is a bit repetitive at times, and would have benefited from more careful editing to limit redundant arguments, Morecroft's book is an encyclopedic resource for anyone hoping to learn more about the evolution and contributions of British asset management.
