British Investment Trusts 1868-1928: Portfolio Diversification and the Beginnings of Institutional Investment

This chapter looks at how the now well-known institutional investment approaches to adding value, such as diversification, evolved in the late nineteenth century and first half of the twentieth century. It explores how ways to optimize returns whilst minimizing risk for long-term investors were developed, promoted through financial advice manuals and texts, and put into practice by investment trusts from the 1860s onwards. We document how the concepts of diversification and yield enhancement dominated the investment discourse and how investment trusts offered individual investors a low cost means of maximizing return relative to risk. We also show how investment trusts implemented a range of investment strategies – in particular, active asset allocation, portfolio diversification, stock selection, market timing and leverage – which form the bedrock of investment strategies today.