In March 1873, Scottish financier Robert Fleming created a fund unlike any other before it.
It was called the First Scottish American Investment Trust (FSA).
Originally created to provide steady income to Scottish widows and orphans, it soon became popular with the Scottish investment class because it offered almost absolute security while paying a hefty dividend between five and eight percent.
The fund quickly sold out.
You see, the First Scottish American Investment Trust was created to allow Scottish citizens to invest in American railroad bonds, carefully selected and widely distributed and where the investments would not exceed one-tenth of the capital of any one security.
It was super diversified, and therefore offered a measure of security.
The FSA was so popular that the Second American Investment Trust was created in 1874…
And as a result of the success and popularity of the first two, the Third Scottish American Investment Trust was started in 1875.
In 1876, Fleming represented the bondholders’ committee of the Erie Railway and saw its plan for the financial reorganization of the railroad largely adopted.
Due to the successful Erie experience — and in its role as a significant railroad investor — Fleming was involved in the successful restructuring of numerous other North American railroads in the 1870s, 80s, and 90s…
Each restructuring produced significant gains for the Fleming investment trusts and drew more investors.
Fleming assumed a central role in the 1886 battle with Jay Gould for control of the Texas & Pacific Railway, in which the Fleming bondholder group ultimately triumphed.
Overall, Fleming claimed to have made a 40% return on investments in U.S. railroads.
By 1900, more than 19 of these funds were launched.
Fleming himself became the “Warren Buffett” of Scotland…
He founded the Robert Fleming Company, an asset management and merchant banking firm. It was sold in 2000 to Chase Manhattan for $7 billion.
And the Scottish American Investment Trust?
Well, it was so successful and popular that it still exists today — making it one of the oldest funds in the world.
You see, Fleming created what is now known as a closed-end fund.
And while closed-end funds are becoming increasingly popular for retirees, they’re still much unknown to the general investing public.
The SEC defines a closed-end fund (CEF) as a collective investment vehicle with a limited number of shares.
It is called a closed-end fund because new shares are rarely issued once the fund has launched, and because shares are not normally redeemable for cash or securities until the fund liquidates.
Typically an investor can acquire shares in a closed-end fund by buying shares on a secondary market from a broker, market maker, or other investor — as opposed to an open-end fund where all transactions eventually involve the fund company creating new shares on the fly (in exchange for either cash or securities) or redeeming shares (for cash or securities).
The price of a share in a closed-end fund is determined partially by the value of the investments in the fund and partially by the premium (or discount) placed on it by the market…
The total value of all the securities in the fund divided by the number of shares in the fund is called the net asset value (NAV) per share.
The market price of a fund share is often higher or lower than the per share NAV: When the fund’s share price is higher than per share NAV, it is said to be selling at a premium; when it is lower, at a discount to the per share NAV.
With baby boomers heading off into retirement, more and more are turning to closed-end funds…
Why?
Simple. Just like the widows and orphans in Scotland during the 1870s, investors are investing in closed-end funds because many of the funds are designed to provide a steady stream of income — usually on a monthly or quarterly basis, as opposed to the biannual payments provided by individual bonds.
In fact, last October, MarketWatch reported the world’s richest man, Bill Gates, “has been quietly taking advantage of a little-known investment on the stock market… and it’s open to anyone. He’s been quietly building his position in two closed-end funds.”
By our calculation, Gates is getting a check every month from these funds in the amount of $140,000.
There are many closed-end funds which mimic the investments of Warren Buffett’s Berkshire Hathaway… but at a fraction of the price.
In the weeks ahead, we will bring you the very best CEFs.
The original bull on America,
Brian Hicks
Publisher, Wealth Daily
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