Media Briefings

New Evidence That The Victorians Were Prodigious Savers And Remarkably Sophisticated Investors

  • Published Date: September 2010

Victorian investors allocated their portfolios in much the same way as a modern investment
adviser armed with the latest techniques would recommend, seeking to improve the riskreturn
trade-off and increase their wealth through diversification into overseas assets.
That is the central finding of new research by economists Benjamin Chabot and
Christopher Kurz, which analyses rich data on over 500,000 monthly domestic and foreign
security returns for British investors in the late nineteenth and early twentieth century.
Their study, published in the September 2010 Economic Journal, finds that the Victorians
wisely showed a preference for the assets that added diversification at the lowest cost and
shunned assets that provided little diversification benefit.
Some historians and economists (and indeed politicians of the time) have accused British
Victorian-era investors of ‘foreign bias’, investing excessive amounts overseas to the
detriment of the national economy. But given the benefits of international diversification, it is
no surprise that these investors sent capital overseas, as they sought both the high returns
and diversification that rational investors crave.
Between 1865 and 1914, Great Britain invested 5.4% of GDP abroad. For a nation that until
1850 had exported less than 2% of its GDP, this was a prodigious sum. The outflow of
capital caused much consternation among politicians at the time that viewed investment
abroad as a ‘running sore, sapping the life blood of British industry’ and attributed domestic
unemployment and the stagnation of trade to this unparalleled outflow of capital.
Questions about the utility of so much foreign investment were raised throughout the
twentieth century. In a 1931 report to parliament, Keynes and his colleagues on the
Macmillan Committee accused the British capital market of a long history of ignoring
domestic industry. The belief that British investors sent capital abroad due to ignorance or
‘irrational prejudices’ fostered the view of one prominent economist that the ‘city of London
and its financial institutions were the single greatest threat to the prosperity of England’.
The claim that British investors exhibited a foreign bias is surprising because economists
who study portfolio choice today lament the refusal of modern investors to hold more
foreign assets. Ironically, the same market failures that are used to explain ‘home bias’ –
the low levels of international diversification observed in modern portfolios – are also cited
as explanations for the high level of historical Victorian investment abroad.
Why isn’t the high level of international investment present in nineteenth century portfolios
viewed as a sign of rationality and efficiency? In a word, diversification. When economists
assert that modern investors should increase their investments in foreign assets, they are
basing this advice on the observed diversification benefits of holding foreign assets with a
low covariance with domestic assets.
Previous studies of Victorian portfolio choice have largely ignored diversification and
focused instead on the relative return of foreign and domestic assets. This omission can
largely be explained by the difficulty of measuring diversification with sparse nineteenth
century data and the fact that the debate was framed in the years before mean-variance
analysis and modern portfolio theory became standard.
At the time that economists were literally writing the books on Victorian overseas
investment, an investment was evaluated by its return, not its effect on the return and risk of
the investor’s portfolio. Despite advances in our understanding of portfolio choice under
uncertainty, the optimality of Victorian foreign investment continued to be framed as a
decision about asset returns rather than risk.
The new study shows that Victorian foreign investment wasn’t so puzzling after all. The
researchers address the data shortcoming by collecting a sample of over 500,000 monthly
domestic and foreign security returns. These rich data allow them to apply modern portfolio
selection techniques to quantify the effect of adding overseas investments to the portfolios
of Victorian investors. They conclude:
‘The Victorians turn out to be remarkably sophisticated investors. The addition of
foreign assets significantly improved the risk-return trade-off of British portfolios,
while providing a diversification benefit equivalent to a significant increase in wealth.’
Notes for editors: ‘That’s Where the Money Was: Foreign Bias and English Investment
Abroad, 1866-1907’ by Benjamin Chabot and Christopher Kurz is published in the
September 2010 issue of the Economic Journal.
Benjamin Chabot is at Yale University. Christopher Kurz is at the Federal Reserve Board.
For further information: contact Benjamin Chabot (312) 322-6065 (email:; Christopher Kurz on +1 (202) 452-3086 (email:; or Romesh Vaitilingam on +44-7768-661095 (email: