Stock market speculation - mainly in railways, but also in what we would now call emerging markets - reached fever pitch in the 1840s and 1850s. And like most such bubbles, it duly burst, leaving investors ruined and angry.
In response, a group of City financiers decided on a new and more responsible approach to investment, and in 1862 the Foreign & Colonial Government Trust was formed to invest in a portfolio of overseas government stock
Foreign & Colonial is still very much in business today - as a fund management group which looks after pounds 26.7bn of people's savings. And as its chief executive, the Hon James Ogilvy, points out: "Many of the countries in which we invested more than 100 years ago are countries in which we still invest today.
"In those days, of course, the investment was fixed-interest stock, rather than shares - but if you look at our portfolio from the 1880s you can see countries such as Colombia, Egypt, Turkey and India - places which are now fashionable as emerging markets."
The hallmark of the early F&C Trust was diversification - reducing risk by spreading investment rather than concentrating on a few stocks - and that is still the main reason to invest in managed funds today.
The early fund management vehicles were mostly investment trusts. These are companies in which you invest by buying shares in the same way as investing in any other kind of company. The only difference is that instead of making widgets, their sole business is investing in other businesses - and today their combined assets are worth more than pounds 50bn.
Then, in the 1930s, along came the Municipal and General, an investment company which imported an American idea into Britain: the mutual fund. Or, as we know it on this side of the Atlantic, the unit trust.
After a slow start, the idea took off in post-war years and now accounts for some pounds 120bn in long-term savings.
At the outset, Municipal and General had just a few hundred investors. Today, known as M&G, its unit trusts are owned by more than 800,000 people and its total funds are worth more than pounds 15bn.
Several of the big names in fund management are now part of high street banking groups.
Gartmore, one of the top five investment managers - savings and pensions worth pounds 51bn - was acquired by NatWest last year. It now forms part of the bank's "wealth management group" alongside NatWest Life and Coutts, the private bank.
Similarly, customers of Lloyds Bank who want to keep their long-term savings within the group need look no further than Hill Samuel Asset Management. Since it sells mainly through independent financial advisers, HSAM is less well known than some of its competitors, but its funds include the Hill Samuel Emerging Companies unit trust, which has been the top-performer over the past five years.
Some of the most successful fund management businesses have been spin- offs from old-established City houses. Guinness Flight - which this week announced plans to merge its fund management business with that of Hambros - began as the mutual fund arm of Guinness Mahon, a merchant bank with its roots dating back to 1836.
Although Guinness Flight is not in the big league of fund managers - assets of "only" pounds 2bn - it is highly regarded for its performance and innovation, thanks to a small, specialist team led by the two founders and joint managing directors, Howard Flight and Timothy Guinness.
In recent years fund managers' ranks have been joined by a number of newcomers, of which the best-known is undoubtedly Virgin. In just two years, Virgin Direct has attracted more than 100,000 customers and pounds 500m into its managed PEPs, marketed on the brand name, strong performance and low charges, which have set a new benchmark for the industry.Reuse content