Advice to Trustees
By NICHOLAS DAVENPORT IT is said that the Public Trustee led the stampede into equity shares last week when the trustees were allowed to switch out of their gilt-edged holdings. Certainly some sizeable business must have been done, for the Finan- cial Times index of industrial equities was lifted 22 points (or 7.2 per cent.) while the hapless gilt-edged market fell another 21 Per cent. to a new all-time low—with War Loan at 501 yielding 7 per cent. The old-fashioned investor will be wringing his hands in dismay at the sight of so much folly. This is the golden opportunity, he will protest, to sell equities and buy government bonds. Equity earnings were !tuning down even before the Chancellor sub- lected the economy to the severest dose of defla- tion ever seen. Profit margins are now being Squeezed to the danger point and far from being annoyed by his request to avoid dividend in- creases most company directors will be over- JoYed to have an excuse for a pause, if not for an actual cut in dividends. As for the hope of relief from membership of the European Com- mon Market, if it comes, most industrial com- panies will be dreading the fiercer competition Which they will have to face. Manufacturing costs have already risen high enough to make some British goods uncompetitive in Europe and the first impact of Mr. Lloyd's deflation will raise Prices still further and cause stiffer demands for higher wages. The prospect of industrial strife (With or without a Berlin crisis) is proverbially bad for the equity share markets. Finally, he Will say, there are government dated bonds Which arc offering wonderful capital appreciation over the short-to-medium term. For example, a seven-year stock like Funding 3 per cent. 1966-68 at 781 offers a certain rise of over 26 per cent. With 3.8 per cent. on your money while you Wait. The Public Trustee ought to know better than to lead a herd of swinish trustees down
Gadarene slope when he should be switching into dated bonds at their present huge discounts.
But I am certain that the switching of trustees into equities will go on. In the first place, the door is only half-open, which, psychologically, tends to make trustees push through into what authority apparently regards as safe anchorage. That is to say, trusts which were formerly con- "fled to trustee investments can now put 50 per ert, of the funds into what is described as wider range' investments (building society shares, unit trusts and qu'oted preference and ordinary shares of UK companies which have an issued and paid-up capital of at least £1 million and have paid dividends for the preceding five years). Once the division has been made it must stay and new funds coming in must be divided ,litY-fifty. If that is the law, trustees will want to take full advantage of it, lest they incur the wrath of the beneficiaries. In the second place, if they do so comply, they can 'pass the buck,' ,which is' a very important safeguard. The law rYs that in putting 50 per cent. of the funds 41° 'wider range' investments trustees must ob- 'am and consider proper advice in writing from a, Person 'who is reasonably believed by the ."tee to be qualified by his ability and prac- 1,1,al experignce of financial matters.' If the ad- :Iseer writes to say that a particular equity is Satisfactory the trustee cannot be criticised even
if it later falls 90 per cent. in market value.
I can well imagine what the qualified adviser will say. He will quote the famous investigation made by the Economist Intelligence Unit into the results of an investment made in 1919 of £1 million in 21 per cent. Consols and £1 million in the equities of the Financial Times industrial index, reinvesting all income and the value of 'rights' sold. By January 1, 1959, the value of the fund in 21 per cent. Consols had become £4 million and the value of the equity fund £41 million. Thus, says the adviser, equities have proved themselves to be ten times better than bonds. The comparison is, of course, unfair. No trustee in his senses would now choose an un- dated, irredeemable bond after the deception which was practised on investors in 1951 by the financial experts of the Conservative Party. In that year they decided to bring back monetary control through the market mechanism of Bank rate without issuing any warning to trustees and others holding undated bonds that this meant reducing their market value by a twelfth or a quarter or a third or a half, if the inflation per- sisted (it has turned out to be by nearly a half, as the wage-cost inflation proved insensitive to monetary medicine). But the dated bond is another story. Just as there will always be a demand for dated bonds from financial institu- tions which have money obligations maturing at the equivalent dates, so there will always be trustees who will want to provide cash at sonic future date which can only be guaranteed by
an appropriately redeemable government stock. Having met this contingency the trustee will no doubt complete that half of his fund which must be invested in the 'narrower range' of eligible securities by switching (after advice) into high- yielding industrial debentures with a fixed date of redemption. And here he has been allowed another escape. He can buy convertible deben- tures and when these are convertible into equity shares at reasonable rates he should jump into them quickly.
For the other half of the fund which can be invested in the 'wider range,' he should, I think, move more slowly. Certainly in time he should go to the full extent allowed and have this 50 per cent. in equities, for there is no other security which can give over the long term (if carefully chosen) an increasing income down the years and with the increasing income an appre- ciating capital value in the open market. But there are few equities which can be relied upon to live up to the growth reputation of, say, Marks and Spencer, and these are in very short supply on jobbers' books. If trustees insist on buying these select few immediately, prices will go through the roof. Therefore it is imperative to move slowly. The opportunity should, of course, be seized when a good 'growth' company makes a rights issue and shares are momentarily plenti- ful, but the golden rule is not to buy in a tight market. Equity shares are sensitive to' bad politi- cal as well as bad economic news and a Berlin crisis may well coincide with a number of shock- ing company reports which herald the Lloyd slump. Investment confidence or the lack of it has an inordinate effect on market prices. Bad days will come and the wise trustee will be ready with his approved list of equities (see Custos) to jump into the market.
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