CITY AND SUBURBAN
The Year of the Dog, or just a hair of the dog that bit us?
CHRISTOPHER FILDES
Every dog has its year, and last year it was the turn of that pedigree dog, the British Government's gilt-edged stock. It was — can you credit it? — your best investment, better than shares, better than cash. The Bank of England kept printing it out but the buyers kept on coming. It gave you a return, in capital gains and in divi- dends, of 26 per cent, after allowing for inflation. This is the dog that, for the last half-century, has bitten your hand off. If you had celebrated peace in 1945 by putting £100 into shares and reinvesting the dividends (and forgot to pay tax on them) and if you did your sums today and allowed for inflation, you would have £2,250. If you had put your £100 into gilt-edged and did the same sums, you would find that you were worse off. Your £100 would have shrunk to £95. What a dog, what a barker, what a howler! Even in the few years when gilt-edged did well, shares could be expect- ed to do better, and when shares did badly, the right place to be was in cash. These are the lessons that stand out from the BZW Equity-Gilt Study, the classic annual survey of what inflation has done to investment in our time. So what is happening now? Gilt- edged have come out on top, and not just this year but for three years in the last five. Should we learn to love this dog as once we did? Only if its fit of madness, the inflation- ary fever that has ravaged it for most of this century, is at last dying down. That, in effect, is what the market has been saying, but it is not what the fever-chart says. To trace it through BZW's pages is to see that the growth of inflation came with the growth of government, always with more bills to pay and always tempted to pay them by printing more stock or more money. (How shocking it now seems that we are being asked to pay them out of tat!) I will believe that inflation is dying when I see government shrinking. Until then I shall beware of the dog.
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