The professional approach MONEY
NICHOLAS DAVENPORT
A foolish headline in The Tittles Business Sup- plement of 4 August—Insurance Companies Unload Gilt-edged'—reminded me that the in- vestment policy of what we call 'the institu- tions' needs clarification. Of course the insurance companies have not been unloading 'gilt-edged.' Since last October, when that market began to boom, they have added greatly to their holdings. But it is true to say that over the past few years the life managers have put a smaller percentage of their new money into government stock. This is still a free country —unlike France where 50 per cent of life funds have to be held in government stock—and they can invest their funds just as they please, sub- ject to periodic directions from the Bank of England as to investment overseas. The actual amount of gilt-edged held by the British life companies at the end of 1966 was £1,575 million—only £16 million more than at the end of 1965. The reason why they took no more was because they were busy taking up extra large amounts of the new debenture issues which companies had been making under the duress of the new corporation tax. Last year they added no less than £221 million to their holdings of debentures, loan stocks, preference shares and guaranteed stocks, bringing this group up.to 22f per cent of their total funds against 16.8 per cent for British government stocks. At the same time they let the percentage held in ordinary shares fall to 211 per cent against 22 per cent in 1966 and 22+ per cent in 1965. All this is best shown in the following table:
Percentage distribution of Life Funds
'65 '66 British govt stock 18.0 16.8 Commonwealth and foreign govt 2.9 2.8 Debentures, loan stocks, prfrnce etc 21.7 22.5 Ordinary shares 22.0 21.5 Real property and ground rents 10.7 11.3 Mortgages 18.1 18.8 Other 6.6 6.3
100.0 100.0
For a life-assurance company growth means growth of income. The object of institutional investment policy is therefore the maximi- sation of income. Of course, capital apprecia- tion will follow, but that is not the primary objective. When Mr Callaghan's tax revolu- tion forced industrial and commercial com- panies to issue debentures and loan stocks instead of ordinary shares—at a time when the rate of interest was rising—the life managers rejoiced, for they were able to invest their new money at increasing yields of up to 8 per cent. That is why they neglected for a time the gilt-edged market; they were boost- ing their income from debentures and at the same time avoiding the slump in the gilt-edged market caused by the rise in the rate of in- terest. They went back into gilt-edged last October when interest rates began to decline —the first cut in Bank rate was on 26 January this year—and they went out to some extent in April after the Treasury had overdone their funding operations (as usual) by selling to the public £1,000 million net of stock in the six months ending March. Now they are prepstrine to go back. The steel nationalisation issue is out of the road and as it was a 'short the way is clear for an advance in the 'mediums' and 'longs.' There was some hesitation when American bill rates jumped sharply urnsards last month, but this has now been largely re- moved by President Johnson's call for a 10 per cent surcharge on corporate and indis idual tax bills. The tighter the fiscal action, the less call for monetary action. The us Treasury bill rate has already fallen back and ours should follow. Incidentally, the current in- crease in the supply of Treasury bills should add to bank liquidity and, with advances show- ing little or no expansion, we might well see bank money as well as the life funds pouring into the gilt-edged market. Certainly, the market seems poised for recovery.
It will be seen from my table that while the percentage of the life funds invested in ordinary shares has fallen from 22+ per cent to 21+ per cent, no less than £111 million lN put into equities last year by the life manages. I expect more will be put this year—not be- cause the managers are bullish about the economy or about the Government's control of it but because they feel that reflation is bound to come this winter if unemployment creeps up towards the 700,000 mark. When re- flation does come company profits should rise, for in this period of industrial stagnation there has been a slow improvement in productis ity. Output per man-hour has in fact risen by about 8 per cent over the past two years.
It must be borne in mind that the managers of life funds are long-term investors. They do not need quick results but long-term results. Being very conservative people they work to certain conventions in their investment policy and one of these conventions is that the per- centage invested in ordinary shares should not fall below 25 per cent (at cost). They are there- fore anxious to add to them when shares are on offer but they are not rushing after them. The Financial Times index is not far off its all-time high (387) of October 1964. There is at present a reverse yield gap not only in divi- dends but in earnings. Against a yield of 6.9 per cent on War Loan there is an average divi- dend yield of only 5.24 per cent and an earn- ings yield of 6.59 per cent on the Financial Times index of industrial shares. This makes the institutional investor extremely cautious but it does not keep him out of the equity market.
The demand for equity shares, in spite of its selectivity, still exceeds the supply. The figures
show that the net new money accruing to the life funds last year was £680 million, to which must be added the pension flow of about £350 million. A quarter of £1,000 million of new money is £250 million and the supply of new equity shares last year was only about £1,425 million. So demand continues to exceed new supply and the prices of existing shares must rise. But selectivity is therefore all the more important and it would not be surprising to find that if the index of equity prices goes on rising some individual shares will not keep pace. for example, those of the 'blue chips' like Marks and Spencer and in and Unilever which have fallen out of favour. There is no sentimentality in institutional investment polic4.
Previous page
