Investment: change or decay MONEY
NICHOLAS DAVENPORT
As a professional investor I have no objection to being accused of inconsistency provided I end up with the right stocks. When Keynes first became chairman of the National Mutual Life Assurance Society and asked the actuary to explain the techniques of investment policy for a small life fund he remarked that the man- agers would be wise t have one investment only and change it every day. Such an ideally flexible policy is now, alas, ruled out by the short-term capital gains tax. But flexibility remains impor- tant. I,n these days financial, economic and political conditions change very rapidly and I cannot overstress the fact that at the .moment a world financial-crisis is in full swing and, be- lieve it or not, Britain is in a state of revolution- ary change. It is obvious that we cannot go on being governed in an amateur and ineffectual way, but no investor can know at this stage what form of government is likely to emerge and how it is going to influence or limit our investment decisions. We must all try to keep as liquid and as flexible as we can. It is not a time to be fully invested or stuck in a particular market.
A correspondent thinks that I have been in- consistent because in December 1966 1 wrote that the equity share markets had lost their secular upward trend and were no longer a reliable hedge against inflation, while a month ago I said that it would be wise not to put one's faith in money stocks but to put the family sav- ings into equity shares—especially through the medium of one of the equity-linked life policies offered by a unit trust. I do not find this incon- sistent. I explained on 22 December that the cult of the equity had undergone a profound change. It became a fashionable cult after the war when the automatic growth of company earnings and equity share prices had been guaranteed first by the shortage of the post- war period and then by the euphoria of a full- employment policy. But when the inflationary effects of the full-employment policy had caused the Tory governments (and Labour under Mr Wilson) to adopt a stop-go-stop technique it was obvious that equity shares could no longer be regarded as the automatic expression of growth or the automatic hedge against inflation. They became for the professional investor a medium for 'trading,' that is, for buying at one time and for selling at another.
It is appropriate to point out that the Financial Times industrial share index was 343 on 4 Janu- ary 1960 and 284 on 8 November 1966. For nearly five years the equity investor got nothing out of equity shares except a lot of anxiety from watching the endless ups and downs. And even after the sensational rise from 284 to over 400 in 1967 (now 395) he will find that equity prices over a long period have not offset the fall in the purchasing power of the £. So much for their value as an inflation hedge. As a medium for investment growth it is obvious they will have to be traded in.
Perhaps the non-professional investor has not yet fully realised that `stop-go' knocked the regular `go' out of equity shares. `Stop-go' is really a confession of failure on the part of governments that they cannot manage the Brit- ish economy properly, that they cannot secure normal growth without monetary crises. Of course, there are some company managements —for example, Marks and Spencer and Rugby Portland Cement—which are clever enough to maintain an earnings growth in spite of 'stop- go,' but they are few in number. The profes- sional investor will often make an exception in their case and keep their equity shares in his portfolio permanently. Even so, their market prices will fluctuate widely enough, to make 'trading' profitable, provided short-term profits and losses can be evenly balanced for capital gains tax. In the five-year period I have cited the swings in equity prices on the Financial Times index averaged 25 per cent—rise or fall.
I realise that the non-professional investor will find it almost impossible to 'trade' in equity shares. The act of selection and timing has become, as we all know, damnably difficult. Government interference is always disturbing industrial prospects. 'Stop-go' falls unevenly on the economy. The consumer durable trades, par- ticularly the motor and ancillary trades, can be deflated one year and boosted another. Hire- purchase finance is the plaything of Treasury monetary policy. The heavy engineering com- panies are also specially vulnerable to govern- ment deflationary packages. The aircraft in- dustry can be flattened at one time and helped at another by a change in official policy. Not so long ago the paper industry was trying to emerge from a self-imposed surplus capacity when the Government suddenly knocked it out by rushing toward free trade in EFIA. Not many years ago the electrical equipment companies made heavy losses on government contracts for nuclear power stations. The investor who selected some of -the fashionable 'atomic' market leaders in 1955 would have lost over 30 per cent of his money by 1960.
Even if the private investor is able to pick out the best industrial managements, suddenly death takes a hand and the management loses its dyna- mic. A well-known firm of brokers once worked out a set of ingenious rules for investing in growth equities which were based on the record of achievements in the previous ten years, but this 'investing in success' was bound to run into trouble because managements. never stayed the same in quality. I have always found that it pays better to invest in failure—provided the com- pany is nationally important enough to make it imperative that it should be put right.
In spite of these hideous uncertainties the
variable dividend equity share remains technic- ally the correct medium for long-term invest- ment, for it is the only type of aeCurity—except- ing the convertible debenture or loan stock— which can give, if wisely selected, an increasing income down the years and, as a result of that, an increasing capital value in the market. But it is now better traded in than held permanently. If the private investor feels that he cannot hope to trade or select effectively he must leave it to an investment trust or a unit trust whose managements have experience in both. Here he can spread his investment risks over a wide portfolio, and can choose the type of portfolio he likes—whether it is a 50 per cent American investment trust or a high income or growth unit trust. But if he is a small investor I must repeat my advice—buy an equity-linked life policy through a unit trust or instruct his Trustee Savings Bank to switch his deposit into the new unit trust formed by the managers.
Recently I have felt that as the world finan- cial crisis is getting worse rather than better the professional managers of investment portfolios would be well advised to accumulate the equities of companies with oil, metal, mining and trad- ing interests overseas. This they are already doing. It is a testing time for even the profes- sional investors.
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