The Best All-Rounder
By HERBERT ASHWORTH
NEVF.R before have the wares of the invest- ment shopkeepers been displayed in such attractive variety. From among them all, one particular brand may well appeal' to the pro- spective investor for its distinctive 'all-round' flavour, Building society investment certainly owes much of its wide popularity to its characteristic virtues of simplicity, satisfactory yield and security, and in 1961 these qualities have lost none of their savour. In fact, the in- creased competition is stimulating: the very merits of other forms of investment serve to accentuate their special nature and to throw into relief the more general appeal of building societies.
The essence of building society investment is this fusion of the three qualities of simplicity, security and satisfactory yield. Taken in isolation, each quality can probably be found in other forms of investment, and while it is difficult to imagine anything safer or more simple, it would be idle to deny that there are some higher re- wards to be had—at a price. This usually in- volves leaving the investment undisturbed for a contractual period or accepting less security in
the hope of capital appreciation. Building society investment imposes no such limits, not even on the amount of capital that may be invested. The general limit of £5,000 applies to any one society, and a larger investment can be spread over a number of societies.
Absence of restriction coupled with a minimum of formality is, for many, one of the principal attractions of the building society investment service. A straightforward application and de- claration opens the account; no stamp duty, brokerage or commission payments eat into the available sum, so that the whole can start earn- ing interest at once. When received, the whole of the interest is available for spending or re- investment, as income tax has already been paid, and the trouble involved in reclaiming tax already deducted does not arise.
With a general increase in prosperity, the special arrangement between the inland revenue authorities and building societies, that interest may be paid net, the societies accounting for income tax at the 'composite rate' (currently 5s. 4d. in the £), is proving advantageous to more and more investors. It is both simple and profitable to members, many of whom pay tax at the standard rate, and to whom '31- per cent. tax paid by the society' means a gross return of £5 14s. 3d. on every E100 invested.
Simplicity is again to the fore where with- drawal of capital is concerned. Not only do most societies pay up to any amount on demand but, more important, the investor knows that no matter when he may need it, his capital will be returned to him pound for pound, economic climate and outside influences notwithstanding. In these days, when much emphasis is being placed on the existence of inflation and the in- evitable fall in the purchasing power of the pound, some people tend to regard building society and other non-fluctuating investments as dull and unenterprising. What the champions of equities, both growth and yield shares, forget is that investors part with their money 'until they need it.' As many a speculator with an eye to capital appreciation has discovered to his dismay, realisation of his capital may be forced upon him at an unfavourable time, and even if he does not sell at a loss, his gain may be so modest as to be more than offset by the low yield that he has been receiving in the meantime. It is quite the most outstanding attraction of the building society investment that it carries the double assurance of attractive yield and immediate realisability without capital loss.
How far is loss of capital so remote a con- tingency that it can be dismissed as impossible? Traditionally, building societies have long been regarded as being 'as safe as houses': they are experts in their field, lending prudent sums on carefully selected mortgage securities. More- over, I think it is little appreciated that the bor- rower, as well as the property, constitutes the true security, and experience has shown that this balance of emphasis is well placed. Remarkably few borrowers ever default, and a loss arising from a forced sale is rare indeed.
Sound lending policy, however, does not by itself make a good society. It is but one of four essential aspects of good management, the other three being the wise investment of surplus funds, maintenance of ample liquid resources and the provision of adequate reserves. For years most societies have been impeccably managed, and it is their example that has been crystallised by the Government into standards for all. Under the House Purchase and Housing Act, 1959, socie- ties whose liquidity and reserves exceed certain minimum standards may qualify for trustee status, their deposits taking on a 'gilt-edged' look. The Building Societies Act, 1960, prescribes limits to the two remaining aspects of good management, lending policy and investment of surplus funds. And, as if these safeguards were not sufficient, societies are now empowered to assist one another in the unlikely event of finan- cial difficulty and even to establish a fund to guarantee their investors' money.
There is no question that 1961 finds the build- ing society investor one of the most jealously protected members of the investing public. He has the sure knowledge that by placing his money in the hands of a society whose deposits have been accorded trustee status, his security is second to none.
The third quality, satisfactory yield, is no less important. A feature of recent years has been the increased sensitivity of building societies to the importance of the rate of interest they are pre- pared to pay on their investments. The two in- disputable attractions of simplicity and security are not in themselves sufficient to draw and keep an abundance of funds which is so necessary in times of sustained mortgage demand. The last few years have echoed with societies' cries for more funds to meet the requirements of a host of would-be borrowers. Investors are, therefore, well aware of societies' assiduity in offering a rate of interest that, coupled with flexibility and security, makes their share accounts very attrac- tive. Three and a half per cent. with income tax paid by the society means an effective yield to an ever-increasing number of investors liable to tax at the standard rate that is, by any stan- dards, a handsome return on their capital.
The present rate of interest is a very good one, yet we do not deceive ourselves. It is no more than is necessary to ensure a steady flow of funds into societies. This flow is itself inadequate to meet the insistent demand for mortgage funds which would appear to be likely to continue for some years to come. Then why do not societies pay more interest, ensuring thereby a greater investment intake that could be put to profitable use in financing home ownership? The short answer is that they feel unable to do so. Most societies are of the opinion that their objects, `to promote thrift and facilitate home ownership,' are not achieved by charging borrowers (parti- cularly existing borrowers) a rate other than the lowest compatible with the need to pay a fair rate on investments. At present those rates are o per cent. and 31 per cent. and that is as high as many societies would care to see them.
Unless there is a downward trend in interest rates generally, it would appear that the current 31 per cent. will continue to result in available funds being rationed to would-be borrowers. Although it is hardly to be expected that people will be moved by a plea to invest so that other people might buy their own homes, you would think that those who hope to borrow from a • society at some future time would invest their savings meanwhile with that society. But this is not so. For many years it has been surprising that those seeking credit in the form of mortgages from building societies built up credit with other institutions with whom they placed their savings. More recently, there has inevitably grown up a practice among societies of giving preference for loans to those who are already in- vesting members. It follows that anyone who foresees that he may be calling upon a building society to assist him in house purchase at some future time can ill afford to ignore this additional sound reason for placing his investment with the society.
It is natural in these days of buoyant stock markets, steadily advancing property values, and other means of capital growth, that un- fluctuating capital investments should be held up to question. It is equally certain that there is a place in every investor's portfolio for a solid building society holding. The confidence of four and a half million investors who have entrusted more than £3,000 million to building .societies endorses this view.
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