14 FEBRUARY 1970, Page 23


Mr Wilson and the City


If Mr Harold Wilson loses the coming elec- tion it will go down to history as an ex- traordinary fact that his government did nothing throughout its term of office to 'clean up' the City. Not that the City specially needs any 'cleaning up' but Mr Wilson had so often expressed his • displeasure in the business of 'making money out of money', which is the City's job, that we all imagined that he would put his finger in the financial pie as soon as he could. But he never got round even to setting up a little 'Neddy' for the square mile.

There are two areas in which I thought he would take some action. The first was merchant banking, because the merchant bankers play a very important role in his key programme for the restructuring of British industry. Everyone knows that the merchant banks are virtually a law unto themselves and interpret the rules for takeover bids as they think fit. The Takeover Panel has drawn up an elaborate code of conduct (now being reconsidered by the Government) but when a takeover battle becomes fierce the rules are invariably abused or stretched. Complaint has been made more than once in the House of Commons but Mr Wilson has replied that he hoped that it would not be necessary to set up a Securities and Exchange Com- mission on the American model. In that I agree with him, for a statutory commission can become too rigid and arbitrary—the American Commission, for example, has barred Mr Bernie Cornfield's ios from selling securities to any American anywhere in the world!—but it is obvous that there should be some better professional control over the merchant banks similar to that ex- ercised—and applied with sanctions—by the exemplary Stock Exchange Council over its own members. The government-sponsored IRC, which has been run by ex-merchant bankers, has not always set the good ex- ample it should in takeover fighting. I have never been on a safari but the sight of two merchant banks descending for the kill on a helpless company victim must be reminiscent of the African jungle.

The second area which escaped Mr Wilson is the unit trust movement. It has become an important savings medium but it is allowed to proliferate at the whim of the merchant banks or management company as if it were no concern of the nation. The 'sixties saw an immense growth in unit trust funds—from £200 million to £1,400 million. There are now over 200 unit trusts managed by fifty- seven separate management companies. The managers find that it is easier to attract the public's money when equity shares are booming. So in the 1968 boom they secured a net investment of £258 million; in the reactionary markets of 1969 they raked in only £186 million. The disagreeable feature of their advertising is that they tend to con- centrate on the growth of capital profit over a period of years as if they are responsible for the growth! In fact, most of them fail to beat the market index of growth. This is not surprising partly because the managers can make an initial charge not exceeding 5 per cent (together with the half-yearly fee it must not exceed 13i per cent over twenty years), partly because the funds managed are too large for manipulation in the ups and downs of the market. In other words, their ad- vertising tends to give a false impression of their financial expertise and of the long-term profit potential of the subscriber's in- vestment. They boast that equity shares are a fine inflation-hedge, but in real terms most managements fail to keep their subscribers' funds intact.

Continued false optimism can land the unit trust movement in trouble as it has done in South Africa. The two large unit trusts in South Africa are the National Growth Fund and South African Trust Selection which are managed by National Fund In- vestments. Subscribers who bought units before the end of May were given rights in the popular issue of shares in NFI timed for September. There was therefore a rush to buy units during the great stock market boom in April-May. In three weeks £130 million came in to be invested at the top of the market. In June the market cracked and in six months share prices tumbled by about 30 per cent. The disgruntled unitholders be- gan to cash in and if this disinvestment were to become an unmanageable flood the unit trusts would have to close down. Dealings were actually suspended in NF1 shares last week and the situation was serious enough for Dr Diederichs, the Finance Minister, to intervene and say that NFl was backed by the leading financial institutions in the country and that there was no need to panic. But when dealings are resumed in NH there will be heavy losses to meet. I am not suggesting that such a tragedy could happen in London, which has a far wider and better distributed market, but the story has its moral for the unit trust movement here.

The South Africans evidently imagined that the unit trust management coin- pany—NF1—was making enormous profits. This is not always the case with managements in Britain. Our largest management company—Save and Pros- per—with nearly £460 million of funds, scored a profit of £1.1 million in the year to last September. The Hodge Group, with funds of only about £17 million, secured about £56,000 in the same period. This profit was considered so good by First Finsbury Trust, another lively unit trust manager, that it is buying out the Hodge Group manage- ment on the basis of a price-earnings ratio of 44—the second highest price yet paid. To get £50,000 as the initial charge on a £1 million fund is attractive enough, but a unit trust management company is useful for many other—less obvious—reasons; for example, getting new customers in the case of a joint stock bank, various share market operations in the case of a merchant bank and all sorts of other financial purposes in the case of a conglomerate.

For the investing public the unit trust becomes more desirable when it is linked with a life assurance policy. This will enable the subscriber to secure tax relief which he could not get in an ordinary savings plan. Assuming a subscription of £100 to a unit trust-linked life policy the cost of the life cover could be about 8 per cent and the tax relief 16 per cent of total savings. This tax relief enables the subscriber to buy the units at a discount. I cannot imagine why anyone should want to invest in a unit trust on any other basis.

The gathering-up of personal savings for investment is surely a matter of great con- cern for any government which desires to see national savings usefully invested for the na- tional good. When the gathering is done by a building society or a life assurance company it is likely to be in the national interest, but when it is done by a management company for financial purposes, which may include off-shore investment for tax evasion, it is asking for some sort of government regula- tion. Yet we may have to wait for a change of government to see any such reform.

Happily, for the reform of the merchant banks envolved in takeover mergers, we have only to wait for the coming legislation set- ting up the Commission for Industry and Manpower. This will contain a new code of conduct for mergers.