Happy returns
JOHN BULL
There has been an important development in the property bond business (about which I have written more or less critically on two occasions in these columns). Abbey Life, which runs the biggest of the five existing funds, has stopped trading on mouth-water- ing growth forecasts. This is a brave decision, because while its rivals continue to shout 'double your money' from the roof-tops, Abbey Life may find its own, more muted prospectus brings in less business than before. If, on the other hand, the savings public is more impressed by respectability than brag- ging, it will win hands down. It is also a correct decision. I don't know of any fore- casts that the market for office and shop space (the type of property in which the funds invest) will actually be weak in the 1970s but in the parallel market for residential property, that is precisely the current estimate.
Abbey says: `few recognise the danger In extravagant forecasts of property bond performance . . . over-optimistic estimates,
especially when based on dramatic short- term records, so often lead to excessive expectations last year's record of 3.9 per cent after-tax yield plus capital growth of 4.4 per cent (indeed allowing for the fact that some of the funds were held on term deposit while properties were purchased the capital growth rate on property actually held was 6.25 per cent) giving total appreciation of 8.3 per cent might easily tempt us to make exciting forecasts . . . However we prefer to be judged on our results alone'. Compare that with, for example, the Fordham line: 'why settle for 5+ per cent when Fordham property bonds give you all the security of property and an estimated return of at least
II per cent tax paid
The issue of 10 per cent loan stock, aimed not at the big institutions but at the ordinary investor, by the Industrial and Commercial Finance Corporation (IcFc), is worth care- ful consideration. In the first place, the ICFC is very safe. It is controlled by the clearing banks, and the Bank of England is a share- holder. It is in effect a source of long term finance for young growing companies. As the prospectus puts it, the Corporation's prin- cipal activity is 'investing, both directly and through subsidiaries, in small and medium sized industrial and commercial businesses or enterprises in the British Isles, by subscrib- ing for or purchasing shares or by making loans'. The ICFC is offering the general public three 10 per cent loans, all issued at f97+ per cent and redeemable at £100 per cent. The first one is paid off in 1972, the second in 1974 and the third in 1976. Taking into account the small capital gain, the true yield over the full life of the loans is fl 1 Os Od per cent for the three year term, flO 13s 2d per cent for the five year term and £10 lOs 3d per cent for the seven year term. The minimum application is for £100 of stock (the lists closed, I am afraid, last Tuesday) but the stock should be easily negotiable on the open market.
The novelty of this offering lies in the short life of the loans. There are few comparable stocks. One, the Imperial Tobacco loan issued as part consideration for the acquisi- tion of Ross, is artificially priced because the holders will meet a capital gains con- sideration when they sell. So the ICFC has broken new territory. I can recommend the ICFC stocks as a convenient way of earning a good rate of interest on surplus cash—with one qualification. The gilt-edged market now provides a substantial advantage over this type of stock. Capital gains on gilt-edged stocks are tax free. Thus for anybody pay- ing tax at the standard rate, the true return from a stock like Savings 3 per cent 1965-75 is around fl 1 16s. The ICFC stock is excellent value for those who want a high running yield, but if you are after a large return over a six to seven year term, then gilt-edged securities will suit you better.
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