MONEY The threat to unit trusts
NICHOLAS DAVENPORT
money squeeze, which Mr Jenkins lares must go on without relaxation, now hitting the Stock Exchange badly. urnover in September dropped by 170 illion to £1,940 million, the lowest vel of business since December 1966. The mailer firms of stockbrokers, who deal 'My with private clients, are having to rge or go out of business. The rally in uity shares does not look robust: and the T index has been back below 370, having me down 150 points from the peak. All s is in furl accord with Mr Jenkins's intent ad aims. If he cannot stop the rise in em- loyee wages he can at any rate stop the rise the capital value of the employers' equity res. To cut off at least one of the cads of this Cerberus of an inflation tat gladden the heart of the Treasury— at is, if it has one.
One of the building society chairmen
• ntly questioned. whether the 'cult of equity' is not played out. It is very nlikely, he said, that the nineteen- -venues will see a repetition of the equity ms of the nineteen-fifties and nineteen- xties, because many of the forces behind ose booms have now vanished. One of em was the concept of equity as an flation hedge. Now that a Labour overnment can no longer stop the rise wages going ahead of the rise in roductivity in the public sector—witness e capitulation to the railwaymen, the ustmen and the miners—but can still stop e rise in prices in the private sector y interfering, through the agency of the rices and Incomes Board, with the price- sing of companies, it is certainly no ager true to say that equity shares are cessarily an inflation hedge. In fact, a age-cost inflation can actually kill an uity share boom, for with inflexible rices, it cuts into profit margins. In abour's pamphlet 'Economic Strategy', it argued that there are certain key prices hich must be .subject to 'permanent view' and 'statutorily-backed interven- on by the Government'. These include read, beer and cement—and rents. And hen a deflationary policy " is being" ruth- ly carried out by the Treasury at the me time as a price-fixing policy, so that mover is also- being reduced, the effect company profits can be devastating. roe recent company results are proof. ven major corporations like Rolls-Royce, ndon Brick and Associated Portland ement have had to cut dividends.
Unlike the equities of companies whose ofit margins are vulnerable •to the nt-day wage-cost inflation, • property ares have hitherto been regarded as the rfect inflation hedge, but the inclusion of ts in the list of 'key prices' which should kept under permanent review brings to also under suspicion. This applies en to the special property unit trusts hich have been set up to cater for pension
nds and charities by holding properties req.
Looking back on the great equity- share 111S it will be found that they only cur when a favourable economic climate
and a favourable political climate are in conjunction. As Labour's 'Economic Strategy' remarked, equity shares do not move in a steady upward fashion, but in occasional sharp bursts. The most remark- able were the two bull markets of 1952-5 and 1958-60, when the political and econo- mic signs were in favourable conjunction. Each scored an advance of about 120 per cent. The next did not come until 1962-4 when the score was a rise of about 50 per cent.
The advent of the Labour government in the autumn of 1964 removed the favour- able political factor, but was offset in 1967 by the outstanding favourable econo- mic factor of devaluation. The anticipation and realisation of devaluation created the equity share boom which began in November 1966 and lasted till January 1969, giving a rise of just over 80 per cent. As Lord Balogh remarked in his candid letter to the Times of 26 September: 'Devaluation "works" by reducing real wages and increasing profits'. It worked a Stock Exchange miracle by creating an equity share boom in an unfavourable political climate.
Now the unit trust movement grew on the supposition that equity shares provided in the long term a means of protection against the continual fall in the value of money, and that the risks inherent in invest- ing in risk capital were minimised by the wide spread of a unit trust portfolio. If this supposition were found to be erroneous on both counts it would surely stop the growth of this important savings movement. So far the unit trust managements say that there is no evidence of the public losing their faith in equity share investment; people always tend to buy more units in a bull market and to cut down their buying in a bear market.
But the sensational drop in unit trust net sales since March this year—September saw the lowest for two years: little more than a third of the peak—has been sharp enough to suggest that a fundamental change is taking place in popular taste. The public may be waking up to the fact that a con- ventional unit trust neither offers a reliable hedge against inflation nor any protection against the risks of equity investment. By the end of September the Financial Times Actuaries all-share index had fallen this year by 20.2 per cent while over the same period the Economist unit trust value indicator had fallen by exactly the same amount. It is obvious that the average unit trust fails to beat the index, especially so when i has become too big to take effective protective action. A small fund actively managed has the • better chance but where is -the market wizard who can always turn in a new trick? The cult of performance has become as mythical as the cult of the equity.
The managements may object that 1 am taking too short a view. A Labour govern- tient does not last for ever" but a well managed company does. Over a long period—I am looking at a chart extending the Financial Times index and the cost of living index over a period of thirty-four years—the equity index has certainly kept pace with the fall in the purchasing power of money. But it has had long periods of stagnation. And we may be in such a period today—at any rate until the next general election. If we take a prospect of three years it is obvious that the equity share is unlikely to do better than a short- dated gilt-edged security offering gross yields to redemption (free of capital gains tax) of over 94 per cent.
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