Professional Investment Blues
By NICHOLAS DAVENPORT A CORRESPONDENT chides me for choosing Christmas as a time to frighten the investor. All I said was that the Stock Exchange had already had some unpleasant shocks in industrial reports and that worse was to come if Mr. Lloyd continued his squeeze far into the New Year and submitted another defla- tionary Budget. I am confident that I did not frighten the institutional investor. He was frightened already. He can see industrial earn- ings falling still further and he is scared of the depreciation on his portfolio. Indeed, his por- folio of equities is now as large as he wants to see it. The 1960 investment figures published by the British Insurance Association show that the life offices now have 21.9 per cent. of their total funds_ invested in ordinary shares, against 10.6 per cent. in 1947. These figures are at cost or 'book' prices. If market prices were taken it would probably be found that the value of the equity holdings of the life offices would be well over 40 per cent. of their total investments. That would be the average. In some individual cases it would be 50 per cent. Having regard to the fact that they cannot often avoid taking up new issues of equities at 'cheap' prices, most insti- tutional investors may now be regarded as 'out' of the equity market; they are no longer steady buyers of shares, particularly industrial shares.
Incidentally, I have never understood why the institutional investor ever bought industrial equities, particularly those concerned with capi- tal goods, if he was not prepared to adopt an ;active, cyclical investment policy and go 'in and out.' He should have had enough experience to know that industrial shares of the cyclical type can easily lose 50 per cent. of their market value in times of depression. The odd thing is that he should have had such a blind faith in the ability of governments to iron out cyclical depressions and take away his industrial risks. It is true that we no longer have the pre-war type of depres- sion with massive unemployment; but the futile attempts of the Treasury to maintain price stability with full employment by the use of monetary weapons and a few tax 'regulators' have set up a new type of cycle which is popu- larly known as `stop-go'—two years down and two years up. What makes the present down Phase more serious than usual is that the Government seems at last to have realised that it cannot contain a wage-cost inflation by these Methods alone. It must have a wages policy; 'it Must get labour to agree to serve on a planning Council which will issue a guiding light to show What rise in wages is allowable by what rise in 'Productivity. As there is no present sign that ..labour will agree to this new technique, Mr. Lloyd seems determined to teach them a lesson by creating serious unemployment—by restrict- ing demand, even industrial investment, through excessively dear money and tighter credit and by Making it impossible for industrial companies to pass on to the consumer any fresh rise in wages. The final 'knockout' is to be the Common Market, which is expected to drive the very in- efficient companies to the wall. It is surely a time of reckoning for the poor industrial shareholder.
Such thoughts are having a very depressing effect upon a number of professional investors. One firm of brokers has issued a circular to its clients under the heading, The Euthanasia of the In- vestor.' This, I think, is really going too far. Their argument is that the investor, who had been conditioned by the post-war inflations to despair of fixed-interest securities and to put his faith in ordinary shares, now realises that he has been worshipping a false god. As an equity share is priced at so many times the estimated future earnings, the investor, they say, is begin- ning to see the illogicality of applying an ever- increasing multiplier to an amount of profit which is often falling, sometimes stable and only rarely rising. And they give a table to show that gross profits per unit of output have only in- creased by 18 per cent. since 1954, whereas labour costs have risen by 30 per cent. As the ability of industrial managements to pass on wage increases is now ending, while the benefits of a more intensive use of labour-saving capital tend to be offset by higher corporate taxation, higher interest rates and trade union restriction- ism, industrial company equity shares are no longer a hedge against the depreciation of money. `After the chloroforming of the rentier,' they con- clude, 'the investor is himself being put to sleep.' In spite of this gloomy conclusion, this firm of brokers goes on to give a list of thirty-one equity shares it would buy. The test is whether the company is efficiently managed and is develop- ing new products which provide some protec- tion against competition and whether the price of the shares allows an earnings yield compar- able with, and preferably superior to, the long- term rate of interest. If these tests are passed with flying colours the investor can rest assured that a purchase of such equities will prove much more profitable in the long term than buying fixed-interest securities. That is why the select equity share will remain the professional's choice as a medium for long-term investment. But the selection will be spread in future over a much narrower range of shares, such as life insurance (composite insurance only with important life funds), property developers, consumer goods and services and a very few capital durable goods with special situations (the brokers give Jaguar, Rugby Portland Cement, English China Clays, Lamson Industries).
Industrial shares as a whole are 'out.' Surely rigid selectivity has always been the correct rule for investment in equity shares? Cyclical indus- trial shares have always been left to the specu- lator on the 'in and out.' Certainly the days when the life insurance company could build up an equity portfolio by taking a parcel of shares from every group quoted in the official list, when a member of an investment club could truth- fully say that she had obtained as good a result as the careful analytical others by sticking a pin blindfold into the back page of the Financial Times, are gone for ever. And a jolly good thing, too. It was time, as I have said, for the cult of the equity to become a wilt.
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