MONEY Strikes and the equity cult
NICHOLAS DAVENPORT
What was remarkable about the Stock Exchange reaction to the worst economic news since the war—the disruption of our overseas trade—was that after the initial shock the markets began slowly to recover. This could only mean that investors generally had a childlike confidence that the new government would handle the crisis in a more sensible way than its predecessor. Hitherto the after-strike settlements have been inflationary and conducive to strike repetition. The trade unions discovered, after the breakdown of Labour's incomes policy, that to strike for pay rises far in advance of the increase in output and productivity was a very paying proposition. After all, the welfare state financed the strike, however much of a try-on it might be. There would be repayment of income tax and supplementary benefits in respect of wife and children and rent and perhaps even h.p. payments in respect of furniture. These might add up to £10 to £15 a week in addition to, say, £5 strike pay. But the City is obviously hoping that the new government will change the tune and make the supplementary benefits payable to wife, not the striker, and defer the repayment of income tax until after the return to work. Meanwhile it is trusting Mr Carr not to give way to an inflationary settlement, but to bring out a constructive one which will give security and productivity gains to the dockers.
While the markets display their confidence that the Government will not come to the rescue of the strikers they should also bear in mind that it will not come to the rescue of inefficient or unprofitable private enterprise. Mr Macleod, whose death has plunged us all into gloom, expressed his party's dissatisfac- tion with the present system of investment grants. Must the IRC rescue any more bank- rupt companies? It should be clear to the City that a tougher attitude to business will go along with a tougher attitude to Mr Heath, who wrote finis to retail price main- tenance. It would not be surprising if he were now to issue tougher instructions to the Monopolies commission.
Perhaps it was a gradual realisation of this change of attitude towards business that has caused the equity share markets to be less firm than the gilt-edged market. The coming fall in the balance of payments surplus was rightly considered to be less worrying than the doubtful profitability of some industries. It is slowly beginning to dawn on the investor that Mr Heath's government is not going to father the equity cult. (I am not attaching great importance to the fact that Mr Heath has given no job to the ex- chairman of the Tory party, who is identified with the unit trust movement; but it is a fact worth mentioning.) The number of people who believe in the equity cult certainly seems to be dwindling, if the sales figures of the unit trust movement are any guide, and this trend is likely to gather momentum when the tougher business policy of Mr Heath's government becomes better known. For the first half of 1970 net new investment in unit trusts fell by 53 per cent by comparison with last year's figures, net takings being £63 million against f133 million. The sole redeeming feature was that only £3.4 million worth of units had to be bought back from unit holders. This reflects perhaps the re- emergence of public confidence in our economic future under the new government but not any return of confidence in equities.
The analysis of performance by unit trust managements which appeared in the investor's Chronicle last week was not calculated to make any one jump onto the unit trust band wagon. The results were compared on the basis of investing £1,000 and reinvesting net income after tax at the standard rate for a period of seven and a half
years. A tiny few doubled their money over this period; the majority showed a gain of not much over 50 per cent. This may be con- sidered good enough for the average investor but by comparison with some gilt-edged stocks it is not a triumph to blazon abroad. In seven and a half years Transport 4 per
cent will be paid off at par and if £1,000 were invested in it today at 79+ and the income reinvested net of tax the result would be £1,500. In ten years and six months Transport 31 per cent will be paid off at par and if £1,000 were invested in it today at 641- and the net income re-invested the result would be £1,984. A similar calculation for a longer-dated stock—Gas 3 per cent 1990/95 — would result in £4,493. The gift-edged investments do not have to be watched; they are riskless except for the rate of inflation. But what is not always appreciated — the capital gains are free of capital gains tax. A capital gain on an equity would have to be nearly 40 per cent higher to equal one on a gilt-edged stock.
In the same issue of this investment journal there was a remarkable interview with Mr Oliver Stutchbury who used to be managing director of the Save and Prosper group and is the author of the classic work on The Management of Unit Trusts. In it he contends that far too many intelligent people are playing the investment game and that they would be better employed in industrial relations—settling the docks strike?—or in exporting. 'Top stockbrokers and stock- jobbers,' he says, 'get paid very much too much and this drags the salary levels for investment skills way into cloud-cuckoo land'. I suggest that he has put it the wrong way round. Real investment skill and success are worthy of their rewards because they are so rare but far too many people are in the public relations business advertising unit- trust achievements as if the equity cult was an Aladdin's lamp. 'A good spread of equities', remarked Mr Stutchbury, 'is as good as anything else.' Well, it is not as good as Gas 3 per cent or Treasury 31 per cent because a spread of equities must take in a large number of companies whose managements are not capable of beating the wage-cost inflation. Over how many bad companies spread the total investments of the unit trusts which now amount to £1,276 million?
Of course, an equity share is the only type of security capable of beating the inflation, but the successful managements are rare and
a spread merely gives an average of good and bad. What is wanted for investment success is selectivity, or choosing the few. This entails greater risk as well as greater rewards. The boss of a successful £20 million portfolio told me that he had only twenty securities. That is the right technique for management success.
As an afterthought, it occurs to me that the reason why Mr Heath did not give a job to Mr du Cann is because he contemplates before long introducing some legislation to tidy up the unit trust savings movement. It is an important movement but its advertising often misleads the small investor. The Chief Secretary of the Treasury, Mr Maurice Macmillan, was prominent in the Wider Share Ownership battle and must have strong views on unit trust reform. Mean- while the liquidity crisis which is being lorced on the company world and the tougher attitude which Mr Heath intends to take towards business as well as trade unions imply that the equity share markets must remain for a time in a difficult and dangerous phase.
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