Promising flop
PORTFOLIO JOHN BULL
I have decided to invest in the biggest flop of the year—the f40 million Greater London Council loan at 7} per cent. Issued last week on very tight terms, the institutions left it alone, and so 98 per cent of the stock was left with the underwriters. Is this a record, I wonder? At all events, on the first day of dealings, the disgruntled underwriters dumped about £10 million of the stock back on to the market, pushing the price well down. The,,result is an attractive buying opportunity, but if that were all, I should not be interested. The key to the situation is that for the next month the stock is what is known as 110 paid.'
What this means is as follows. The stock was issued at £981 per £100 and has now fallen to f9712. However, only £10 per £100 was payable on application. The balance is payable in three instalments: £30 per cent on 30 April, £30 per cent on 29 May and the remainder on 1 July. In fact, the current price is quoted not as £9712 but as £9a. The point is that as fixed amounts of the stock .remain to be paid up, any fluctuations in the price are reflected in an exaggerated form in the £10 paid stock. To take a simple example, if the market improves so that the stock in its fully paid form is worth £1 more, which would be an improvement of slightly over 1 per cent, the corresponding £10 paid stock would stand at £11, which is 10 per cent better. The charm —and worry—therefore of investing in partly paid stocks is that they magnify trends in the fixed-interest market. For this reason I have put the £2,000 nominal of GLC 71 per cent stock which I have bought in its £10 paid form into my new speculative portfolio. I paid £191 5s; that is, twenty times Da.
Can much happen to fixed-interest stocks in the month during which the new GLC stock is only £10 paid? What I expect is not so much a further cut in Bank rate but an increasing con- fidence in this market. At the moment gross yield lo redemption in 1977 is £7 12s per cent. If this were to fall by only one quarter per
cent, that is to £7 7s, then the £10 paid stock would stand at f121, providing me with an appreciation in value of 30 per cent. There is, I think, some chance of that. There is also a good chance of more corporation issues soon, providing me with an opportunity to jump from one £10 paid stock to another.
I suppose I had better own up quickly to my errors. You will remember that I sold my holding in Rolls-Royce a few weeks ago at a small loss. On Friday the shares jumped lOs in as many minutes on the news that the group had pulled off the big aero-engine order in the United States. It was nerves about this particular transaction which led me to ditch the shares. The decision was a particularly painful one because it was obvious that Rolls- Royce's whole future turned on its success or failure in the American market at this junc- ture. In the event I played for safety and got out. What this illustrates is that investment can become a sheer gamble. Heads you win, tails you lose—and I called tails. This does not, however, happen often. Is there at the moment, for instance, a single development which can be said to be quite decisive for ICI? Or for British Leyland or for Distillers? This answer is no. Their progress depends upon a large number of plus quantities exceeding a smaller number of minus quantities.
To my note last week about split-level trusts after the budget (Throgmorton Secured Growth is an example in my first portfolio) I must add a footnote. The capital shares, which pro- vide maximum growth but no dividend, are not only ideal for surtax payers who fear another special charge on unearned income, but also for children, now that infants' investment income is to be lumped in with their parents'. I think this removes the final cloud from this new form of investment trust and I expect Throgmorton Secured Growth to prosper accordingly.
Valuations at 3 April 1968 First portfolio 100 Empire Stores at 62s 6d .. . .
50 Phoenix Assurance at 202s 6d . .
225 Lyle Shipping at 19s 9d . • 600 John I. Jacobs at 8s 14A xd .. . .
100 Unilever at 61s 104d • • .. £2,000 War Loan at £4941 „ • • • 300 Witan at 18s 104d .. • • ..
100 E. Soragg at 78s ..
250 John Brown at 38s 3d • • . . 100 Barclays Bank at 81s 9d 200 Throgmorton Secured Growth (Capital) at 17s 444:1 100 National and Grindlays at 61s 6d 500 Clarkson (Engineers) at 11s 74d .. Cash with local authority at 71 per cent £5,838 Deduct: expenses £108 Total £5,730 Second portfolio 100 Guardian Assurance at 44s 3d .. £221 40 Royal Exchange Assurance at
122s 6d £245 £2,000 OLC 71 per cent 1977 (£10 paid) at
£191 Cash in hand .. £4,382 £5,039 Deduct: this week's expenses f3 previous expenses £12 £15 Total £5,025 £312 £506 £222 £244 £309 £999 £283 £390 £478 £409 £174 £307 £290 £915
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