Suppose you have money that you do not need for several years (just imagine). You could lend it to the British government, and after a decade, £1000 will have turned into, well, £1000 or thereabouts. If you want to be sure of getting your capital back in 2026, then your grand will make about £9 a year.
This is the so-called “risk-free” option, the corral into which the actuaries have driven the herds of pension funds. As a result, long-dated government stocks return a magnificent 1.5 per cent. This yield is anything but risk-free. Any possible upside depends on an even greater flight to perceived safe havens, while a return of inflation in the next decade would bring massive capital destruction. Stock prices and the purchasing power of the proceeds would both fall.
At the other end of the risk scale stand the leading shares whose prices have been poleaxed by Brexit. These are, the experts tell you, totally unsuitable for the innocent investor. Here are a (nearly random) dirty half dozen: Aviva, Persimmon, Lloyds Banking, British Land, BP, Marks & Spencer. Our actuary might call them the height of madness for a future pensioner. Just look at how the prices have fallen! Aren’t you glad you didn’t own them last month?
Yet this is rather the point. Our struggling six are now discounting years of misery ahead. Last week Aviva’s CEO pledged a “sustainable and growing dividend”. Aviva’s capacity to disappoint is legendary, but at 360p the yield is nudging 6 per cent on last year’s payout.
Shares in housebuilders Persimmon cost £13.60. On Tuesday last week the company reported that people still wanted to buy houses and re-iterated its commitment to pay out a total of £7.90 a share by 2021.
Lloyds Bank may be constrained from raising its payout by the governor of the Bank of England, but at 50p the shares yield 4.7 per cent, even excluding a repeat of the 0.5p special dividend.
Property fund investors have rushed to the exits from open funds, only to find them closed. As a closed-end company, British Land shares have suffered less from the fallout than the bargain-hunters might have hoped. However, its cheesegrater building burnishes the City’s skyline -whereas Land Securities’ neighbouring walkie-talkie horror just burnishes passing cars. At 570p British Land shares are just off a three-year low, where the yield is 5.1 per cent.
BP has actually risen since Brexit, but oil majors are the new tobacco companies in the eyes of some investors, who are selling out of them. (Tobacco companies have been fine long-term investments.) BP shares yield over 6 per cent at 455p. How much over depends on sterling, since the company declares its dividends in dollars.
M&S is another triumph of hope over experience. It looks more like a high-risk annuity than a dynamic, forward-facing retailer, and demonstrated again this week how resistant it is to management attempts to make it competitive. However, much of that pessimism is in the price, 291p is a seven-year low, and there’s a decent food retailer buried among the frocks and socks. The yield on last year’s payout is 6.5 per cent, or 8 per cent if you believe there will be further special dividends.
These shares could fairly be described as unsafe havens. Some may be forced to cut their dividends, and one or two may not even survive the next decade in their current form. However, as investors stampede into absurdly overpriced government securities, this balance between risk and reward is too extreme to make any long-term sense.
Old Mut to the rescue
Is there no end to the Brexit misery? Even the dog is suffering post-referendum remorse, according to Liberum. As things get worse, Fido’s owner is expected to downgrade his treats from the upmarket Pets at Home to some budget on-line chow provider. Coming after what the broker describes as “a poor flea season” – though perhaps not from the dog’s point of view – this is enough to warrant an earnings downgrade. Since coming to market at 245p two years ago, Pets shares have jumped up and then – down Fido – to today’s 225p. Still, it has one faithful holder in Old Mutual. The fund manager has just raised its holding above 14 per cent. Good boy!
This is my FT column from last Saturday. The share prices were correct when I sent the copy on Thursday night.