If the crises of the past seem less ghastly than those of the present, it’s because we know what happened next. The world did not come to an end; rather, it carried on getting richer. Last week saw the neat co-incidence of the 60th annual Barclays Equity Gilt study and the FTSE100 index finally topping its 1999 peak. The one shows that shares have been a fine long-term investment, while the other shows up the shortcomings of an index which is more of a reflection of investment fashion than sustainable value.
The study draws the charts since 1899. The Great Depression, World War 2, the collapse in 1974 and the banking crisis of 2007 are mere blips on the smooth upward progress of shares. More realistically, £100 invested in 1990 would have turned into £750 now, including reinvested dividends. Even after inflation, that’s almost a quadrupling of value. Government stocks, despite their extraordinary run, returned only marginally more. Index-linked gilts and cash are miles behind. The difference is the dividends. While the returns on government stocks dwindle each year the price goes up, dividends on shares have risen, albeit erratically, almost every year since 1945.
The Barclays study has ballooned into a 200-page monster, complete with analyses of the oil market (lower for longer) and global demographics. It concludes that the changing ratio between savers and spenders as the population ages should spell the end of the savings glut, which “seems quite inconsistent with market pricing of very low or negative 5-year and even 10-year forward interest rates.”
Not only do these rates make it ruinously expensive for companies to try and match their pension liabilities, they make it dangerous as well. To describe the 1.74 per cent yield on a 10-year gilt as “risk-free”, as the actuaries routinely do, is patent nonsense. The Barclays study highlights the real risk – that capital which could be employed productively is forcibly lent to the government, at the expense of growth and those future dividends.
Bad apples go cherry-picking
It was a simple scam. The broker would buy stock in the morning, “names later, old boy.” If it rose it went into his account, if it fell it was booked to a client. It was so obviously abuse that even in the bad old days before the Financial Services Authority it was outlawed. So it’s shocking to find a variant of the scam at Aviva right up to 2013. The FSA’s successor calls this cherry-picking. Others might use something stronger, and now it’s come to light, Aviva has been fined and paid £132m to disadvantaged policyholders in compension. Some cherry.
As usual in such cases, the top brass at Aviva are shocked that its “three lines of defence” of risk management should have failed to catch an abuse which had gone on for eight years. Lessons learned, rules tightened, systems reviewed, etc, etc. Aviva Investors has £240bn under management and is about to add a further £100bn by taking over Friends Life. Integrating life offices is notoriously tricky, and Aviva has proved over the years that the gains are often illusory. And integrating the fund management side is supposed to be the easy bit.
Sofa, so good. But who for?
Up to 60 per cent off! Limited time only! Reduced from £1bn to £585m! This is DFS, the sofa retailer whose products last longer than its previous life as a public company. So round it comes again, this time with an ambition to get sat on across the world, rather than just Britain. Upholstered with the addition of a couple of smaller rivals, the mid-point price of next week’s offer values it at nine times last year’s EBITDA.
It’s a great business model. Customers pay before the product is even made, and the ever-changing sale items encourage them to take the plunge while their choice is half price. Yet Advent, its private equity owners, is trimming its holding from a three-seater 89 per cent to a two-seater 50 per cent, while the directors are also selling. Sofa sales need constant plumping up with shouty advertising, and are notoriously cyclical. Even at the new cut price, this offer looks like one to sit out.
This is my FT column from Saturday