A 'Life' View of Equities
By NICHOLAS DAVENPORT
THE 'life' view of equities, seen through the eyes of the manager of life-assurance funds, has changed—and is, I fear, less rosy. The astonish- ing fact is that British indus- trial shares now have a political risk—not only be- cause the Labour Party may win the next election, but because the Conservative Government may stay in office and live up to its promises. It must not be forgotten that in the economic debate of July 26 the Prime Minister made this definite anti-profit statement: 'It is vital that people should not feel that their acceptance of the restraint implied in a national incomes policy is merely going to give someone else a larger profit or dividend. The Government will, by fiscal or any other appropriate means, restrain any undue growth in aggregate profits which might follow from restraint in wages and salaries. . . . I give this formal pledge.' And Mr. Maudling followed it up with this further anti- profit threat: The treatment of profits and dividends must be on the same principle as that of wages. The principle that applies to one must apply to the other, but the method clearly is different. The direct power of the Government over the level of profits is far more stringent than their direct power over any level of wages.'
It would seem that Mr. Maudling is prepared to lean over backwards in order to shake hands with Mr. Woodcock and Mr. Cousins of the TUC.
In the bustle attending the end of the par- liamentary session Mr. Maudling's ominous words did not excite much political comment, but they were not lost on the professional managers of life-assurance funds. These gentle- men are particularly sensitive to political attack, for, controlling the investment of a vast accumu- lation of private savings —their funds now ex- ceeding £6,000 million—they are well aware that they exercise great economic power without any political responsibility: this gives them a tender social conscience. So 1 have no doubt that the Prime Minister's statement convinced them that British industrial equity shares were not going to be allowed to be what they used to be for life funds—splendid hedges against inflation and uni- versal providers of capital profit. Other people who 'have never had it so good are coming to a similar conclusion—that the future is less promising.
The long-sustained rise in equity share prices over the ten years to 1961 was borne along on the tide of insurance company buying. The funds or the life offices have been growing at a re- markable pace—thanks to soaring personal savings—and last year out of an increment of no less than £584 million, a little over £160
million was invested in ordinary shares. The pro- portion of life funds put into equities has been steadily increasing since 1951. In 1947 it was only 10 per cent, of the total, but by
1960 it had grown to 21.9 per cent, and by 1961 to 22.4 per cent. These percentages, published bY the British Insurance Association, represent book to values, the normal insurance practice being publish investments at cost prices less net profits on realisation. If market values were taken, the proportion invested in equity shares would be found to be much higher. According to Mr. R. G. Glenn, the secretary and investment manager of the National Mutual Life (which IS the only one of the life offices publishing its' stock exchange securities at market prices), the leading institutional exponents of equity invest ment have from 43 per cent. to 47 per cent- °f their funds invested in ordinary shares at market prices. The fact that the increase in their equity portfolios slowed down to some extent last year suggests that the managers are not keen to see their equity proportion rise any higher. In fact -
most managements, assessing the new political risk attaching to equity shares, are anxious to see the proportion lower. An equity portfolio of £1,349 million—at cost prices—could now be a load of trouble.
While the managers believed that an en- lightened policy of full employment had ironed out the old trade cycle with its extreme alter" lions of boom and slump, they did not regard this huge investment in equities as too 8re3t an economic risk to carry. At the worst tneY thought it could involve them in a depreciation of around 15 per cent, in market values during a deflationary period. Full employment, they felt, had given a secular upward trend to equity shares. As no government had solved the prob- lem, of internal price stability, industrial profits In Money terms must show a rising trend and ,dividends and equity values must follow suit. '5ut slowly this belief has been losing its hold on the managerial mind. The recent fall of 30 Per cent. in the Financial Times industrial index was a reminder that equities were not what they ht to be. Indeed, the rise in equity prices foVer the Years has not kept pace even with the bail iu the value of money. The annual ploughing- aek of profits has not given the proper rate of retu rn to shareholders which mathematically it suftid. In other words, the inept stop-go policies 10u Treasury have interfered with the normal rate of growth of private enterprise. The fre- quent restrictive measures imposed to curb the cost-inflation have caused the rate of return on new capital outlays to fall. And as the rising vPriees have inflated the money cost of new in- re.strtlent, more external finance has had to be al SeCl'In Companies, so that the rate of earnings growth per existing equity share has fallen. Just when the managers of the life-assurance funds had come to realise that the outlook for equity shares had in fact changed, that the growth of dividends in the next few years would be much slower than that between 1955 and 1960, the Prime Minister and the Chancellor came out with their distressing anti-profit statement, indi- cating that any restraint in wages, which most people would regard as long overdue, would not be allowed to offset the fall in profits or help the ordinary shareholder.
So there is a direct political risk on top of the economic risk. This is really too much for the managers of life-assurance funds to stomach. They will take up their equity rights and play the game as legal proprietors of the business, demonstrating to Professor Titmuss that being an equity shareholder is not a mere farce, but they are not likely to put a lot of new money into equity shares while Mr. Macmillan and Mr. Woodcock unite to take away the equity rewards of risk-taking. So do not expect another equity share boom as soon as Mr. Maudling announces his modest reflation of the economy.
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