MONEY
The investment dollar premium
Nicholas Davenport
When labour troubles beset our domestic industries it is comforting to look at our investments abroad and thank God for our invisibles.' Like the deity there is not one invisible but three invisibles ' — public services (a minus), private services and ' interest, profits and dividends.' Their net total has been running last year at plus £50 million a month, that is, over £600 million a year. We would be sunk without it. In addition to this favourable balance on current trading we enjoyed (or suffered) a colossal inflow of foreign capital last year amounting to over £1,600 million. The result has been the most embarrassing boost to our official reserves that we have ever seen — no less than £1,348 million after repayment of debts — bringing total reserves at the end of December up to £2,526 million. Since Mr Wilson left office they have increased by 134 per cent or £1,448 million. This is embarassing to Mr Heath as well as to Mr Wilson because it makes every one suppose that we are stinking rich,' whereas our export trade is now exposed to an increasing risk through an over-valuation of sterling.
With these unprecedentedly swollen reserves it is amazing that the Treasury should hold on to all its exchange controls. Mr Barber in his budget speech in March declared that there could not be any extensive or general relaxation of the controls on overseas investment and asked the City to continue to observe the "voluntary programme of restraint" on direct and portfolio investment in the four developed countries of the sterling area. More amazing still is that Mr Barber did not remove the "25 per cent grab" of the investment dollar premium which was instituted by Mr Callaghan in 1965 — as a transfer from hidden reserves to ' front-line ' reserves — simply to make a better show while the latter were unduly depressed. The occasion for this window-dressing is no longer operative. What is more, the retention of it is interfering with the efficient management of our overseas portfolios from which we derive a large part of our invisible ' income.
Who invented the 25 per cent grab of the dollar premium I do not know but I always regarded it as a clever piece of Treasury skulduggery. I once wrote to Mr Callaghan about amending it, receiving in reply a courteous but non-cooperative letter from his then Economic Adviser, Mr Robert Neild. For those who are unfamiliar with it I must explain that British residents who want to buy dollar or other non-sterling securities cannot get official exchange for the purpose but must go to the investment pool and buy investment dollars. These always stand at a premium, which varies from day to day according to the state of the market, which is extremely narrow and volatile. What Mr. Callaghan laid down was that a seller would have to surrender to the Bank of England 25 per cent of his premium dollars which would then be exchanged into sterling for him at the official rate, the dollars being credited to the official reserves. From the moment the ' grab ' began to operate, the managers of the dollar portfolios tended not to sell stocks they would normally unload for reasons of over-valuation simply because they would have to surrender part of the proceeds and erode the assets base from which the flow of income came. Thus, good management declined and also buoyancy of our future ' invisible' inco It was an ill-conceived attack on P° folio management. It would have b , better for management purposes if the rill had been reversed. I wrote in April 1968 the Financial Secretary of the Treast4 suggesting that instead of grabbing' 1 per cent on sales, he should make IP investor buy 33i per cent extra preMidf dollars on purchase. This would not int° fere with the management's judgement d, selling over-valued stocks but would ma! them think more deeply before bought. But again I got no response to tbj plea for common sense. The Labour Ch0 cellors while admitting that it place "some inhibition on the active manal! ment of portfolios" (Mr Callaghorj phrase in the budget speech of 19!, protested that they could not remove u' grab because it had become "a use, source source of benefit to the reserves." At zenith in 1968 and 1969 it brought: about $250 million a year and it is 11' much less today. Having recognised that they had 10 portfolio management, the Labour Chaarr lors allowed the City to raise dollar Euro-dollar loans for investment overSel but again they put on hurtful restrictioff The worst was to insist on the minaterm of five years, so that a manageirel who had raised an 8 per cent to 10 P. 1, cent Euro-dollar loan to buy dollar sta.' yielding 2 per cent could not sell e). repay the loan if the market began to c" lapse before the five years run. ridiculous five-year restraint was reMOr by Mr Barber last year but not before had cost the portfolio managers SOP grievous losses. The gyrations of the dollar pre010 have also inhibited good managen0 During the worst crises of the Lab`l regime, when it seemed good to get otlt, domestic 'sterling equities, the dollar mium rose to nearly 60 per cent. After: return of the Tories it fell below 30 V cent and after the easier loans policy 41, allowed by Mr Barber in April it fell, about 16 per cent. But it is up again A' write to 27i per cent. It has beconle, spoke in the wheel of portfolio t11,: agement. Now that Wall Street resumed its bullish trend while other sty, exchanges abroad remain in the d11111; , there are unique opportunities for 014 agements to improve the quality of te7 portfolios and make a lot of money WO will accrue for the benefit not only of 11 owners but for the hidden reserves of nation. The dollar premium will have to 10 t Under the Treaty of Rome there is posed to be free capital movement, so 9; / when we join the EEC the investni` dollar pool will have to be revised, In ober last year France abolished its WV: r ment dollar premium and allowed inveSv,i to buy foreign stocks through the rneri.,1 f of ' commercial' francs which cost abOIP n per cent more than official francs. Wheo r comes to money the French are no f01 The Bank of England in my view sb(), consider this two-tier system of exchel: as well as the two-tier system of Intel, rates which I have always advocated 59 s the days of Keynes.
Previous page
