Bull at a gate
PORTFOLIO JOHN BULL
As I write, share prices have reached a new-. peak : the Financial Times- index is over, 430, compared with 403 at the close of business on budget day. In these conditions the shrewd in- vestor rubs his hands at the performance of his portfolio, stays well back from the rush, and waits for the inevitable reaction before ventur- ing into the market again. That is what, hope- fully, I intend to do. Originally when starting my first portfolio last October (with £5,000 in cash) I envisaged the Financial Times index bobbing up and down between 380 and 420 (the index was 390 at the time). I must obviously revise my limits, placing the range of price movements now at 395 to 440.
In fact, I think one must be careful of this bull market. Output is on a 3 per cent growth path, no more unless exports do unexpectedly well. Unemployment will flatten out for the rest of this year at the relatively high level of 2.1 per cent. Consumer spending will go backwards not forwards. Industrial costs are rising fast. And dividend restraint may be a good deal more permanent than many envisage. So let us hope that the bulls are right, that all this is sufficient condition for the establishment of a British economic miracle. Meanwhile I shall let the market subside a little.
As far as gilt-edged securities are concerned it is much easier to feel .wholeheartedly opti- mistic. The encouraging implications of the budget for this market were underlined by the half-point cut in Bank rate last Thursday. First to take advantage of this new situation is the Greater London Council, which is launching a £40 million loan this week. Prospective holders have to apply by tender, which keeps the terms
in line with the market. Heavily committed to War Loan as I am (see below) I shall not enlarge my commitments in this direction. One of the outstanding individual features of the post-budget equity market has been the rapid improvement in the split-level investment trust shares, one of which—Throgmorton Secured Growth capital stock—is represented in my first portfolio. On the morning of the budget it stood at 15s 6d: today it is 17s 414. Four factors have caused this reappraisal.
First, investment trusts are exempt from the dividend freeze. They can pay out as much as they like. Next, and most potent, is the special charge on investment income. Although this applies to the tax year almost completed, which means that it is too late to take avoiding action, the capital shares of split level trusts are seen to have a special charm—their lack of a divi- dend. Believing that the special charge on in- vestment income is a measure which the Government will feel tempted to use again, many large private fortunes will want to in- crease the proportion of their funds in low yield shares and, most useful of all, in no-yield shares where income is sacrificed for the fastest possible growth.
Thirdly, the introduction of a 31 per cent ceiling on dividend increases reinforces the shift in market thinking away from the contem- plation of dividend yields towards earnings ratios. Ultimately share prices are determined by dividend decisions, but there is a growing body of analysis which looks first at earnings growth.
Fourthly, the buoyancy of the market itself focuses attention on the investment trust move- ment. Investment trusts mostly consist of an equity fund partly financed by loan capital. The result is that changes in the value of the trust's portfolio are magnified when translated into asset backing for the trust's ordinary shares. In a moving market investment trust shares, therefore, outpace the field—either up or down—by a significant margin.
Valuations at 27 March 1968 First Portfolio
100 Empire Stores at 62s .. • • 50 Phoenix at 197s 6d • 225 Lyle Shipping at 19s 41d .. • • 600 John I. Jacobs at 8s xd • • 100 Unilever at 63s 6d .. • • £2,000 War Loan at £49 13/16 .. • • 300 Witan at 17s 61c1 • • 100 E. Scragg at 77s 6d • • 250 John Brown at 38s 6d .. • • 100 Barclays Bank at 78s 6d
200 Throgmorton Secured Growth (Capital) at 17s 41d 100 National and Grindlays at 56s 9d .. 500 Clarkson (Engineers) at I Is 3d .. Cash with local authority at 7i per cent £5,751 Deduct: expenses £108 Total £5,643 Second Portfolio 100 Guardian Assurance at 41s 6d .. £207 40 Royal Exchange Assurance at 116s 3d • • .. • • £232
Cash in hand ..
• • £4,573 £5,012 Deduct: expenses f12 £5,000 £310 £494 £218 £240 £317 £996 £263 £387 £481 £392 £174 £283 £281 £915
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