11th June 2012
As the Queen celebrates her Diamond Jubilee, Richard Cumming-Bruce, senior investment researcher at Principal Investment Management, examines how Britain’s financial markets have changed over the past 60 years.
In the plethora of recent reviews of how Britain has changed since the Queen came to the throne, few have focused on the fact almost no part of British life has changed as radically as its financial markets over the past 60 years.
In 1952, and indeed for decades thereafter, the stock exchange (SE) in London remained an insular and narrow institution, which did not even embrace women, let alone foreigners.
Stockbrokers’ partnerships were strictly separated from the ‘jobbers’ who traded stocks; banks were emphatically prohibited from owning either; and minimum commission levels on deals were prescribed by the SE.
All bargains were transacted face-to-face on the floor of the exchange, and settlement only occurred a week after the end of a fortnightly accounting period. The whole thing seemed to have a ‘clubability’ about it, in which most participants knew each other, and old-fashioned values of honesty and integrity were self-policed – albeit robustly, and usually with surprising effect.
FT 30 to FTSE 100
There were no banks, oil companies, pharmaceutical stocks or miners in the main market index. Indeed, the first oil company, BP, did not join the index until 1977, and the National Westminster was the first bank in the FTSE 100, as late as 1984.
Rather, the index used in 1952, the FT 30, was mainly made up of UK-based companies engaged in heavy industry, such as the British Motor Corporation, Lancashire Cotton, London Brick and United Steel, as well as Harrods and Woolworth.
The only companies in the Index in 1952 that are still in the FTSE 100 Index today are GKN, Imperial Tobacco, Rolls-Royce and Tate & Lyle. None of those companies has been an omnipresent part of the Index in the intervening period – and Rolls-Royce in particular had more than a slight hiatus and change of focus in the meantime.
The notion that Kazakh or Chilean-based mining companies – like Kazakhmys and Antofagasta – would be constituents of the main market index would have required an unusually large leap of a particularly fertile imagination.
Nor would many brokers of the day readily have come to terms with the fact that American banks, such as Goldman Sachs, would increasingly dominate the market; that all trades would be conducted electronically and settled by computer the next day; or even that ‘insider trading’ would be banned by law.
In many more immediately practical ways, investment has changed too. Although the first investment trust was launched as early as 1868 and the first unit trust in 1931, the concept did not really extend to the mass retail market until the 1960s. Also, not least because of exchange controls and the dollar premium, few investors held any overseas equities.
In fact, the concept of a portfolio of managed funds, which could spread assets widely across different asset classes and geographic regions, adding value in asset allocation as well as manager selection, was completely alien. Indeed, the concept of discretionary portfolio management at all was very much in its infancy and, of course, the development of the panoply of modern portfolio management tools, used to analyse, control or leverage risk, was primitive at best.
The cult of the equity
Even more fundamentally, the so-called ‘Cult of the Equity’ had yet to take hold. The concept of mass personal pensions was still decades away and, in an era of low inflation, most investors saw gilts, typically yielding about 3%, as the main answer to their long-term investment needs. Equities persistently yielded more than gilts, as they do again now for very different reasons, but the risks involved were seen as excessive and unnecessary.
This underscores that for all the ups and downs – through the uncertainties of the Cold War, the horrors in markets of the mid-1970s and the recent financial crisis, the equity investor has been far more handsomely rewarded over 60 years than the bond or cash investor. £1,000 invested in a UK index fund 60 years ago – if indeed such a thing had existed – would have been worth £77,176 at the end of 2011, even if all the dividends had been spent.
If the dividends are included, the figure rises to £1,043,405 – a compound annual return of 6.6% ahead of inflation. Whereas £1,000 invested in gilts would now be worth £82,378 if the income had been reinvested, and a cash deposit would only be worth £60,145.
That, of course, is not to say that anything like this will happen again in the next 60 years. The regulator’s favourite risk warning: “past performance is not a reliable indicator of future results” really is more than usually apt here.
Certainly the halcyon period for investors of the 1980s and 1990s seems a very long way off, and there is little prospect of an early rerun of such buoyant markets.
The economic circumstances of today contain storm clouds that no one even imagined in 1952. Surely, if some latter-day Cassandra had told Sir Winston Churchill that there would be a crisis essentially resulting from France, Germany and Greece sharing the same currency, he would (and indeed perhaps should!) have called her sanity urgently into question.
It is easy to lose sight of just how much markets have changed in the last 60 years. Not all the changes are positive: costs have risen, even in real terms; it can be more difficult to find a truly personal service than it was; and many feel ethical standards are no longer a given.
Also, some find the 4.30pm closure of the market more irksome than the 8am opening is helpful. However, there have been many improvements: in the range of opportunities and investment products; in the sophistication, transparency and liquidity of markets; in the speed of response and communication; in the ability to access and analyse information, investors are very much better served than they were in 1952.
While great challenges and difficulties undeniably lie ahead, this is surely a moment to recognise and relish the fact investors have been, almost uniquely, empowered by change during the Queen’s long stewardship of the nation.
Almost no part of British life has changed as radically as its financial markets over the last 60 years. The only companies in the index in 1952 that are still in the FTSE 100 index today are GKN, Imperial Tobacco, Rolls-Royce and Tate & Lyle.
The concept of a portfolio of managed funds, which could spread assets widely across different asset classes and geographic regions, adding value in asset allocation as well as manager selection, was completely alien. The economic circumstances of today contain storm clouds that no one even imagined in 1952.
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