Is the easy money era over? Former Money Observer editor Andrew Pitts deep dives into the past for clues.
The concept of easy money has resonated throughout Money Observer’s 40-year history. First came the virtual guarantee of immediate share price gains from mass privatisations in the 1980s; then came the windfalls from building society demutualisations as the decade turned; and then the spoils from dotcom fever in the late 1990s, when any company that came to market could raise capital, burn through it and make its stockmarket backers rich, albeit fleetingly.
More recently easy money has come courtesy of central bank printing presses following the global financial crash of 2008, which helped boost asset values, from bonds and equities through to property.
So what can we learn from a review of some of the opportunities for easy money that have arisen over the past 40 years – for whichever groups of stakeholders – and how are these working out as we enter Money Observer’s fifth decade?
Privatisation takes off
Margaret Thatcher was elected in May 1979, five months before Money Observer’s first appearance as a quarterly supplement in the Observer. The Thatcher years were marked by the privatisation of state-run industries and utilities. Initially, privatisation was a low-key affair, but in 1984 the age of the UK private investor was born with the privatisation of British Telecom, followed by the ‘Tell Sid’ TV campaign of 1986, which encouraged the public to buy shares in British Gas.
‘Stagging’ new issues (subscribing for shares with the aim of making a quick buck by selling them when trading began), particularly privatisation shares, became a national hobby, as everyone knew these shares would be ‘priced to go’ on their first day of trading on the stockmarket. This pricing policy inevitably led to accusations that the government was selling off public assets on the cheap. With individual allocations limited, people resorted to nefarious means to get more of the action by sending in applications in the names of friends or family members.
Privatisation reached its peak in the Conservatives’ third term in office between 1987 and 1991, with British Airways, British Petroleum, British Steel, Rolls-Royce, and electricity and water utilities sold off. In all, more than 50 state-run enterprises were denationalised before Tony Blair’s New Labour took office in May 1997.
Labour changes tack
With few, if any, candidates on the shelf to hive off as ready-made businesses to investors, New Labour enthusiastically pursued a different form of privatisation. The private finance initiative and the public private partnership saw more and more local and government services go out to private tender. The building and/or management of schools, hospitals, courts and other public services have since been widely taken out of public control.
Cedric the Pig’s appearance at a British Gas shareholders’ meeting in 1996 was one of the first signs of discontent – specifically, indignation that chief executive Cedric Brown had his snout in the trough. It was indicative that utilities privatisation in particularly was benefiting consumers less than executives and shareholders.
The highest-profile privatisation failure was that of Railtrack, which the Labour government refused to bail out in 2002, having already forked out billions in extra subsidies from the public purse. Shareholders, including employees with their entire pensions invested in the company, were wiped out.
The argument over the benefits and drawbacks of privatising state-owned enterprises continues to rage today. The easy gains for private investors from privatisations happened a long time ago, while various scandals and failures and low levels of customer satisfaction have inevitably led to calls for many public services to be brought back under public control.
Building society demutualisations – the next chapter in the easy money story – were enabled by the Building Societies Act of 1986, which turned carpetbagging into a national pastime. Carpetbagging involved opening savings accounts with multiple (ideally) large building societies and then lobbying for demutualisation. Abbey National was first on the block in 1989, followed by other sizeable societies: Cheltenham & Gloucester in 1995, Halifax and Northern Rock in 1997, and Bradford & Bingley in 2000. Building society savers were not alone in getting a windfall. Much like the directors of privatised national industries and utilities, building society executives did pretty well. A study by a group of MPs found that between 1993 and 2000, executives in demutualised building societies enjoyed a pay rise of almost 300% on average, while those running mutuals had to make do with a 65% increase. By 2008 all those building societies that had publicly listed had failed and/or been taken over by conventional banks.
Sadly, it is nearly always the case that investments that are marketed as paying attractive or guaranteed levels of income are the ones that fail and that retirees, the people who need income most, bear the brunt of these failures.
Most of the high-profile failures occurred in the 2000/03 bear market. Split-capital (often referred to as split-level) trusts were the most high-profile failures for investors. They tended to have two or three share classes. Zero dividend preference shares would aim to pay out a fixed amount at the end of a trust’s predetermined life and were marketed as ideal for planning for costs such as school fees. Various forms of income share would pay out a usually outsized dividend, while capital shares were high-risk plays that accrued all the capital gains once the predetermined calls on a trust’s assets had been met.
Traditionally, zeros supplied modest gearing, but some trust providers took what was an appealing structure to excess by loading extra bank debt on the zeros. This proved to be a leverage too far in the bear market, and the situation was worsened by myriad cross-holdings between various splits, known as ‘the magic circle’, that was first revealed by Money Observer. The collapse of splits cost private investors an estimated £700 million.
The 2000/03 bear market was a particularly busy time for regulators assessing compensation issues, as thousands of clients were also claiming back what they had lost from so-called ‘precipice bonds’ that had been aggressively recommended by 57 advisory firms subsequently declared to be in default over advising their clients to buy them.
Precipice bonds were marketed as low-risk, high-income products ideal for retirees, but these ‘structured capital at risk’ products were anything but, as they were generally reliant on stockmarket indices not falling by a predetermined amount, say 30% – hence the precipice moniker. When stockmarkets approached losses of that magnitude following the dotcom bust, the precipice of total capital loss drew much closer.
What of arguably the biggest misfortune to hit pensioners? Equitable Life closed its doors to new business in 2000, and one doesn’t hear much these days about the with-profits products it sold on the promise of high, ‘guaranteed’ terminal bonuses – but there remains around £350 billion invested in them, according to Cazalet Consulting.
For Equitable Life’s dwindling band of policyholders, many of whom have died waiting for redress, two decades of misery might soon come to a close. This November most of the remaining 400,000-odd may vote for a £1.8 billion uplift to their with-profits products in return for sacrificing guaranteed value and conversion to unit-linked policies, to be run by Utmost Life and Pensions.
In the 30th anniversary issue of Money Observer I said: ‘It is unfortunate that the past 10 years have been among the worst: a legacy of the dotcom boom, misguided monetary and fiscal policies, and a financial services sector in the UK that in too many instances has treated the consumer of financial products as a cash cow that doesn’t mind how often it is milked.’
Has the most recent decade been much different? Yes. Since the global financial crisis, investors have been rewarded and savers have been punished. Borrowers have benefited from persistently low interest rates supported by benign inflation, but this has not reduced their growing debt burden as higher inflation did in the past.
In the regulatory field, the Financial Conduct Authority is less supine than its predecessor, the Financial Services Authority, which was regularly accused of being asleep at the wheel. Nevertheless, recent scandals surrounding London & Capital Finance – a regulated firm that collapsed owing £236 million to investors who had bought unregulated ‘mini-bonds’ masquerading as fixed-term Isas – and the events that led to the gating of the LF Woodford Equity Income fund suggest that the FCA is at least guilty of dozing.
Is the era of easy money over? It’s fair to say that where easy money could be made, those particular cash cows have been milked dry, whether it’s in shares, bonds or property. Or, for that matter, via compensation: UK banks have helped buoy consumer spending and VAT receipts through £44 billion of refunds to customers who were missold payment protection insurance.
Politically, we appear to have done a volte-face. In 1979 Thatcher won an election with the slogan “Labour isn’t working”. Forty years ago we certainly would not have seen the Financial Times, that bastion of the capitalist establishment, calling for a vote of no confidence in a Conservative government, as it did in late August. Nor would we have expected two investment banks, Citibank and Deutsche Bank, to state that given the two main political parties’ current leaders and the policies they espouse, a Labour government would be less economically damaging than a Conservative one.
It seems the times they are a-changin’.
Search for income in premium territory
Older individuals among the growing ranks of investment trust fans have seen their own special opportunities for easy money manifest themselves. Investment trusts’ increased visibility on leading retail investment platforms has lifted demand, which has helped reduce average discounts to net asset value. That is particularly true for income-oriented infrastructure trusts, which have become highly popular in the post-financial crisis search for income.
A decade ago the sector’s three infrastructure trusts had a combined market capitalisation of £1.5 billion. Today the sector has assets in excess of £10 billion. The largest trust back then was 3i Infrastructure, which had a market capitalisation of £765 million. At 94p, the shares traded on a discount to NAV of -11.4% and yielded 5.6%. With its shares now at 300p, 3i Infrastructure has a market value of £2.3 billion, yields 3.7% for new investors and trades on a premium of 30%. On paper, then, long-term investors have enjoyed a 41% extra uplift in the NAV, a slowly rising dividend yield and a few special dividends thrown in for good measure.
These infrastructure plays have since been joined by trusts focusing on renewable energy with assets of more than £8 billion, and 31 debt-oriented trusts in three sectors that pay average yields of 5.3-9.7%.
Shift from shares fuelled property boom
Many savers and investors were left out of pocket and deeply mistrustful of the financial services industry’s ability to manage their money honestly and successfully in the five-years up to 2003. Moreover, their scepticism was compounded by the global financial crisis of 2007/09. Small wonder, perhaps, that the nation of shareholders envisaged by Margaret Thatcher’s doctrine of ‘popular capitalism’ was slowly supplanted by a nation of buy-to-let landlords.
That said, the seeds were sown under Thatcher, with her chancellor, Nigel Lawson, championing ‘right to buy’, the policy that allowed council tenants to purchase their rented property. This helped fuel a house price boom that turned into a dramatic bust in the early 1990s (prices in South-East England fell 35%).
The late 1990s were arguably the best years to have bought property, with investors increasingly turning to the private housing rental market following heavy stockmarket losses in the wake of the dotcom bust. Strong demand, rental growth and cheap, tax-advantaged mortgages sent house prices soaring: the value of an average house rocketed from £75,000 in January 2000 to £186,000 by October 2007, according to Nationwide.
Prices faltered in the financial crisis of 2007/09, but the Bank of England put another rocket under UK property via quantitative easing and near-zero interest rates. Average house prices peaked at £217,663 in July this year.
Today, ‘right to buy’ has taken on a different connotation: Labour has proposed that it should be extended to tenants who are renting older properties from private landlords.