Managers caught offside as gilts take possession

Government bonds outperformed equities in the short and long term, leaving pensions and investors to pay the penalty for a biased securities industry. By George Pitcher

Probably the funniest piece of business news of the past week is that Sir Alex Ferguson accidentally wounded the England captain and the world’s most famous football icon, David Beckham, in a rage after Arsenal knocked Manchester United out of the FA Cup.

I say that it’s business news, because Beckham has long since ceased simply to be a footballer and is undoubtedly a depreciable asset on his company’s balance sheet. Football, like an advertising agency or an investment bank, is a people business – though football must be the only industry left in which it’s acceptable for a manager to injure his principal assets.

Can you imagine what would happen, say, to Sir Martin Sorrell – not to mention WPP’s share price – if he physically injured a president of Young & Rubicam or a creative director at J Walter Thompson? And, with the greatest respect, these individuals are probably not worth as much as Becks.

Yet the share price of a publicly listed football club such as Manchester United barely twitches on such news, though I imagine it would if Beckham decided he’d had enough of managerial tantrums and joined a more civilised football club, such as Arsenal or Inter Milan.

Football is a funny business, but that’s a subject for another day. The next funniest piece of business news of last week was the altogether drier information, which nevertheless made bigger headlines than the off-field Beckham injury, that government bonds have turned out to be a better long-term investment than equities.

This news may turn out to be of greater concern to what the investment industry calls a high net-worth individual, such as Victoria Beckham, than the stitches over her husband’s eye. Since her lucrative days as Posh Spice in the mid-Nineties, she can reasonably be expected to have had a large proportion of her fortune invested in equities as the bull market approached its nemesis in the dot-com debacle.

Without wishing to be unduly intrusive, I doubt that Mrs Beckham’s advisers weighted her investments significantly in government bonds. But it now turns out that the bear market in equities has been so severe this past three years that the allegedly dusty fixed-interest instrument is the sexiest investment option.

Not only that – it emerges that such government gilts have been the better investment for the 16 years since the start of 1987, when Margaret Thatcher’s Tories were rushing for economic growth and flogging us shares in privatised utilities. One might have expected some short-term fluctuations between the relative returns of equities and gilts, but seemingly good old bonds were the sound long-term bet too.

The MSCI World equities index shows a return of 188.2 per cent since the beginning of 1987, while the JP Morgan global government-bond index has returned 234.4 per cent over the same period. In the UK specifically, the FTSE All-Share index has returned 387.2 per cent over the period, while the government-bond index has returned 447.7 per cent.

As I say, this tortoise-and-hare relationship between equities and bonds is funny in so far as it makes complete asses of the entire securities industry that has based its investment strategies for a generation and more on the expected out-performance of equities. At least, it would be funny if it wasn’t so serious – I doubt it’s likely, for instance, to keep the likes of Mrs Beckham in stitches as long as her husband is.

The biggest bear market in equities since the early Seventies, along with longer life expectancy (even for a Man United midfielder under Ferguson) has forced British companies to raise the contributions they make to their pension schemes by some 25 per cent over the past two years, according to research published this week by Income Data Services (IDS).

Recent figures from Morgan Stanley reveal that FTSE-100 companies face pensions deficits of over £65bn. Companies have been forced to top up pension schemes by an additional £6bn over the past 12 months alone, claims IDS. This is the ticking time-bomb at the heart of the UK economy, and one that will deepen and prolong this recession – I say “recession” in case anyone thought a quick resolution to the Iraq crisis would have us back to a booming economy.

Companies are increasingly being forced to make one-off contributions to their pension funds to keep them viable. BT, for instance, has been forced into a £700m special contribution – its total shortfall could be somewhere between £2bn and £2.5bn. This is dwarfed by American companies such as General Motors, which is facing a shortfall of some $23bn (£14.4bn).

These companies don’t have to find this cash immediately, but it’s scary nevertheless. My friends at Financial Issues, the only consultancy practice in town that’s specifically addressing bond-market communications issues, tell me that pension trustees want to investigate who runs funds, how separate they are from company managements and when moves were made from cash to equities.

The biggest question is why the riskrating agencies didn’t see it coming. That’s what they’re paid for.

Heads will roll – there’s a case for some regime change in these markets. Meanwhile, people like Ferguson may not be able to retire as soon as they thought – which could partly explain the rage. He might have got a better pension by betting on his racehorses than the stock market.

George Pitcher is a partner at communications management consultancy Luther Pendragon

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