War loans

In the continual debate between the benefits and drawbacks of bonds and equities, it is worth looking at the example of the war loan. War loans were issued at the end of the First World war with the slogan “if you cannot fight, invest all you can in 5% bonds.  Unlike the soldier the investor runs no risk”. By 1932 the coupon had gone down from 5% to 3.5% where it is today, that was the first risk that no one anticipated. The war loan unlike most government debt issuance has no maturity, so the investor has no date when he gets paid back his capital. The coupon of 3.5% is an annual payment. 

The war loan currently trades at 85p in the pound, having issued in 1917 at 100. If one had invested a £100 in 1917 it would be worth £85 today. In 1917 £100 would certainly have bought you a Rolls Royce and could well have bought you a small house, today it won't buy a week's shopping at Sainsbury's, such is the power of inflation.

The S&P 500 index has 25 companies which have grown their dividends by at least 10% per annum over the past 32 years. If you take a stock that traded at £1 thirty years ago, and paid a 3.5p dividend, that would have given the stock a 3.5% yield. Assume the company grew its dividend at 10% per annum for the next 30 years that dividend would be worth 60p today, to keep the stock on a 3.5% yield the stock price would have to have risen to £17 a share. One hundred pounds 30 years ago probably have bought you two theatre tickets, £1,700  today would buy you the tickets, dinner and a stay at one of London's finest hotels, leaving enough for the taxi fare home the next morning!

On the slightly more mundane matter of interest rates, the Bank of England released on Wednesday the minutes from the last rate decision meeting. The vote remained at 9-0 to keep rates where they are. Reuters reported that the committee discussed the possibility of raising rates, but then reading between the lines appeared to quickly dismiss the idea. The slightly more dovish tone to the minutes eased sterling back on Wednesday.

Posted on July 24, 2014 .