Andrew Bell, chief executive of the £1.5 billion Witan Investment Trust, has argued bond investors face huge losses comparable to those suffered after the Second World War.
Speaking at the Wealth Manager Forum in Edinburgh, Bell (pictured) noted that gilt yields in 1945 were around today’s level of 2.5%, having been depressed through the 1930s and the war.
‘The parallel is that the Bank of England was leaning on the banks to buy lots of gilts in order to help fund the war effort,’ he said.
‘So bonds were artificially depressed in the same way as they are now, because either banks are being forced to buy or investment institutions are buying gilts to immunise their long-term liabilities.’
Over the subsequent 30 years, Bell noted that gilt investors who reinvested all of their coupons gross of tax lost 75% of their money after inflation.
Equity investors through the same period gained 75%, with Bell observing it was only so low because of the 1974 crash. Investors who locked in profits before then would have made five times their money.
Bell acknowledged that shares were ‘probably cheaper’ in 1945 than they are presently; although reliable price-to-earnings data are not available, the market yielded about 5% after the war.
‘Equities were priced at the end of the war to give the patient investor the benefits of the subsequent economic growth. They might have been a bit on the cheap side, but over 30 years that won’t be a big contributor,’ he said.
‘They gave you a massive positive return. Gilts were priced at levels which, even with inflation averaging less than 4% over that period, absolutely poleaxed the wealth of those who were invested in them.
‘That process carried on until the 1980s. I think we’re at the start of a similar period. Equities may not be as cheap, but bonds are as expensive.’
He added: ‘Investing in bonds at this level is a recipe for poverty.’
On the likelihood of short-term volatility in stock markets, Bell recognised that equity investors will still have to endure ‘the odd 20% or 40% hiccup’.
And while Witan’s portfolio is predominantly equity focused, he has retained some fixed income exposure through specialist assets. These include the NB Distressed Debt fund, convertible loan stock in the Edinburgh Dragon trust, and an Electra Private Equity convertible bond.
Over the past three years Witan has returned 39.5% in share price terms, compared with 23.3% from its composite FTSE UK/US/Europe/Asia benchmark index. It is currently trading on a discount of around 5%.