Newspaper Article

Business Europe: Equities Still Beat Bonds

MacDougall, William

2003

Overview

Fifty years ago, George Ross Goobey changed the face of the investing world. Until Ross Goobey came along, most everyone had taken it for granted that bonds -- czarist railway loans for example -- were a nice safe place to be. Accordingly, the proper place for the investments of widows and orphans, and pensions, was therefore bonds. Ross Goobey reversed this conventional wisdom, saying that equities had a higher yield and were a real asset, so they were the better place for your money. He moved Imperial Tobacco's pension scheme into equities. While inflation has been low and stable in the U.K., it would be wrong to ignore inflation risks. The Bank of England and other central banks are cutting interest rates at a time when they are forecasting inflation above their targets. They may be right to take risks with prices to improve growth, but they are taking risks with inflation, and therefore inflation is more likely than deflation. A rise in the inflation rate to 4% from 2% for 30 years is perfectly possible, and would be devastating for anyone whose savings were locked away in long-term fixed-interest bonds. The U.K. government has just made things worse by lowering the required inflation-related pension cap to 2.5% from 5%. This is the maximum inflation protection required by law. The result of this change is, once again to make holding bonds in pension funds more attractive relative to stocks. While some schemes will chose to keep a higher cap, to keep some inflation protection, the government has removed any legal requirement to protect your pension against inflation, and thus reduced the need to hold equities as a hedge against inflation.

• Publisher: Dow Jones & Company Inc
• Subject: Central banks / Equity / Government bonds / Investments / Pension funds / Pension plans / Volatility