Few stories can have been more steeped in irony than the report at the weekend of the anonymous donation made in 1928 to pay off the national debt. It started as £500,000. It has now grown 700-fold to £350 million.
However, the government can’t get its hands on it, because the donor specified that the fund should be held in trust until the state had collected enough money to pay off the whole of the national debt. There has been little chance of that. In fact, the national debt has mushroomed from Stanley Baldwin’s day to some £1.2 trillion – and the donation has been left alone to grow.
It has now been stuck in legal limbo for 85 years. Barclays, which became trustee of the fund in 2009, sought to get permission to use the money to make charitable grants – or at least to turn it over to the Treasury. But any such change would need to be approved by a court. There would be inevitable legal objections to any such changes – and no solution has been found.
So the capital has been left to sit and grow and the dividends and interest income re-invested, so that the total amount has swollen through wars, recessions, economic crises, stock market crashes and booms to its current size.
How Scottish lawyers would love it: a fat juicy estate that just can’t be frittered away on the beneficiaries.
Quite why Barclays should be in a hurry to discharge its trustee duties is a mystery. For here is a fact that will ring balefully true for many estates: last year the fund paid out £1m in fees and charges to those unavoidable hand maidens, the investment managers at Baring Brothers, the lawyers, and Barclays. How they may well wish this splendid roast can continue to drip fees until the end of time.
We do not know what investment policy has been pursued by the fund over the decades. And as no comparators are yet available, it is hard to discern whether in fact the 700-fold increase is a lot or a little. I dare say it will not be long before some publicity-hungry fund manager will conjure up research to show that, had the £500,000 been invested in his leveraged emerging markets smaller companies special situations fund, it would have grown by much more (assuming all rescue rights issues and share placings had been taken up).
Long-term investment does pay off. But readers, of course, will immediately spot the flaw: few of us are bequeathed £500,000 at birth, and what use would it be if it cannot be touched until age 85 at the earliest? Even the allure of fast cars, Mediterranean villas and a yacht bobbing off Grand Cayman’s Seven Mile Beach can fade just a little at such an age.
But the haunting resonance of this story is the way it illustrates how money left alone with income re-invested can grow over time to a very considerable sum. Given the market volatility of recent years and the constant bombardment of varying and often conflicting advice, many private investors are encouraged to chop and change their investments every other year, if not more frequently.
This constant switching back and forth from one sector to another, and from one fund to another, can defray overall performance through fees and charges – and there is no guarantee that the changes will lead to a significantly improved performance.
Investors should resist the urge to chop and change at every turn in the market. If this temptation cannot be resisted – and it can be a powerful urge, reinforced by the daily torrent of market commentary – a limit of some sort should be put in place. For example, between 60 and 70 per cent of a portfolio should be dedicated to funds to be held for the medium to long-term – a minimum of five years or more. Some 20 to 30 per cent can then be actively managed,with switches and changes as the investor sees fit. The residue should be held on deposit to take advantage of opportunities as they arise.
But the lesson of “long-term hold” still holds true for shorter periods. The Association of Investment Companies has produced long-term performance tables for parents and relatives of children considering an investment.
Over 18 years, a £1,000 lump sum placed in the average investment trust would have grown by the end of July this year to £4,243 in share price total return terms (less 3.5 per cent bid/offer spread). However, over the same 18 years, a £50 per month investment – £600 per year – in the average investment company would have grown to £26,284.
The top performing sectors over 18 years in each case are set out in the accompanying table, above. But either way, think twice before you make the grand gesture of leaving it in trust to pay off the national debt. It may take a long time.