Bill Jamieson: Lloyds causes controversy again over share sale

Investor appetite for bank shares has cooled as low interest rates have squeezed profits, writes: Bill Jamieson

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Not all that long ago, the government was cheering the prospect of a “tell Sid” sale of shares in Lloyds Banking Group to the retail public. But now, after a torrid tumble for bank shares, the government has changed its tune: retail investors will be excluded from the upcoming sale.

Hargreaves Lansdown chief executive Ian Gorham has written to Prime Minister Theresa May, calling on her to rethink the “disgraceful” decision. He said the reasons given for the sale to institutions only, citing among other factors “market volatility”, were not valid.

Since the great privatisations of the 1980s, the cry was that open-to-all share sales gave everyone an opportunity to buy and hold shares directly. As recently as 2013, some 690,000 retail investors supported the Royal Mail share offer and the Lloyds sale would have provided a similarly attractive opportunity to encourage long-term saving and investment.

And as rival broker AJ Bell has pointed out, the dividend on Lloyds Banking Group shares, currently 4.3 per cent, makes the stock attractive to income investors. Higher dividend payments and “juicy” yield formed the “key planks” of the investment case for the bank. And since it was public money that “saved” Lloyds, the public should get to share in the sale.

However, investor appetite for bank shares has cooled as ultra-low interest rates have squeezed profits. Shares in Lloyds Banking Group have fallen from a high of 77.8p earlier this year to 52.4p.

And any mis-priced share offer would expose the government to ferocious attack. Set the price too high and the sale flops, leaving the underwriters to pick up the pieces – and investors nursing unpleasant losses. Price the shares too low and a subsequent upwards bounce would invite the charge of betraying the interests of taxpayers who footed the bill for the bank’s rescue in 2008.

And there is – as we have seen with sterling in the past week – marked volatility: pricing a share sale to avoid the extremes of big losses and giveaway profits in current conditions would be a near-impossible task. But the political storm would be even greater were the big institutions seen to be handed an effortless profit. Best to wait for calmer times.

Golden age may be over

After a stonking performance that has lifted the UK stock market towards all-time highs, it seems perverse to warn about low returns. But investors must take a view longer than three months and wider than just the domestic equity market. Cautious fixed interest investors need no reminding that we have entered an era of ultra-low returns on savings.

But for all the bumps and scrapes along the way, investors have enjoyed a golden era. A recent McKinsey Global Institute report found that returns on US and Western European equities and bonds during the past 30 years were considerably higher than the long-run trend. And over the next 20 years, total returns including dividends and capital appreciation, could be considerably lower than in the past three decades.

These exceptional returns, in what has been a “golden era for investment returns” (1985 to 2014), have been driven by a confluence of economic and business trends including a sharp decline in inflation and interest rates, strong global GDP growth and even stronger corporate profit growth.

The McKinsey research warns that some of these trends have run their course. The steep decline in inflation and interest rates has ended, while GDP growth is likely to be sluggish as labour-force expansion and productivity gains have stalled.

In a slow growth scenario, total real returns from US equities could average between 4 and 5 per cent – 250 points below the 1985-2014 average – while fixed income real returns could be nil to 1 per cent.

As Alan Brierley, director of the investment trust team at Canaccord Genuity, points out, in this environment “ongoing fund and trust charges will have a much greater dilutive impact on returns, particularly when compounded over the long-term, and therefore should warrant even greater scrutiny”.

His research features 51 investment trust companies and open-ended funds. Notably, only 45 per cent of closed-end funds now have a lower ongoing charge. He also found that a large majority of trusts have outperformed comparable open-ended funds and benchmarks during the five years to 30 September.