Bonds look better than equities

THE INVESTMENT COLUMN

A superficial reading of the latest annual BZW equity-gilts study suggests that equities should remain the sure-fire choice for investors. Last year saw a real total return from equities of 19.5 per cent, comfortably outstripping the 15.5 per cent on gilts.

On a 10- and 20-year basis, the out-performance of equities appears even more outstanding. Real returns on equities averaged 10.6 per cent a year since 1975, compared with 6 per cent for gilts.

Yet a different picture emerges for the1990s to date, when the margin between equities and gilts has diminished substantially. Since 1990, the average annual return on gilts of 10.6 per cent has been much closer to the 12.7 per cent return on equities.

Indeed BZW says that the past 14 years have seen the longest post-war bull market in gilts. Not since the early 1930s have gilt investors had a similar home run to celebrate.

This re-rating of gilts has come mainly from declining inflationary expectations. A secondary factor is the maturing of pension funds and the effect of the Pensions Act in pushing funds to increase their weighting of bonds to comply with minimum funding requirements.

According to BZW, the scope for bonds to make further gains from lower inflation is now limited. That seems too pessimistic a view, but there is something in the argument that the main long-term impetus for gilts will now switch to expectations of real progress in curbing budget deficits.

On both counts, however, the medium-term outlook for gilts still looks a lot more promising than the prospects for equities. As the chart shows, the stock market is flirting with a degree of over-valuation not seen since the early 1970s. Indeed the deviation of almost 40 per cent is one of the largest ever recorded.

Sooner or later, the BZW trend line suggests, the equity market is likely to have a great fall. But Michael Hughes, the firm's head of global strategy, warns that these periods of over-valuation can persist for quite long periods. Demographics are on the side of the markets, as the baby-boom generation moves into its peak age for saving.

However, the political risks are growing. If and when a Labour government is elected, the signs are that they will be tougher on the public finances and inflation than is generally expected. But equities could be unsettled by the impact of the minimum wage and steps to encourage long-term investors, not to mention a further assault on the tax privileges of pension funds by cutting the tax credit on advance corporation tax.

In the long run, equities may be the better bet, but don't write off the chances of the bull market in gilts breaking new records. For the rest of the decade, bonds look the safer and more remunerative bet.

Texans hooked

on Sotheby's

Shares in Sotheby's Holdings, the world's biggest fine art auction house, have leapt 100p since the Bass family of Texas emerged as big shareholders at the end of last week. Share-buying earlier this month has taken the Bass stake to 7.7 per cent of the low-voting A shares, sending them to 985p, an 18-month high.

This excitement is based on the past reputation of the Texas-based Bass family, who have already amassed what is described as a "modest" fortune in Texan oil and are active corporate investors.

Robert Bass, who broke with the rest of the family some years ago, has in the past made tilts at Macmillan, the US publishing giant, and Continental Airlines, where he was linked with a bid from Air Canada in 1992.

But it is the rest of his family, led by Sid Bass, who are involved with Sotheby's and their style has been markedly different from brother Robert. Known as investors in what they see as undervalued companies, they have substantially increased their wealth by pursuing a strategy of working with existing managements.

Their involvement as investors in the Walt Disney Company seems to have coincided with a period of revival at the famous entertainment group, while an investment at Quinta, a chain of US motor lodges, has also turned out well.

Sotheby's management have welcomed the increased interest from the Bass group. As well as the family's relative benevolence to incumbent management, Sotheby's board can rest safe in the knowledge that the group is protected from hostile takeover by chairman Alfred Taubman's control of the high- voting B shares.

The Basses may also have just timed their share-buying to coincide with a revival in the company's fortunes after five lean years.

At the end of December, the group reported 1995 auction sales up a quarter to $1.66bn (pounds 1.05bn), the fourth-highest level on record. Even so, they remain well below the record high of $2.9bn achieved in 1989.

Net earnings for 1995 are likely to have jumped from $20.3m to $31m, and are expected to rise to $42m this year. But on a forward multiple of 20, the shares are up with events.

Fish and chips

- at a price

It has been quite a week for Harry Ramsden's, the fish and chip shop group. On Monday the shares jumped 36p - or 13 per cent - when it announced a deal with Compass, the catering group, to open more branches in airports. Up to 15 restaurants will open over the next five years in locations such as Singapore and Malaga. Compass will operate the outlets while the Leeds-based chip shop group takes a percentage of revenues.

Yesterday the shares rose a further 8p to 319p on the back of good results. Harry Ramsden's may be an illiquid stock, with only 8.8 million shares in issue, but the shares have increased by a third this month alone.

Last year's figures continued what has been a very steady performance since the company joined the stock market in 1989.

Profits for the year to October jumped 21 per cent to pounds 1.1m on sales up 16 per cent to pounds 4.2m. This was in spite of higher potato prices, which affected margins, and the hot summer, which held back sales in some restaurants, though seaside locations such as Blackpool and Bournemouth did well.

The group has 16 restaurants, with another opening in Belfast next month. John Barnes, chairman, thinks there is room for 30 and the plan is to add more branches around the M25.

In other activities, the Ross Chip Shop chips and battered fish range has been followed up with other product launches in November.

The Henry Higgins joint venture - which concentrates on smaller outlets - also looks promising.

The Harry Ramsden's gravy train has been an enjoyable ride for investors who embarked at the beginning and have seen their investment treble. But for those who missed out the shares are looking expensive. House broker Henderson Crosthwaite is forecasting profits of pounds 1.3m for the current year, which puts the shares on a forward rating of more than 30. Enough to give anyone indigestion.