Investment: Thriving on Ross Goobey's kind of wisdom
What his career ultimately demonstrated was the essential paradox of all investment
Wednesday 24 March 1999
As most of the obituaries have rightly noted, in a long and distinguished career as the in-house manager of the Imperial Tobacco pension fund, Mr Ross Goobey did more than any other single individual to persuade pension fund trustees in this country that it was both prudent and rational to commit most of their assets to the stock market.
Before his arrival on the scene, most pension funds had most of their assets invested in Government and corporate bonds. Bonds were, as recorded in the pages of the Forsyte Saga and other chronicles of the lives of the affluent, the "safe as houses" medium of choice when it came to investment. What, after all, could be safer than putting your money with the Government, the safest credit in the land? The idea that the average pension fund might have 75-80 per cent of its assets invested in the stock market would have been regarded at the time as the height of folly. Yet that is the situation today.
What conventional wisdom of the day failed to see - but which Mr Ross Goobey most certainly did - was three things. One was that equities are ideally suited to the kind of long-term investment that pension funds are perforce engaged in. Because dividends grow faster than inflation over time, equities provide pension funds with a well-fitting match for their long term liabilities, which are to pay pensions linked to the rate of increase in wages and prices.
Secondly, Mr Ross Goobey was smart enough to see that gilts and other bonds, however safe they might seem to be on the surface, were in practice anything but. His original ire was centred on the infamous 2.5 per cent Consols issued by Hugh Dalton, the first Chancellor of the post-war Labour Government.
At a time when inflation was at 4 per cent, there was no way in theory or practice, he pointed out, that Consols could provide pension funds with the 5 per cent a year returns that they had blithely offered their employees and pensioners. Yet for years many pension funds continued to load up with gilts, oblivious to the real risks that they were running (even if, to be fair, none of them could have foreseen quite how bad the inflationary excesses of the Sixties and Seventies were going to be).
Thirdly, given these first two insights, it was not difficult for Mr Ross Goobey to spot another feature of the investment markets in the immediate post-war period. Precisely because conventional wisdom held that gilts were a safer choice than equities, shares and gilts were always priced in such a way that the yields on shares exceeded that of gilts.
It was only when the rest of the world eventually concluded that this was the wrong way round did the anomaly disappear. By being the first into the field, Mr Ross Goobey was able to benefit not just from the superior returns provided by equities over the long term, but he also gained from the once-in-a-lifetime revaluation of shares as the "cult of the equity" became a reality in the mid-Fifties.
This is the origin of the so-called "reverse yield" gap, the notion that shares should - as they do now - always yield less than gilts, rather than the other way round, which is how it had been for 100 years or so before Mr Ross Goobey arrived on the scene. Since the Fifties, the yield on gilts has consistently and without exception exceeded that on shares. It still does so today - although with inflation falling, the margin between the two has fallen to its lowest level in many years.The interesting thing about Mr Ross Goobey, however, is not just that he was the first professional investment manager to expose the internal contradictions of the prevailing actuarial assumptions which underpinned the valuation of the market at the time. What made him an outstanding investor was his refusal to let conventional wisdom (including his own) blind him to changes in the prevailing climate.
By the early Seventies, for example, he realised that the revival of the equity markets had gone far enough and made a second big strategic leap into property, which he believed offered better value than the stock market. By the time yields on gilts had reached double digits in the mid- Seventies, he was quite prepared to argue the case for them as well.
The interesting question is what he would think of the markets today. I don't know what his personal views were more recently, but re-reading this weekend a speech he gave at an investment conference in 1971, it is striking how clear his analysis of the bull market at the time was. He went out of his way to make clear that the move out of gilts which had made his name arose "only because I was convinced that they were ridculously cheap compared with the traditional gilt-edged, and not because I was following a cult or a fad".
His conclusion then was that there was little to choose between gilts and equities at their then levels, but that in his view property shares offered a better long-term investment than either.
What Ross Goobey's career ultimately demonstrated was the essential paradox of all investment - which is that conventional wisdom can never by definition deliver more than average performance. To do exceptionally well, you have to embrace an insight that may well appear cack-eyed to most sensible people at the time.
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