The Diamond Jubilee – the changing investment landscape

1st June 2012

Sixty years of shares succes

Media coverage of the Diamond Jubilee points out just how much has changed since the Queen ascended the throne in 1952. We've moved from a world where only a minority of homes had a phone – and then often a "party line" shared with neighbours so you could listen in to next door's conversations –  to one where almost everyone has access to so many phones they can't remember their own numbers. 

The smartphone has substantially more computing power than a 1952 mainframe – and as economist Graham Kitchen at Henderson Global Investors writes "it was only around five years before Elizabeth became queen that IBM president Thomas J Watson allegedly said that he thought there was a world market for about five computers."

Technology, globalisation and the move from a labour force based on brawn to one based on brains have turned UK 2012 into a nation that would have seemed science fiction to an age where the few who bought television sets had to find nearly £2,000 in today's money for a tiny black and white screen with one channel broadcasting a few hours a day. 

Equities are the royalty of asset classes

But investors have been able to count on one unchanging factor over the period – the long term superiority of equity investment. There have been some very bumpy periods along the way but shares have outstripped other assets over the sixty years – and they have done well in every discrete decade starting in 1952. Buying a diversified portfolio of UK shares in 1952, 1962, 1972 and so on would have proved a good idea ten years later. 

For those who kept the faith, £1,000 (the price of ten or so 1952 television receivers) would now be worth around £1m – provided they had re-invested the income. That £1m will now buy around 3,000 mid-range TV sets. And despite bonds performing well over the past decade, they would have been a disaster over the 60 years, often falling behind rising prices.

There is no doubt that globalisation and the subsequent shift to a service led economy along with technological advances have changed the way that Britons and people around the world live on a day-to-day basis. 

From horse and cart to web 2.0

Milk and coal were still often delivered by horse and cart. More than a third of homes had no fixed bath. Only a minority of homes had a car. The fridge was a luxury item, the washing machine a rarity.

Certainly living standards have improved. When the Queen ascended the throne, there were no credit cards, no cash machines, most were paid weekly in cash, few had bank accounts, and financial services were limited to a man (never a woman) collecting (pre-decimal) pennies a week for life cover.

And few, very few, invested in the stock market. But those who did ended up with a huge gains even when adjusted for the inflation which, over the sixty years, has practically turned pennies into pounds.

Figures from the annual Barclays Capital Gilt Equity Study – it tracks asset prices back to the Edwardian period – show that equities did very well indeed over the Queen's reign. They survived the massive bear market in the early 1970s when the UK index fell by nearly two-thirds (more than in the depths of the 2008 aftermath) and, despite the FTSE100 Index going nowhere over the past decade or so, even the period since the Queen's Golden Jubilee has been satisfactory (admittedly not scintillating) once dividends are added back in.

A £1,000 investment into a fund of shares at the start of 1952 with all the dividends ploughed back  into new shares would have – at January 1,  2012 – £1,043,000, although it may have fallen back a little since. This figure assumes basic rate taxes on dividends but ignores any capital taxes as well as  transaction or fund management fees.

Dividends the key to long term growth

With dividend re-investment, every decade of the Queen's reign has been a winner – each of the first three ten year periods saw the value of the Barclays Capital portfolio (effectively an index tracker) multiply around three times, the 1980s notched up a fivefold gain before the pace slowed.

However, if the portfolio owner had spent the dividends, the Barclays statistics show the £1,000 portfolio in 1952 would only be worth £82,000 at the start of 2012. That is still more than three times ahead of inflation.

Price changes have created an unrecognisable world for anyone returning from a sixty year sleep. Many schoolchildren were presented with a commemorative "crown" for the Queen's coronation in 1953. A crown was a pre-decimal five shillings – 25p. Although there was not so much to buy in the shops, that crown could purchase a lot – two months' worth of newspapers or 24 letter stamps or five pints of beer in a pub.

The jubilee equivalent is a £5 coin – 20 times as much. But that five pounds will buy less than the five shillings of 60 years ago. While prices stayed much the same during the reign of Queen Victoria, who also celebrated a Diamond Jubilee, figures from Barclays show that a basket of goods worth £100 in 1952 would now cost £2,500 or 25 times as much. What cost just under 10d (4p) then is now £1.

Inflation was moderate in the 1950s and 1960s, took off like a rocket in the 1970s with prices rising almost fourfold, but returned to more manageable proportions by the 1990s.

The inflation basket constituents have changed. Food was far more important, with basics such as lard and bread, leisure less so, but dominated by cinema tickets and the pub. Electronics, wine, and foreign holidays were practically unheard of.

Home ownership soars – then sinks

And owning a home was still for a minority but one that was due to grow quickly. Home buyers in 1952 were already complaining about house prices – a London suburban semi that cost £600 before the second world war had become £2,400 or so – some four times as much. In good condition, that property might now sell for £300,000 or 125 times as much. Property prices depe
nd on location but the vast majority have beaten inflation several times over – in this case five-fold. Over the UK as a whole, according to figures from The Halifax bank, they have trebled in real terms, with the gains falling back since 2007. These figures show how power in the economy has centralised in the London area.

Two lavatories are better than none

A major difficulty in analysing property prices, however, is that our homes have changed. We have central heating, not open fires; almost all homes have bathrooms and inside lavatories; now 41% of homes have more than one loo against virtually none in 1952. We proportionally build more flats and detached houses and fewer semis than in 1952 – in fact, we build fewer properties each year.

And they are smaller, reflecting in part the trend to smaller households.

Owner occupation, the Halifax calculates, has risen doubled to 66% – down from 70% a decade ago. And it is harder to buy now. In the first decade of the Queen's reign, the average house cost 3.5 times the typical salary; over the past decade the ratio increased to 4.8.

But many things have not changed. The UK has a rocky economic outlook – just as it did in 1952 and at many points since. Henderson Global Investors point out: "If we look back to 1897, when Queen Victoria was celebrating her Diamond Jubilee, there are some striking similarities in where investors were putting their money compared to the investor of today. In both 1897 and 2012, the primary focus of investors in the UK was in infrastructure and the emerging markets." Latin America was the focus of railway and other investment. Perhaps, the more we think we are different, the more we are the same.

 

More on Mindful Money:

Can the financial system be fixed? The Philosopher vs the Trader

The economics of the Olympics

Burying bad news on a bank holiday

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