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LGT Vestra US

Betting on peace and long-term returns - Feb 2017

Jonathan Marriott – Chief Investment Officer, LGT Vestra LLP

Searching through an old correspondence file I found a letter from Henry Spelman to his broker. Henry asks him to invest £300 in Consolidated Stock. He commented that the price was so depressed that rather than the 3% nominal interest he would earn nearly 6% and if there was peace he would make a profit. In other words, 3% consolidated stock was trading at 50% of its face value. This letter was dated July 1797 and the war with Napoleon would continue for another 18 years. Consolidated stock was UK government debt that carried interest at 3% first issued in 1757 and only finally redeemed in 2015.

The government was borrowing heavily to fund the war with Napoleon and as a result was paying a high interest rate and the price of existing government debt was depressed. Speculation on government debt could make substantial amounts. Famously in 1815 the Rothschild family, who were already helping finance the war, got wind of Napoleon’s defeat at Waterloo before the rest of the market. They bought substantial amounts of government debt making enormous profits when government finances improved as a result of the peace.

This made me wonder what the value of £300 in 1797 was today and how Henry’s investment would have performed. Henry was a farmer and would have employed labourers to work his fields. During the Napoleonic wars, workers wages rose and a farm worker could command the princely sum of one shilling and sixpence a day (7 ½ pence in decimal currency). This was 50% higher than in 1750. If Henry was farming today, he would have to pay at least the minimum wage of £7.20 per hour which gives the worker £60 per day or 800 times what the 1797 worker would have been paid. On this basis £300 was the equivalent of £240,000 today.

So how would Henry’s investment have performed? For his investment of £300 he would get £18 per year or £3,924 over 218 years until redemption in 2015 when he would have got £600 back. However, the power of compounding is a wonderful thing and if he reinvested his income of £300 at 6% over 218 years then the total value would be over £98million. Therefore, by reinvesting his income and all other things being equal he would have had a substantial real return.

However life is not that easy, Consolidated Stock was restructured twice in its life and the interest rate reduced first to 2.75% in 1888 and again in 1903 to 2.5%. Assuming he paid tax on his investment his return would sadly be reduced further.

What can we learn from Henry’s investment? His thought that peace would be profitable was correct but I don’t suppose he envisaged a time horizon as long as 218 years when he made the investment. The power of compounding in a tax free structure is clearly remarkable.