British Government Securities

1. British Government Securities: Consols. The return generally is too small, but the chief objection is that the principal is so constantly subject to fluctuation that it is hardly advisable to invest. The stock is naturally a most sensitive barometer of all national relations with foreign countries, the course of which it is impossible to predict. Apart from foreign countries, any troubles with our dependencies (to employ a general term) frequently entail an additional creation of funds for the purposes of military action, and the enormous "watering" of Government Securities occasioned by the recent South African War will be remembered. At any stated time there exists a practical though fluctuating equilibrium between the amount of National stock and the public demand for it as an investment, and these fresh additions, by disturbing that equilibrium, obviously depress the price. Its price within a few years has shown a diminution of £31 in respect of each £100 of stock. One of our principal assurance companies made a fortune over a hundred years ago by purchasing Consols when the value had receded to about £48 per £100. (On the 1st of June, 1797, Consols, which then paid 3 per cent, interest, stood at 47½, and on the 23rd of August, 1798, at 47¼.)

Independent of purchases in the market by the operation of the Sinking-fund, these stocks may be regarded as practically irredeemable - a perpetual annuity of the interest attached, but liable to diminution under circumstances favourable to National credit, - for although they may be redeemed at par (£100) after a specified date at the option of the Government, the process would in all probability be adopted of substituting stock at a reduced rate of interest.

Local Loans And Guaranteed Irish Land Bonds

2. Local Loans Stock and Guaranteed Irish Land Bonds are well deserving of attention. A remark is suggested with respect to redemption. In the lists issued by stockbrokers, which I have seen, the year of redemption of Local Loans Stock, for example, is (from exigency of space) stated to be 1912; in the official list the statement is "not redeemable before 1912." The investor would naturally, I think, understand these references to mean that the stock would be paid off in the year mentioned, and he would thus probably base his calculation of its total yield on that apparently clear assumption; if, for example, he purchased at 96 he would naturally suppose that in four years' time (from 1908) he would receive, besides the intermediate payment of the interest, the additional bonus of £4 (the excess namely of the redemption amount of £100 over the price at which he had bought). His calculation would then stand as follows: £3 on each £96 signifies a return of £3 2s. 6d. per cent per annum: the £4 on redemption is equivalent (at 3 per cent) to an annuity of 19s. 1d. for the period of four years, so that his total annual receipt for that time would be £3 19s. 1d., or about £4 2s. 4d. per cent. A reference, however, to any book of authority (containing fuller details) would disclose the fact that the stock was issued on the condition that redemption would not occur prior to April 1912, and that, on and after that date, repayment might be effected at not less than one month's notice, in certain amounts at any one time. Hence, if the investor's portion of stock were not redeemed until, say, 1920, his return (including the annual equivalent of the excess of £4) would prove to be about £3 8s. 4d. per cent, instead of £4 2s. 4d. Inquiry, accordingly, should always be made in connection with every redeemable security, whether it is absolutely repayable on a specified date, or whether that date is simply the point of origin of the subsequent notice of redemption.

Avoid Securities Redeemable Within 5 -10 Years

This remark suggests another rule. Do not invest in securities which possess a currency prior to redemption of, say, less than five or ten years, according to your preference. An early repayment means the trouble, time and expense of securing a substituted investment. It is most desirable also to make a practice, as far as possible, of purchasing when a security is at a discount; this happens when the price is less than the sum at which the bond will be redeemed, or less (in the case of shares) than the amount paid up per share. The trouble of a sinking-fund is thus avoided, and a greater chance afforded of a resulting profit. As I am merely furnishing specimens of the kind of suitable securities I now proceed to other forms.

Corporation Stocks

3. The Corporation Stocks of all established towns and districts in this kingdom deserve favourable notice. No doubt in some instances the existing loans of particular municipalities are somewhat excessive, and too heavily proportioned to the local resources which constitute their support, while, in other instances, injudicious expenditure and defective administration have not secured the complete beneficial results which the advances were granted and expected to ensure. While our municipal elections to the important position of administrators for the benefit of local districts result, as they so frequently and unfortunately do now, in the appointment of inferior men who, competent to engage in retail transactions involving shillings, are utterly incapable of dealing wisely and knowingly with complicated and extensive financial expenditure which comprises thousands of pounds; and while the spirit of political party so disastrously intrudes, so long will our municipal government prove an ineffective instrument for genuine popular service.1 But if carefully chosen this difficulty

1 For the strain is not felt in the fervid period of borrowing: the test of productive expiditure is to come need excite no apprehension, as it is not probable that any established town (especially with important local manufactures and staple trades) will ever be so diminished in resources, within the compass of the loans' currency, by a fall in the rateable values of the properties which secure the advances (from loss of vigorous trade or migration elsewhere) as to engender doubt. And even were this a practical possibility in any case, the trade and population must settle elsewhere, and by a judicious distribution of these investments the augmented prosperity of the one will help to repair any reduction in the stability of the other. I have already submitted a comment upon the advisability of excluding short-dated bonds; and particularly in bonds of comparatively brief currency, do not purchase, as I have advised, above par (that is, where the price exceeds £100, the capital value), since the premium will be lost on redemption.