Jenna Barnard, Co-Head of Strategic Fixed Income, shares the story of how receiving a book on investing from 1892 – found by chance at a second-hand book shop – turned out to be a rare gem of a birthday gift. The book’s lessons on investing are not only instructive but also shine a light on the predicament facing bond investors today.
Last month I received a birthday present of a singular little book dating from 1892 that was found by chance at a second-hand book shop. Counsel to Ladies and Easy-Going Men on their Business Investments and Cautions against the Lures of Wily Financiers & Unprincipled Promoters turned out to be a personal guide to bond investing written by an anonymous woman based on her own investment experience in the late 1800s. Understandably, this might not appeal to everyone, but from my perspective it turned out to be a rare gem of a birthday present.
The book’s contents are not only instructive but also bring illumination to the predicament facing bond investors more than a century later. It is worth noting that the book was written in the UK in 1892 in the midst of what was known as “The Long Depression.” This period has many parallels to our own but hit the UK particularly hard. The UK became a pursued economy, with its industrial hegemony eroded by the emergence of the U.S. as a competitor. Globally, the 1870s, 1880s and 1890s were a period of falling price levels and economic growth rates that were significantly below the periods preceding and following. Triggered by financial crises (railroad bonds in the U.S., a silver crisis in Europe) and stagnant real wages, this period exhibits many parallels to the current global malaise.
The book contains timeless investment principles, and here I’ve chosen a few choice quotes from the book to reflect on:
Recurring Troublemakers & Government Bond Investing in Europe
“Securities of good Continental Governments, such as Germany, Prussia, Holland and Scandinavia are too dear as a rule.”
“France, Austria, Hungary and Italy, are honest, but they add to their debts year by year.”
“The government securities of the South of Europe, Spain, Portugal, and Greece are dangerous as permanent investments; from time to time they have compromised their creditors in the past, and will do so again.”
The relevance of these statements is obvious given the experience of Europe in recent years, but it continues to amaze us that many investment managers exhibit little long-term stewardship of their clients’ money or perspective during “hot” markets. A classic case in point was the almost farcical Argentinian 100-year bond issued in 2018 and currently trading at 67 cents on the dollar.1
Corporate Bond Investing
“No investments are more dangerous for a lady than new banks and new insurance companies.”
“New banks at home or abroad are often started by second class people, and must be carefully avoided. Established and solid business firms do not readily change their bankers, so that many of the clients of a new bank are third or fourth rate firms; for some years usually bad debts are made, and the management has to buy its experience at a heavy, and sometimes ruinous cost.”
This point is not lost on anyone who might have invested in bonds from Metro Bank, a UK challenger bank that was launched a few years ago.
Metro Bank 5½% 6/26/28 Bond Price
Source: Bloomberg, Metro Bank 5½% 6/26/28 Bond. Data from 6/20/18 – 4/28/19, GBP
资料来源：Bloomberg，MetroBank5½％6/26/28 Bond。数据从6/20/18 - 4/28/19，GBP
“Loans of small states and the securities of companies with small capital… are difficult of sale and the quoted margin… is usually considerable. Moderate stakes in large companies are the best.”
We have also found the bonds of smaller companies to have higher default rates, on average, and lower recovery rates. Lending to a company with less than $100 million in EBITDA (earnings before interest, tax, depreciation and amortization) is, in our view, best avoided by investors.
Short-Duration Bond Strategies
“Bonds to be paid off at par in a few years are not very desirable for ladies. If good they will have to buy at a premium, and will of course incur a loss of capital at the end of the term. They will then have the trouble of finding a new investment and as the interest on money may further decline, this may be a considerable disadvantage.”
The issue of reinvestment rates is particularly pertinent today if, as we believe, the Federal Reserve has signaled that rates in the U.S. have peaked at the 2.4% effective fed funds rate. Rates in much of the developed world will likely not rise by much, if at all, during this cycle. Thinking about where rates may go in the next recession is sobering and makes longer-dated investment-grade bonds attractive, in our opinion.
“In a country like England, where low rates of interest rule, a security offering 5 or 6 per cent would properly be looked at with suspicion.”
“Avoid bonds or shares to concerns which hold out a promise of an unusually high rate of interest, or an excessive profit.”
In conclusion, this little book is a useful reminder of the importance of style and discipline in credit investment. It also emphasizes that anchoring to the high interest rate and inflation regime of the 1980s, when many investment managers started their careers, is neither useful nor rewarding as a mental starting point. Periods of low inflation, low interest rates and speculative manias are many and varied through history. Sensible bond investing can help investors navigate these environments with their capital intact.
It is fitting to end on this final bit of wise counsel from the book:
“It is the common experience that fortunes tend steadily to increase in the ratio that losses are avoided.”