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Go back 40 years, and almost half the securities listed on the Stock Exchange were fixed-interest securities rather than equities.
There were debentures, convertibles, unsecured loan stocks and all manner of other fixed-interest securities in all shapes, sizes and coupons, and on any given day they would account for about half the trading volumes.
Before the bull market of the Eighties and Nineties made equities the exclusive centre of attention for most private clients, a typical portfolio would almost always contain a mix of shares and fixed-interest.
The Americanisation of the market indicated the beginning of the shift. The big thing of the Sixties and Seventies was the development of the eurobond market in London where sovereign borrowers and companies began to tap into the offshore funds deposited here. From the beginning, it was a wholesale market for institutional investors, not individuals.
Companies and their banking advisers wanted a limited number of investors who could put up big money, and it quickly happened that the minimum holding they would accept was far too large for a normal individual to accommodate. Much later, the European Union set this trend in stone by allowing issues of £50,000-plus to go through on a shortened prospectus —the lesser protection being justified as they were targeting sophisticated investors. Inevitably, these developments plus redemptions as bonds matured and the absence of new issues targeted at private investors brought a huge decline in the number of listed accessible bonds.
The London Stock Exchange has noticed this, and it has also noticed the efforts by investment banks and institutional investors to keep the bond market as an opaque and cosy club. So it plans in the autumn to start listing bonds again, and hopes to make these attractive to private investors by making it easier for their stockbroking advisers to deal.
It is confident it knows what it is doing because bonds have remained big with private investors in Italy, and Borsa Italiana is of course now part of the LSE group, so London has access to the technology and skills.
Italy also demonstrates that private clients can deliver the funds companies need. A couple of weeks ago, ENI, the Italian oil major, offered a series of bonds exclusively to retail investors. The minimum size of the issue was �1 billion, with an upper cap of �2 billion. In the event, the issue was massively oversubscribed with �5.8 billion chasing it.
The same could surely happen in the UK because people with cash are desperate to find an alternative to bank deposits where they can earn a decent yield in relative safety. And there are obviously attractive corporates looking for money. John Lewis, for example, recently issued a 10-year bond that has an interest rate of 8.75% — a return which most retail investors would die for. But of course under the current clubby system, they were effectively shut out from it.
This is the problem. Admirable though the LSE's initiative is, it could easily founder because of that minimum dealing size. Much as private investors would want to buy bonds of quality they will be reluctant to put such a large sum in a single stock.
These days, when the banks are reluctant to lend, it makes sense for companies to raise the capital they need through the bond markets. It makes even more sense for them to target the retail investor with these issues because they would surely be willing to lend John Lewis — and the other blue-chips such as Tesco or Vodafone — at a much lower rate than the 8.75% demanded by the institutions. Companies would get cheaper capital, investors would get higher returns and the efficiency of the system would be improved.
The losers would be the investment banks, which would have to work harder to manage an issue, and the institutional investors who would no longer get this stuff on a plate at a price of their choosing. The winners would be the clients whom the exchange exists to serve — the companies looking for money, and the investors willing to provide it. But at the moment the potential losers are calling the shots, so nothing is happening.
There is work here for the Financial Services Authority. It makes much of the need to treat customers fairly, but pricing retail investors out of the bond markets flies in the face of this admirable concept and simply should not be allowed. The FSA needs to take on the vested interests and clear a path through the legal undergrowth of EU prospectus rules and the know-your-client obligations of private-client stock brokers. The objective should be to make it as easy to buy corporate bonds as it is to buy equities. It is not difficult but it does require an act of will.
There is also a public policy issue. If people have to make their own pension provision in years to come, they have to be given the tools with which to do the job. Easy access to the bond markets is an essential part of that.
