What happens when you mix politicians,
bankers and private "retail" investors...?
I AM REMINDED of this story by Vince Cable, currently the
UK's Business Secretary, writes Paul Tustain, founder and CEO of BullionVault.
He seeks to offload the British government's shares in Royal Bank of
Scotland (RBS) by giving them to something like 30 million British
taxpayers. Something similar was done with British Gas – using the
advertising slogan 'Tell Sid' – a quarter-century ago.
Sid became a caricature of a new breed of private investor in the late '80s,
when privatisation was all the rage. He was in due course conned by the
bankers.
There were only two million Sids on the British Gas share register. But that
was two million people who had to be provided with financial statements,
occasional circulars, the means to vote at AGMs, twice yearly dividends and
all the other informational paraphernalia that goes with investments in
quoted companies. It was an expensive mess which required a massive
management effort to organise and control. This was a major distraction and
cost for management and a significant competitive disadvantage for the
company.
Eventually British Gas decided to reduce the numbers of shareholders. The
result was a capital re-organisation which was manipulated by bankers (I'm
not saying who) and which stripped the value from Sid while lining
professional pockets. It was a fraud on fractional entitlements, designed
ostensibly to reduce the huge share register to a manageable size.
Fractional entitlements are what is left when – say – you need a minimum of
100 original shares to get a resulting stock issue, and you have only 70. The
bankers will aggregate all the fractions, sell them in the market, and redeem
to small investors their proportionate interest. Usually it's a model of
fairness.
Sid's British Gas shares were converted into bond packages, with an unusually
high minimum nominal amount of £1,000 created expressly to eliminate Sid from
the register and make his entitlement fractional. So none of those big bonds
were distributed to Sid. Instead, the entire allotment went to the issue
managers as fractional entitlements – in theory to be sold for the benefit of
those entitled two million Sids, who would receive one final cheque before
being ejected from share ownership and expunged from the share register.
But the bankers used stabilisation (legal market-rigging to you and me, and
quite common for a big bond issue) to hold the price steady while they
offloaded those fractional entitlements into the market. The result was a
long-dated inflation-protected bond. This 23-year index-linked stock came at
a steady price, yielding 2 full points above market. It saw a steady supply
of £200m of Sid's property being bled onto the market by the issue managers,
and at a bargain basement price. They even had a ready made excuse for the
low price – the sheer weight of supply.
Nevertheless...index-linked stock yielding 4.3% for 23 years? Don't you
wonder who bought them?
Well, I admit I did. I read about the proposed BG re-organisation in the Financial
Times, I think in October 1999, and I noticed how unusually unbalanced
it was. But for the next four months while it was happening there was not a
single article on Sid's reorganisation published anywhere. I checked, many
times, in the old McCarthy news service – a sort of 20th century 'Google'
made of newspaper cuttings, with scissors, glue and photopiers. This
incredibly attractive index-linked stock was being sold with what appeared to
be a news blackout, and without any marketing whatsoever. That's when I
decided it would be smart to be on the same side as the bankers, and bought
it.
I still have those bonds, paying 4.1875% Index Linked until 2022. I paid less
than par, and I bundled them into my PEP (now an ISA). So for the last 14
years I have in fact received a handsome 4.3% tax-free yield each year,
index-linked against inflation. Over and above that lovely yield, I have
watched my capital more than double. So my humble index-linkers have
outperformed the equity market by about 100%, and provided me with a healthy
income.
I imagine Mr Cable will be able to plug this particular hole in his RBS plan.
But I doubt he will outsmart the bankers and plug every hole.