Shares: the century's best punt

Equity trading may have changed but it beats bonds

Every £1 invested in UK shares in 1900 is now worth £16,499 according to a study by investment bank ABN Amro and London Business School.

But although London Stock Exchange was the most profitable home for investments in the 20th Century, the study says it was not as lucrative as had previously been thought.

The authors of the report say that the annual rate of return from stocks during the century was 5.9%, lower than the 8.8% which had been previously assumed.

They say that the study is more accurate and detailed than previously published calculations which were based on the period from 1919 and 1954.

20th Century returns

£1 invested in shares in 1900 worth £16,499 now

£1 in 1900 equivalent buying power of £54 now

Average inflation is 4.1%

The ABN Amro/LBS study also found that the average inflation rate during the century was 4.1%. This meant that £1 in 1900 had the same purchasing power as £54 now.

Long-term government bonds gave what is described as disappointing returns of 5.4% per year, or 1.2% after inflation.

The study seems to back up the view of the so-called Sage of Omaha, legendary investor Warren Buffet, who maintains the best policy is to buy stocks for the long term..

Brewing maintains its share

The report found that in any given year the gain or loss in the value of the shares tended to be much larger than that year's dividend income.

But over the longer term, reinvesting the dividend income is much more lucrative than merely waiting for share values to rise.

They say that over the past century a portfolio of shares with dividends reinvested would be worth 100 times the value of the same portfolio with dividends which were not reinvested.

Their study, to be published in full in a book in early 2000, also says that the current domination of the London stock market by a few companies is not unprecedented.

Currently, the largest 10 companies account for 50% of the FTSE 100 index, which itself accounts for 79% of the entire stock market's value.

Although this is high by the standards of the past five years, it is not as concentrated as it has been for large chunks of the 20th Century.

As to the type of company in the top 100, the brewing, banking and utilities sectors make up roughly the same proportion of the top 100 companies at either end of the century.

But railways, which made up 50% of the top 100 quoted companies in 1900, make up just 0.3% in 1999. By contrast telecoms account for 18% today compared with 2.5% in 1900.