Brian Tora: Column

ASK ANY stockbroker where to put your money and you will be told that equities are the best investment. They may go up and down according to the vagaries of the market, but over any five-year period they will have outperformed alternatives such as cash or bonds. Until now. According to statistics to be released, British Government Securities - UK bonds to the cognoscenti - have outperformed ordinary shares this decade.

The source of this revelation is the Equity/Gilt Study published yearly by Barclays. It traces the performance of the stock market, gilts and building society deposits all the way to 1918. The survey that brings us up to the end of 1998 is expected to show that British Government stocks put on a late spurt last year, and edged their way to the top of the table for the returns achieved during the 1990s. This is really quite a remarkable achievement.

Yet I am sure it is true. Gilts have performed remarkably well recently. Confounding expectations, yields on long-dated British Government stocks are now below those achievable in America or Germany. US 30-year bonds return 5.1 per cent, German 4.5 per cent, and here in the UK just 4.2 per cent.

Why has it happened? It is not just that inflation has fallen and stayed down - that has happened elsewhere too. In the UK there has been unprecedented demand for gilts by pension funds. This Government, too, has been chary of increasing borrowing, so over recent years demand has outstripped supply. Can it continue? It is hard to see that it will, but then who would have predicted yields so low when we entered the 1990s.

This may have been good news for some investors, but it does have severe implications elsewhere. It is an interesting twist to realise that the latest potential scandal to hit the financial services industry - guaranteed annuity rates on certain personal pension products - would not have occurred had gilts not risen so much recently. Annuity rates depend upon the returns available in the Government securities market. With these now so low, promises made years ago to deliver a particular income at retirement can no longer be met other than by diverting additional funds to make up the shortfall.

The message must be that most of the fun in this market has already taken place, but you need to plan early and fund well to enjoy retirement. Living off capital is all very well, but markets fluctuate and you may need income at a time when you do not want to sell.

Meantime, bargains are there to be had. Some fund managers recognise this, launching bond funds offering spectacular yields. Be careful, though. High yields mean higher risk, although in many cases the yield premium seems out of all proportion to the attendant risk.

Buy them if you will for an income that will surely be greater than that which you can expect from gilts or building society deposits - however, treat any capital gains as an unexpected bonus.

Brian Tora is head of the Asset Management Division of Greig Middleton & Co