“Real return, real return – wherefore art thou real return” – Con’s cri de couer

Con Keating’s cri de couer demands an answer. Shakespeare scholars will recognize that Juliet was not asking “where Romeo” as much as “why  Romeo”. This article asks where inflation beating returns can be secured and leaves us answering the question “why real return?”.


My attention since the beginning of the year has switched from developments on the regulatory front to some basic questions of investment management. The pensions minister, Guy Opperman, has been encouraging the wider use by pension funds of illiquid investments. This is a sound idea, but the timing is terrible.

The cost of liquidity is currently close to its all-time lows, and it is liquidity which has a cost, not illiquidity which commands a premium. This is a direct result of quantitative easing. It has also found expression in the unwillingness of the investment banks to run the huge bond trading inventories of former times. The price of liquidity is insufficient reward for them. Buying at today’s price may look very foolish at tomorrow’s, when we need to liquidate.

Traditionally, property was the home of illiquid investments, but pandemic, or more correctly the government response to pandemic, has torpedoed the commercial and industrial sectors there. The rents and income from these sectors have declined dramatically, but the debt service on them continues inexorably. Do we really know enough about the future state of our economy and the high street to make new commitments to property?

One positive note to emerge from pandemic has been the rise in the visibility of ESG. Alongside this, the speed of the shift in emphasis from hard-nosed shareholder capitalism to the softer, more inclusive stakeholder form has been remarkable. This has been trumpeted by some as the end of neo-liberalism. The lessons from the ‘end of history’ school which arose at the end of the Cold War have not been learned. The shift has taken tangible form; 192 CEOs signed the US Business Roundtable open letter that ended: “Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.” However, I have not noticed any material decline in share buy-back operations. Greenwashing anyone?

I have been swamped by salespeople wanting to tell me about green gilts and sustainable bonds. In my youth, green was how you looked and felt a month or two after buying any gilts. Is the Treasury really going to hypothecate the proceeds of issuance to specific purposes? This is something they have resisted tooth and nail with taxes and other revenues for generations.

I am intrigued by the concept of a sustainable bond. As an analyst, I was taught that the place to start reading with any new issue prospectus was the ‘Use of Proceeds’ section, and if those uses were not acceptable to read no further. (and not buy any) Of course, there is the other possibility, that these are bonds that will be sustainable in the sense of being extremely unlikely to default, but that is unlikely to pay me any premium above the time value of money.

Financial markets are currently being roiled by the prospect of the return of inflation. In the short term this is seen as a consequence of the self-indulgent sprees expected as savings accumulated during the year of lockdown are spent once those restrictions are removed. In the US, there is talk of a roaring twenties revival. In the long-term, we have the cautions offered by Charles Goodhart and Manoj Pradhan in “the great demographic reversal”. Simply put, an ageing society can be expected to consume while not producing and that is inflationary and continues for some three decades.

This brings me to a cri de coeur, and there is a major prize for the innovator who solves this problem, who can create securities which are secure and pay inflation plus some small margin – the way linkers once did?

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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