Jane Austen's investment guide
The Anthology section features some of our best writing for clients. This piece for Janus Henderson shows how investing for income is as important now as it was in 1813
AUTHOR: Rosie Murray-West
EDITOR: Caroline Elderfield
Jane Austen’s heroes knew how to get a decent income on their investments. Mr Bingley, for example – a “single man in possession of a good fortune” from Pride and Prejudice – is likely to have achieved his £4,000 or £5,000 a year by investing in government bonds.
Rather like today’s pensioners, Austen’s gentlemen of leisure needed to keep their capital intact, deriving an income from it.
At the time of the book (somewhere between 1797 and 1813), government gilts paid interest at around four or five per cent. Austen herself invested the profit from her novels in the ‘Navy Fives’ – bonds issued at five per cent. Present-day investors in gilts would not be able to get anywhere near her returns.
Then, Mr Bingley needed capital of £80,000 to produce income of £4,000 on rates of five per cent. To produce the same at today's gilt yield of around 0.8 per cent, he would need capital of £500,000.
That is, of course, without taking into account two centuries of inflation. His £4,000 would buy nothing like the grand lifestyle it did in the early 19th century.
Mr Bingley, in keeping with modern investors, would need to look further up the risk ladder to achieve a good income from such a pot. Back in the here and now, these options are worth considering.
If you – or a latter-day Mr Bingley – invest in shares that pay a dividend, you do not have to sell to gain a steady income stream.
The benchmark FTSE 100 was yielding 3.73 per cent at the end of August this year. However, dividends are not guaranteed and the value of your underlying investment changes, too.
Gilts and bonds
Bonds, like Jane Austen’s Navy Fives, pay a fixed level of income usually once or twice a year. They can be issued by companies or countries and the initial issue value is paid back on maturity. In practice, however, because bonds are then traded within the market, the return they bring changes with economic sentiment.
At present, the income you can achieve from investing in gilts (UK government bonds) is less than one per cent. If you want an index-linked bond, where the return rises with inflation, the interest rate is even lower.
Gilts seem safe because the UK government is unlikely to default (fail to meet repayments to bondholders). With corporate bonds, on the other hand, the stability of your investment will depend on the financial position of the company. The more risk a bond carries, the higher the income you can expect.
Commodity investors can put their money into metals, farm products, coal and oil through funds, share investments or by buying the commodity directly. As we’ve seen in recent years with the oil price, commodities can be volatile but lucrative.
Valuations for mining stocks roughly follow the value of commodities. For example, the three large mining stocks – BHP Billiton, Rio Tinto and Anglo American – currently yield between two and three per cent, although dividends can be volatile and risk being cut altogether during commodity-price downturns.
One way to secure a regular income is to be paid rent by tenants, either from residential or commercial property.
A recent report from Your Move suggested that investors can find yields of 4.5 per cent from buy-to-let residential property. However, managing such an asset takes time and you will need to factor in void costs. Perhaps not the thing for a gentleman of means.
Another popular way to exploit this market is by investing in commercial property, such as shops and office blocks. It tends to be of higher value, so investors typically opt for commercial property funds or trusts that allow them to have exposure to a portfolio of different buildings. UK commercial property yields on average 5.2%.
Investing in infrastructure gives you a slice of the returns on new-build hospitals, roads and other big projects undertaken by private companies in the UK and overseas. Infrastructure funds can provide long-term income because large-scale projects tend to provide cash flow for several years.
Diversity and its desirability
For those who wish to live off their income – like Mr Bingley – a diversified portfolio is desirable. It helps to spread risk because if one source of income dries up, others are able to take its place.
For individuals who wish to keep their capital intact, the solution is to take only the ‘natural income’ – dividend and coupon payouts – from the pot and leave the rest invested.
Investing in a spread of asset classes through managed funds could give more time for riding on the estate, while even ladies and gentlemen of leisure might prefer to draw on a fund manager’s expertise. They are also an alternative to single-asset funds.
Austen’s characters might have been impressed with good multi-asset funds. They allow you to take advantage of all the investment options above. In bringing together every asset type, multi-asset funds aim to give you income and growth in line with your risk appetite.
FURTHER READING: Janus Henderson case study