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People and MarketsCommentLeader

Balls of steel, or crystal?

The Wellcome Trust charity is a fine institution. The medical research it has funded will benefit the world for many years. This week it helped fund that work by selling a £750m 100 year bond. The investors who bought it probably have a warm glow inside knowing they have helped the cause. But is it responsible to buy bonds that will redeem in 2118?

This is a bond issue that will be redeemed beyond not just the lifetimes of those that were allocated some of it, but also those of their children. It could be that their grandchildren will be pensioners by the time these bonds mature, assuming pensions still exist in 2118. And what will the age of retirement be then?

In 1918, the life expectancy of a UK citizen was 56 — it is now nearly 80. When the state pension was introduced 10 years earlier, the pension needed to last around nine years on average. Today it needs to last 20 years beyond the 65 year mark at which a state pension is drawable. Many of those pensions would have been invested in the Wellcome Trust deal and will be receiving 2.517% for the next 100 years.

Forecasting economic growth and inflation can be difficult on a month by month basis, so how can anyone confidently model that data for 100 years? Long term averages suggest interest rates will allow a better return than 2.517% at various points in the coming decades, but maybe past performance will not be an indicator of future performance and it will look like a stellar return.

But who will be here to judge? Will the artificial intelligence investors of the future deem it a good buy? Or will the machines send one of their own back in time to nip century bonds in the bud? Portfolio managers would do well to steer clear of anyone asking for their clothes, their boots and their motorcycles.