Financial directors, feverishly trying to enhance shareholder value, must have been contemplating the futility of their efforts when it was revealed by Barclays Capital that the best investments in the UK in the 1990s were gilts, not equities. A depressing thought, given that equities (at 9.5% pa over the period) are supposed to represent “growth” in a very real sense, while gilts (10%) represent a loan which the government taxes to oblivion via inflation. But fears of recession and a crisis-induced ‘flight into quality’ have seen interest rates and bond yields fall, bond and gilt prices rise. The mathematics make the total returns from fixed-rate stocks almost unassailable: if market yields fall from 8% to 6%, the price of bonds will rise by up to 33% (depending on the time to maturity). FDs should take heart. Unless the UK is about to enter a period of Japanese-style interest rates (authorities there have just cut bank rates from 0.25% to 0.15%), then equities should start to outperform gilts again. This is because gilt investment is a zero-sum-plus-coupon game. Gilts are issued at (or very near) par and are redeemed at (or very near) par; as market yields fall, fixed-rate bonds rise in value, creating prospective capital losses between then and when they reach maturity. Of the 32 medium-to-long term fixed-rate gilts listed in the Financial Times, all but one is trading above par (the exception is a bond with a 3.5% coupon). Yet with redemption yields running at around 4.4%, the prospective total returns are certainly less attractive than they have been. Even if interest rates fall further, creating more capital gains for gilts, future buyers will face even bigger gilt price falls as maturity looms, and hence shrinking total returns. Caveat gilt emptor. In contrast, the prospects for equity investment in plcs that create shareholder value are virtually limitless.