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AFTER THE PLAGUE, THE FAMINE

Posted by on 26 May 2020

Despite the fact that the UK government appears, like Gilbert’s Duke of Plaza-Toro*, to be leading from behind, I suppose that this fearful fog of indecision will eventually dissipate and some kind of hobbled phoenix will stumble out of the smoking ashes of the economy. In passing, I would like to bestow their share of responsibility on the political opposition, including the trade unions, who constantly urge caution and demand something called “safety” for all, in the calculated knowledge that the worse the economic consequences of lockdown, the worse for the government.  Can they really be that cynical? Oh yes. THE DAMAGE DONE But whether you believe that lockdown was a) catastrophically late or b) completely unnecessary, (and history may one day deliver a verdict but you won’t find it on Twitter this afternoon), a vast amount of economic damage has been done. And the longer paralysis continues, the worse it will be.  And given that the government is now a follower of international decisions rather than a decision maker itself, we must look at the US, Germany, France (!), Sweden...

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Quarterly review

Report on Q1 2020

Posted by on 4 Apr 2020

It is difficult to remember now but UK equities had a storming close to 2019, driven by the Conservative victory in the General Election and the release from the threat of becoming a loose money, centralised, statist economy. But, as Corbyn finally goes, the UK enters a period of unknown duration featuring the most fiscally “irresponsible” government ever, a nearly universal bailout for the private sector and social rules that are martial law in all but name. Back to Q4 for a second to note that the star performer was the FTSE 250, the most domestically exposed index, which rose by 10%, compared to 2% for the 100 and 3% for the All Share. With the leisure industry shuttered and its quoted representatives suddenly revenue-free and left with only their balance sheets between them and oblivion, it is no surprise that the FTSE 250 was -31% compared to a sprightly -25% for the FTSE 100. With the world now able to agree that any doubt of a severe global recession has been removed, government bond yields fell again. The US 10...

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Companies

ON BELIEF – LISTEN TO YOURSELF, TRUST YOURSELF

Posted by on 4 Feb 2019

There is a classic episode of Yes Prime Minister (“The Bishop’s Gambit”) in which Jim Hacker has to choose between two problematic candidates for a vacant bishopric. One is a “modernist” and the other is a “separatist” (of church and state). There is a famous exchange that runs as follows: Sir Humphrey : “The Queen is inseparable from the Church of England” Hacker: “What about God?” Sir Humphrey: “I think he’s what is known as an optional extra”. Sir Humphrey explains that a “modernist” is a coded word. “When they stop believing in God they call themselves modernists”. Theists tend to prefer the word “faith” to “belief”. Much blood has been spilled across the centuries over the question of whether the wafer and wine offered as part of holy communion are really the body and blood of Christ or merely symbols. If you think that the answer to that question is obvious (and the chances are 1000-1 on that you do) that is because you can’t help yourself. Belief is not a result of choice. It’s something that happens to you...

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Big picture

AFTER THE PLAGUE, THE FAMINE

Posted by on 26 May 2020

Despite the fact that the UK government appears, like Gilbert’s Duke of Plaza-Toro*, to be leading from behind, I suppose that this fearful fog of indecision will eventually dissipate and some kind of hobbled phoenix will stumble out of the smoking ashes of the economy. In passing, I would like to bestow their share of responsibility on the political opposition, including the trade unions, who constantly urge caution and demand something called “safety” for all, in the calculated knowledge that the worse the economic consequences of lockdown, the worse for the government.  Can they really be that cynical? Oh yes. THE DAMAGE DONE But whether you believe that lockdown was a) catastrophically late or b) completely unnecessary, (and history may one day deliver a verdict but you won’t find it on Twitter this afternoon), a vast amount of economic damage has been done. And the longer paralysis continues, the worse it will be.  And given that the government is now a follower of international decisions rather than a decision maker itself, we must look at the US, Germany, France (!), Sweden...

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Recent Posts

Dare you trust these dividends?

Dare you trust these dividends?

21 Sep 2015

Perhaps the most pertinent question for UK stock investors today is “can I trust those high dividend yields?” Glaxo has pre-announced that it will maintain its dividend at 80p per share this year and next year. That’s a yield of 6.2%. Royal Dutch appears to yield 7.5% on the basis of paying $1.88 (c.120p) also “guaranteed” for 2015 and 2016. If these companies can be relied on to continue these pay-outs, it matters little whether Janet Yellen dares to raise the federal funds rate from irrelevant to insignificant or indeed whether Mark Carney goes mad and does the same with the bank rate.  Here is what I previously wrote about the interpretation of high dividend yields. Shares that yield 5% The market does not like these companies. They are seen as unreliable. This may be because there are external threats that are beyond the power of management to prevent or mitigate or it may be that management is simply mistrusted. It might also be the case that they are mature businesses that are, rightly or wrongly, thought to be approaching the end of their life-cycle.   Shares that yield 6% The market does not trust the dividend. It expects it to be cut (or “rebased”, in modern corporate terminology). Naturally I agree with every word of this and everything that follows should be seen in the context of those comments. I will briefly discuss Glaxo and Royal Dutch before moving on to some humbler companies. There is a summary at the end. GLAXO           Price:  1296p                    Hoped for dividend:  80p                       Yield: 6.2% Glaxo is showing off by paying a bonus 20p in respect of Q4 (year-end March 2016). This seems to me an unnecessary answer to the sceptics who would anyway be confounded merely by flat progress. People dislike Big Pharma about as much as they dislike Big Tobacco and they both look like industries that spend a fortune on lobbying. Glaxo needs to generate $3.8bn of free cash flow to pay its 80p dividend without adding extra debt (nearer $5bn this year with the bonus). In 2014 it made free cash flow of $5.5bn; in the year to March 2015 free cash flow was...

“Clients are very nervous”

“Clients are very nervous”

28 Aug 2015

Like many people, I hoped and almost believed that the financial services industry would reform itself after the global disaster for which it was largely responsible. Sadly, there is plenty of evidence that the “leaders” of the financial community are merely waiting to resume their old behaviour. No one appears to be trying very hard to stop them and, if one can stay out jail (and almost everyone does!), taking advantage of stupid but solvent people is very lucrative. As that schoolboy joke goes: “Why does a dog lick its own private parts?” “Because it can”. And so to this week’s story about the giant asset management firm Pimco.  A story on Bloomberg states that Pimco’s assets under management peaked at $2.04 trillion in March 2013 but subsequently declined by almost 25 percent. Pimco’s funds have not performed as well in the last two or three years as they did in the past and its two most high profile names, Mohamed El-Erian and Bill Gross, both left in 2014, with rumours that they had fallen out (with each other). Senior staff at Pimco were partly paid (in cashable internal currency known as “M shares”) on the basis of the firm’s profitability which is dependent on fee income which naturally rises and falls with funds under management. According to Bloomberg, Bill Gross “took home” $290 million in 2013 (a real hunter-gatherer of the 21st century). As the funds’ performances have faltered and the funds under management have declined the group’s profitability has fallen and the performance award has turned south. This is how capitalism works you might justifiably say to yourself: and these financial superstars must understand and even appreciate that: this, surely, is the game they have chosen to play. But wait! Not so fast there! According to the impressively well-informed Bloomberg reporter, “clients are very nervous”. Are they nervous because they are paying top performance fees for mediocre performance? No! They are scared that the threat of lower rewards will motivate their money managers to take their talents elsewhere. According to Mary Childs (she’s the journalist in the pink cocktail dress if you watch the video), it is too much to expect that...

Report on Q2 2015

Report on Q2 2015

6 Jul 2015

In Q2 the FTSE 100 fell by 3.3% but the FTSE 250 was up by 2.8%. In the first half year of 2015, the FTSE 100 was flat but the 250 was +9.2%. This divergence is probably indicative of two factors. The FTSE 100 is heavily weighted with banks and resource and mining stocks, few of which have looked like attractive investments for some years. The 250 is more reflective of UK PLC. Second, despite nervous headlines about (in no particular order) Greece, China, the interest rate cycle and the various consequences of terrorism, large companies have not benefitted from any move to perceived safe havens. Blue chip oil and pharma companies yield 5%+ but the average investor doesn’t seem to care. To put it another way, investors are not particularly nervous. European bond markets have normalised to some extent. The UK 10 year gilt yield has risen from 1.6% to 2.1%. Way back in September 2103 I recommended (and bought) a gilt, UNITED KINGDOM 1 3/4% TREASURY GILT 22. It was trading at 92. Having touched 103 in Q1 it now trades at just under 99, yielding 1.9%. This is not yet tempting me to get back in but it’s movement is worth following. Very little happened to the share prices of the major food retailers in Q2. They have all begun to tackle their structural problems. My view is that the market is now ignoring a trickle of good news. While Tesco is taking small steps at the start of a very long road – because Tesco needs to overhaul its financial structure – Sainsbury reported that the performance in its large stores had improved in June. It implied that the appeal of discount stores like Aldi and Lidl was waning slightly. Wishful thinking, perhaps, but Sainsbury is making an effort and its new joint venture with Argos is interesting. Morrisons has a new chief executive, David Potts, who seems to be making the right noises. When the (dull) Q1 numbers were released he said: “My initial impressions from my first seven weeks are of a business eager to listen to customers and improve“. He seems to be as good as his...

Gifts in the mail

Gifts in the mail

15 Jun 2015

The privatisation of Royal Mail in October 2013 was a lesson in how the City can run rings around politicians who fancy themselves as financial sophisticates. In this case the sap-in-chief was Vince Cable, a man whose CV includes many “economics advisor” titles. Despite this supposed in-house expertise, his department for Business, Innovation & Skills hired a vast syndicate of City banks, perhaps believing in the wisdom of crowds. It is well known that the shares were priced at 330p, that the institutional offering was oversubscribed by 24x and the retail portion by 7x. Most applicants for shares got none at all but 16 priority investors shared 38% of the entire offer (representing 22% of the company). On the first day of trading the shares closed at 455p. Within a few weeks, seven of the sixteen priority shareholders had cashed out completely. The grounds on which the priority investors had been selected were said to include their willingness to be long-term shareholders. It is hard to escape the conclusion that the government behaved with a mixture of ignorance and fear. For many years, financial institutions have gorged themselves on the naivety of their customers but, as a citizen, I find it very disappointing that my elected representatives are quite so useless. The underpricing and mishandling of the IPO was something of a public humiliation that may have contributed to the ejection of Vince Cable in the recent general election. It took only until March 2014 for the National Audit Office to publish a report that criticised the government for being cautious and pointed out in restrained language that “the taxpayer interest was not clearly prioritised within the structure of the independent adviser’s role”.  Royal Mail was something of a dinosaur company in stock market terms. It was a state-owned business that retained a highly unionised workforce and huge defined benefit pension liabilities. Moreover, it was obliged to maintain a national postal delivery service while the potentially more lucrative parcel delivery service was open to new competitors who could to some extent cherry-pick the services that they fancied. Letter volumes are in clear decline as most of us prefer e-mail while parcel volumes are rising...

On Scepticism – can we have our word back?

On Scepticism – can we have our word back?

9 Jun 2015

Scepticism is essential to successful investment. At its simplest, it implies recognising the possibility that anything the market prices as certain or very likely, might turn out to be false. This practical application of scepticism should feature in all investment decisions. Given the priceless value of scepticism, it seems wrong and somewhat suspicious that the word has acquired pejorative connotations. In Britain, “eurosceptics” are taken to be anti-Europe and specifically against the UK’s membership of the European Union. There are plenty of such people, but they seem to me to have made up their minds. If you are decided on a matter you are not sceptical. It may be that people against Europe like being called sceptics because it makes them seem more open minded. But this use of the word has started to turn it into a term of abuse, specifically in relation to the belief in climate change. Climate change deniers are referred to in language that implies them to be corrupt criminals or merely idiots and they are rarely if ever distinguished from those who choose to treat all arguments about climate change with scepticism. Here is Kofi Annan talking to the Guardian last month. “We seriously have to question the motivation of those people referred to as climate change sceptics, who are denying the evidence of human-caused climate change and preventing us from moving forward by spreading disinformation and supporting unchecked carbon pollution.” Climate change believers frequently state that 97% of all climate scientists agree that the consensus view – that global warming is caused by human activity – is true. As an investor, this assertion discomforts me. It makes me think of packages of securitised junk mortgage loans being given AAA+ scores by ratings agencies. If everyone thought or more precisely said that they thought they were OK, what could possibly go wrong? Ratings agencies were, it would seem, paid to award high ratings to rubbish. Whether climate scientists have a financial incentive to swim with the dolphins in the warm waters of the consensus I don’t know. But it is clear that on numerical grounds alone, publicly expressing scepticism will make you stand out a bit.   It...

Our fictitious “housing crisis”

Our fictitious “housing crisis”

6 May 2015

IT’S NOT ABOUT HOMES, IT’S ABOUT HOUSE PRICES Politicians, journalists and sundry do-gooders seem, against the odds, to have discovered one fact on which they all agree. It seems that Britain has a housing shortage and, to paraphrase the late Vivian Nicholson, we must build, build, build. Whenever an opinion, no matter how compellingly simple, is presented as a fact with which no one could disagree it is wise and even compulsory to question it. I bought a dead tree copy of the Times last week (28 April 2015) and there was an opinion piece about housing that contained this sentence: “It’s reckoned that we need about 250,000 new homes a year”. It didn’t add who reckons that or why. But once you start googling “250000 new homes” you quickly light upon a report written in 2003 by Kate Barker, a one-time stalwart of the Bank of England Monetary Policy Committee. It is reckoned, as they say, that this report demanded 250,000 new homes a year and eleven years on that has not been achieved once. It would appear that the nation has accumulated a bit of a backlog: to be more precise, a backlog of 845,000, that being the difference between the actual number of completions and 2.750,000 (11x 250,000). So what did the esteemed Kate (now Dame) Barker actually say in her report? Did she really demand that 250,000 new homes should be built every year? (Spoiler: no). The first line of the report is this: “The UK has experienced a long-term upward trend in real house prices.” And there’s a clue. I think it is fair to say that the primary motivation of this report is to make housing more affordable by increasing the supply in order to restrain prices. Here is the section that deals directly with the question of how many new houses are desirable: “Looked at purely from the perspective of the UK economy, more housing would be beneficial. Different approaches to measuring the shortfall, produce a range of estimates: • projections of population growth and changing patterns of household formation (a proxy for future demand), compared to current build rates implies there is a current shortfall of...

Report on Q1 2015

Report on Q1 2015

30 Mar 2015

In Q1 the FTSE 100 rose by 3.3% and the FTSE 250 by 6.4%. The FTSE 250 is probably more sensitive to the domestic economy (or at least to how investors are feeling about it). The FTSE 100 has larger more global businesses including, of course, oil companies and banks, which received another kicking in the recent budget. That last point is a salutary reminder that investors will have to judge political risk in Q2 as the general election arrives 7th May (though the formation of a government may take weeks if the polls are correct in suggesting that no party will win a majority). I strongly doubt whether the economic outlook will be materially changed regardless of who wins. There is very little room for manoeuvre and it is painful to watch politicians trying to pretend otherwise. But where the banks have been led others could follow, particularly if the next government includes Labour. Utility companies have already been singled out to be sacrificed to the mob. No politician appears to understand that electricity supply is a very long-term and expensive commitment. It may be true that utilities are greedy cash cows but they will not invest the vast sums needed in next generation energy supply if they are treated like political footballs. Labour also wants to limit the profits available to companies who provide services to the NHS. I have no idea what they mean by this (drug companies? nursing agencies? hospital retail concessions?) but I am pretty sure that they don’t either. The point to bear in mind that stupidity is no bar to persecuting businesses that can be successfully vilified. Gilts had a relatively quiet quarter with yields falling from 1.72% to 1.57%. Last week I took profits on 25% of my gilt holdings. This was a small insurance against the political scene, but looking across the sea and seeing Irish 10 year bonds yielding 0.76% it is clear that most of us are missing something. Core eurozone bonds i.e. those of Germany saw 10 year yields fall from 0.54% to 0.18% and as I write the seven year German bonds have a negative yield. ECB QE now looks even...

Sex and money – we need to talk

Sex and money – we need to talk

10 Mar 2015

Calm down now. This post does not address the alleged aphrodisiac qualities of wealth or any other aspect of paying for sex. It is about taboo subjects. A combination of embarrassment and distaste tends to prevent the discussion of topics that should properly be addressed. Hence our nation’s ludicrous history of sexual secrecy with its toxic residue of unplanned pregnancies, sexually transmitted diseases and child abuse. Absurdly, forty years after homosexuality was legalised in England, the CEO of BP felt it was necessary (in 2007) to go to court to stop himself being “outed”.   You might think that the sexual inclination of a CEO or any employee is of no interest to anyone else. But a judgemental attitude persists in the UK and it motivates people to behave as if work relationships have to be furtive. Indeed, many organisations take this much further and require all relationships between employees to be confessed. The implication is that such behaviour is sinful. It is quite true that good or bad relationships, sexual or otherwise, can influence the way that people behave at work. And it is essential that unwanted sexual attention is prohibited. But this no excuse for prurient gossip dressed up responsible human resource management. A purely practical point is that many single people who work long hours will spend half their waking time in the company of colleagues. It is nonsense to pretend that professional relationships will not merge with personal life. But I have known couples who have gone to extreme and potentially damaging lengths to disguise relationships that started at work. And once the lying starts it is hard to stop. You think that employment law gives protective rights to woman who become pregnant? It doesn’t if they feel that they must retire to protect the identity of the father whom they met at work. I know of a case just like this. In the UK, a similar damaging reluctance accompanies discussion of financial affairs. While a certain restraint is appropriate when discussing both sex and money – as the Facebook generation might find out to its cost – there is nothing shameful about needing either. And need is not greed. It...

The ECB, QE and the waiting game

The ECB, QE and the waiting game

12 Feb 2015

Quantitative easing is a process by which a central bank buys relatively safe assets (mostly government bonds) and thereby puts cash into the hands of the newly-ex owners of those assets. In the early years of the financial crisis, this was effectively a life-support system for financial institutions which, post-Lehman Brothers, looked like they might fall domino-style. As the central bank bids up asset prices it creates a rising tide that floats many boats. One side effect of this is that the wealthy become wealthier. QE is quite tricky to justify from this point of view. If it is necessary to prevent the collapse of the banking system it is a jagged pill that needs to be swallowed. As I have written before, this is broadly how the Bank of England justified QE in 2009. “Purchases of assets by the Bank of England could help to improve liquidity in credit markets that are currently not functioning normally.” But gradually, while the music remained the same the lyrics changed. Expressing an idea that was essentially imported from the US, the justification from the Bank in 2011 was quite different. “The purpose of the purchases was and is to inject money directly into the economy in order to boost nominal demand.” You see what they did there? Once again, it was party time in financial markets. Bonds and equities were rising nicely. Bonds were rising because the Bank was buying them and other people were buying them because the Bank was buying them and equities were rising because they looked cheap compared to bonds. And property in the areas where financial people live began to go up again, despite the fact that prices appeared to require mortgages that quite high incomes could not plausibly service and that damaged banks could not reasonably be expected to offer. My friends and I have done splendidly from this once we had “got it”. And although I don’t know any influential people, some of my friends do. Call me a conspiracy theorist if you want but these influential people soon popped up all over the place saying how brave and wise central bankers were to extend QE. THE HIGH MORAL...

OIL…….Something Happened

OIL…….Something Happened

7 Jan 2015

The recent sharp fall in the price of crude oil is one of those rare financial events whose importance is appropriately reflected in press headlines.  Oil has a strong claim to be the world’s most important commodity and also the most political. OPEC was founded in 1960 by the charming quintet of Iraq, Iran, Saudi Arabia, Kuwait and Venezuela. According to its website: “OPEC’s objective is to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.” Were these companies rather than sovereign nations, this would be an illegal price rigging cartel subject to enough lawsuits to employ every lawyer until the end of time. As it is, it’s a legal price rigging cartel that everyone else has to live with if they wish to continue consuming oil. In 1973, OPEC became explicitly political when the US supported Israel in the Arab-Israeli war. It banned exports to the US and the barrel price of crude quadrupled from $3 to $12. It was a shocking inflationary impact that the world did not need. The Iranian revolution in 1979 saw a further leap from $14 to $40. The next great move came in the 21st century as global economic growth was propelled by developing countries such as China and India that became huge importers of oil. The price touched $140 until the financial crisis torpedoed the world economy in 2008 and the price fell right back to the 1979 price of $40. It is worth making a couple of points here. One is that the oil price has shown itself to be very volatile with changes in marginal demand having a huge impact. The other is that, partly thanks to OPEC, the market’s opinion of whether oil is cheap or expensive has largely relied on referencing its own history – the most unsophisticated way of valuing anything. That having been said, it is obvious that oil over $100 makes costly oil supply viable, notably from Canadian oil sands but also from fracking. The world...

Report on Q4 2014

Report on Q4 2014

5 Jan 2015

In a confusing financial and political world in Q4, the UK stock market offered small but notable evidence of calm in as much as the FTSE 250 (+4.5%) easily outpeformed the FTSE 100 (-0.9%), reversing the trend seen in Q2 and Q3. Normally, larger shares perform better in nervous times as they are seen as safer havens. In the case of this quarter, the collapse of oil and oil sensistive shares (including other resource and energy related companies) may have delivered a particular blow to the FTSE but I am still inclined to take the 4% gain in the FTSE 250 at face value. For 2014 as a whole, the FTSE fell by 2.7% following a rise of 13.9% in 2013. Once again, major governmrnt bond yields provided a supportive background. German 10 year Bund yields fell in the quarter from 0.93% to 0.54%. A year ago they were 1.96%. 10 year Gilt yields have fallen from 2.88% to 1.72%. While these seems incredibly low to anyone who has followed gilts over the years, it could be seen as high when compared to the equivalents in Spain (1.62%) and Ireland (1.25%) and France (0.83%). Last quarter I wrote that “bond markets are shrieking the news that global growth has made a long-term shift to lower levels”. The fall of nearly 30% in the oil price in Q4 appears to confirm this view, though it can be argued that a cut of this scale in the price of such a key commodity will ultimately benefit the economies of all countries that do not depend on oil revenues.Initially, though, the effect is more likely to be felt by oil producers and will play out as generally negative in the short term. See my next blog post for more discussion on this. In the UK, the political future appears more important than usual. But it does not seem likely that a change of government would result in a great expansion of government spending. Nor does it seem probable that a referendum would result in a vote for the UK to leave the EU. Most of the political outcomes that frighten investors are highly unlikely and their probability...

The paradoxical results of education for the masses

The paradoxical results of education for the masses

2 Dec 2014

The Churchill wartime government was kicked out by the electorate less than three months after the German surrender in May 1945. Labour won a huge majority and set about a radical socialist programme of nationalisation of key industries and the creation of the NHS and the welfare state. That story is quite well known. What will surprise many people now is that Churchill’s government managed to pass one dramatically progressive piece of parliamentary law in 1944: Rab Butler’s Education Act. There would be free education for all with selection at the age of 11. Children who passed the 11 Plus were eligible for places in grammar schools – it was intended that the top 25% should reach that standard. Places for the other children were to be offered at either secondary modern schools or technical schools which specialised in scientific and mechanical skills. Sadly technical schools were expensive and hard to staff and there were few set up. This gradually created the impression that the majority of children “failed” at the age of 11 and were sent to schools for underachievers. The 1944 act also allowed for the creation of comprehensive schools that could incorporate all standards. Perhaps grammar schools were burdened with having been promoted by a Conservative politician, but socialist politicians grew to dislike their perceived elitism and the Wilson governments of the 60s and 70s embarked on a determined programme of abolition. This culminated in an education act in 1976 which stated that state education “is to be provided only in schools where the arrangements for the admission of pupils are not based (wholly or partly) on selection by reference to ability or aptitude.” The class warrior secretary of state for education leading this was Shirley Williams (St Paul’s School for girls and Somerville College, Oxford). It is a matter of wonder that the most privileged members of the establishment tend to be dismissive of grammar schools and the upwards social mobility that they seem to offer. Our Old Etonian Prime Minister called arguments about grammar schools “splashing around in the shallow end of the educational debate” and “clinging on to outdated mantras that bear no relation to the reality of...

Turning a good idea into an investment

Turning a good idea into an investment

29 Oct 2014

This is the transcript of a speech I made this week at the smartfuturelondon conference How to turn a good idea into an investment What makes a good idea?  If everyone agrees that change is inevitable and ‘it’s only a matter of time’, it always seems to take a very long time. Having heard yesterday’s presentation on smart energy – hands up if anyone thinks that’s a bad idea – I suspect that a common drag on the development of really good ideas is that everyone wants a piece. I was watching The Man With The Golden Gun on TV the other day. It was made in 1974 when the world was suffering the first OPEC oil shock. So in the tradition of the James Bond series to be topical, they shoved in a sub-plot in which the Golden Gun Guy steals the Solex Agitator, a device that turns the sun’s rays into energy.  What a great idea. Someone should try that. When mobile payments were agreed to be a good idea in 1997, there were more than 100 companies represented in the first mobile forum. That year, Coca Cola built a vending machine that accepted payment from a Nokia phone. Around 2005 I attended a presentation about mobile payment at which someone said that there was a Coca Cola vending machine in Helsinki. Everybody was trying to get a piece of mobile payments – and it was all taking a very long time. Sometimes, great ideas are just too early. Twenty years ago, Larry Ellison of Oracle thought that the PC was an absurd device, being limited by its own processing power and memory. “Put it on the internet” he said. So Oracle launched what we would now call the first netbook. Unfortunately, the internet was too slow at the time. The Oracle NC failed. But one of Ellison’s managers thought it was a great idea. He was Marc Benioff and he left to found Salesforce.com in 1999. It is now the reference business cloud computing company and has a market cap of $37 billion or 7x forecast revenues. The best and most valuable ideas seem to come from nowhere and often evolve...

Report on Q3 2014

Report on Q3 2014

4 Oct 2014

The stock market remained nervous, reportedly seeing below-average turnover in Q3. The trend that began in Q2, of the shares of smaller companies performing worse, continued. The FTSE 100 fell by 1.7% and the FTSE 250 by 2.9%. For the third quarter in a row, yields on European government bonds fell to previously unimaginable lows. German 10 year Bund yields have fallen below 1% (now 0.93%). To put this in some context, 10 year Japanese bond yields were around 1.9% before the financial crisis bit in 2008. Japan is considered to be the reference case of a country suffering from long-term deflation. Its 10 year yield is now 0.53%. Since June 2008, Japanese yields have declined by 72% and German by 80%. As I have noted before, the bond markets are shrieking the news that global growth has made a long-term shift to lower levels. Many will argue that this is bound eventually to be reflected in lower corporate profits. It is hard to argue with that but wrong to assume that share prices are consequently too high. When yields on all financial assets are falling, investors are paying higher prices for them. A dollar of corporate profit literally becomes more valuable than it used to be. Many stock market commentators, seemingly obsessed with short-term news and the aphrodisiac of growth, appear to be incapable of understanding this. Given that the cloud of deflation continues to hang over the world (see above), the traditionally nervous month of October will probably produce plenty of gloomy headlines. In my post about the supermarkets, I pointed out that, when operating leases are included as liabilities, Morrison was much cheaper that Tesco and Sainsbury. Well, the gap has reduced but not necessarily as anticipated. Morrison’s price has fallen but the others have fallen further. Tesco’s accounting practices have caught up with it and I must say that, as yet, there is no price at which I would buy it. At last I have noticed the beginning of a backlash in the press against Lidl and Aldi – our nostalgia for the 1970s must surely be limited. Sainsbury has promised a strategic review, a development that appears to have...

The dead constituency

The dead constituency

24 Sep 2014

There is a widespread view in what passes for middle-England that people have a right to leave their wealth to their descendants. It seems odd that, in a country where demonising privilege has persisted as a mainstream political sport, we mostly seem to be more than comfortable with the idea that success or fortune should pass from one generation to another. But it turns out that even ideological turkeys do not vote for Christmas. “According to May 2014 research by Skipton Financial Services Limited, 48pc of under 40s expect to receive a large inheritance from their parents. Of these people, one in five are banking on an inheritance to get onto the housing ladder, and 17pc are relying on it because they have no pension set up. Other stated reasons for hoping for an inheritance include starting a family.” Daily Telegraph, 1 Sept 2014 Accordingly, politicians are frightened of this subject. David Cameron has called the desire to pass on your (hard-earned, responsibly saved) money to your children as “the most natural human instinct of all”. It’s parenthood from beyond the grave. It was reported that in 2007 the opposition Conservatives scared off Gordon Brown from calling a snap general election by pledging to raise the inheritance tax threshold from £325,000 to £1 million. Although Labour pointed out that this was a policy designed to benefit a relatively few relatively wealthy families, it backed off in the face of evidence that the Conservative pledge was popular. (To this day it remains no more than a pledge – it did not survive the coalition government). At present, the law says that an individual may leave £325,000 tax free above which level the rest of the estate is taxed at 40%. At first glance this is generous. Then one looks at UK property prices, particularly those in London and the South East. The average property price in London is now £499,000, in the rest of the South East it is £326,000 (source: ONS, June 2014). If the “family home” is worth the London average of £500,000, it will be liable to £70,000 of inheritance tax when the last exempt person (e.g. spouse or civil partner) has...

Moral money

Moral money

21 Aug 2014

What do Iran, Syria, Zimbabwe and North Korea have in common? There may be several answers but one is that, along with 145 other nations, they are recipients of UK Official Development Assistance (ODA). In 2012, total UK aid was £8.766 billion or 0.56% of gross national income. According to the press, this may have risen to 0.70% in 2013, which is the target suggested by the UN for members of the OECD Development Assistance Committee (DAC). In 2012 the average DAC member trailed well behind the 0.70% target at 0.30% (the US and Japan were both well below the average, the Scandinavian countries were well above). So, if the UK has hit 0.70%, it will be awarding itself a gold star. All UK politicians (with the exception of UKIP) seem to believe that ODA emits a moral glow, in which light they can disport themselves to effect. Doubtless they can’t help themselves and, though a fairly revolting sight, it beats fighting wars.   But I find myself wondering what sort of policy determines the choice of ODA recipients. In 2012, India topped the list with 7.9% of total bilateral aid. (NB bilateral aid is what we give directly – about half of our aid budget is multilateral which means that we donate to international organisations which then pass it on however and wherever they deem best).  India is one of the IMF’s official emerging nations. Is it the most deserving charitable destination in the world? Clearly, a better way to understand these figures is to look at ODA per head. On that basis, India falls to 67th (still in the top half) and above Burundi and Niger, two of the poorest countries of all, both with average annual per capita incomes of less than $1000. The top per capita recipient of UK ODA is barely believable. St Helena is a British Dependent Territory with a population of around 4500. In 2012 the UK gave bilateral aid of £106 million or c.£23,500 per head. Apparently we are building them an airport so that they can become a tourist destination. I have read in the press that the total cost of this airport (not yet...

Report on Q2 2014

Report on Q2 2014

3 Jul 2014

I have noted before that it is generally the case that smaller companies’ share prices are relative beneficiaries of improving confidence. Large blue chips do better when investors are seeking protection. In Q2, the FTSE 100 rose by 2.2% but the FTSE 250 (companies 101-350) fell by 3.4%. There has been widespread profit taking from the shares where much of last year’s good stock market performance was concentrated. This is evidence that nervousness is about. As was evident in Q1, the prices of assets regarded as safe continue to rise and the definition of “safe” to become less demanding. I mentioned the marked fall in European government bond yields in my Q1 report and returned to the theme in June. Irish 10 year bond yields fell from 3.43% to 2.83% in Q1 and have since declined to 2.37%; Portuguese from 5.9% to 3.73% and now to 3.66; French from 2.46% to 1.99% to 1.61%; and so, it seems, it goes on. Nervousness among equity investors is generally a good thing. Complacency is dangerous but very hard to spot. (An interesting philosophical question is: can one simultaneously be complacent and recognise one’s complacency?) It is only when nervousness turns to panic and rout that it becomes destructive. There is a stock market saying to the effect that a bull market climbs the wall of worry. I find this quite wise. There is another well-known traditional piece of advice – “Sell in May and go away” with its less famous follow up – “Come back on St Leger’s day”. The St Leger is a horse race which falls this year on 13 September. I have always felt that this is suspiciously convenient for City types who want to go to Wimbledon, Lords, Henley and the south of France. Certainly share volumes fall in the summer and market moves can be exaggerated. It’s a nasty thought that your portfolio might misbehave if you are not there to look after it. So, by all means, make up a little rhyme to justify some profit taking. I have certainly questioned the level of my shares that have done well and have taken profits in some. But I have failed...

The eurozone is the frozenzone

The eurozone is the frozenzone

19 Jun 2014

The yields of bonds issued by government are broadly influenced by three factors: the performance of the underlying economy; the outlook for the currency in which the bonds are denominated; and the probability of default. Eurozone government bonds have demonstrated all three factors at work since the financial crisis hit in 2008. The story can be traced by the changing yields offered by (for example) Italian 10 year government bonds since 2008. In the first half of 2008, yields rose as the market worried that governments would have to issue more debt to bail out a few troubled financial institutions. This was widely expected to be inflationary (bad news for bonds). By mid-2008, worries began to be directed towards the probability that the crisis was going to cause recession and that interest rates were heading down. For two years, Italian bond yields fell. Then the story changed again. The possibility that Italy (and a number of other Eurozone countries) might default caused near panic. Finally, in late 2011, the ECB began to convince investors that a solution would somehow be found. The second blip in yields in the summer of 2012 coincided with much wild talk of the break-up of the euro causing some panicky types to worry that Italy et al would honour their debt in a new made-up currency that they could “print” themselves. This was an irrational fear, not least because much of the German and French banking system was a huge holder of such debt and would have been effectively destroyed. Through the rest of 2012 and 2013, Italian government bond yields normalised, offering a consensus view that the economy was poor, inflation low and the government unreliable but unlikely actually to default. In 2014, something quite different has happened. Yields on Eurozone bonds have started to deliver a single rather shocking message – low economic growth and low inflation are here to stay for years and years. Assuming that an investor is happy to disregard the risk that the Italian government will default, we must contemplate the fact that he apparently believes that a 2.6% return on Italian assets is enough to justify a ten year investment. As the...

Patriotism, protectionism and AstraZeneca

Patriotism, protectionism and AstraZeneca

15 May 2014

Boswell attributed to Dr Johnson these well-known words: “Patriotism is the last refuge of a scoundrel.” I suppose there is some merit in this view if you accept that the great tyrants of history have tended to claim to be patriots (though “scoundrel” seems a mild word to apply to the men responsible for the Holocaust, Collectivisation and The Great Leap Forward). Johnson actually wrote at length on the subject of patriotism, specifically in opposition to American independence. “He that wishes to see his country robbed of its rights cannot be a patriot. That man, therefore, is no patriot, who justifies the ridiculous claims of American usurpation; who endeavours to deprive the nation of its natural and lawful authority over its own colonies; those colonies, which were settled under English protection; were constituted by an English charter; and have been defended by English arms.” I think the key sentence here is the first. It raises the interesting but complicated notion that a nation can have rights, beyond the aggregated individual rights of its citizens. It is a potentially dangerous idea and has been the cause of many international disputes, some farcical, others calamitous. After a couple of world wars and a widespread if not ubiquitous international consensus in favour of eliminating racial discrimination, patriotism is a trickier position to hold than it once was. Patriots use their support for sport as a way of expressing themselves. I found the chauvinism during the 2012 London Olympics somewhat distasteful (being of the opinion that hosts have the obligation to put the interests of their guests first) but certainly not dangerous or harmful. If crowd behaviour limits itself to sport, we should be thankful. In 2014, financial patriotism has started to feature in political debates. We have become accustomed to being told that e.g. Romanian families will travel 2000 kilometres in order to claim state benefits in the UK. (I find this hard to believe. How many Britons would emigrate to Romania on the promise of living in poverty for free?) Now, somewhat bizarrely, some people object to foreigners bringing too much wealth to the UK. They are supposedly buying our trophy assets, aided by the fact...

Report on Q1 2014

Report on Q1 2014

22 Apr 2014

The FTSE 100 fell by 2.2% in the quarter. The FTSE 250 (that’s companies from 101 to 350) rose by 2.1%. I wrote in the Q4 report that it is generally the case that smaller companies’ share prices are relative beneficiaries of improving confidence. Large blue chips do better when investors are seeking protection. It is worth noting that in the first three weeks of April, FTSE 250 shares have become more jittery, falling by 2.2% compared to a modest 0.4% recovery in FTSE 100 stocks. It looks as if there has been plenty of profit taking in the best performing shares of the past year, many of which are those of FTSE 250 companies. These were relatively trivial ups and downs in UK equities. Of more consequence for relative valuations is the continued strength of major government bonds. Yields on US, German and UK 10 year bonds have continued to fall, despite much talk of stronger economic data and falling unemployment. More impressive still has been the rebirth of demand for the bonds of Greece (yield on 31 December 2013, 8.41%; today, 6.12%), Portugal (5.9%; 3.73%), Ireland (3.43%; 2.83%) and even France (2.46%; 1.99%). Cash continues to chase yield and is becoming less fussy. At a time when the price of assets regarded as safe continues to rise, it would seem irrational to turn negative on the shares of established and financially sound companies. On that basis, this year’s flat equity market is probably resting rather than expiring. Turning to shares that I have recommended, in December I highlighted four companies with long-term strategies. UBM, whose share price is nearly unchanged since then, has just acquired a new CEO. I must admit that I had missed the declared intention of the CEO David Levin to retire in 2014. He has now been replaced by Tim Cobbold, ex-CEO of De La Rue. There is no reason to think that this will change the company’s long-term strategy. UBM raised its dividend slightly in 2013 and, with its low capex requirements, is confident of maintaining its “progressive” dividend policy. But, there is inevitably a risk that a new CEO will surprise investors (new managers are usually...

Grocers minced

Grocers minced

24 Mar 2014

“FTSE 100 sees supermarket shares shelved as Morrisons wages price war.” Last Thursday week (13 March), shares of William Morrison fell by 12% to 206p. They have fallen by 32% since their 2013 peak of 302p in September. In a show of empathy, Sainsbury’s shares were -8% and -26% from last year’s high and Tesco’s -4% and -23% respectively. The strategic announcement from Morrison has emphasised what we already knew – that discounters like Lidl and Aldi have been winning market share from the “Big 4” supermarkets (the other one, Asda, is a subsidiary of the US giant Walmart). This stock market fallout has delivered some shares that ostensibly now look cheap. As ever, the way to judge is to ask what the valuations tell us about the outlook for the businesses and to decide whether this view is realistic, optimistic or pessimistic. But first, some background. Due to the fact that we all go shopping, my observation is that people tend to overestimate the value of their own opinions about retailers. (This is true of many other topics: house prices, because we all live somewhere; climate chance, because we all notice the weather; healthcare, because we all get ill; bankers, because we all use banks.) On that basis, I must assume the same is true of me. So let’s get my prejudices out of the way. First, Lidl and Aldi are private companies from Germany. In my experience, which is somewhat out of date, shopping in Germany is a grim experience, evocative of Britain in the 1970s. If German retailers compete on scale and price, it is because they have nothing else. It is still the case that the collective German psyche has a horror of inflation (I have a 50 million mark note from the 1920s on my desk) and until 10 years ago, the law regulated prices and shop opening times in a way that suggested that shoppers needed to be protected from greedy retailers. The only Lidl outlet I know (in rural France) usually has just one member of staff on the checkout and the last time I was there (buying Chardonnay at less than €3 a bottle) the customer...

Are RBS shares on a dotcom!!! valuation?

Are RBS shares on a dotcom!!! valuation?

28 Feb 2014

You might have heard that The Royal Bank of Scotland (RBS) delivered some disappointing results yesterday. Underlying operating profit fell by 15% to £2.5 billion and the shares fell by 8%. But you might be surprised that it made a profit at all, given that the reporting of the figures and the interviewing of the latest CEO were generally hostile. Well, here’s a point. The net result, discouragingly referred to as “attributable to ordinary shareholders” was rather a long way shy of the £2.5 billion underlying operating profit – it was in fact a loss of £9 billion. If you want to know how these figures are related, the earnings release has 225 pages to help you get up to speed. But before you do that, I would like to draw your attention to the report for 2008. Over a mere 99 pages, a modest underlying operating profit of £80 million somehow delivered a loss of £24 billion to those very ordinary shareholders. If you are wondering what damaged that hapless underlying profit so badly, it included: “Credit market write-downs and one-off items, purchased intangibles amortisation, write-down of goodwill and other intangible assets, integration costs, restructuring costs and share of shared assets”. Stuff, essentially. In case you think that the bank is putting a deceptive spin on its results, it explains itself as follows. “The financial information on pages 23 to 81, prepared using the Group’s accounting policies, shows the underlying performance of the Group on a managed basis which excludes certain one-off and other items. Information is provided in this form to give a better understanding of the results of the Group’s operations.” In other words, if you think that the bank made £2.5 billion rather than lost £9 billion, you will be understanding it better. You will be better informed than the FT (“Royal Bank of Scotland slides to £9bn loss for 2013”) and the BBC (“RBS shares fall after biggest loss since financial crisis”). The dictionary definition of “underlying” is interesting. 1. Lying under or beneath something: underlying strata. 2. Basic; fundamental. 3. Present but not obvious; implicit: an underlying meaning. 4. Taking precedence; prior: an underlying financial claim. I think...

Jittery January

Jittery January

6 Feb 2014

“The bond markets are suggesting that we are looking at a fairly gentle, low inflation recovery.” The dangerously alluring feeling of comfort that I wrote about in my Q4 report did not last long. Major stock markets have fallen this year: FTSE -4%, Dow Jones -6%, Nikkei -13%. Many financial commentators are saying that this is the result of weakness in emerging markets which are in danger of being starved of investment dollars as the Federal Reserve continues its tapering policy. Even writing that makes me feel slightly ridiculous. It is typical of the confusing non-explanations offered by the financial services industry, helping only to encourage ordinary punters in the belief that all this is far too hard for them to understand. “Emerging markets” is an inherently biased way of referring to exotic countries in need of investment.  The term seems to have been invented in the 1980s. According to Wikipedia, prior to that the label Less Developed Countries (LDCs) was used. In 2012, the IMF identified 25 emerging markets. For the record: Argentina;  Brazil; Bulgaria; Chile; China; Colombia; Estonia; Hungary; India; Indonesia; Latvia; Lithuania; Malaysia; Mexico; Pakistan; Peru; Philippines; Poland; Romania; Russia; South Africa; Thailand; Turkey; Ukraine; Venezuela Note, sadly, that that the only African country is RSA. Looking again at the list, if you are particularly attached to democracy, private ownership rights or tolerance of homosexuality, you might find the thought of investing in some of these countries hard to digest. You might also ask how many countries have succeeded in emerging since the 1980s. The answer to that would appear to be zero. Foreign investment in emerging markets tends to be tidal: it flows in and it flows out again (if it can). Why then should this concern the risk-averse investor? There are two reasons, one specific and one general. The specific reason is that businesses in which we might be invested could be hit by diving emerging market economies. Global companies that sell consumer products are especially prone to this. Last week, Diageo the drinks company reported weakness in China and Nigeria. The general reason is that nervousness is infectious (especially in the banking industry). Undoubtedly, we have both these...

Report on Q4 2013

Report on Q4 2013

7 Jan 2014

The FTSE 100 rose by 4.4% in the quarter for a full year gain of 13.9%. The FTSE 250 (that’s companies from 101 to 350) performed twice as well in 2013, rising by 28.8%. There are never truly hard factual reasons why share prices move but it generally remains the case that smaller companies’ share prices are relative beneficiaries of improving confidence. Large blue chips do better when investors are seeking protection. It is also probably the case that smaller companies are less well known and consequently deliver more surprises. Note that in bad times they typically deliver more bad surprises which point takes us back to why large stocks do better when investors are nervous. It is reasonable to conclude that confidence improved in 2013. The mood implied by the yields offered by government bonds rose from clinically depressed to merely grumpy – in the case of the UK this was from 2.0% in January 2013 to 3.0% now. In the US the rise was slightly sharper, from 1.8% to 3.0%, but it was much the same story. The bond markets are suggesting that we are looking at a fairly gentle, low inflation recovery. Analysts sometimes name this “Goldilocks” (not too hot, not too cold) and it feels like a very comfortable investment environment. Comfort eventually causes complacency and this is exactly why it is wrong to commit one’s investment strategy to an opinion about the future, no matter how tempting. Investment is always about how probability is priced. Consensus rarely offers compelling value. I am pleased though not surprised to say that my satellite index of companies with female executives quite dramatically extended its outperformance against the FTSE 250. After the first nine months of 2013, the FTSE 250 was +25% but the 27 companies with female executives had risen by 35%. After the full twelve months, those numbers were +29% and +46% respectively. As for the shares that I recommended this year, in Q3 I wrote that I was surprised that Enterprise Inns rose by 40% in Q3. In Q4 it was much quieter, rising by 6.5%. I am not attracted by the value of the company now and I don’t...

Calmly seeking companies with long-term strategies

Calmly seeking companies with long-term strategies

6 Dec 2013

It may seem odd but it is harder than you might think to find companies with clear and measurable strategies. It is depressing how many listed companies offer nothing but a “mission” to be the “best of class”, to be “passionate about their customers” (yuk) and to pursue “value for all stakeholders”. In these challenging times when (thanks to QE) all assets are being priced as if they offer outstanding long-term value, I am inclined to seek companies with reasonably clear medium to long-term strategies. These generally feel obliged to keep their shareholders up to date with progress. Their executives generally accept that their careers depend on their achievements. If the strategies are realistic, they should be quite easy for investors to understand. To be fair, it is easier for a business to offer a clear strategy if it needs to undergo some kind of transformation. It is tougher for e.g. Coca Cola whose strategy understandably consists of flooding ever more of the world with its yummy syrup. The same could be said of Microsoft which has torched billions and billions of dollars trying to add other products to its ubiquitous desk software. There is no call to criticise successful businesses for failing to reinvent themselves – all we need to do is to check their attitude to shareholder value. But if we want to make serious money we should be looking for successful transformations. The simplest but most dangerous transformations are those, like Enterprise Inns, that involve financial rehabilitation. Share investors can be well rewarded if the equity portion of the business rises as the debt decreases. The purpose of this piece is different. It is to look for companies that are taking on the challenge of adapting their business model to changing times. Beware of companies that focus purely on financial targets, especially when these are linked directly to executive remuneration. A German company that I once followed made a quite inexplicable acquisition. While the company’s core business was in software with an operating margin of 25%, it bought a ragbag IT service company with a margin of approximately 0%. The justification offered by the management in defence of the deal was...

Bring on the girls

Bring on the girls

5 Nov 2013

A few weeks ago, I listened to Carolyn McCall, CEO of Easyjet, choosing her Desert Island Discs on Radio 4. After her first 18 months in the job, the shares have taken off, soared and flown since the start of last year (+187% as I write). I found myself thinking that she had timed that career move perfectly – there has been a tremendous cyclical recovery in many airline stocks. Then I wondered if I was being a little harsh. We will never know, obviously, but would things have gone so well if Mr Buggins in a suit and tie had been appointed instead? Then a week ago a friend e-mailed me to ask what I think of Mitie shares and I replied: “I’m ok with Mitie. It’s run by women”. He thought I was being humorous and in a way he was right. It was a true but unserious answer. Yet it had emerged from my sub-conscious and caused me to wonder whether I might prefer companies with female executives. (Mitie is a stand-out as both the CEO and CFO are women). I have as many unsubstantiated and uninteresting views on the different qualities of the sexes as anyone but I do not make investments on the basis of generalisations like that. I want to see some statistics. So I went looking for some. First, some background about where we are, in the UK, on this topic. Girls are now outperforming boys academically and I read a comment piece the other day saying effectively that we should now be more worried about the fate of our young men. Be that as it may, it is widely recognised that the scarcity of women at board level is egregious. Many people would say that it is unfair and proof of discrimination. I would say that it is prima facie evidence of a damaging waste of talent that, as an investor, might well be costing me money. In February 2011, the government published a document entitled “Women on Boards”. Britain is the only country that could commission a report on “diversity” from a white chap known as Lord Davies of Abersoch CBE but this quote from...

The big lie that makes them rich

The big lie that makes them rich

11 Oct 2013

Last week, one of the most successful hedge funds apologised to its investors. “The Pershing Square funds declined by more than 5% during the third quarter of 2013 generating flat performance net of all fees for the first nine months of the year.” This is an unaccustomed setback for Bill Ackman, the founder of the fund, whose personal net worth, according to Wikipedia, is $1.2bn. It is not news that the most successful few hedge fund managers make money on this scale, nor that the fees charged by hedge funds are high (typically, 2% of funds under management and 20% of gains, sometimes above a benchmark level, annually). So it’s turning out to be a bum year for Bill. To mitigate his shame and sorrow, Mr Ackman includes the performance of his fund since inception on 01/01/2004. Its gross return is 780% which is very impressive but less striking than its net return, after fees. That is 433%. Mind the gap. Every time that the investor, who is putting his money at risk, has made a dollar, Mr Ackman has made 80 cents. Never mind. Investors since inception have had a wonderful performance and would probably have bitten your arm off if offered those returns and those fees at the beginning. But that’s not quite the end of the story. Were a terrible and unimaginable financial event (say, a default by the USA) to happen, resulting in a devastation of the fund’s performance, that 433% return after fees could start to shrink rapidly. But the fees themselves are safe. They have been paid, in cash. The last paragraph of my last investment rule states: Always be thinking about how and when you are going to get paid out. Mr Ackman is a highly talented investment professional, who, like all hedge fund founders, probably thinks about this question a great deal. He is all over it. I fear that one cannot say the same for his investors. The dollars they have made are accounting profits whereas the fees they have paid are in cash. I have picked on Pershing Square because it has been very successful. Most hedge funds are not. A paper last year...

Report on Q3 2013

Report on Q3 2013

2 Oct 2013

The FTSE rose by 3.9% in the quarter (Q1 +8.7%, Q2 -3.0%) meaning that year-to-date it is +9.2%. I didn’t recommend a single new share in the quarter. This is partly because I was away in France, but is also because no compelling new ideas turned up. City analysts are expected to come up with recommendations (usually ‘Buy’s) regularly but real people don’t have to. To some extent, this reflects my current view of the stock market. The most likeable companies are generally priced accordingly. As I mention repeatedly, value is always relative and shares must always be compared to other asset classes. On that basis, there is not so much to worry about. UK house prices are creeping higher from unaffordable levels, encouraged by the government’s reckless Help to Buy scheme. (I heard the PM complain that the average income is unable to buy the average house. You might think that the solution is to raise the average income or lower the average house price or preferably both, but the answer from our government is to play “let’s pretend” and to forward the problem into the future, as usual). With growing numbers of people hooked up to the life support of the 0.5% Bank Rate, the chance of regular savings accounts bidding for your money are also about 0.5%. The only practical rival to equities in Q3 was, surprisingly, government bonds. On 10 September I recommended one. UNITED KINGDOM 1 3/4% TREASURY GILT 22 was trading at 92 then. This is an investment to tuck away for the long term but in the short term it has risen to 93.78, which, for a gilt, is pretty exciting. Shortly before the end of Q2 (12 June), I suggested a yield portfolio of twelve shares. From that date, they have returned 6.1% (including dividends) against 2.3% for the FTSE. So my implied caution has worked out quite well. The only stinker was Ladbrokes, thanks to a profit warning derived from its concerning failure to manage its online business. That having been said, its cash flow remains good and it has pledged to maintain the dividend. Today (167p) it yields more than 5% so I am,...

The savers’ lament

The savers’ lament

10 Sep 2013

Your savings have gone down the plug ’ole, Your savings have gone the plug… I am giving up on saving with the UK retail banks and building societies. I can potentially live with low interest rates if the service is competent and not annoying, but it appears that customers willing to be paid badly are losers who must expect to be treated badly. Last week a young man who was not born when I started working in the City told me that I would need to book a 30 minute appointment with him on a different day in order to be offered 1.7% on a two year fixed bond. In a rival establishment, another half hour appointment was required if I wanted to switch out of a savings account that pays 0.2%. In each case, the only convenient option was to close the account. This is fine with me, but why does it seem to be what the retail banks want? Here are three reasons. First, the bank rate is at a record low (0.5%) and the new Governor of the Bank of England is very keen to convince us that it is going to stay there. The experiences of the last few years have lowered savers’ expectations and have caused them, understandably, to be suspicious of those who offer surprisingly attractive interest rates. Why are they bidding for our money? Surely it must be safer to deposit our hard-earned with those who appear to be indifferent to it? Secondly, the regulations introduced to protect us from unscrupulous financial advisers have caused many of the banks to withdraw from the advice business. Since 1 January, independent financial advisers have to charge a fee rather than take a commission out of what they sell you. If banks were ever pretending to offer independent advice, they cannot do so now. A person with financial flair and ambition would not stick it for long as a customer advisor in a retail bank reading out the small print and asking us to sign here and here. Consequently, nobody working in the local branch of your bank really gives a toss what you do with your savings. Thirdly, another...

The dangerous comfort of crowds

The dangerous comfort of crowds

30 Aug 2013

The British football season is back. After a few weeks’ break, perhaps spent on surprisingly hot beaches, the fans have returned to the comforting warmth of whichever partisan crowd they belong. The Latin for crowd is “vulgus” and the word “mob” derives from “mobile vulgus” meaning, roughly, a movable (or swayable)crowd. When waging war, nations need to mobilize their armies – effectively to persuade crowds of generally quite harmless people to unite with the intention of killing other people. Armies are notoriously intolerant of any individual considered to be breaking rank. In WWI, the British executed 306 men for “desertion”. Almost all were young men from non-commissioned ranks and their punishment was seen as exemplary in the most sinister way. DH Lawrence, who was, awkwardly, a pacifist married to a German, wrote of the “vast mob-spirit” of the war. Those lucky enough to survive WWI were sent home to lives of economic uncertainty and a widespread fear of Bolshevism, which meant that organised labour was regarded with hostility by what we can call the ruling classes. The hindsight of history judges that the ordinary “heroes” of WW1 were treated pretty shabbily. Their experience was called being “demobbed”. Crowds are needed to fight wars and insult referees but what else are they good for? Political extremism and hard-line religion spring to mind. Come to think of it, these sometimes result in wars too. In all cases, the crowd induces people to behave in a way that might not seem obvious or even wise to according to rational introspection. This is an investment website and it must be obvious where I am heading but there is one general point that I would like to emphasise: crowds are comforting to belong to and can be uncomfortable (to say the least) to be excluded from. This leads straight to what is, in my view, the saddest sentence ever written about professional investors. “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” J M Keynes (The General Theory…) What a bleak observation of human mediocrity. Long before Keynes (in 1841), a Scot called Charles Mackay published “Extraordinary Popular Delusions and the Madness...