AO World has changed the world of domestic appliance retailing. If your fridge-freezer dies, you can have the new model of your choice installed before the frozen pizzas start to melt. The company is a demonstration of how to marry the internet to state-of-the-art delivery. It’s hardly surprising that investors loved the story, scrambling over themselves to get stock when it came to market in March.

And yet…there are limits to the need for next-day delivery of cookers or washing machines, and a brilliant analysis by Shore Capital suggests AO is well over them. Michael Stewart calculates that if the company eventually sold every single domestic appliance bought in Britain, the shares at 267p would still cost 22 times earnings. But this is one tough market. As he puts it: “The consumer has limited brand loyalty, price competition is incredibly high and demand is elastic.”

Unfortunately for the bulls, this is just the half of it. The other half is the sort of product insurance that the banks used to add to their loans until they admitted mis-selling and paid £15bn in compensation  (and counting). AO doesn’t break out its profits from product protection, so Mr Stewart has tried to do it for us. He notes that AO has 150 people in a call centre devoted to selling protection, and his back of the envelope calculation says they generated one-third of the company’s latest profits.

Such point-of-sale insurance is almost always bad value. Accusations of mis-selling are never far away and appliances break down so rarely. AO has amitions to take its impressive business model across the Channel, but others like Amazon have similar ideas and depper pockets. The investors who failed to get any shares at 285p in the float can have as many as they like at 267p now, but it’s easy to see why they aren’t rushing in.

Balls up for CGT changes

If you don’t like the capital gains tax regime, then don’t worry. There will be another one along if you’re patient. This tricky tax has been a playground for chancellors ever since it was introduced half a century ago, and finding a fair, stable system has eluded them all.

It makes sense to tax short-term gains as income, since one looks much like the other. But last weekend my colleague John Lee reported how he will pay 28 per cent on the gain from his 40-year investment in Pochin’s (his saga reads like a financial version of Apollo 13 – successful lift-off, near-disaster, and an improvised rescue). This is less a tax on a gain than a capital levy through inflation, and is manifestly unfair.

The previous CGT regime had allowed for this, tapering the tax to reflect the time the investment was held. When one private equity boss pointed out that this meant he was paying a lower rate of tax than his cleaner, the government panicked. Rather than simply strecthing the taper to make things fairer, it imposed the current regime.

Now Labour, casting about for something which sounds business-friendly, is is looking at the subject again. The shadow chancellor likes the idea of long-term investment, so if he gets the chance, might bring back the previous regime – a Labour government design, after all – which cut the tax on long-term gains. Besides, get-rich-quick invites taxation, while get-rich-slow suggests building something of lasting value.

Let’s be more refined

Diesel should be cheaper than petrol, but it’s years since it was, thanks to the rise of diesel cars and oil refineries set up to maximise petrol output decades ago. Refining is a grim, almost profitless business, thanks to the shale boom and ban on crude exports from the US, so it was a surprise this week to see ExxonMobil preparing to spend $1bn beefing up its plant in Antwerp to produce more diesel.

As refineries close across the continent, Exxon plans to be (almost) the last man standing. Antwerp will also help its other plants across Europe stay open by taking their heavy fractions. It’s a real, long-term investment. Don’t expect Esso’s diesel to get any cheaper, but at least that irritating price premium should eventually disappear.

This is my FT column from Saturday

Tempted by the latest IPO? Then lie down until the feeling goes away. London’s new issues market is in danger of becoming a racket. Prospectuses are frequently published only after conditional dealings have started; banks or brokers whose analysts might be expected to take a robust view are brought on board, thus silencing criticism, while any prospective investor asking awkward questions risks being cut out of the issue.

The process has become less transparent, not more. Competition was supposed to drive down fees, but the evidence shows the opposite, and in some recent IPOs a significant portion of the flotation proceeds has gone to the advisers. One finance director who negotiated a lower price from bank A was asked by bank B to accept the tariff in return for better terms on some future deal. Some of the real clunkers can only have got away by those in charge warning potential buyers that they might not see the next (better) offer.

So who are the villains of this particular piece? Not all private equity companies have behaved badly, but a disconcerting number of the real dogs at flotation have been done over by the PE boys. They are overstocked with businesses they expected to sell years ago, before the bear market got in the way. Some of those businesses have been sold to other private buyers en route, with equity replaced by debt at each transaction.

Nobody is forced to buy new issues. Anyone tempted to do so should ensure that there’s a published prospectus, and that the business has been trading in its current shape for more than just a year or two. Then look at who’s selling in the offer. Ignoring this market completely may mean you miss the odd nugget, but it saves sifting through all that low-grade ore.

Pricey floorcovering

It’s hardly surprising that Philip Harris is reluctant to give up the carpet business. The 71-year-old knows almost nothing else, and this week rescinded his earlier proposal to leave the chair at Carpetright, arguing that 71 no longer looks old to him.

The puzzle, though, is why so many outside shareholders (his family owns a fifth of the stock) are also clinging on. Carpetright is nothing like as successful as Lord Harris’s previous venture, Harris Queensway, which made his fortune. Carpetright sales hit £475m in 2007, when EY (as it’s now called) made him entrepreneur of the year, and it’s been increasingly threadbare ever since.

The last dividend was more than three years ago, and there’s red ink all over the accounts. Yet the shares refuse to reflect this depressed reality, and actually perked up on this week’s horrid trading news. At 511p Carpetright is valued at £346m, but last year’s £448m of sales yielded just 4.7p of “underlying” earnings per share. If the housing market is picking up, it hasn’t picked up Carpetright’s carpets.

When EY was giving Lord Harris his award, earnings hit 46p a share, supporting a 33.9p dividend. Perhaps the company’s exciting new luxury vinyl tiles and lovely soft polyprop carpets will bring those days back, but it’s a distant prospect, and time is not on Lord Harris’s side, however young he feels.

Joy for jobsworths

Ooh, goody, a brand new boondoggle. The Chinese are prepared to lob in a spare $100bn as starting capital for “a new global financial institution“, and 22 other countries with too much money want to join the proposed Asian Infrastructure Investment Bank.

The first aim is to finance a rail link from Beijing to Baghdad (a sort of iron silk road) but the real attraction is to found an institution which isn ‘t controlled by the smug western bankers and bureaucrats who dictate policy at the World Bank and International Monetary Fund.

These boondoggles are easy to start, quickly sprouting their own secretariats, conferences and cushy jobs for cronies of the founding governments. The Paris-based OECD shows that stopping them is another matter. It sails on long after performing any useful function, as does the United Nations Industrial Development Organisation, or UNIDO, to which the only response is: Oh no we don’t.

This is my FT column

Q. How do you attract the attention of a Missouri mule? A. Hit it briskly over the head with a length of 4×2 planking. Last week saw the simultaneous publication of two indices of inflation, pointing in opposite directions. The second question might be: which measure do you think the Bank of England’s Monetary Policy Committee prefers?

The Consumer Prices Index is up by a barely-discernible 1.5 per cent in a year, while the Central Statistical Office’s measure of house prices is 9.9 per cent higher. The divergence is not new, but it’s horribly large and persistent. Other house price measures tell much the same story: if you live in the south east and own a house, you’ll be feeling clever and slightly smug. Own one in London, and you’ll be insufferable (up 18.7 per cent).

The Governor of the Bank of England could  impose a 21st century version of hire purchase controls, to limit the numbers of high loan-to-value mortgages  that a bank can offer, but it’s likely to be even less effective than they were. Moreover, in his brief tenure he’s proved anew that forecasting is always difficult, especially for the future. After indicating unchanged interest rates for years to come, he ignored rapidly falling unemployment when it didn’t fit his projections. Now, belatedly, he’s suggesting that rates may rise in the autumn.

To which the only response is: get on with it. Today’s near-zero Bank Rate was set five years ago when we seemed to be on the brink of the economic abyss. Now we’re in an old-fashioned asset boom for shares, art, collectables and, of course, property. The CPI may indeed stay stuck for a year or two, especially if there’s a full-blown price war in the supermarkets, but cheap food hardly helps when buying a home anywhere near the jobs is beyond so many people.

As last week’s contrasting figures show, the MPC is not paying attention. The boss may be from Alberta rather than Missouri, but he still appears to need the application of the equivalent of a 4×2 plank.

Free the 90 per cent

Over 700 militant free-marketeers occupied Guildhall last Wednesday, to boost the Thatcher-inspired Centre for Policy Studies’ attempt to free the workers (sic). Its chairman, Maurice Saatchi, had a simple message (he specialises in simple messages): abolish corporation tax for small companies, and capital gains tax for their shareholders.

As any fule know, this is shockingly expensive, costing £10.5bn next year, according to the CPS. Ah, but the jolt such radicalism would give the economy means that by 2018/19, the liberated labourers in soaraway small companies would have paid so much more tax that the exchequer is actually better off.

The timescale may be heroic, but releasing small companies (90 per cent of the total, defined in the Companies Act as those with fewer than 50 employees) from corporation tax would undoubtably boost their expansion. A CPS survey found that big companies are almost as unpopular as big government, and the measure would have the agreeable side-effect of allowing the taxman to focus on avoidance at the multi-nationals. Release the very smallest companies from the quagmire of employment legislation as well, and this could be a winner.

Crowded out

When both buyers and sellers think they’re getting a rotten deal, it’s a sure sign of a deeper malaise. So it is in banking, where depositors get little or nothing, and business borrowers are either refused or charged ruinous rates.

Banks are supposed to match those with cash to those wanting it, but reserve requirements, high fixed costs and an inability to judge the borrowers’ credit are combining to produce this market failure. Into the gap is, increasingly, stepping peer-to-peer lending and last week Santander, one of those big banks, clinched a partnership with Funding Circle, a P2P website.

Zopa, which claims to be Britain’s biggest, has now lent over £500m, while newcomer Archover is a “crowdlender” which believes it can survive on a gross margin of just 1 per cent. The banks never really liked lending to small businesses because it was too much trouble to understand them. If this trend continues, they won’t have to.

This is my FT column from Saturday

Benny Higgins is best known as the banker who liked to say no. In 2007, he thought the housing market was getting too hot, so he tightened the terms of HBoS’s mortgage offer, and as the bank lost market share, he lost his job. Mr Higgins is too polite to say  “told you so”, but now he’s getting his revenge the best way, launching Tesco’s long-awaited current account.

This move is likely to cause considerable pain for Lloyds, the owner of HBoS, as well as collateral damage to the raft of “challenger banks” led by TSB which are competing for the nation’s savings. Mr Higgins’ current account offer has echoes of the old-fashioned Tesco which worked out what the customer wanted and then tried to give it to her.

Current accounts cost the bank money, but are generally considered to be the gateway to profitable banking services like mortgages, so it will be a year or three before the £600m Tesco has sunk into the venture produces a profit. The big banks can ignore the growing number of fleas which are trying to bite them –  even after casting off TSB, Lloyds has £400bn of deposits – but Tesco is sufficiently big and ugly to cause them more than a fleabite. Potential customers pour through its doors every week in their millions, and while Britain’s biggest grocer may not be loved, its reputation is way above that of the biggest banks.

Retail accounts are much harder to get right than it looks from the outside, especially since we’re hooked on free-in-credit banking. Systems need constant updating to keep pace with the mobile-driven technology, and we’re notoriously reluctant to switch. Much depends on whether Tesco can deliver on its attractive promise of a straightforward, transparent current account which pays interest. However, if anyone has the necessary experience, it’s Mr Higgins. He’s been working on this project long enough, and he’s got the motivation too. Who knows: Tesco Bank could mark the start of the supermarket group’s fightback.

Dig those crazy deals

Oh no, say it ain’t so! Those Billiton assets which were such a “sensational fit” with BHP 13 long years ago have contributed nothing, well, nothing much, to the growth of the business. A devastating analysis from the FT’s James Wilson this week concluded that  the biggest beneficiaries of the deal (apart from the former Billiton shareholders, of course) have been those who took the fees up front.

Now, it seems, they or their banks are to be rewarded again, by overseeing the divorce, selling off the bits of Billiton that BHP no longer wants, which turns out to be most of them. The new management’s ambition to “simplify” the world’s mining colossus is admirable, but the move is another example of the shocking hubris of those who ran the businesses not so long ago.

It’s little more than a couple of years since BHP, far from getting smaller and simpler, bid to get bigger and more complicated by buying Rio Tinto, to create a woldscale monopoly of sea-borne iron ore. When that failed, BHP tried to buy into the potash business. Mercifully (for the shareholders) that was blocked too.

The moral of the story is that miners should stick to mining. Unfortunately, human nature being what it is, fee-addicted bankers singing siren songs about bragging rights in the Melbourne Mining Club will always make the bosses believe that deals are more exciting than digging.

Swish! and SWIP’s toast

What’s a fund manager worth? Little more than a rounding error in a takeover, it seems. The Aberdeen Asset Management sword has swept along the assembled heads at SWIP and decapitated almost the whole line. It’s barely six weeks since Aberdeen completed the £550m purchase from Lloyds Banking, taking over the £138bn of assets left under management left after £6bn had fled last year.  Since nobody had ever heard of SWIP, the name was ditched immediately. Few of the global equity managers have lasted much longer, and their bosses were already long gone. The ultimate owners of that £138bn will never notice…

This is my FT column from Saturday


To what problem is the Collective Defined Contribution scheme the solution, exactly? It certainly won’t save  the defined benefit scheme, now on the brink of extinction thanks to successive governments and actuarial paranoia. It’s incompatible with George Osborne’s Budget move which scrapped compulsory annuities. It’s not even obviously much cheaper, as insurers are cutting their management charges for new schemes.

Defined contribution schemes produce miserable pensions when long-term interest rates are low, as now. In theory, CDC shcmes would have no guarantee, the word that has generated the paranoia among the actuaries, and forced schemes into “risk-free” bonds instead of their natural long-term investments of stocks and shares.

However, a CDC requires that all the members are liable for ensuring solvency. This must include the pensioners themselves, or it will turn into another tax on the current generation of workers to the benefit of the previous one, like National Insurance. The liability means that pension payments during retirement could be cut, including to those pensioners who had been obliged to join a workplace pension scheme under the last government’s change of rules.

Actually imposing a cut promises to be so unpopular that administrators would be desperate to avoid it. The very thought would trigger the actuarial caution, pushing the funds into buying the same lousy-value bonds as existing schemes.Then there are the valuation problems of employees switching from one collective scheme to another, where working out a “fair” transfer value is little better than guesswork.

The complexity and practical difficulties of this proposal are enough to ensure that few employers will want to go anywhere near it. Fortunately, they won’t have to, since it has no chance of ever becoming law. So the answer to the question above is simple, after all: the CDC scheme solves the problem of the need to be doing something at the Department of Work and Pensions in the dying days of the coalition. It seems to have succeeded.

Up like a Rock(et)

When Northern Rock Asset Management offered to redeem the rescued bank’s 12.625 per cent perpetual subordinated notes for £33 per £100 in 2010, the management made things sound so bad that most of us holders smelled a rat and declined the offer.

This week NRAM produced another set of impressive results, showing that it’s repaying its debt to society (aka the taxpayer) and shrinking to fit its new modest status. Arrears are falling. Overwhelmingly, its borrowers are continuing to pay, even those who took Northern Rock’s crazy offer of 125 per cent mortgages at the height of the boom and are still in negative equity.

Underlying profits at NRAM were up from £876m to £1.160bn for the latest 15 months, and reserves are now up to 8.8 per cent of assets. This sunny picture would quickly darken if interest rates rose significantly, but each month that passes with low rates builds more buffers against defaults.

Which brings us back to the £125m of bottom-of-the-heap debt. The unpaid, accrued interest is now £72m, which shows the magic of rolling-up interest. The 12.625 per cents are up to £104, which shows the value of patience. One day, NRAM will either have to pay up (and keep doing so) or make us an offer that this time we really can’t refuse.

In case it’s Yquem

Trading in the Luxembourg-based Nobles Cru wine fund was suspended a year ago, and if the claim of “lack of liquidity” was some sort of wry joke, the investors didn’t get it. However, as FTFM revealed last week, some holders have traded, selling out at a 28 per cent discount to book value to a mystery buyer, who then swapped his holding for wine with a notional value of E37.7m from the portfolio.

Understandably, other holders are sniffing this deal suspiciously, arguing that Luxembourg’s financial watchdog should have tasted it first. Valuing fine wines is an inexact science, and Nobles Cru has endured some distinctly corked comments in the past. It denies cherry-picking by the buyer and claims the deal left a “similar level of diversification” in the remaining E50.8m fund. The watchdog declines to comment on individual cases. Of wine?

This is my FT column from Saturday

Any bank that likes to say yes is asking for trouble. Unfortunately, there is nobody left at TSB to explain to its enthusiastic CEO, Paul Pester, what happened last time this bank had more capital than it needed. Like nearly all other clearing banks since, it plunged into the exciting world of investment banking. It bought Hill Samuel, and the pain was such that it wasn’t long before the TSB was saying yes to Lloyds, where it has resided quietly ever since.

Until now. The offer of shares will be aimed squarely at those who either bought, or wish they’d bought, Royal Mail, and hope for the same instant profit. After all, this is a nice clean bank, a sort of mini Lloyds as it would have been without the horrors of HBoS, with low-risk mortgages financed by consumer deposits, and a socking £21.60 in equity for every £100 of liabilities.

This is such a fat cushion that there’s no hope of earning a decent return on the difference between mortgage and deposit rates, which is one reason why there’s no dividend until 2017. The other is Mr Pester’s ambition to grow by as much as a half  (sensibly, he doesn’t say how fast), winning market share from banks old and new. He might even buy one of the newcomers, but of course there’s no question of going into investment banking, no sirree.

TSB seems likely to be priced at a modest discount to net asset value, so Lloyds shareholders are giving away far less than they would have done with the disastrous Co-op deal. Despite the summer ennui towards new issues, TSB is likely to get away. The 5 per cent bribe to retail shareholders if they hold on for a year looks curious considering that Lloyds will be a forced seller of its remaining shares soon afterwards. Curiouser still is the decision not simply to give TSB shares to Lloyds shareholders and let the market price both. Nothing to do with the fees paid to the investment bankers, surely.

More light, please

David Blake at the Pensions Institute reckons that the disclosed fees on pooled funds can be as little as 15 per cent of the true cost to the investors. He’s pressing for better, if not full, disclosure of the real amounts that punters pay to have their money managed by others.

This is a thoroughly laudible aim, and the Retail Distribution Review has already forced reductions in management fees, but claiming that 85 per cent of the true cost remains hidden requires some heroic assumptions about the return on spare cash, the bigger spread on large trades and the rate of churn in the portfolio.

The RDR has turned the spotlight onto a dark, and highly lucrative, corner of the City, while the Financial Conduct Authority’s push for fuller disclosure continues. The true rewards enjoyed by those managing other people’s money, often for mediocre performance, are only starting to become apparent, and as they do, more individual investors are likely to decide that they can (mis)manage their own affairs just as well, and save themselves the fees.


Alternative Asset Class

Go on, you’ve always wanted your own steam train. Now’s your chance. Lovingly maintained, cleared to run on Swiss railways (in other words, everywhere) it’s yours for…oh, probably not very much. The vendor of the magnificent locomotive prosaically-named 141R568 is, curiously enough, Andrew Cook, co-author of Coal, Steam and Comfort, and better known as the boss and proprietor of  William Cook Holdings, makers of precision steel castings.

Mr Cook hardly comes across as sentimental, having successfully steered the family business through 32 years which have done for so many Sheffield steel businesses. The buyers of complex, reliable, mission-critical parts are not that worried about the price. The buyer of 141R568 shouldn’t be, either. He will find that the purchase price is merely the down payment, as romantic buyers of the Flying Scotsman discovered as their money disappeared into the black hole of maintenance. Still, with imagination, 141R568 could be promoted as a 2-8-2 Alternative Asset Class loco, with dividends in the form of trips through the Gotthard Tunnel. Don’t all rush.

This is a corrected version of my Saturday FT column.

Astra Zeneca is not the National Trust. It’s a commercial organisation with billions of pounds of other people’s money at its disposal. The directors are playing up the value of research and development for all they’re worth, but the plain truth is that Astra really isn’t very good at it. Like most big drug companies, it’s good at exploiting promising compounds, getting them to market efficiently, and finding ways of extending the patents which produce the profits.

These skills are valuable, since the patent clock ticks fast, and complying with local rules on use of the drugs is essential. To exploit a treatment fully before the generics arrive to undercut the price requires the sort of reach and organisation that only a substantial multi-national company can sustain. For all the bluster about their research, these marketing skills are the big companies’ core competence.

Last week, in its first response to the Pfizer approach, Astra rather let the cat out of the research bag. Of the seven “mid-stage pipeline assets” which it said hold the key to its prosperity a decade hence, six were developed by companies which Astra itself had bought. All six further compounds showing “attractive optionality” were developed by others.

Astra’s in-house research may indeed be better than Pfizer’s – which is generally thought to have the worst recond of any major group – but it’s nothing to shout about. Measuring the wealth that a drug can produce over its lifetime is difficult, but both companies have spent tens of billions of pounds for diminishing returns.

Pfizer is proposing to pay two-thirds more than nearly all the City’s analysts thought Astra was worth six months ago. The harder question for the shareholders is not whether this modestly-increased bid is enough, but whether Pfizer paper is worth keeping. The 5 per cent fall in the price since the approach betrays the market’s doubts. The swift rejection of the raised offer is likely to infuriate Astra shareholders, who must either strong-arm the directors into changing their minds, or hope that all that drugs-in-the-sky hopes come to pass. It may be a very long time before the share price passes Pfizer’s offer.

As for the march of medical science, the overwhelming evidence is that smaller, more entrepreneurial businesses are better at research: measured in terms of successful drugs per dollar, there is no contest. Should Pfizer win Astra there will be wailing, gnashing of teeth and redundancies among the scientists in both companies. But many, perhaps most, of them will quickly find work in the next generation of R&D businesses, where their talents will be far more efficiently deployed. Just don’t expect any of the politicians to admit as much.

AO world of its own

The share price of AO World, on-line purveyors of fridges and washing machines, is looking a little better. It’s had a torrid time in the tumble dryer since flotation in February at 285p a share. So many investors thought that price absurdly low that it shot to 378p on its first day, followed by cries of foul play from some of the 300 institutions that failed to get stock.

Well, they could have all they want today, at the mid-season sale price of  245p. Perhaps they are not rushing because AO is still valued at £1bn, or nearly four times sales in the year to March. Profits? Don’t ask. This is an internet retailer, after all.

Shares in fuddy-duddy old Dixons Retail sell on less than 0.3 times sales, and the response to the well-flagged merger with Carphone Warehouse was 10 per cent off the share price. It’s not obvious that AO can really do anything that CarDix (or whatever) can’t, and AO’s price plunge might have been even worse without US-based Baron Capital, which has popped up as a 5 per cent shareholder. It claims to be a long-term investor in stocks with “substantial competitive advantages and barriers to entry”. Ah, that’s it: AO is obviously the next Amazon.

Irish decimal points

There are 523,438,445,437 Allied Irish Banks shares in issue. The (ESM) price is E0.1, which values the bank at E52bn. The Irish government owns 99.8 per cent of the equity. In its (relatively) cheerful trading update this week the board felt moved to add: “AIB trades on a valuation multiple of 8x 31 December 2013 net asset value. The bank notes that the median for comparable European banks is c.1x NAV.”

This is an updated version of my FT column


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