Perhaps it was the sight of Peabody Energy collapsing into bankruptcy, or perhaps someone had told the Rockefeller family of the terrible fate of the Nuffield Foundation, but there is something particularly poignant at their decision to sell their last shares in Exxon Mobil, the business that their forebear built.

Nearly all Nuffield’s eggs were in the basket marked British Leyland, and when it became a basket case, they broke. There are plenty of others who would like to see Exxon go the same way as BL, and who point to Peabody as a terrible harbinger. Lucky, then, that the Rockefeller family trustees can claim a convenient conflation of financial sense and ethical behaviour: “There is no sane rationale for companies to continue to explore for new sources of hydrocarbons.”

The experts at Bond Vigilantes tend to agree. A cheerful post entitled “The end is nigh” warns about the credit ratings of the three-quarters of the world’s non-financial high yield debt that is issued by energy companies. The Vigilantes fear that some of the assets backing these bonds will be “stranded” between rising restrictions and falling hydrocarbon prices, to the point where it will never be worth exploiting them.

Well, so far, so fashionable. Big oil cannot expect to be loved, but forecasts of the end of the oil age have been as wrong as they have been frequent. It is barely two years since Goldman Sachs was forecasting $200 oil, and it is only a decade since the price was last under $40. The big companies have learned to survive under feast and famine. BP has survived much worse, with the Macondo disaster demonstrating that there is a deal of ruin in an oil company. Oil powers the world economy, and will continue to do so for decades to come, whatever the green dreamers believe.

The assault on the oil companies has parallels with that on those other pariahs, the tobacco companies. They have grown used to ever-increasing regulation and tax rises, yet in the last decade, tobacco shares have more than doubled (the FTSE100 is almost unchanged). Unlike their customers, rumours of their demise are much exaggerated. Rather like the oil companies, in fact.

Maths lessons at the Treasury

Mervyn King, in his post-Governorship ruminations, made much of the idea of “radical uncertainty”, a somewhat more sophisticated version of “forecasting is difficult, especially for the future”. Experience at the Bank of England had taught him, often rather brutally, that stuff happens. Surprises in economics are seldom pleasant.

We should be grateful that nobody at the Treasury seems to have grasped this. Had they done so, we would not have had the entertainment of the Equation of the Week, the arithmetic gobbledegook behind George Osborne’s assertion of economic misery in 2030 if we leave the European Union. Produced by a Treasury which has proved so poor at forecasting that we need four Budgets a year, and brilliantly deconstructed by Chris Giles,  the equation asserts that you trade more with countries that are nearer, with bigger populations and who speak the same language. Of course. Has anyone been to Japan?

Pity the (relatively) poor chairman

The season for revolting shareholders is in full swing. After Bob Dudley came Mark Cutifani. Next month it’s Mark Wilson. They are CEOs of BP, Anglo American and Aviva respectively. It is understandable that any investor unlucky enough to hold all three of these duds wants to vote down egregious pay packets, and to blame the remuneration committee for awarding them in the first place.

The unfortunates who populate these committees must struggle each year to find justifications for the pay awards regardless of performance, which is why the dozen or so pages of the annual report contain explanations of metrics with all the clarity of, say, your mobile phone tariff. However, the buck should really stop with the chairmen, all done for a (relative) pittance. Lest they feel they are not getting the recognition they deserve in this debate, here are Sir John Parker at Anglo (£724,000) Sir Adrian Montague at Aviva  (£481,000 for part of 2015) and that Macavity of the oil industry, BP’s Carl-Henric Svanberg (£823,000).

This is my FT column from Saturday

 

 

Nick Macpherson has discovered that owning bank shares can damage your wealth. The former Treasury permanent secretary admits that the loss on the state’s £19bn holding of Royal Bank of Scotland is rather more permanent than his own position. One day, a chancellor will have to admit it.

The days of banking on a sliver of permanent capital, leveraged with debt, producing fat returns for shareholders and even fatter ones for bank executives, are over. Today’s regulators demand ever more capital. The banks are resisting, arguing that reduced leverage cuts the amount they can lend, restricting good things like economic growth and animal spirits.

Except it may not be true. A wide-ranging study for the Bank for International Settlements concludes that banks with more equity have lower borrowing costs and faster loan growth. This is grist to the mill of bank regulators everywhere, as they argue that there is still not enough permanent capital in the banking system to prevent the next crisis. As the study’s authors conclude: “Greater retention of net income…would almost pay for itself through lower cost of debt.”

In other words, stop paying dividends. In the five years to 2014, New City Agenda calculates that the top five UK banks paid £31.5bn to their shareholders. They also paid £32.6bn in bonuses and £32.9bn in misconduct costs, so attacking the egregious bonus culture and behaving better would be an even quicker route to stustainability. It is unlikely that the bank executives will want to take it.

However, the state does have leverage that other long-suffering RBS shareholders lack, in the form of voting control. It could insist on linking bonuses to dividends and good behaviour, rather than to some incomprehensible formula dreamed up by remuneration consultants.

Even at this price, selling the RBS holding might be prudent, if we discover that we can manage without banks altogether. Stephen Lewis argues in The Death of Banking that “The provision of credit will gravitate towards new, technology-based institutions.” All this, and negative interest rates threatening to destroy the very reason for being a bank, and you can see why Sir Nick reckons that the loss is permanent.

Managing to get away with it

Fund management is the City’s dirty little secret. The rewards from managing – in some case that is hardly le mot juste – other people’s money are out of all proportion to the effort. Consider: after private equity firm Permira bought Bestinvest in 2014, it made £39m in revenue from £5bn of assets. After its latest takeover, Towry, it expects to make £200m from £20bn of assets.

So much for passing the economies of scale on to the customers. It may be that Permira’s fund managers are so good that they earn their fees, but consistent outperformance is almost impossible, while many hardly even bother. The Financial Conduct Authority examined 19 fund management companies with 23 funds and £50bn between them. Five of the funds were, effectively, closet trackers of their benchmark indices, while “one used jargon that a retail investor might not have understood.” What, only one?

There is some pressure on fees following the Retail Distribution Review, which has forced more transparency on the industry, but the 3 1/2 pages of funds listed daily in the FT, compared to half a page of UK share prices, rather gives the game away. The profitability in this industry is out of all proportion to the value added. RDR looks like only the first step on a long road.

Ingredients for a bear market

*Rising annual tax on homes held corporately

*Higher stamp duty on more expensive homes

*IHT to apply to non-doms’ property

*CGT on property sales by foreigners

*3 per cent extra stamp duty on Buy To Let and second homes

*Restricted interest offset on BTL

*Bank of England curbs on BTL mortgages

(not to mention Brexit)

This is my FT column from Saturday

 

 

 

 

 

 

 

The cross-looking woman who sometimes appears on the home page of the Ofcom website is not Sharon White (who is black) but she shares her irritation. The telecoms regulator is not happy at the prospect of O2 disappearing into Li Ka Shing’s global empire, reducing the premier league of UK mobile providers from four to three.

Last week she published  the snappily-entitled “cross-country econometric analysis of the effect of disruptive firms on mobile pricing”. After studying conditions in 25 countries, this confirms what any fule kno, that disruptive firms do indeed disrupt, while more competition means lower prices – around a fifth lower with four operators rather than three, provided one of them is disruptive.

Until now, this role has been played by Mr Li’s Hutchison group, in the shape of 3. However, the £10.5bn takeover of O2 would change all that. With 40 per cent of the mobile market, 3O2 would jump from disrupter to market leader. Nevertheless, last month Mr Li’s offsider Canning Fok wrote movingly to the FT about standing up to “the leviathan BT” and “old top-of-the-heap predator Vodafone”, with pledges not to raise prices for five years if the deal goes ahead.

Technology should be driving prices down anyway, although incomprehensible tariffs make it impossible for the average consumer to be sure. Since Mr Li is a Buffett-style long term investor, the pledge rather begs the question of what happens after 2021. Perhaps to crank up the pressure on the regulators, Hutchison is reported to have put all future investments in the UK under review.

UK telecoms already looks too concentrated for the customers’ good after BT’s seamless takeover of EE, the merged Orange and T-Mobile. Ms White is right to be fighting this deal. Unfortunately for her, and us, this purely British domestic affair will be decided by the European Commission in Brussels.

Too much previous to like RBS

When the analysts at Goldman Sachs think they have spotted a glaring market anomaly, they put the stock on their “conviction buy” list, and on Tuesday it was the turn of Royal Bank of Scotland. The Goldman boffins reckoned the shares are worth 375p each. That would make RBS the cheapest major share in the market, since they cost 234p at the time.

The reasoning behind the recommendation is mostly that RBS is cheaper than Lloyds, measured by the book value of its assets, and that as RBS gets out of investment banking to concentrate on mortgages, the market will rerate the stock. Well, maybe. It is still something of a shock to see how far RBS shares have fallen – they are the same price today as immediately after the ten-for-one consolidation in 2012, and just 3 per cent of the peak value in 2007.

Unfortunately, what goes down may not come up, especially when Goldman’s previous convictions are taken into account. The list had a dreadful start to 2016, and now the curse has struck again. Just a day after the RBS tip, the Chancellor chopped back the value of carried-forward losses for tax purposes. RBS has £50bn of these, accumulated over the last eight years, and its shares sank still further on the news.

The taxpayer’s 76 per cent holding from baling out the bank is now worth half its purchase cost. Dreams of balancing the books by selling the stake are fantasy, along with any hope Goldman had of fees from placing the shares. This unfortunate experience is another indication that unless and until the bankers return to lending money to borrowers who can repay it, bank shares are for traders, not conviction investors.

A Barclays winner, of sorts

Shareholders in Barclays are hardly in the RBS pain zone when it comes to punishment, although they have lost three-fifths of their money since 2007. Not all of it has been wasted, however, as the wife of the suitably-named Rich Ricci cleaned up at Cheltenham. The third winner, Vautour, took £178,538 off Ryanair. Mr Ricci is not fondly remembered as Bob Diamond’s righthand man when Diamond Bob was turning Barclays into an international investment banking powerhouse, paying themselves zillions in the process. It is not thought that Mrs Ricci will be giving her winnings to charity.

Mixing their drinks

Further proof, so to speak, of the value and longevity of spirits brands. Grand Marnier, a syrupy liquor made from cognac and Caribbean orange peel, is 190 years old, with a financial performance that might charitably be described as sober. Enter, perhaps as a reward for investors’ patience, Gruppo Campari to buy out the family, paying a dizzying premium to an “undisturbed” price of E5,020, a level first reached 11 years ago. The agreed offer of E8,050 a share values the business at E684m, or five times 2014 sales. Enough to warrant a stiff Campari and Grand Marnier.

This is my FT column for this weekend (published early here because I’m flying away, with extra shot of Grand Marnier)

If you last visited BHS when it was called British Home Stores, you are not alone. Last March Philip Green decided that he would rather not go in again either, and offloaded the whole chain for £1. He has since found that walking out of the stores is easier said than done.

The security guard blocking the exit is the pension fund covering 11,000 past and current BHS employees. He is not exactly demanding money with menaces, partly because nobody has a clue how much it needs – anywhere between £230m and £570m, depending on how you do the sums. Only one thing is sure: BHS’s current owners cannot find it.

The company is on the brink of failure, demanding rent reductions for its stores. Many landlords can see better tenants in more dynamic retail chains, and are unlikely to comply. They see BHS as too tired and dowdy to survive, and that a rent cut is a mere sticking plaster. Besides, it would do nothing to tackle the pension problem.

This has is now landing with the Pension Protection Fund, which is essentially a mechanism to force those companies which run properly funded schemes to bail out those in trouble. The pain is bearable provided failures remain rare and small, and while the levy is projected to fall, but today most major pension schemes have deficits thanks to the pitiful returns from low-risk investments, and nobody is starting schemes like those at BHS.

The PPF will find itself demanding payments from fewer and fewer such “final salary” schemes, where the risk is borne by the company. The true cost of these promises can be life-threatening for the business, so the more alert boards are scrambling to turn solvent schemes into “defined contribution” funds, beyond the reach of the PPF, and before the next BHS arrives.

Sir Philip’s wife took a £1.2bn dividend from his retail empire in 2005, so it is understandable that the PPF is asking him to chip in. He might point to the £200m loan to BHS he wrote off last April, and is reported to be offering another £80m, half in cash and half writing off another inter-company loan. Since BHS raised £65m on its own last September (and so presumably was solvent)  he might reasonably argue that enough is enough, that he has repaid his debt to society, and that BHS is now the PPF’s problem.

Nothing like a hot Chocolat

There is something heartwarmingly old-fashioned about last week’s most attractive company flotation. Hotel Chocolat is the product of nearly 30 years’ hard work by its two founders, whose combination of passion for the real thing and financial imagination means a £40m payday, while they keep control of the business.

The passion is 84 shops to try to wean us off vegelate, and the imagination is in its chocolate bonds, units of £4,000 each, paying 7.3 per cent – in chocolate, of course – which have helped finance expansion until now. The image of the business is also helped by ownership of a cocoa plantation in St Lucia, a few of whose beans get into the final product, and which (naturally) has a suitably sybaritic hotel on site.

Heartwarmingly of all, the business has been built entirely free of artificial ingredients in the shape of private equity. There is no trace of the financial e-numbers which produce the queasy feeling that if they’re selling, you shouldn’t be buying. Of course this purity comes at a cost. At its estimated market value of £150m, Hotel Chocolat shares sell on nearly twice last reported sales and 19 times earnings before everything. For chocaholics only, perhaps.

Better off to the races, George

Another week, another Budget. Conservative chancellors used to get by with one a year, but George Osborne is challenging those from Labour who needed two, and sometimes three, to get through every twelve-month. He is also following the Gordon Brown model for obfuscation and complexity – think Inheritance Tax or stamp duty – while backtracking on previous announcements like tax credit reforms and the rules on pension contributions. The solution here is obvious: fewer Budgets. Mr Osborne could start economising next week, and let us all go to Cheltenham instead.

This is my FT column from Saturday

Mervyn King wants to make the job of a central banker more interesting. After what he went through as governor of the Bank of England during the crisis, you might think it was interesting enough already, but since retiring, he has thought about why it happened, and why there’s another one coming.

Like all careful forecasters, he does not specify when, but he has an idea of how to eliminate, rather than merely postpone, banking crises. In The End of Alchemy he proposes turning central banks into financial pawn shops for all seasons, not just (as they were obliged to be in the crisis) pawn shops for the financially desperate.

Here’s how it works: when things are calm, each bank must take all its assets to the B0E’s shop, which casts a pawnbroker’s eye over the lot and grades them. Government stocks might have a pawn rating of 100 per cent of cost, while riskier assets would be good for only a percentage of their cost. Some of the cleverer examples of financial engineering would attract a savage writedown

Dennis Weatherstone, when CEO of JP Morgan, invited his bright young things to explain any proposed new instrument in 15 minutes. If he failed to understand it, the bank would not proceed. The BoE pawn shop might classify assets like a CDO Squared as financial porn, and rate them at zero.

Armed with the rainy-day valuations of all its assets, a bank could then take in deposits up to that value plus its permanent capital. Everyone would know that however bad things got, the depositors could all be paid out. A run on a bank would be pointless.

Pawnbroking was, in effect, what the central banks were doing at the height of the crisis, only they were making up prices as they went along. A tariff established in calm markets is a logical extension of the methods which evolved then. Vast swathes of prudential rules could be scrapped.

It might take 20 years to get from here to there, but this is a brilliant idea. In addition, there would be all sorts of interesting stuff that the owners failed to collect, and central banking would never be the same. Bagsie run the pawn shop.

Where there’s blame, there’s a claim

Have you been in an accident? Have you been mis-sold a claims management business? Then the solicitors at Slater & Gordon can help. They have extensive experience of what it is like to be on the wrong end of a transaction, and their shareholders will feel your pain. The shares are in the 99 per cent club, and unless some slick lawyer can make a claim stick, they look worthless.

S&G is the Aussie listed law firm that paid £763m last March for the bulk of Quindell, a bizarre hotch-potch built on a country club. Please do not call them ambulance chasers. Sheer bad luck that the beastly UK government changed the rules to tackle our reputation as the whiplash capital of the world, but the price had already looked incredible to anyone who followed Aphaville’s What is Quindell? saga.

S&G has now decided that the business is worth £400m less than it paid, and is desperately seeking a rescue plan. However, the real mystery is why three months of due diligence seems to have meant ignoring anything in the newspapers. As the FT frequently pointed out Quindell was, ahem, a less than blue chip business, and is now under investigation under its new name, Watchstone.

Meanwhile, lawyers Maurice Blackburn want to start a class action, which is surely just what S&G would recommend. You need a heart of stone not to laugh.

To be Frank, it’s a risk

Michael Roney is a low-profile CEO running a low-profile company. Shares in Bunzl, distributor of plastic cutlery and cardboard cups, serial acquirer of other low-key companies (last year’s haul included a Brazilian dental business) have tripled under Mr Roney’s decade in charge. After his valedictory results last week the shares cost 27 times last year’s earnings. Let us hope his successor, Frank van Zanten, knows what happens after a long-serving, successful CEO retires.

This is my FT column from Saturday

The recipe for horse and rabbit pie requires one of each. The recipe for the new all-Europe stock exchange requires one Deutsche Bourse and one London Stock Exchange. Can you spot the rabbit? The killer phrase here is “merger of equals”. There have been a few genuine mergers, but they are a recipe for acrimony pie. In true life, there are only takeovers, and the chief executive calls the shots. This one also creates a “European champion” which counts as a double red light.

The gains from putting clearing houses together are so simple that even an outsider can see them, which is why everyone has wanted to buy the LSE over the years. As CEO, the fiesty Clara Furse was forever fighting them off, at prices which look silly now. Today’s boss, Xavier Rolet, wants to spend more time with his bees, and after seven years it is hard to blame him. Donald Brydon is a 24-carat City grandee, but with today’s governance rules the chairman is not in charge of the business.

Then there is the curious timing. Perhaps the ambitious Carsten Kengeter thinks Brexit is irrelevant, but whatever happens in June must impact the investment landscape – a known unknown which could have been avoided with a little patience. The newish Deutsche CEO is clearly a hungry man, but on these terms he should not be allowed to eat the rabbit.

At home with Legal & General

Legal & General is not your average housebuilder, but then Nigel Wilson is not your average insurance company CEO. He actually wants disruption, and no more so than in housebuilding, a cosy industry which he savages as “constrained supply in a rising market and a shortage of innovation and competition”. Where other investors might lean on the builders, L&G is going into the business itself.

Rather than join the fight for scarce brickies and carpenters, the company is to make the homes off-site in a new factory. Please do not call it system building, responsible for those ghastly flats half a century ago. If L&G’s pretty pictures are a guide, these will be nice Scandinavian-style homes, and building time on site will be cut by 70 per cent.

Mr Wilson has more than housebuilders in his disruptive sights. Talk of getting a return from financing attractive projects makes him sound like an old-fashioned banker, but a life office has a key advantage. It is financed by contracted savings rather than short term deposits. It can invest for the long term without needing to keep cash on hand. It can take a 50-year view. It can, in the jargon, capture the illiquidity premium.

This is hardly new. What is, in Mr Wilson’s eyes, is today’s “world of zeroes” – zero growth, zero interest, zero inflation, which obliges insurance companies to do more than rely on buying debt and letting compound interest meet their pension and life policy obligations. Companies are awash with cash, but “never has there been so much money available to invest, yet so little of it being put to productive use.” L&G is stepping in with “economically and socially useful” capital.

This visionary speech, to Cazenove’s investment conference last week, might be enough to get us hard-bitten investors running to sell the stock, except that Mr Wilson has already nailed his financial colours to cash, earnings and dividends as the driving metric. As he concluded: “We have seen significant dividend progression, including 19 per cent in the first half of the year…” Not exactly your average profit forecast either, then.

Something rotten in paradise

Do they know what they are doing? Shares in a little AIM-quoted outfit called Eden Research jumped after the company was cleared to use a terpene-based fungicide (don’t ask) on vines in Spain. This stuff prevents botrytis, “a widespread fungal disease that causes grey mould on many fruits”. Please keep it out of Bordeaux, home of the world’s finest sweet white wines thanks to botrytis, or noble rot. As Sydney Smith did not quite say: “My idea of Eden is drinking Chateau d’Yquem and eating foie gras to the sound of trumpets.”

This is my FT column from Saturday

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