If the crises of the past seem less ghastly than those of the present, it’s because we know what happened next. The world did not come to an end; rather, it carried on getting richer. Last week saw the neat co-incidence of the 60th annual Barclays Equity Gilt study and the FTSE100 index finally topping its 1999 peak. The one shows that shares have been a fine long-term investment, while the other shows up the shortcomings of an index which is more of a reflection of investment fashion than sustainable value.

The study draws the charts since 1899. The Great Depression, World War 2, the collapse in 1974 and the banking crisis of 2007 are mere blips on the smooth upward progress of shares. More realistically, £100 invested in 1990 would have turned into £750 now, including reinvested dividends. Even after inflation, that’s almost a quadrupling of value. Government stocks, despite their extraordinary run, returned only marginally more. Index-linked gilts and cash are miles behind. The difference is the dividends. While the returns on government stocks dwindle each year the price goes up, dividends on shares have risen, albeit erratically, almost every year since 1945.

The Barclays study has ballooned into a 200-page monster, complete with analyses of the oil market (lower for longer) and global demographics. It concludes that the changing ratio between savers and spenders as the population ages should spell the end of the savings glut, which “seems quite inconsistent with market pricing of very low or negative 5-year and even 10-year forward interest rates.”

Not only do these rates make it ruinously expensive for companies to try and match their pension liabilities, they make it dangerous as well. To describe the 1.74 per cent yield on a 10-year gilt as “risk-free”, as the actuaries routinely do, is patent nonsense. The Barclays study highlights the real risk – that capital which could be employed productively is forcibly lent to the government, at the expense of growth and those future dividends.

Bad apples go cherry-picking

It was a simple scam. The broker would buy stock in the morning, “names later, old boy.” If it rose it went into his account, if it fell it was booked to a client. It was so obviously abuse that even in the bad old days before the Financial Services Authority it was outlawed. So it’s shocking to find a variant of the scam at Aviva right up to 2013. The FSA’s successor calls this cherry-picking. Others might use something stronger, and now it’s come to light, Aviva has been fined and paid £132m to disadvantaged policyholders in compension. Some cherry.

As usual in such cases, the top brass at Aviva are shocked that its “three lines of defence” of risk management should have failed to catch an abuse which had gone on for eight years. Lessons learned, rules tightened, systems reviewed, etc, etc. Aviva Investors has £240bn under management and is about to add a further £100bn by taking over Friends Life. Integrating life offices is notoriously tricky, and Aviva has proved over the years that the gains are often illusory. And integrating the fund management side is supposed to be the easy bit.

Sofa, so good. But who for?

Up to 60 per cent off! Limited time only! Reduced from £1bn to £585m! This is DFS, the sofa retailer whose products last longer than its previous life as a public company. So round it comes again, this time with an ambition to get sat on across the world, rather than just Britain. Upholstered with the addition of a couple of smaller rivals, the mid-point price of next week’s offer values it at nine times last year’s EBITDA.

It’s a great business model. Customers pay before the product is even made, and the ever-changing sale items encourage them to take the plunge while their choice is half price. Yet Advent, its private equity owners, is trimming its holding from a three-seater 89 per cent to a two-seater 50 per cent, while the directors are also selling. Sofa sales need constant plumping up with shouty advertising, and are notoriously cyclical. Even at the new cut price, this offer looks like one to sit out.

This is my FT column from Saturday

“Corporate responsibility” is one of those essential phrases for the modern plc. It’s employed to demonstrate that the business is not merely some rapacious money-making machine, bulldozering everything in its path, but a caring, sharing organisation that, like the old dope pedlar, is just trying to do well by doing good.

Fund management businesses are not immune, since the Companies Act obliges them to comply, even if nobody quite knows what the expression means in this context. Here, for example, is Henderson Global Investors: “Responsible investment is the term Henderson uses to cover our work on environmental, social and corporate governance issues.”

This fine phrase isn’t going down too well in Winchester, where a Henderson associate company plans to develop a run-down slice of the city centre, and quite a few of the natives are revolting. This week the £165m project ground to a halt in the high court when Mrs Justice Lang ruled that the city council had acted unlawfully in accepting Henderson’s proposed changes, which degraded the scheme. Whether or not the development would enhance the ancient city – a shopaganza designed by a single architectural practice on a five-acre site near the cathedral doesn’t sound promising – the reputational risk to Henderson is substantial.

The profitable part of the fund management business is garnering the savings of thousands of individuals. They are spoilt for choice of manager, and after what looks like a display of greed with this scheme, it’s safe to say that few of the wealthier residents of Winchester will be looking to invest in Henderson funds.

This little local difficulty may not set the ripples spreading widely enough to cause the brand significant damage. It is, at least, a demonstration of how things are connected. It’s also Henderson’s chance to show a little corporate responsibility.

 It’s cash, but not in the bank

About those Swiss francs you’ve got (perfectly legitimately, of course). You really don’t want to deposit them or buy government bonds only to be charged for the privilege, so what do you do? Take them out in cash, put them into a fireproof safe deposit box or three, and trust that neither moth nor rust doth corrupt.

As bond yields turn negative, this strategy will become more popular, and not just in Switzerland. The bondwatchers at Bond Vigilantes have been trying to work out what it means as money crosses the “zero bound” into negative rates. For a start, the narrow money supply will rise (as it did, for different reasons, during the banking crisis) but since the cash won’t appear on the banks’ balance sheets, it’s neither spent nor available to borrowers.

The further below the zero bound that bond prices go, the bigger the incentive to simply hoard cash this way, and the less the banks have to lend, thus exacerbating the deflationary effect the authorities are trying to counter. As the vigilantes say: “In the extreme, you could even develop markets in exchange traded derivatives issues that are linked to cash held in a depository”. These derivatives could, presumably, be sold for cash, inventing a whole new proxy banking system. The cash, of course, would go into a fireproof safe deposit box…

The 1p coin should cop it

Find a penny, pick it up, and all day long you’ll have… a bad back. Perhaps that’s why these copper-coated steel slivers can lay undisturbed for days on pavements, or perhaps it’s because the coin has so little value that it’s not worth the bother of stooping. Its principal use is to keep shop assistants honest, as we wait for our receipt and change. Many of the 11.278bn minted pennies lurk unwanted down sofas and in drawers.

Now those shoppers who preferred to save a penny are to be denied the choice as Poundland prepares to swallow 99p Stores for a rather chunkier £55m. There have been calls for the deal to go to the competition authorities, but that does look rather silly. Other retailers are available, if not of Valentine’s Day fluffy red handcuffs (only, er, £1). If the authorities want to get involved, they might instead ask whether inflation has finally done for the 1p. It’s time to scrap it.


This is my FT column from Saturday (with apologies for late posting. Sheer incompetence)

You might have thought that £47bn would be enough to keep 300,000 increasingly elderly BT pensioners in the style which the company had promised. At £150,000 each, it’s much more than most workers could hope to accumulate in their pension pots. You would, of course, be wrong. BT’s actuaries have decided that it’s £7bn short of what’s needed to meet the company’s promises.

Despite the money BT has shovelled into the scheme, the shortfall is almost twice what it was the last time the actuaries looked, three years ago. They’ve agreed a 16-year plan for payment, but it’s just as well BT is in rather better shape than it was in 2001, when it sold off its mobile phone business. Indeed, it’s doing well enough to splash out £12.5bn (though not much in cash) to buy the ridiculously-named EE, an even bigger mobile phone business than the one it sold.

That £7bn deficit figure – eight years of dividends at the current rate – is entirely the work of the actuaries. It’s almost impossible for outsiders to follow their maths, so the pension fund trusteees must accept it, remembering that they could be personally liable to 300,000 pensioners if they don’t.

The collapse in bond prices means that the “present value” of the promises is much greater than it was when the actuaries last looked, even though the pensioners are older. Given the way things are going, as bond yields turn negative, the deficit might get even bigger. This is the madhouse of actuarial mathematics.

Imagine, instead, if each beneficiary had his own pension pot. The latest reforms would allow him to choose what to do with his (average) £150,000 of savings, with that extra £7 billion over the next 16 years shared between the survivors. They would be freed of the demands of the actuaries, while BT’s shareholders would be freed of the possibility of a still more costly calculation next time around. BT’s management could concentrate on convincing the customers that bigger really does mean better. Well, we can all dream.

Can pay, won’t pay

Do you want to pay for your bank account? Neither do 62 per cent of those surveyed by PwC. An even greater proportion spotted that there’s no such thing as a free lunch, but until the bill arrives, are happy to keep eating.

They don’t expect the bill to come to them, and for the majority, they’re right. The cost of free banking is borne by those who can’t stay in the black, or those who buy things from their bank, like payment protection insurance. The argument from the banks currently runs: if we charged you for current accounts in credit, then we wouldn’t have to sting you for everything else we’re trying to sell.

This is ingenious, even if it lacks credibility, given how PPI has exposed their real-life behaviour. If it’s so compelling, then we’d happily pay for current accounts in return for cheap loans, attractive deposit rates or useful insurance. Those banks which have tried it have not been killed in the rush.

PwC’s Steve Davies suggests a different approach. He argues that free banking stifles innovation and ensures that the so-called challenger banks will never make an impact. He suggests that the banking regulator might intervene. Best of luck with that. “Regulator forces consumers to pay” is a career-threatening headline. Given the choice, 62 per cent would rather not. What were the other 38 per cent thinking?

How green was my Spar

The saga of the Brent Spar is one of Greenpeace’s more disgraceful episodes. It boarded the oil storage tank as it was being towed out for dumping in the ocean, providing irresistible tv news footage and forcing Shell to bring it back to be broken up onshore. Last week the company embarked on dismantling the Brent Delta platform, which the subsequent rules oblige it to deal with the same wasteful way.

Thus was a golden opportunity for conservation lost to a political stunt. Controlled dumping of surplus unstallations would have created a marine sanctuary, allowing Atlantic fish to escape the monster nets of the trawlers.Now there are hardly enough fish left to bother.

This is my FT column from Saturday


When you’ve softened up the market to expect a 10 per cent cut in the dividend, a mere 5 per cent is considered a result. Which is why Severn Trent shares rose last week, as the big water companies capitulated to the demands of the regulator, along with the usual blather about a fair balance between the interests of the shareholders and the customers.

The dividend, in the deathless prose of such setbacks, is to be “rebased”, and look, we’re hoping to raise it in line with the Retail Prices Index every year for the next five. How’s that for sustainability? Of course, the five-year cycle of water regulation does make life harder for the companies than, say, running a bath, but dividend sustainability is measured in decades. Us shareholders like dependable divis. “Rebasing” does serious damage to the idea that the income stream can be relied upon.

Had Severn been under the cosh to protect its all-important credit rating, the cut would be understandable, even sensible. But the company is actually making its capital position worse, by launching a £100m share buy-back programme. The £10m a year saved from cutting the dividend looks hardly relevant by comparison.

The company bangs on about capital efficiency, and the difference between the balance sheet and the p&l, but cash is cash is cash, and paying a dividend has (almost) exactly the same effect on the company finances as a share buyback. The clear winners from this move are the brokers who will handle the trades. There is no mention of price. The intention is to keep buying (prudently, of course) until the money runs out.

Severn Trent is among the best-run water companies and two years ago it fought off a takeover approach at £22 a share, 25 per cent above its previous peak. A combination of good performance and plunging debt costs has finally closed that gap, but the Canadian pension fund that led the charge last time will also have adjusted its target returns to today’s flat-lining interest rates. This ill-judged cut to the dividend may be just what the marauders need to renew their assault.



Osborne, Osbond, Osbatty

There’s still time, provided that your advanced years allow you to tackle the internet thingy, to get your ration of Osbonds. Every OAP who can find up to £10,000 is eligible, and the three-year version of NS&I’s Guaranteed Growth Bond returns 4 per cent before tax (which will be knocked off at 20 per cent before you see it). Most people who can find the maximum will pocket £320 a year.

This is much more than a mere building society can afford to pay, and much, much more than the government needs to offer for three-year money. Rather than pay 0.66 per cent, our dear Chancellor is bunging hundreds of pounds a year to the middling-affluent oldies. We are not even what might be described as core Labour voters needing to be seduced.

These bonds go with the free bus pass and the £200 tax-free winter fuel allowance. Gratuitous benefits all three, richly deserving of the sort of crackdown being applied to those without jobs. It would serve George Osborne right if in three months’ time, the young rise up and vote him out. The Osbonds should encourage them.

No competition in this game

The backers of the shirts of premier league clubs know their target audience. Not to be put off by the collapse of Alpari, the name on the front of West Ham United’s players, online currency broker Swissquote is to join the fun by sponsoring Manchester United. Quite why people believe they can beat the market playing the foreign exchanges is one of life’s little mysteries, because experience proves they can’t.

This is a game for mug punters, and the professionals on the other side of the trade clearly think the mugs watch the match. It’s not much consolation to learn that Swissquote also paid heavily for its central bank’s decision to free the franc; it lost money because its clients were wiped out before they could be closed out. Just watch the ball instead, guys.

This is my FT column from Saturday

Luckily, you’re probably not a shareholder in Coca-Cola HBC. Unless, of course, you’ve got a FTSE100 tracker, in which case you may wish you weren’t. HBC, of course, stands for Hellenic Bottling Company, and the company has as much to do with the UK as those miners with the alphabet soup names which infested the index during the commodities boom.

HBC is in London’s main index by default, having departed its original home on the Greek market because it was becoming the Greek market index. In September 2013 it decamped and came to town, its market value of £6.5bn propelling it straight into the FTSE100. It looked like an expensive misfit at the time, and so it has proved. From over £19 then, it’s been downhill only to today’s £11 a share.

It’s still not obviously a bargain, although one tries to be sympathetic. Over one-third of HBC’s sugary fizz goes to Russia and Nigeria. Rotten luck that both have gone, well, flat, almost overnight. The brokers at Cazenove reckon the countries’ woes will wipe 27 per cent off this year’s earnings. Merrill Lynch, who never liked the shares, add the risk of Coca-Cola raising the price of the gloop or even removing a territory or two from HBC.

Contrarians might argue that after such a fall, all this is already discounted, except that the price is still 19 times the Caz estimate, not far out of line with the “consumer staples” sector. With sugary fizzy drinks getting the sort of publicity that once softened up the tobacco companies, Coke may one day not look like a “staple” at all. Still, you never know. Perhaps Warren Buffett will decide to add HBC to his Coca-Cola holdings.

They would say that…

Stockbrokers need buyers of stocks, so the argument  from Merrill Lynch that shares paying “safe” dividends could double from today’s prices brings to mind the famed comment attributed to the late Mandy Rice-Davies. In truth, the brokers’ list is a pretty rum one.

At the top is Roche, the Swiss pharma giant. AstraZeneca is not far behind, but there’s no mention of GlaxoSmithKline. British American Tobacco (still listed as a “staple”) is the lone maker of death sticks while British Land, Land Securities and Hammerson prop up the table, despite the “low” risk to their dividends. There are no miners or British banks.

Yet the brokers may have a point if their prediction of 2015 being the year of negative yields is right. The Swiss charge you to look after your money, the Germans pay nothing, and index-linked bonds already guarantee buyers will lose money in real terms. Long bonds return less than 2 per cent, and at the shorter end, negative-yielding bonds are the world’s fastest-growing asset class.

By contrast, safe dividend stocks yield almost 4 per cent, and they are already tending to behave like bonds. Merrill’s argument is that the market could drive the prices until they have yields to match. However, a safe dividend needs a business that is sustainable and profitable not just for a few years, but over the decades, or more than the entire life of some quite substantial companies. Despite its wobbly dividend record, Marks & Spencer is on the list. Woolworth, of course, is not.


All Helge let loose


These are grim days for companies and individuals who had got used to $100 oil. Attacking the cost base is the new black (stuff) so projects are being canned and experienced workers fired. Few oil majors are under greater pressure than BG Group, with its debt-funded commitments to expensive deep-water drilling 150 miles off Brazil and its vast LNG plant in Australia.

So results day on February 3 promises to be uncomfortable for the company and its new chief executive, Helge Lund, headhunted at great expense and terrible timing from Statoil in October.His first pay package was shouted down, but even the second (trimmed to avoid the need for ratification by shareholders) looks increasingly inappropriate in the brave new world of sub-$50 oil. The shareholders really wouldn’t mind, Helge, if you pared it down again. It would make the pain you’ll inflict on your new colleagues a little easier to bear.

This is my FT column from Saturday

Last week, with a two-paragraph announcement headed “Material fact”, one of Europe’s biggest banks slashed its dividend by two-thirds and raised E7.5bn in new equity. If ever there was a demonstration that Santander, owner of Abbey National and Alliance & Leicester in Britain, is not like other banks, this was surely it.

A quick presentation disclosed a 30 per cent rise in net profits, highlighting a capital position that implied little need for new funds. Then followed a mega “accelerated book build” by Goldman Sachs and UBS. to issue the maximum allowed under the rules restricting share sales to outsiders.

There was no tedious underwriting of an offer to shareholders, which considering Santander’s vast shareholder register following its British takeovers, is understandable. Rather than view small shareholders as an unwanted cost, the bank had positively welcomed fragmentation of the register. It had also allowed holders to take more shares instead of cash dividends, an option encouraged by the tax rules for Spanish holders. It worked. Dividend declarations of over E6bn in 2013 cost less than E1bn in cash payments.

The drip-feed of returning capital increased the number of shares in issue by a quarter in five years. Yet the price defied this watering of the stock, and last September brokers Berenberg, pointing to its gravity-defying nature, rated the shares a sell at E7.66.

At the same time, a new executive chairman arrived. Exhaustive selection processes are for other banks, but Ana Botin is the daughter of the founder, and while Santander is no longer a family firm, the family doesn’t seem to have noticed. Despite its controlling only 2 per cent of the Santander equity, there was never any argument about who should succeed Emilio Botin.

It may be that Ms Botin is sufficient of a chip off the old block to steer the bank as competently as a conventionally-chosen chief executive. The hedge funds which snapped up 60 per cent of the issue at E6.18 apiece must believe it. Perhaps they were encouraged by Ms Botin’s pledge that in future most of the dividend would be paid in cash, rather than the sleight-of-hand issue of new shares.

As for the by-passed small shareholders, they shouldn’t grumble. No only were the E75m of fees paid to Goldman Sachs and UBS modest by today’s standards – a rights issue would have cost much more than 1 per cent of the sum raised – but they can buy all the shares they want today at E5.98.

When you’re in a hole…

If there’s an enthusiastic buyer with a big slug of cash he’s pledged to invest, you might think it would provide some protection against a falling share price. You’d be wrong. Every market day since Christmas, traders for Glencore have been buying back the company’s shares, in ever-larger numbers. The sellers, though, just keep on coming, and while all the miners have had an unhappy new year, few major stocks have fallen as far as Glencore.

So far, almost half of the £120m the company earmarked on Christmas Eve for buybacks has been spent, and the shares are down 20 per cent. At 240p they are well under half the 2011 flotation price, and a considerable embarrassment for the smartest guys in the room.

We shall have to wait to see how well Glencore’s own traders coped with the plunging copper price. Unfortunately, as the world’s largest miner of the metal, it’s pretty exposed. However, those traders buying shares for the company, having spent the equivalent of about 0.5p a share, might learn from their experience and suggest paying the rest direct to the remaining shareholders instead.

Jordan’s a stunner

Oi ref! That Thomas Jordan’s well offside. That move is against the rules of the central bankers’ game. Look at all the money we’ve lost! And, adds Christine Lagarde at the International Monetary Fund, the bankers’ referee, he didn’t even tell me he was going to free the Swiss franc.

Well, no, of course he didn’t. Ask George Soros how much you can make getting ahead of a step change in the value of a currency. The least expensive way to do it is without warning, as the Swiss National Bank did on Thursday morning. The short-term cost to the bank’s credibility and the Swiss economy is high, but nothing like as high as continuing to defend the indefensible.

Currency pegs break. However appropriate the rate is at the start, diverging economic performance builds up intolerable stress over time, as Britain discovered in 1992. The Swiss economy has grown by 7 per cent since 2008, while the eurozone’s is still smaller. Even without the threat of yet more euros to add to its mountains, the fixed exchange rate was unsustainable. That Thomas Jordan. What a player!

Gold interest, sort of

The drawback of owning gold, the textbooks point out, is that it earns no interest. Well, these things are all relative. It earns more than a deposit at a Swiss bank, since you must now pay them 0.75 per cent to look after your newly-revalued francs. Finland, Germany and Japan all have zero rates, and deposits in France earn next to nothing. All this before the European Central Bank starts its money-printing programme. At least with gold the bank won’t charge you an interest rate for holding it.

This is my FT column from Saturday

Spare a sympathetic thought, if you will, for the 15 non-executive directors of the Court of the Bank of England in 2007. They are there not for the money but for the burnishing of their CVs, curiosity, and perhaps a sense of public duty. Some are bankers, but none is a central banker. They’d struggle to explain the difference between Bankers Reserves and Short-term Repos, or why the totals should be roughly in step. They are all jolly busy with day jobs.

As this week’s minutes show in gruesome detail, when it comes to discussing the lack of racial diversity at the BoE, everyone has a view. When it comes to the technical consequences of rescuing Northern Rock, they have little to add. Actually, it’s worse than that. Their chairman, John Parker, reprimands them for leaking the appointment of a deputy governor (to the FT, natch) and implies that if they can’t keep quiet, they’ll be told even less.

Given this environment, it’s hardly surprising that the volumes covering the Great Banking Crisis portray Court members as flapping around like fish on a slab. Since even the technocrats were bewildered by the speed and novelty of the events unfolding before them – some had even interrupted their holidays to attend! –  it seems particularly unfair to savage the non-execs. The whole set-up was archaic, but it suited the executives to keep it that way.

As for those BoE technocrats, they would be less than human if, in the early days of the crisis, they had to suppress a shiver of shadenfreude. When in 1997 Gordon Brown had passed the setting of Bank Rate to the BoE, he followed up by taking back control of the gilts market, effectively blinding the BoE to its signals.

Much worse, in what was widely seen as a deliberate humiliation of Eddie George, then governor, he shunted the supervision  of banks to the nascent Financial Services Authority. As was obvious at the time, this strategic blunder not only gave the task to an organisation that had no idea how to do it, but robbed the BoE of the ability to detect early signs of individual bank stress.

With overall responsibility at one end of the Docklands Light Railway and individual responsibility at the other, something was bound to fall between the tracks. It turned out to be the British banking system.

Retail bond shocker

Few buyers of Enquest’s 5.5 per cent 2022 retail bond will have read the whole of the 144-page prospectus last February. Had they struggled through the legal bindweed they might have noticed that “the issuer’s business is materially affected by the prices obtainable for oil and gas. Any material decline in prices could have an adverse impact on the issuer’s performance and financial condition.”

Well they did, and it has. Enquest describes itself as the largest independent in the North Sea, and its shares have followed the oil price down. November saw a (fairly) reassuring trading statement, but in those far-off says, oil fetched over $80, and since then the jitters have spread to the retail bond, down from £100 in October to just £67 now.

The directors are piling into the shares, and one, Philip Nolan, is buying the retail bond. In theory it yields over 12 per cent to redemption. However, it’s also “unsubordinated and unsecured”, and swathes of the North Sea are unprofitable at today’s oil price. Do not expect the statement with the results in March to make happy reading.

Form an orderly queue

Land Securities is attempting to repay its debt to society by throwing open the top of its City monstrosity to the public. Well, not exactly throwing, since you can’t just turn up for the Sky Garden, no sirree. You have to book your leisure moment well in advance (nothing available until next month) with your name, rank and (email) number. Bring ID and if you miss your slot, well, tough. Oh, and do make sure you’ve read the terms and conditions to be allowed into this “public” space.

Of course the views are breathtaking, because the building curves away under your feet, and because the ghastly walkie-talkie isn’t in the way.

This is my FT article from Saturday


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