I intend to publish this blog every Friday if there is sufficient interest. If you like it then tell others. They can read back numbers at http://www.neilcollinsxxx.wordpress.com if they are not sure, and set up an email alert for future blogs. Feedback (including abuse) is welcome.

 

Natasha Landell-Mills gave the fund management industry a rap on the knuckles in the FT this week. You managers, she said, nearly all voted the wrong way at the annual meetings of those beastly oil companies BP, Shell and the others. The directors averaged 97 per cent votes in favour of their appointment, as the institutional shareholders signalled their approval.

Ms Landell-Mills is “Head of Stewardship” at one of those fund managers, Sarasin Asset Management. Sadly, there was not space to say how her firm had voted, or indeed whether its $18bn of funds under management include these shares. Furthermore, it is not clear whether this stance should be an ethical decision (oil companies are inherently evil) or whether it is long-term self-interest (oil companies are doomed, so don’t invest in them) but the more difficult question is: whose vote is it anyway?

The likes of Sarasin are not the beneficial owners of the underlying assets. They are merely managing on behalf of those who have entrusted them with their capital. Unfortunately, what matters most to the managers is not how well they do with your money, but how much of it they can attract, since nearly all of them are rewarded by taking a slice of other people’s assets.

Those rewards, incidentally, are pretty attractive once the funds get into the $18bn zone, and signalling disappointment with those voting figures is a fine way to look virtuous, attract more savings and reap even more rewards.

The owners of the capital may feel less enthusiastic about their managers fighting the fight against climate change, since they are paying. As individuals, we might prefer Shell shares, yielding 6 1/2 per cent and sustainable for many years ahead as the world’s appetite for oil shows no sign of flagging, to fashionable tech stocks yielding little or nothing.

All oil company shares are cheap, not because the companies are running out of revenue, but because so many money managers have decided that we shouldn’t hold them despite their market-beating income stream. We would like the chance to vote, at least, rather than being lectured by proxy by the likes of Ms Landell-Mills. After all, it’s our money.

No sub-scale rewards here, thanks

If you had any doubts about the rewards from fund management, consider the case of Andrew Formica. He was in charge of Henderson in 2016, and decided that having $127bn under management meant the business was “sub-scale”. His rewards, on the other hand, were not, since he was paid $7.6m, but his solution was to get together with a US outfit with $196bn of assets.

This was a true merger, since both CEOs carried on, and like all other such push-me-pull-yous, one CEO lost the power battle. Mr Formica was paid $12m to go away. Still, you can’t keep a good man down, and in January he agreed another poverty-avoiding package to run Jupiter Fund Management, then with a definitely sub-scale £42bn under management.

It’s rather more sub-scale now, with the departure of manager Alexander Darwell and £3bn, while the board of the £47m UK Growth trust has lost patience over its poor performance. Mr Formica’s package only pays the jackpot if Jupiter shares do well. No sign so far, but the division of spoils between the managers and the owners of the capital they control promises to be as asymmetrical as usual.

A lost opportunity to be transformational

There are few words more doom-laden in the dealmakers’ lexicon than “transformational”. It sounds so positive and forward-looking, but in translation it commonly means “we don’t like the look of our current business.” The record of the London Stock Exchange rather belies that thought, but the CEO’s description of the $27bn purchase of Refinitiv as a “transformational transaction” is ominous.

The swift collapse of the bid approach from the Hong Kong stock exchange clears the way for the Refinitiv deal to go through, but the logic of the exchange merger is more powerful than that of paying up for a business which is miles behind Bloomberg, its nearest competitor.  The opportunity to turn the tables on the Hong Kongers is as rare as it was unexpected. It may not occur again.

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I intend to publish this blog every Friday if there is sufficient interest. If you like it then tell others. They can read back numbers at http://www.neilcollinsxxx.wordpress.com if they are not sure, and set up an email alert for future blogs. Feedback (including abuse) is welcome.

We are all being urged to buy electric cars to feel smug while we drive, and to save the planet. A few of us are actually doing so, either for the bragging rights of a Tesla or the convenience of a second runabout for town. But the motor of the moment for most people is the SUV, the four-wheel-drive, go anywhere vehicle which generally tackles nothing harder than the M4.

This is a worldwide phenomenon. SUV new car market shares are 45 per cent in the US, 42 per cent in China and 34 per cent in Europe. While the rebels in Parliament Square would like us to give up the internal combustion engine entirely, we want butch gas-guzzlers.

Perhaps the buyers are getting them in anticipation of some future ban, or perhaps they prefer not to hang around the motorway service station waiting for their car (or worse still, the car in front) to recharge.

The decision by James Dyson to abandon his electric car project after sinking billions into it may just reflect the coming tough competition from bigger, uglier manufacturers. On the other hand, it may reflect the considered view of the future of the electric car from one of the world’s foremost engineers.

Saving something from the wreckage

Once upon a time there was a company called Autonomy. Nobody outside the company really knew what it did, but it was whizzy, techy and its boss and guiding light, Mike Lynch, talked a lot about algorithms and software which could work out what you were meaning to say.

Investors loved the story, and the share price multiplied more than seven times between 2004 and 2011, when a desperate, declining Hewlett Packard paid $11.6bn to take it over. Things started to go wrong almost immediately, and eventually $8.8bn had to be written off. The inevitable court cases, plus an investigation into the Autonomy audits, continue to this day.

In 2016 Hewlett Packard sold its software business to the much smaller Micro Focus, specialists in making old tech perform new tricks (cheaper than chucking it out). The purchase was indeed transformational for Micro Focus, but not in a good way. When the full horrors were revealed in March last year, the shares halved in a day and fell out of the FTSE100. They recovered somewhat, thanks to an aggressive share buy-back programme, but have since slumped to £10.54, a five-year low.

The point of this story is that a couple of analysts, Paul Morland of Peel Hunt and Daud Khan of JPMorgan Cazenove, had challenged Autonomy’s accounting and were roundly pilloried by the sensitive souls around Mr Lynch for their pains. Mr Morland recommended selling the shares, and was completely wrong-footed when HP came blundering in. The wrong answer for the right reason, so to speak.

Still, that was then, and Mr Morland, now at Panmure, is on the case again. His conclusion is that “the shares appear to discount zero chance of progress” with Auld Autonomy. He believes “a business model that prioritises shareholder returns over growth has been pilloried by the bears” and that Micro Focus will earn its current market value in free cash in six years on his not very demanding projections. He reckons the shares are worth £15.

This is hardly a problem-free company.  Kevin Loosemore, its executive chairman, raised £12m in the summer by selling half his holding. It has wasted shareholders’ money buying back shares at up to twice today’s price (program now “completed”) and half the shares were voted against its remuneration policy last March. Better behaviour and a strategic review are promised. Perhaps this time Mr Morland will get the right answer for the right reason.

Hurry for Murray’s free lunch

Should you want some pre-fireworks sustenance on November 5, there is just time to become a shareholder in Murray Income Trust, and toddle along to the annual meeting in London that day. In contrast to most boards, the Murraymen (and women) are actively encouraging shareholders to attend, offering lunch for every shareholder plus a friend.

The quality of the repast is not revealed (sit-down splendour? Stand-up sarnies?) but the quality of the investment is just about palatable. The trust has narrowly beaten its benchmark (the FTSE UK all-share index) over three and five years – and the benchmark doesn’t offer a free lunch.

 

This is the first of what I hope will be a weekly blog, now that the Financial Times can no longer find space for my column. Please do not hesitate to forward the blog to anyone who you think might be interested/entertained/irritated enough to read it. They can sign up by going to https://neilcollinsxxx.wordpress.com/

 

Imagine being a central banker. Horrible job, enduring continuous strafing from all sides, struggling to keep up with the latest technical and technological developments, stuck on a salary while commercial bankers are force-fed millions in bonuses, etc etc.

On a quiet day you might wonder whether the great suppression, which has given us lower, and (increasingly nowadays) negative interest rates is storing up some terrible denouement. Your nightmare is a crisis of confidence in paper money that you are powerless to prevent.

At present, the world’s faith in fiat money is little short of miraculous. With the exception of Zimbabwe and Venezuela (for their own reasons) it seems that governments can borrow as much as they like, and the lenders will rush in at rock-bottom rates.

Every German government bond now has a negative yield, while no UK government bond yields more than 1 per cent. The Bank of England owns a third of Britain’s national debt, through the weird merry-go-round that is Quantitative Easing, and a cut in Bank Rate from 0.75 per cent is widely expected.

The strategy of almost-free money is effectively exhausted, yet the UK economy teeters on the edge of recession. The next weapon is the aptly-named helicopter money. This is not quite throwing fivers into the street from the sky, but it is not quite as daft as it sounds.

We already have a version of it, in the form of the “winter fuel allowance” which deposits £200 each year into every pensioner’s bank account. Helicopter money  means sending a useful sum into everyone’s bank account. Yet more intervention in the money markets just boosts asset prices even further, while helicopter money would be mostly spent, boosting demand instead.

We have already seen a sort of People’s QE in the form of payment protection insurance, which has cost the (partly nationalised) banks £50bn. Now that PPI compensation is coming to an end, it is time for those hard-pressed central bankers to get those rotors whirring.

 

Much more misery at Metro

It is only six months since the bizarrely-named Banking Competition Remedies decided to give £120m to Metro Bank, to help “radically transform the UK SME banking experience”, paying for “stores” in Manchester, Liverpool, Leeds and Sheffield. We were promised “initiatives to introduce a range of game-changing digital capabilities to help SMEs thrive”.

This money was a straight gift from the Royal Bank of Scotland (majority owner, HMG) in settlement of a dispute with the European Union about state aid in the banking crisis. The money was paid despite Metro misclassifying loans, an admission that had chopped a third off the share price in a day.

Since then, Metro has stung shareholders for another £350m, yet even £470m of fresh capital has not stopped the rot, and today’s market value at 185p is just £333m. At peak fantasy, Metro was valued at £3.9bn. This week it has raised a £350m bond at a price which included sacking the founder and paying 9.5 per cent, a price to make profitability even less likely.

Meanwhile, an unintended consequence of the post-crisis rules to ring-fence big banks’ UK assets has been a glut of capital. The bankers have billions now literally looking for a home, precipitating a mortgage price war. The “challenger” (please don’t call them secondary) banks are feeling the pain. Metro is not the only one where the principal challenge is survival.

A capital problem for JLP

John Lewis and Partners, the spot-the-difference new name for the John Lewis Partnership, is a national treasure. With no voracious outside shareholders to feed, the group is held up as a model of co-operation between workers and customers. The model looks a bit battered today, as the tsunami that is thundering through the high street has swept away first-half profits.

Improved performance is promised, but without those voracious shareholders, there is no outside source of risk capital should this be slower and costlier than expected. The mutual or employee-owned model works fine until it doesn’t, as the policyholders of Equitable Life discovered all those years ago.

This is my last FT column.

It is more than 30 years since the launch of pac-man, a computer game where players had to eat or be eaten. It is 20 years since London invented the pac-man defence to a hostile takeover bid, the response of Marstons to a hostile bid from Wolverhampton & Dudley Breweries.

Which brings us up to date, to what will surely be the bid contest of the year, the £32bn assault on the London Stock Exchange from Hong Kong Exchanges & Clearing. The HKEX cannot afford to buy the LSE, so it is proposing a (mostly) paper swap, on terms which give the LSE shareholders 41 per cent (?) of the combined group.

HKEX is also demanding that the LSE’s $27bn agreed deal to buy Refinitiv, the markets data business of Reuters, is scrapped, which would trigger a payment of a £200m break fee. In short, the approach is a financial stretch even without the background of the riots in Hong Kong.

Nobody seriously expects it to go through in its current form, but the logic of putting the two exchange businesses together, as the Chinese population becomes affluent enough to join the securities markets, looks attractive.

Indeed, the logic looks rather better than for the Refinitiv purchase. The jump in the LSE share price that greeted that news last month might have owed more to the prospect of another bid for the LSE than enthusiasm for the purchase.

The analysts at Commerzbank were scathing: “The transaction looks nice on paper but there is nothing left for shareholders beside adjusted earnings per share accretion – a pure accounting gimmick.” Refinitiv is a “challenged asset”. This is a minority view, but the business is suffering from years of under-investment, as anyone comparing an Eikon terminal to a Bloomberg would acknowledge.

The share ratings on these massive data businesses are very high, but the long-term potential looks almost unlimited, as new sources and uses of the data appear all the time. As with so much else in the digital economy, scale benefits increase with market share. Had LSE bought HKEX instead of Refinitiv, the reaction of the share price might have been still more euphoric.

The HKEX bid effectively admits the logic of the deal, so its only credible arguments are about price, domicile and who is to be in charge. The Chinese authorities’ approach to the rule of law in Hong Kong is being severely tested by the riots, which are highly unlikely to end with an outbreak of peace and harmony.

The local government effectively controls HKEX, meaning standards of corporate governance are far below those expected of a FTSE100 company. In all, it is hard to argue that the combined business would be better off run from Hong Kong. Besides, the former colony is nearly halfway through its “one country, two systems” half century, short term by the 448-year-old standards of the LSE.

In the context of what is the bigger prize, the break fee for abandoning the Refinitiv deal is little more than a rounding error. Time, surely, for the pac-man counter-attack from the LSE.

Addict in need of help

Help to Buy is the crack cocaine of the housing market. The UK government has broken successive promises to go cold turkey and get off it (the latest is for a “review” after 2021) and three out of five buyers did not need the help to buy their homes in the first place.

The public accounts committee’s finding is only the latest to highlight this terrible policy. It has failed to boost affordable housing or reduce homelessness and has cost the taxpayer £32bn. The conclusions echo those of the National Audit Office in June, and indeed the obvious criticism in 2013 that it was a demand-side measure when the housing market needed a supply-side boost.

As Meg Hillier, the committee chairwoman, concluded, Help to Buy is storing up trouble for both buyers and the exchequer, leaving both vulnerable to rising interest rates or falling house prices.

The beneficiaries of this ill-judged George Osborne policy are those old dope pedlars, the big housebuilders who are doing well by doing good. Their profits have soared, making fortunes for the executives. The shares have not done quite so well. Perhaps anticipating that the party cannot last, they sell on hangover ratings. Odd, that.

 

Of course it is a scandal. The payment protection insurance bill has shot past £50bn, the equivalent of about £800 for every man, woman and child in the United Kingdom. The banks are now weighing, rather than counting, the truckloads of applications that beat last month’s deadline, as the sins of the past fall on today’s executives.

It is hard on them, and worse for their long-suffering shareholders, including the taxpayer. Less so, perhaps, for the rest of us. A fat slice of the £50bn will have gone to the gruesome claims management industry, quite a bit more to straight fraud – believe it or not, there are a few of us who did not have PPI – but the bulk has gone to former borrowers who have spent their windfalls.

This QE for the masses has helped sustain consumer spending while central banks had no idea of how to do so. Their policy to keep buying their own governments’ debt merely gave us high asset prices and has ended in the absurd spectacle of negative bond yields.

If applied to consumer bank accounts, as is the logical extension of sub-zero rates, the rational response is to withdraw funds and keep the notes under the mattress. This will shrink bank balance sheets and their capacity to lend, a highly deflationary outcome.

Hence the suggestion of helicopter money. Not quite literally throwing fivers from the sky, but of the state putting money into consumers’ bank accounts and encouraging them to spend it. At first sight, this seems absurd. Money for nothing must surely invite inflation, but whether you think this disease of money is dead or merely sleeping, there’s very little of it about.

In fact, the UK government is already practising helicopter money. The state plonks £200 each year into the bank account of every pensioner. It is simple, tax-free and cheap to administer, and like the PPI compensation, most of the money goes to those who will spend it.

The risk of deploying the helicopter universally by extending this “winter fuel allowance” is not that it would instantly trigger inflation, but that it becomes politically impossible to stop making the payments when conditions change. Until they do, this is surely a better way to stimulate growth than for the UK to follow the crowd and plunge into the looking-glass world of negative interest rates.

It’s gonna cost you, guv

If you have tears, prepare to shed them now…Cancelling HS2 would push up the cost of infrastructure, according to a bleeding heart letter sent by 22 contractors to the chairman of the latest review into this vainglorious railway line. Their logic, displaying considerable imagination, is the enhanced political risk that future projects might also be cancelled, forcing them to charge more in anticipation.

The 22 do not quite say that this means that cancelling the £100bn project would cost us more in the long run, but by golly there’s a price to pay, and you’ll be sorry. Douglas Oakervee, the review’s chairman, was once chairman of HS2 Ltd, but he will have to find more convincing support than this to justify not pulling the plug.

Aviva reviva?

Could this really be the moment when the ugly duckling called Aviva transforms itself into a beautiful swan? From 350p at the start of the month – a price first reached 30 years ago – the shares have shot up to 390p.

This business has been a mess ever since the shotgun wedding of its components, and even on a “rebased” dividend, the shares yield 7.8 per cent, as successive holders have given up waiting. New CEO Maurice Tulloch has yet to reveal anything like a strategy, but we Brits are getting too fat for a long old age, which helps the life companies, while Aviva’s Asian business might fetch as much as $4bn if sold.

The brokers at Jefferies are daring to dream that seven years of “transformation” may actually produce results, adding wistfully: “the current market valuation of Aviva discounts any possibility of the fruits of this transformation ever being realised.” One day, maybe. There’s always that 7.8 per cent yield while you wait, unless Mr Tulloch decides to “rebase” the dividend again.

This was my FT column from Saturday before the subs got to work.

A year ago, had you been rash enough to buy a 10-year UK government security, you would have known that the return of little more than 1 per cent would almost certainly guarantee a loss, after inflation, were you to hold it to maturity.

Twelve months on, and your total return from the investment is over 10 per cent. The yield is now little more than 0.5 per cent, reflecting the rise in the price of the bonds over the year. Those of us who described the 2018 buyers as preferring hope over the UK’s inflation experience look foolish today.

In an age where investors will buy bonds on negative yields, the return on UK gilts may be derisory, but it is still at least positive (before inflation) so perhaps the prices might go up still further. Yet the risk in buying these so-called risk-free assets increase with each rise, as valuations become ever-further stretched.

Compare that with some of the unloved beasts in the equity market. HSBC, Rio Tinto, BP and BAT, with a combined market value of £315bn, together yield over 6.5 per cent on current dividends, declared in dollars, so they pay out rather more if sterling remains depressed.

Put another way, if the payments are only sustained, these shares will return their whole capital investment in dividends in 15 years. Partly depending on what happens to bond yields, the government stock will have paid a total of less than 8 per cent in interest.

This glaring mismatch has something to do with fear of a humdinger of a world recession, but has much more to do with factors which scarcely bear on investing. Bond prices are high because central banks have wrecked the market by slashing interest rates and buying their own governments’ debt in vast quantities.

The collapse in interest rates is preventing banks from making their traditional margin, while mining is dirty and polluting. The prices of oil and tobacco stocks are depressed because so many of their natural buyers have been warned off the course by special-interest lobby groups.

These are the ingredients for unusual investment opportunities. Banks will find other ways to extract profits from borrowers. Iron ore remains the backbone of physical development. Tobacco companies are proving more resilient than some of their customers, while most projections make oil and gas the dominant sources of energy for decades to come.

Perhaps we really are on the edge of a slump to make the 1920s look mild, which is the only justification for the $15tn dollars of negative-yielding debt worldwide. None of the businesses above is a risk-free investment, but together they look a better bet than the guaranteed return-free alternative of holding UK government stocks at today’s prices.

Marks & Who?

So farewell then, Marks & Spencer, elbowed out of the FTSE100 by the likes of Evraz (Russian steel) NMC Health (Gulf healthcare) and DCC (oil support services) reflecting the impermanent nature of business. When DCC was formed in 1996, M&S declared profits of £1bn and the shares almost touched £8.

It was run in Stalinesque style out of a Lukyanka in London’s Baker St, and since that peak the business has defied all successive managements’ efforts to stop the rot, culminating in the latest desperate focus on food retailing, just as competition there looks fiercer than ever.

Clothes retailing is hard, but decline is not inevitable, as Simon Wolfson has demonstrated at Next. The contrast is particularly painful. Where M&S had long-term property commitments, Next has short leases, allowing flexibility for changing conditions. While M&S struggled with new technology, Next transitioned its clunky mail order catalogue into a competitive on-line offer.

Only three years ago, M&S was buying in its own shares at more than twice the price of this year’s 185p rights issue. Meanwhile, Next has demonstrated rare intelligence with its buyback programmes, buying shares only when the price seemed more attractive than the returns from expanding the business. Since 1996, its share price has multiplied ten-fold.

It is possible that the current M&S management will succeed where their predecessors failed, but the omens are not good. The key question is: if the business disappeared entirely, would you miss it? For too many consumers, the answer is: miss what?

This is my FT column from Saturday

The bar has come down. It’s all over. The Terminator has been terminated. The deadline for payment protection insurance claims has passed. The claims were never for the insurance itself, which frequently turned out to be valueless, but against the banks for selling PPI in the first place.

As an example of the banks’ ruthlessly cynical behaviour towards their customers, this is a peach. Many borrowers believed they would be covered if they were unable to maintain the payments (the clue was in the name) and they were as likely to study the small print as we do the t&cs when buying a mobile phone.

When the scandal started unfolding, the banks cited their own protection in the small print to resist claims. Only when Lloyds unexpectedly abandoned its defence did the floodgates open. It became impossible for the banks to distinguish between genuine PPI claims and those from the growing army of fraudsters, cold callers and claims management companies.

The total cost to the banks has now passed £48bn, including around £12.5bn spent on their administration. The claimants’ intermediaries will have skimmed billions from the £36bn paid out. It is all very shocking, but PPI compensation has helped millions of people during hard times. Lloyds alone had settled with 8.6m customers by the end of June.

The distortion to the economy as a result of quantitative easing has boosted the value of assets mainly held by the rich and well-to-do, but has done little to encourage them to spend. In contrast PPI payments, a sort of QE for the masses, have mostly gone to those who spent it. One consequence was the appearance of new motors on council estates, and as the PPI payments have tailed off, car sales have suffered.

Between them, Lloyds and Royal Bank of Scotland have paid out more than half the claims by value, so considering the state’s holdings in the two banks, around £20bn might be thought of as a sort of targeted tax cut.

As for the banks themselves, Jonathan Davidson from the Financial Conduct Authority doubts whether they have really learned much from the PPI episode. When times get tough “they take more risks in their treatment of customers.”

This behaviour does not produce long-term gains for their shareholders, either. QE, with its consequential tiny interest rates, has destroyed the banks’ profitability, and Lloyds shares are much the same price today as they were a decade ago after the financial crisis. It seems the only true beneficiaries are the top bankers themselves. Plus ca change.

With Amigos like these…

They got frightfully upset at Amigo Holdings at the suggestion here that the business of getting your mate to guarantee your debt had more than a whiff of moral blackmail. Oh no, everyone knows exactly what a guarantee means, and much of the criticism is “urban myths.”

That was last March. This week things looked rather less friendly, with results as horrible as the concept behind the company. Among other things, it is encountering “challenges within collections” as it tries to enforce payments on loans bearing interest rates up to 49.9 per cent. Well, surprise, surprise.

The shares, floated at an absurd 275p 15 months ago, were 145p in March, and 83p after this week’s news. Those in charge at the time have gone, and the new CEO has to work out how a business perfectly designed to drive a wedge between friends can, or indeed should, have a future. The bankers at JP Morgan Cazenove, who brought this wretched business to market, should be ashamed of themselves.

No luck at Mukluk

The North Slope of Alaska transformed BP, which this week announced that it was selling up for $5.6bn. Prudhoe Bay has produced 13bn barrels so far, and at its peak was the biggest producing field in the US. Yet at one stage it looked as though it would be dwarfed by a neighbouring prospect. Sohio, a BP associate, paid $1.5bn for the lease and built a $100m gravel island in the Beaufort Sea to drill it. The seismic looked lovely, but the oil had long gone, and the water that remained made Mukluk the world’s most expensive dry hole.

This is my FT column from Saturday