To Nemat Shafik

Welcome to the Bank of England. As Britain’s top cat at the IMF, it’s amazing that nobody thought of you before, which perhaps shows how closely we watch it nowadays. No matter. Your position, apparently, in the squad of deputy governors, is to worry about how to shift the £375 bn of government stock that the Bank has somehow accumulated as a result of Quantitative Easing.

At £6,000 for every man, woman and child in the UK, that looks quite a challenge, but you know economics doesn’t work like that. The better question is: why bother even thinking about it? If these gilts were old-fashioned, you could use the certificates to fire up the Bank’s boilers next winter. Nowadays, of course, there is no paper to burn; the stocks could simply be wiped out.

The treasury already plans to stop adding the interest to the captive gilts, so perhaps this process has already started. It might do terrible things to the Bank’s balance sheet, but so what? Its obligations are guaranteed by the state, it can print its own money, and if it felt the need to tighten liquidity, it can create new gilts to sell, the way it used to in those distant, pre-QE days.

The state’s finances would be much prettier, and perhaps that’s the real point. Wiping £375bn off the national debt would make it look so small that the politicians would quickly be off down the inflationary primrose path signposted “Zimbabwe.” It’s the moral hazard argument again. Mind you, under your new boss’s predecessor, that didn’t turn out so well, did it?

Get a life

So farewell, then, the impaired life annuity business. It was a terrific moneyspinner while it lasted. The fatal flaws in a model that depends on people being obliged to buy a product that they don’t understand at a price which seems too high have been cruelly exposed at a stroke of the Chancellor’s pen.

Partnership Assurance and Just Retirement piggy-back on the work of the life assurance companies which  collect pension contributions. Both have secret black boxes which somehow allow them to offer better terms to those about to retire and are expected to die soon after, and of course the mainstream providers would never notice. Both companies came to market to raspberries from this column last year,  and both shares halved after the Chancellor holed the annuity business below the waterline on Wednesday.

As Merrill Lynch put it with commendable understatement: “Although we believe that for many consumers, buying an impaired annuity will continue to be the right option, the lack of visibility on the outlook…means we can no longer maintain our Buy rating.”

An impaired annuity may indeed be the right option, but for those in poor health at retirement, the option to spend the money while they can still enjoy it makes more sense. Annuities have been a rotten deal ever since QE started distorting the prices of long-dated bonds. Since government policy did the damage, there’s a certain symmetry to a policy to undo some of it.

As for the lack of consultation with the death assurance companies, they had been warned often enough about their market failures. Had they been consulted, we may be assured that they would have fought to save the annuity, even if it was only with an impaired life.

Just a little bit

Laydees and gennelmen, a warm welcome please, for the great British bitcoin, as the Chancellor would rather we didn’t call his new-look pounds. Some of us were quite happy with the existing ones, and are mystified at the claim that almost one in thirty is a forgery. If that’s true, they are fine forgeries, and minting and distributing them must be an exhausting business.

The replacement risks unpopularity, since we’re quite fussy about our coins, and nobody asked us whether we wanted a dodecahedron. The original thruppennybitcoin (worth about 70p in today’s money when it was introduced in 1937) featured a charming little sprig of thrift on its reverse side. Of course, the past is no guide to the future, prices can go down as well as up, etc etc.

This is my FT column from Saturday. You can also sign up for “author alerts” on the same page, which would give you this column shortly after it is published, rather than waiting until Monday morning.

Henry Keswick maintains that shares in Jardine Matheson have outperformed those in Berkshire Hathaway, the stock widely considered about the best long-term investment on the planet. Well, it depends where you start, but Jardine shares have multiplied 10 times in 12 years, never mind the dividends.

By Jardine’s standards, Warren Buffet’s venture is something of an upstart, since Sir Henry’s family company is now in its eighth generation, with one of his nephews at the helm. This week Jardine did what the Keswicks like doing best, thumbing its corporate nose at governance. It’s downgrading the group listings in London from premium to plain rather than comply with new rules on the influence of controlling shareholders.

The fact that Jardines is family controlled is a powerful reason why us shareholders bought in the first place (alas, not long enough ago). The Keswicks look after the business as if they own it, because they do. If that upsets the governance brigade, well, tough.

Over 30 years ago, a midnight manoeuvre to issue and immediately swap shares in Hongkong Land, then an associate company, stymied a takeover attempt by Li Ka Shing, prompting Nicholas Sibley, then managing director of Jardine Fleming, to brag: “The empire strikes back.” In 1994, the press conference called to announced Jardine’s flit from the Hongkong Stock Exchange attracted hundreds of journalists and a dozen tv cameras – but no Keswicks. Charles Powell was put up to catch the flak from the hacks.

In practice, the listing downgrade will make no difference. As the ultimate “buy and forget” investment, the market is thin,  which is why few analysts cover it.

The authorities deserve some sympathy. Where the Keswicks nurture their empire, newer families have treated their premium listings as piggy banks to be raided, and the loss of Jardines is less damaging to London than a repeat of scandals like ENRC and Bumi. As with DMGT, another successful family-controlled business (thrown out of the FTSE indices for non-compliance) it pays to pick your gene pool with care.

Intu misses out

John Whittaker is a huge fan of what used to be called Capital Shopping Centres. He controls 20 per cent of the equity, or nearly 25 per cent counting his holding in convertible loan stock. Even by his standards £600m it’s quite a bet.

So far, it hasn’t paid off. The shares missed the property boom, and stand 30 per cent cheaper than they were four years ago. Financial engineering has damaged net asset value, and an unchanged dividend is barely covered. The directors are upbeat, but there’s a sort-out going on in shopping centres, with the mega-malls like Westfield thriving at the expense of the rest. It’s not clear whether the likes of Merry Hill fall in the first or second category.

A year ago, the shares were highlighted here because of Mr Whittaker’s (non-exec) involvement, given his formidable record at Peel Holdings. That was despite a re-brand to Intu Properties (as in “go Intu our shopping centres”). It seems the curse of the silly name-change has struck again, after all.

Not so smart

Hi there! This is your smart meter speaking. Please don’t turn on the dishwasher right now, because it will cost you £30. Just wait a couple of hours, will you?

This is already no joke for what’s left of Britain’s heavy industry. Between 4 and 6pm in midwinter, Tony Pedder of Sheffield Forgemasters reckons it can cost £27 to boil a kettle. His workers huddle in one room to keep warm while they wait for the demand peak to pass and thus avoid the “congestion charge” imposed by the company’s supplier.

While surcharging at the peak makes obvious economic sense in terms of efficient use of expensive plant, it would make far more sense to impose a marginal inconvenience on consumers than to impose swingeing costs on industry. This requires smart meters which tell you the instantaneous cost of the current kilowatt hour. Unfortunately, the electricity suppliers are in such bad odour with domestic customers that we’d view any attempt to impose them as a plot for further price gouging. And we’d probably be right.

This is my column from Saturday’s FT

If anyone doubted that there’s more money to be earned shovelling capital about than actually making things, then the saga of Premier Foods should disabuse them. True, there is a happy ending, of sorts, for the shareholders, but the real happiness is shared among the bankers and brokers who charged for putting the business together and are now collecting saturated fat fees for rescuing it.

Premier is a glutinous mixture of  Mr Kipling cakes, Ambrosia puddings, Sharwoods spices and many, many more second division brands, thown together a decade ago. Somehow, the financial engineers reasoned, the business was not only viable, but could carry £1.7bn of debt and pay its pension promises.

In 2004 Premier was valued at nearly £1.5bn. By 2009 the shares were in the 90 per cent club. Last year Premier flirted with disaster, but has now emerged as a working demonstration of the financier’s art, a confection of massive rights issue, share placing, high-yield bond and £300m credit facility, topped off with a deal to push Premier’s pension liability further into the future.

The prospectus runs to 269 indigestible pages, warning that shareholders who don’t take up their rights face 71 per cent dilution. The placing (to existing big shareholders) means that they face 24 per cent dilution, even if they do subscribe. The cream cakes are shared between eight firms of brokers, managers and advisers. Of the £828m raised, £57m goes in fees.

It’s quite a price tag, but in recent years Premier has run through executives like a knife through Hovis (now being hived off into a joint venture, perhaps proving that half a loaf is better than too much bread) and previous attempts at reconstruction have failed.

After this one, net assets of £350m support £513m of debt, on pro-forma sales of £856m for 2013. With the post-reconstruction market capitalisation around £700m, this is hardly a special offer. However, the placing discount of just 7 per cent signals confidence. The shares have risen on the news.

The point here is that consumer brands, even the likes of Marvel and Smash, have extraordinary longevity. Their fans keep buying them for years after they disappear from tv advertising. This reconstruction may be a gravy train for the advisers, but it allows the Premier management to run the business instead of fighting for survival. That’s probably more worthwhile, and definitely more fun.

Boo boom bust?

Heard the one about the Danish poet and the model? Well, boo, hoo. Or rather, since we must be careful here,, which is not to be confused with, a business which Mr Market is valuing at £560m when it comes to Aim next week. That’s 55 times the EBITDA for the 10 months to end-2013.

Boohoo is nothing to do with Boo, which ended in tears in 2001, the most glamorous victim of the dotcom bust. It boasted a website that few home computers could use, a global ambition that made JP Morgan look parochial, and was such a good thing that the advisers took their fees in shares rather than dull old cash.

It burned through $135m of capital in 18 months, and its history was suitably entitled From Concept to Catastrophe. The concept – online fashion retailing – was one on which many companies have since built fabulously valued businesses like, say Boohoo. So there’s really nothing to learn from the catastrophe. Is there?

Worth every penny

Like gmail, free-in-credit banking is a terrific bargain. We instinctively know that both cost the provider money, but the first search engine or bank to try and charge would soon learn how much we’re prepared to pay (nothing).

Now Ross McEwan, the latest wielder of the dustpan-and-brush for cleaning the Augean stable that is Royal Bank of Scotland, has joined the chorus saying free banking must go. Others have even argued that free banking forced the banks into bad behaviour, since they had to make their money somewhere.

Fortunately, Mr McEwan stopped short of offering to behave better if we’d agree to pay the cost of running our bank accounts. Still, if anyone has a bright idea for getting banking out of its self-dug hole, they could always send him an email..

This is my FT column from last Saturday (with the Hovis joke restored)

Interesting times are promised for us shareholders/customers of Alliance Trust. For the second time in under three years, this £2.5bn company has a shareholder on the register who may not be prepared to put up with the combination of cheerful projections and pedestrian performance that have characterised its recent history.

Elliott International, frequently described as a US-based vulture fund, has disclosed a 10 per cent holding in Alliance. It’s unlikely that Elliott seees such glittering prospects in Alliance’s stock selection that it’s put in £230m for a part of the action. Not a great communicator, Elliott is more likely to be eyeing the £310m gap between the value of the shares in its portfolio and the market capitalisation.

Last time the awkward squad appeared on the register, Alliance, quite co-incidentally, announced that it had decided to buy in its own shares for cancellation (thus enhancing the value of the rest). It pursued the new policy with the fervour of the convert, buying in almost daily, and the discount has shrunk to 12 per cent today.

There may not be cause and effect here – discounts have narrowed right across the trust sector – but it was at least a sign of life. Since vultures prefer their prey dead, Elliott’s appearance was somewhat unexpected. Alliance is an unusual investment trust in that it manages its own portfolio. It has also attracted a little outside capital, but it has invented a rather good fund administration business, ATS, which after losing money for several years is now profitable.

It’s rather good because, unlike almost every other similar business, it charges a flat fee to look after your SIPP or ISA (you have to pick the stocks), so the gains are not skimmed off but instead all accrue to the owner of the capital. With the truth about charges in the fund management industry seeping out following the new rules on disclosure of fees, ATS is seeing strong inflows.

As for the main portfolio, Alliance is doing better than it had been, even if it’s still far from best in class. Where it is close to the top is in its management fees for the trust istelf, which are much lower than the average. This is where a vulture might see opportunities.

Were Elliott to gain control, or to force a change in philosophy, a new team could see plenty of possibilities for raising charges, and scrapping such customer-centric ideas as flat fees. The rest of the fund management industry would be pleased to see a low-cost provider disappear, to keep the percentage-fee gravy train on the rails.

It’s unlikely that Elliott’s ambitions are quite that high. It’s more likely to be looking for some Dane-geld, in the form of a pledge to keeping grinding the discount down, or of a tender offer for a slice of shares at close to net asset value. Alliance shareholders should be on the alert, and remember that once you have paid him the Dane-geld, you never get rid of the Dane.

Rescued Sun Alliance

It’s fortunate that Stephen Hester, the go-to boss for big-ticket financial emergencies, has seen so many balance sheet horrors. A lesser man might have reeled at the shocking truth in RSA, the insurance company which seems to have been a small step from disaster.

The £300m-odd that a quick cashbox (as suggested here last week) might have raised is now clearly inadequate. Instead, the medicine is a full-blown £775m rights issue, fire sales of foreign businesses and the purchase of some extra reinsurance. There’s no dividend for at least another year. Mr Hester’s comment that RSA had become “gradually undercapitalised and overleveraged” at least sounds better than “managed to the brink of ruin.”

Given the scale of this financial pile-up, the fees paid to the bankers look as important as the loss of your no-claims bonus in a smash. With RSA desparate for capital, the banks will have hoicked up their usual eye-watering fees for finding it. We must wait for the final terms to find out, but we’re being softened up with comments about sub-underwriting sweeteners for the biggest shareholders. Tough, once again, on the rest of them, but hardly a surprise. After all, Mr Hester is a banker himself.

This is my FT column from 1 March

(with apologies for late publication. It appears that £350m wasn’t enough to fill the hole, and RSA went for a conventional rights issue on 27 February)


Once upon a time, there were rights issues. Shareholders were offered new shares at a modest discount in proportion to their holdings, and a bank or two promised, for a fee, to buy any that the shareholders didn’t want. Then came the deep discounted rights issue, where so much of the post-rights value was in the new shares that there was no need to promise, and thus no fee.

This was very unsatisfactory for the bankers, so they invented the underwritten, deep discounted rights issue. This was far better than either earlier version, since the fee was the same percentage (it’s always a percentage, so it doesn’t sound quite so grotesque) of the cash raised but the risk was negligible. Even a stock market crash would leave some value in the rights.

Now we come to RSA, an old-fashioned general insurance business whose little local difficulty in Ireland has cost the CEO his job, and might well cost shareholders the dividend (again). The floods prove that it never rains but it pours, and the company needs more capital. So rather than an expensive rights issue, it is contemplating the current fashion for fund-raising, the “cashbox”. This exploits a hole in the pre-emption rules which allow a company to issue up to 10 per cent of its current capital without offering the shares to existing holders.

Designed to allow small acquisitions for shares, it’s now being used/abused to acquire a box of cash in exchange for shares. Those shares are sold, thus diluting the existing shareholders. Stephen Hester, new into the hot seat at RSA may, or may not, use this device to take the pressure off the balance sheet. Fresh from Royal Bank of Scotland, he’s used to dealing with, ahem, legacy issues, of which the Irish question is only RSA’s latest.

As Royal & Sun Alliance, it was the product of such a mad merger of equals that it initally had two men in each top post, and even after the Hester rally, RSA shares are still close to a nine-year low. If he does indeed plunder the cashbox for £350m with the figures, the long-suffering shareholders shouldn’t complain too much about losing their pre-emption rights.

The discount on the new shares may be as little as 5 per cent, as opposed to the 35 per cent, plus fees, that the banking cartel now insists is the price for rights issues. The buyers would actually be bearing the risk that the price will fall below their in-cost. Some might even be long-term holders. Looked at that way, the cashbox is a bargain.

Inflation good, inflation bad

It’s another triumph for Governor Carney: inflation below the Bank of England target for the first time in 50 months. Never mind that the cumulative overshoot since then is 4.1 per cent, that’s all rising prices under the bridge, and onward look, the land is bright with flatlining interest rates. as far as Mr Carney can see.

It’s all very comfortable, helped by the slight fall in employment numbers that followed the inflation figure this week. Yet the lagging indicator that is the analysis from the Office for National Statistics  reported a stonking 12.3 per cent rise in house prices in London. This was offset by a comparatively modest 5.5 per cent elsewhere, but the more recent figures from Nationwide signal that the boom is spreading across the country.

The official measure of inflation, the Consumer Price Index, already produces a lower number than the well-established (if statistically flawed) Retail Prices index. Neither captures the crippling rise in the cost of housing in areas of the country where there’s the most work to be had. The conventional wisdom seems to be: asset price inflation good, other inflation bad. Is it possible that Mr Complacent Carney and his team at the Monetary Policy Committee are measuring the wrong thing?

Digital birdwatching

News flash: SpringOwl Gibraltar Partners B Limited has agreed to buy 6.1 per cent of Bwin.Party Digital Entertainment plc from Ruth Parasol DeLeon and Russell DeLeon. Brokers Numis see the chance of a “year of transformation”; perhaps they might start with the names…


This is my FT column from last Saturday.

Ah, the 2013 results from Lloyds Banking Group. How much did it make? Well, the “underlying” profit was £6.2bn, but “legacy items” eat half that, while “simplification (sic) and Verde costs” knock off a further £1.5bn. After “volatile items” and tax, Lloyds lost money.

If that’s not clear, try the 88-page announcement, which includes such gems as the asset quality ratio (down) and the return on risk-weighted assets (up). This information overload looms over the forthcoming sale of the state’s 33 per cent holding, as it seeks to attract the masses. The prospectus for the offer will be almost universally unread.

Last September’s placing was to institutions, who could at least pretend to understand what they were buying. Selling shares to Sid is much harder. Lloyds is not another Royal Mail, but millions of novice shareholders might mistake it for a second opportunity to make easy money.

Unfortunately, the easy money has already been made. The shares have nearly doubled in a year, and no longer look cheap. Modern banking is beyond comprehension, so the key indicator here is the dividend. It’s the only number that can’t be fiddled, and provides the best clue to the management’s real view.

Lloyds expects to restart paying next year, with the long-term objective of distributing at least half the earnings. Considering the desperate thirst for capital over the last five years, this seems almost profligate, but Liberum’s brave analyst, Cormac Leach, thinks Lloyds will pay out two-thirds of its profits. On his forecast, that implies 5.3p a share for 2015, or a yield of over 6.5 per cent at 80p..

Such projections are music to a cash-strapped government with an election to win. Lloyds shares will be priced as cheaply as possible without infuriating the Public Accounts Committee, and marketed as a safe income-producing investment in a zero-interest world.

That may sound appetising, but it’s a harder sell than it looks. Public revulsion against bankers’ behaviour is undimmed, since the general view is that they’ve got away with financial murder, and are still at it. Last week saw Barclays paying out 40 per cent of  2012′s £5.8bn capital raise in one year’s bonuses. Antony Jenkins, the chief executive, trotted out the usual guff about needing to keep the investment banking talent. This is pitiful, particularly when the less risky parts of the business, like Barclaycard, are making the profits.

George Osborne will be hoping that we don’t notice, that greed will triumph over revulsion, and that we’ll be grateful for being bribed with our own money. On past form, he’s probably right.

A drug on the market

Cheer up, we’re richer than we thought. Not by much, it’s true, and not the sort of riches to make you feel better, but the UK’s GDP will increase by about £10bn, as the statistics are adjusted to include the economic value of prostitution and drug dealing.

Measuring these activities requires diligent research and fact-finding missions or, more likely, guesswork, but they’re going into the numbers anyway, thanks to a diktat from Brussels. Curiously, this is really quite sensible. Anything that is legal in one member state is to be included for all, and prostitution and drug-taking are both legal in Holland.

Adding these activities allows a fairer distribution of the goodies the European Union recycles from its taxpayers, although there are limits. The transaction must be between consenting adults, thus ruling out the burglary trade. Money-laundering is illegal throughout the EU, and so escapes. Fraud does too, although a guess at its extent would pretty up the published GDP of some EU member countries – as would a grasp on its extent within the EU’s own cash-dispensing machine.

Carney get it right this time?

The governor of the Bank of England expects interest rates to flat-line until, oh, ages yet, say after the general election. This is despite his new forecast of 3.4 per cent growth, a pace which has always spelled trouble in the past. You’d think that Mr Carney had been appointed by a chancellor desperate for re-election. Mind you, previous BoE forecasts have been so poor that Mr Osborne should be worried rather than reassured.

“Autonomy’s technology allows computers to harness the full richness of human information, forming a conceptual and contextual understanding of any piece of electronic data”. Thus a footnote to one of the company’s constant light drizzle of petty announcements in 2011 when it was a listed company, this one for an order from an un-named US bank worth $50m “over the next few years.”

There were those who claimed to understand exactly what Autonomy did when it wasn’t gobbling up other mysterious companies, while others gave up the unequal struggle and produced research questioning the whole enterprise. The bulls propelled the company into the FTSE100, and to a $11bn takeover by Hewlett-Packard, the maker of overpriced printing inks that was looking for something more exciting.

The acrimony broke out almost as soon as the deal closed, poleaxing the HP stock price, and the two sides have been exchanging fire ever since. HP has been muttering darkly about fake sales, and last week published restated 2010 accounts for Autonomy showing half the previously declared revenues, and 81 per cent less profit.

That’s quite some restatement. A member of Autonomy’s former management blames HP for not nurturing the delicate flower of its technology, and then talks of differing accounting treatments. Neither explanation begins to bridge such a gap, although the new numbers do produce the handy side-effect of cutting HP’s UK tax bill.

Autonomy’s auditors Deloitte are sticking to their guns, but HP’s auditors, Ernst & Young, won’t give an opinion on the restated numbers, citing lack of  “appropriate evidence”. This is curious indeed, since we’re told that nothing electronic is ever destroyed nowadays, so it may owe something to the reluctance of one big four accounting firm to attack another.

There’s so much money at stake here that court action seems inevitable. While erudite arguments over sales recognition may not grab the headlines, an independent analysis of Autonomy’s accounting methods is urgently needed. Outside the profession, audited accounts are still seen as something to rely on, even if the signatories no longer claim that they present a true and fair view. In this case the process seems so inexact that it’s hardly a science at all. Accounting bodies, please note.

Then there’s the little matter of due diligence from HP and its advisers. There was plenty of work from analysts doubting Autonomy’s ability to “harness the full richness of human information” before the bid. Studying some of it might have saved billions for HP shareholders, who might now look to those advisers to get some of it back.

A fine whine

With a bit of luck, you didn’t invest in Fine Wine‘s Bordeaux Fund. Launched in 2008, it’s to be wound up, and £100 invested then will turn into about £42. We’re constantly being told that wine is one of those wonderful alternative asset classes which have made returns from shares look pedestrian, so this sort of performance is something of a shock.

Andrew della Casa of Anpero Capital, which advised the fund, says that the bottles themselves didn’t do too badly. The damage was done by gearing up the fund, and the management and storage charges. Together, these turned an 8 per cent gain over five years into the 58 per cent loss. Mr della Casa says other funds advised by Anpero have done better, but the Bordeaux Fund is another reminder of Woody Allen’s definition of a stockbroker as a man who invests your money until it’s all gone.

Why is Amazon like RBS?

The head office curse has already struck the Royal Bank of Scotland. Its memorial to corporate hubris at Gogarburn would be redundant should Scotland become independent, since the bank is far too big for the Scottish economy to support in a crisis, and Vince Cable is convinced that the bank would have to flee south. Away in downtown Seattle, Amazon is buying land, and building three 38-storey blocks and a circular dog park for an anticipated 12,000 workers. As with RBS, the cost hardly bears thinking about, suggesting corporate nemesis around 2017 when the project is due to complete. At least Gogarburn, so handy for Edinburgh airport, would make a fine hotel.

This is my FT column from Saturday


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