The National Infrastructure Commission produced its first assessment last week. No, nobody else noticed it either, what with all the other excitements, so bad luck to the great and good commissioners. Infrastructure is frightfully fashionable and horribly expensive. The assessment was a fine chance to shine a light on why Britain is so useless at it and why, after years of dithering, we make such terrible decisions for major projects.

Why, for example, are we persisting with HS2, when for the same price the whole of the rail network could be brought up to modern standards, for the many not the few? Why, despite the finding of every outside expert that it is risky and too expensive, are we building another nuclear power station at Hinkley Point? How did we commit to so-called smart meters which are as smart as the average budgerigar and where true savings are a fraction of the cost?

Alas, these questions are far too short term for the commissioners. Lifting their eyes to the hills, they focus on “a long term vision for high quality, good value, sustainable economic infrastructure for the UK, and a clear plan to achieve it.” Well, we’d all vote for that, except that with our record, it would bankrupt us. The nearest the report comes to criticism is to suggest that nuclear power may not be the whole answer to energy provision. Yet far from acknowledging the financial disaster of Hinkley, the assessment timidly suggests that the next nuclear project might be the last, for a while anyway.

In its fantasy world, the commission sees half the country’s power coming from renewables, three-quarters of plastic waste recycled and 100 per cent electric car sales. All by 2030, and all at a cost of 1.2 per cent a year of national output, conveniently inside the maximum the government has allowed for its projections. The numbers at the back of the report look like those familiar far-out years in every Budget Red Book, where somehow the deficit melts away. We are supposed to take them seriously, even though we know they are fantasy.

For good measure, the commission suggests that we give up using gas to heat our homes, and spend much more money on insulation. The future, eh? Doncha just love it? No wonder nobody noticed the report.


A game of two halves

Forget the Southgate waistcoat (so last week for the fashionistas), it’s the absence of quarterly reporting from Marks & Spencer at the annual meeting that got the analysts worked up at the annual meeting. Without those quarterly numbers, what’s left for us to analyse? Shares will trade on out-of-date information, and surely someone, somewhere will have price-sensitive information that would otherwise have been disclosed?

Well, perhaps, but quarterly reporting is the bane of executives’ lives, since the treadmill forces them to worry constantly about presenting the next three months’ figures, rather than trying to create proper long-term value. M&S is hardly a market darling nowadays, so it takes courage from chairman Archie Norman and CEO Steve Rowe to upset their professional financial followers still further after their bleak “burning platform” assessment of the task ahead. Have patience, boys and girls, and hope the dynamic duo can prevent M&S becoming the Woolworth of the 2020s.

This adVenture is over

Venture Capital Trusts have been a big success, even if not quite in the way the original designers imagined. Rather than producing failed investments and the occasional lottery-sized win, the typical VCT has become something more like a high-risk annuity, with tax-free dividends being paid at the expense of capital preservation.

As other tax breaks have reduced, the tax relief on subscription has drawn more capital in, just as the rules on what VCTs can buy were tightened, resulting in more money chasing fewer qualifying investment prospects. So one small VCT, Chrysalis, has warned that it now plans to shrink the business, perhaps to the point where it is no longer viable. Few others take such a gloomy view, but they should. Investors, meanwhile, should think twice before rushing in for the tax breaks. It does look as though the best days for VCT returns are over.

This is my FT column from Saturday


In matters of commerce the fault of the Dutch

Is offering too little and asking too much*

It ought to be a long, hot summer for the directors of Unilever, that essential ingredient in every sensible UK investor’s portfolio. They are trying to unify the group’s unusual Anglo-Dutch share structure, but the way they are going about it is causing resentment and risks doing material harm to holders of Unilever plc.

In principle, merging the two classes of share makes sense. It overcomes any conflict between them, helps the use of new shares for purchasing businesses and reduces costs. The other Anglo-Dutch giant, Royal Dutch Shell, recently managed to merge without fuss. By contrast, Unilever’s proposal guarantees trouble.

If the plc shareholders approve, Unilever would cease to be a British company as generally defined, since it would be registered and listed in Holland, with headquarters in Rotterdam. The original press release in March rather gave the game away. After some boiler-plate guff about “building the Unilever of the future” and soothing noises about the importance of UK manufacturing businesses, the intended move was presented as almost a routine tidying up operation, replete with the usual adjectives about being more agile, more focused, more strategic flexibility, etc.

For plc shareholders, it is nothing of the kind. While the move may make sense corporately, we are being forcibly switched from the UK share into a Dutch one. Despite pressure from the company, the compilers of the FTSE100 index have resisted waiving the rules to keep the share in the index. Sensibly, they have concluded that Newnilever NV would be no more a British company than, say, IBM or Ford.

As a result, some funds would be obliged to sell their plc shares to stay within their mandates. For the others, shunted onto the new register, there remains an awkward question about the 15 per cent with-holding tax on dividends from Dutch shares. The Dutch government has pledged to scrap this from 2020, but its position is not secure, and already there are rumblings about giving tax cuts to foreign investors. The cost of a tax-inefficient dividend would dilute the gains from unification, while a pledge in a company press release to deal with the problem is hardly a long-term commitment.

There is much at stake here beyond losing a major constituent of the FTSE100. However international the investment professionals consider themselves, the majority of UK shareholders tend to buy domestic shares for their portfolios. We may be a dwindling band, but the plan requires a 75 per cent majority of votes cast to proceed.

Together the individuals who own shares through Hargreaves Lansdown, Rathbones or Alliance Trust (for example) speak for several per cent of the plc votes. Two of the top 10 shareholders have signalled serious doubts about it, while other institutions are unconvinced. If individuals can harness their votes, they can defeat this proposal.

It does look suspiciously like a coup, organised by a CEO who is about to retire, to deliver the business into Dutch hands, safe from the possibility of takeover, and less visible to the critical British financial press. So here’s the question for the plc shareholders: is this proposal really in my interests, or just those of the board?

*George Canning 1826


Another profit warning from McCarthy & Stone. The CEO is retiring, although probably not to one of the company’s retirement homes. The stagnant housing market is blamed, since the last-time buyers that are McCarthy’s market are finding it harder to sell their old home.

Yet there is a deeper crack in the business model. Waving goodbye, the CEO now expects profits between £65 and £80m. In December, he estimated that sales of ground rents would  generate £33m this year, as he lobbied to be exempted from the proposal to ban them.

Long leaseholds make sense for flats, but there is no convincing case for them on sales of new houses, least of all to the elderly and vulnerable. Ground rents skim off value and complicate secondary sales, giving the (often shadowy) holders unreasonable power. Banning them removes one way that buyers of retirement homes can be confused,  and helps keep McCarthy and Stone honest. Bad news for the share price, though.

This is my FT column from Saturday.

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Petrol is getting dearer, but cheaper computer games are now a big enough factor (see below) to balance the impact. The result of this pushme-pullyou was that consumer prices rose less than expected last month, and an annual rate of 2.4 per cent spared the blushes of the UK’s Monetary Policy Committee for spending another month dithering over interest rates.

Perhaps this dithering is because the current members of the MPC have no experience of raising them. Aside from the reversal of the panic post-referendum cut, UK Bank Rate has now been stuck at 0.5 per cent for more than nine years. What started as a desperate measure to head off a financial crisis has somehow morphed into the new normal.

It’s quite a contrast to the US Federal Reserve. Although the rates of inflation in both countries are similar and they share a target of 2 per cent, the Fed raised rates this week for the seventh time. For good measure, it signalled two more rises this year, with a further three in 2019, which would take its bank rate to the dizzy heights of 3 per cent.

There are no such detailed projections from the Bank of England, which is just as well considering its woeful record on forecasting. Governor Mark Carney’s reputation as the unreliable boyfriend has been well earned. He might consider a comment from Paul Tucker, the pre-crisis front runner for governor, that doing nothing is doing something.

The effect of all this almost doing something is to give the impression that the MPC is pushed about by the previous week’s weather and economic statistics. There is no sign of a strategy for getting Bank Rate to a level which balances the interests of lenders and borrowers, only an assertion that inflation will somehow stay quiescent.

In the old days, a central bank that found itself chasing rising inflation had to raise interest rates much further to overtake it. At the Fed, they are taking pre-emptive action. At the BoE, they still think a rate nearly 2 per cent below inflation is just fine.

High Speed spending

Britain’s white elephant game reserve of wealth-destroying capital projects is filling up nicely. Here are Gordon Brown’s planeless aircraft carriers. There is Hinkley Point nuclear power station. And look, that dear little calf is HS2, the railway line whose justification changes more often than passengers at Crewe.

It is now showing a fine appetite, and consuming cash at an increasing rate. Needless to say, the forecast diet of dosh is proving inadequate for the growing pachyderm, as New Civil Engineer reports. The target for the construction works is £6.6bn, but contractors’ cost submissions are £1.2bn higher. They have been asked to review their sums, but following the collapse of Carillion they know how to respond to requests for cuts in their estimates.

When the government gave the green light to the line, the estimate for the project was £32bn. That seemed pretty pricey at the time, but it has already almost doubled, to a jumbo £56bn, before any real work has started, so even £1,000 for every man, woman and child in the land may not be the final answer. In that context, £1.2bn may seem like a rounding error, rather like the £1.6bn already paid in compensation to those affected by the line.

It is still not too late to set the financial big game hunters onto Nellie. And even with Notwork Rail’s hopeless budgetting, £56bn would go quite a way to modernising the entire existing rail network. For the benefit of the many, not the few, as the current argot has it.

It’s only a game

You may not understand the lure of computer games any more than the next grown-up, but the scale of this industry is pretty scary, with one estimate suggesting a market worth $145bn worldwide by 2020. Codemasters, which came to Aim this month, is a market leader in racing games, and has raced to 253p from its placing price of 200p. At £354m the business is valued at 5.5 times last year’s sales. There are no (post R&D) profits, but no debt either. High risk, of course, but if you want to be up with the zeitgeist…

This is my FT column from Saturday

Every government makes mistakes, but it takes a really special administration to make a massive blunder and then go on to make the same fundemental error again, just months later. The blunder is the £20bn Hinkley Point nuclear power station, which Theresa May bottled out of scrapping, and which will force UK customers to buy some of the most expensive electricity on the planet – an inflation-linked £105 per MWh in today’s money.

Despite this fabulous, guaranteed price, the project is so financially toxic that it threatened to break EDF, its contractor. It seems that Hitachi, which fancies building a £16bn nuclear power station at Wyfla in north Wales, has noticed, and wants us to share the risk. Ominously, it seems we are going to.

The Hitachi design is said to be better than EDF’s, in that there is an actual working example, and the guaranteed price is rumoured to be around £15 per MWh less than Hinkley’s (though still wildly expensive). Yet if even this is not attractive enough for Hitachi to go ahead unaided, is any big nuclear plant worth building? While wind and solar costs are falling, ever-stricter safety rules continue to drive up those for nuclear. Changing patterns of use and advancing storage technology also undermine the “base load” case on which nuclear is built.

Elsewhere in the land of white elephants, here’s the Swansea barrage, optimistically priced at £1.3bn and recently described by business secretary Greg Clark as “an untried technology with high capital costs and significant uncertainties”. Pulling the plug on that would at least avoid a hat-trick of terrible energy policy decisions.


He reads the small print

If you have tears to shed for the traders of credit default swaps, prepare to shed them now. Oh, you haven’t? These nifty little financial instruments nearly brought down the world’s financial system a decade ago, but CDSs are so profitable that the banks can’t resist creating them.

Their basic purpose is simple enough: to allow holders of bonds to hedge against not being paid. In practice, there is even more small print in bond prospectuses than in, say, your home insurance policy. That’s the one you haven’t read, and that four-fifths of us wouldn’t understand even if we did so.

It seems that buyers of bonds also bought in blissful ignorance, except that at Blackstone, Akshay Shah read the documents. Blackstone bought CDS contracts for debt issued by a struggling company. Since default looked likely, the debt holders were keen to offset the risk. Blackstone then approached the company to offer finance on condition that it triggered the default conditions on the existing debt.

This default could be as trivial as a slightly late interest payment, if that’s what the documents dictated. The CDSs would then pay out regardless of what happened at the struggling company. This “manufactured default” is being branded insider trading, mostly by those banks who have had to pay out on the CDS contract.

It looks more like fair game between consenting adults. After all, the banks create these dangerous instruments, not the company, and if Blackrock’s financing (and the associated default) is the difference between survival and failure, you could say the company has a duty to take the money. If Mr Shah has irreparably damaged the CDS market, then we’ll all pretend to be frightfully upset.

They’re fleeing from the black stuff

Once the boffins established beyond reasonable doubt that smoking was a bad idea, there would be no new tobacco companies. As a result, the industry has consolidated into a fireproof world oligopoly, and the stocks have ranked among the best performers of the last 20 years.

Something similar may be happening down the coal mine. The mantra is familiar: coal is killing the planet unless the industry is killed first, green-backed litigation is never far away, and investors are sloughing off anti-social assets. Yet as brokers Jefferies point out, rumours of coal’s death are much exaggerated.

Global demand is increasing, while US stocks of coal are falling faster than domestic demand, spurring a “greatly under-appreciated” bull market. The brokers pick Glencore in London and Peabody in the US. Just don’t expect anyone to like you for investing in these particular smokes.

This is my FT column from Saturday

Philip Hammond, we’re told, is so unhappy with Britain’s modern version of capitalism that he is working up a major speech on improving it. He has no shortage of targets, from runaway boardroom pay and the gig economy, to extracting significant tax revenue from the internet giants.

Above all is the growth and influence of large corporations, seen by many as “malignant rather than benign” as James Odgers, a farmer, wrote to the FT last week. Nowhere is this power more apparent than in the decision by Walmart to sell Asda to j Sainsbury.

Skilfully presented as some magic formula for cheaper food, the proposal would create a company with over 30 per cent of the UK grocery market. Yet it was not the prospect of millions of happy shoppers that caused the Sainsbury price to leap by 15 per cent when news of the deal broke last month, but the prospect of oligopolies behaving the way they always do.

We now know how Tesco behaved when it considered itself so powerful that no supplier dared argue. Alongside Tesco, Sainsbury/Asda would mean two companies controlling almost two-thirds of Britain’s food sales. Small suppliers would face an intensified squeeze. No amount of store sale “remedies” would make a significant impact on this dominance.

Above all, this is another test of whether the UK authorities are serious about competition. It took a brave stand from the EU’s competition commissioner, Margrethe Vestager, to prevent the takeover of O2 by Three. The UK’s Competition and Markets Authority recently waived through Tesco’s takeover of Booker, presumably because wholesale food is nothing like what you get in the supermarket.

The CMA now has a chairman in Andrew Tyrie who can face the consequences of being awkward, one of which was to deny him high office in the government. He now has the chance strike a blow for competition, and stop this anti-competitive stitch-up in its tracks.

Very few signs of life

Standard Life Aberdeen has been transformed, chairman Gerry Grimstone told shareholders this week, into a “capital light investment company.” All that fuddy-duddy 200-year-old life assurance stuff has gone, with the final disposal to Phoenix for £3.2bn, a deal which he described as “excellent value”. The new company is so capital light that half the proceeds are not needed.

The shareholders do not seem impressed. Despite the prospect of getting £1.75bn back, the shares sagged. They are cheaper now than before the ‘orrible merger that created Staberdeen in March last year. The yield is over 6 per cent, and if there are any benefits, they look a long way away, rather like the hundreds of jobs which are lost in Scotland as a result.

The double act at the top, with an unmatching pair of CEOs, has lasted longer than many observers expected, but still looks like unstable equilibrium. Sir Gerry is off next year, by which time the troops may want results. His successor will doubtless note that there is no such thing as a successful merger.

As for Phoenix, this “transformational” (dread word) purchase will be paid for with a £950m rights issue and the £500m of Fixed Rate Reset Perpetual Restricted Tier 1 Write Down Notes (you knew) it has already raised. The banking vultures are skimming a mere £13m from the rights issue. It is not known how many shareholders will be merely recycling their Standard capital handout into Phoenix. It’s how the City works, after all.

Not perpetually enhanced

When the board of Invesco Perpetual Enhanced Income demanded a cut in fees, Invesco managers refused and gave notice, as they are entitled to do. Now instead they are biting back. With their allies, they want to remove two directors and (presumably) keep the mandate for this £153m trust. Given the wide dispersion of shareholdings through platforms and nominees, their 23 per cent might well win the vote.

This looks like blatant self-interest. The fees, for managing a bond portfolio, are high even before a complex performance kicker. The interests of the outside majority are being sacrificed for the managers. Unless Investec backs off, or produces a convincing explanation, its actions will do long-term damage to itself and the industry.

This is my FT column from  last Saturday


The season of revolting shareholders is in full swing. They are mostly revolting about the amounts being dished out routinely to the top executives of quoted companies, but considering the scale of those rewards, it might seem curious that more shareholders do not care enough to vote against these magnificent, intricate pay packages.

The answer is that those running large fund management businesses are not going to drain the swamp while they are wallowing in it. Here, for example, is Jupiter Fund Management. The 32 pages in the annual report devoted to pay contain enough detail for a PhD, but the board considers that the elegantly crafted and almost incomprehensible set-up is no longer enough to get the executives out of bed.

The remuneration committee has decided that Maarten Slendebroek, the CEO, needs £425,000 rather than £250,000 to come to work, and as much as eight times that much if he does really well when he gets there. Small wonder that a fifth of Jupiter’s shareholders voted against the report at the annual meeting.

Fund management CEOs are obviously jolly valuable. Janus and Henderson merged after deciding that managing $127bn of other people’s money was “sub-scale”, a deal which allowed the pay of both chief executives to be scaled up to $17m between them.

Jupiter and Henderson have clearly under-rewarded their CEOs. Both companies are bleeding assets, so the obvious answer is more executive incentives to stop the rot. Jupiter’s funds under management are down from £50bn to £47bn, and the share price has defied the bull market, falling a quarter this year.  After a twitch of enthusiasm following the merger, Janus Henderson’s shares have wilted a similar amount as the money has fled their funds.

If they are to justify picking the pockets of shareholders this way, the new, souped-up pay packages must quickly reverse those outflows. In the meantime, you can see why the managers with holdings in companies which award their executives life-changing packages are so reluctant to rock the gravy train.

Yesterday’s problem, or tomorrow’s?

Good news and bad on the pensions front. Marks & Spencer may be struggling to avoid becoming the Woolworths of the 2020s, but its pension fund is in rude health. Actually, and actuarially, so are nearly all the big company funds. Lane Clark’s annual survey calculates the surplus in the FTSE100 constituents at £4bn at the end of last year, and estimates it at £20bn last month, the best since 2007.

For all their smart sums, measuring the difference between two large numbers is as much art (or accounting rules) as science, and two baleful features stand out from the good news. As medical science loses the race with obesity, life expectancy is starting to fall for the first time in half a century.

This ill wind has blown more schemes into surplus, but has done nothing to stop their managers’ dash to so-called risk-free assets. A pension fund is uniquely placed to take the long view, and all the evidence points to shares as the best long-term home for savings. Yet from over 60 per cent equities in 2002, the funds’ proportion of assets in shares has slumped to little more than a fifth. The money has mostly gone into bonds, which are surely riskier today than at any time in the last 20 years. A return to “normal” rates of interest, and the surplus would vanish like smoke.

Don’t get mad, get even

The exception tests the rule, and the exception in a much-troubled sector is Babcock International, outsourcer to the MoD. Last week it reported some business-as-usual results, unlike Capita, G4S, Mitie and Serco for whom business as usual is a distant dream.

Last December, fretting about the accounting horrors among support service companies, analysts at Morgan Stanley and RBC got the jitters over Babcock as the share price tumbled. This week’s numbers, capped with a 4.8 per cent rise in the dividend, show their fears were unfounded.

Other shares in this disgraced sector could hardly be less popular. Research from MarketPsych in the US suggests that a bet against the angry mob is a highly profitable investment strategy, since we throw stocks in hated companies out of the portfolio almost regardless of price. We should grit our teeth and hang on.

This is my FT column from Saturday (with apologies for late publication)


Contracting is a miserable business. Once the accountants, lawyers and bankers sitting in offices for their risk-free fees, someone has to go out and build the damn’ thing. As the post-mortem of Carillion reveals the extent of the financial gangrene in the company, we might spare a little sympathy for those taking the risk on thin margins and actually doing the work.

As every homeowner knows, a builder’s estimate is a sum roughly equal to half the final cost. For big projects, the arithmetic is more complicated and often worse. The contractor must keep his workforce employed, so in harder times the pressure to bid low enough to be sure of winning the work is greater.

Early payments allow trouble to be put off until the later stages of the contract, and auditing each unique work in progress is more art than science. A robust, genuinely independent audit of Carillion’s true cash position would doubtless have exposed the rot sooner, but it would not have stopped the company from taking on loss-making contracts in the first place.

The excoriating report from the MPs’ committees skewered the greed and willful blindness of the company’s board, but is mostly a howl of pain on behalf of suppliers and taxpayers. The pressure to split audit from other accounting services may now be irresistible, but looks uncomfortably like: something must be done, this is something, therefore it must be done.

The real problem lies in the nature of the contracting industry in Britain. The best brains become lawyers, bankers, architects or designers. Actually doing the work is a miserable business to be done by somebody else.


Avast there!

You probably failed to buy shares in this month’s hot new £2.4bn issue, the strangely-named Avast. Ignorance has already saved investors a few million, since the flotation has not been an unalloyed success. The parent company of AVG, guardian of a zillion computers, Avast was priced at 250p, the bottom end of the indicated range, yet has already drifted to a 20p discount.

Valuing this anti-virus, Czech-based, business is not easy, since internet threats are so amorphous. The 332-page prospectus cheerfully asserts that “smart home devices are ripe for hacking”, while investors are treated to such gems as “deferred revenue haircut reversal” along with 28 pages of risk warnings.

Other warning signs are less obvious, but the founders Pavel Baudis and Eduard Kucera along with their private equity backers from CVC Capital and Summit Partners are cashing out £380m of shares. Then there is a legal spat with Gary Kovacs, who sold AVG to Avast.

In the circumstances, to raise £600m for fees of a mere £22m shared between Morgan Stanley, UBS and their little helpers, seems quite reasonable by today’s City standards. Meanwhile, investors who missed out should remember the rule not to buy a share within a year after flotation.

Oh Beattie, where are you?

It’s been a long way down to £2, the price BT shares were 30 years ago, and Maureen Lipman was telling us to pick up the phone. The dire performance is a grim verdict on the succession of CEOs at what should be the core of the internet revolution. Now it seems that Gavin Patterson, the current incumbent, has had a brilliant idea. Why not put BT and EE together?

Furthermore, this astonishing insight is to be called BT Plus! Never mind the Italian fraud, the hubristic foray into footie on telly, the failure to grapple with the pension deficit, the customer service, the snail-paced rollout of fibre, Mr Patterson sees a glad, confident new day, although not for the 13,000 staff he now says he can do without.

As Nic Fildes pointed out last week, many think he should head the list. The star analyst here is Saeed Baradar of brokers Louis Capital, whose somewhat over-excited prose style contained a devastating demolition of BT’s prospects two years ago when the price was twice today’s 203p. Had Mr Patterson listened, he might have faced reality rather earlier. The new strategy makes sense, but he is not the man to implement it.

This is my FT column from Saturday