Ken Morrison never really liked the City, but it was the bizarre decision of a Labour government at the other end of town that effectively ended his career and almost brought down the business he built.

In January 2003, a rampant Wm Morrison agreed a £3bn takeover of Safeway, a bigger business which was losing ground to Tesco, Sainsbury and Asda. Their response was to signal their interest in counter-offers to the Office of Fair Trading, and in March, the government sent all the proposals to the Competition Commission.

This was precisely the outcome the three big groups wanted. It had been plain from the outset that none of them would be allowed to buy Safeway, and that competition would be hotter if Morrisons gained a national footprint. The commission, a lumbering body with no understanding of the value of time, took six months to reach this glaringly obvious conclusion.

By the time new terms were agreed in December, Safeway was a shambles, made worse by the introduction of a new accounting system just weeks before the takeover completed. The impact on Morrisons was devastating, requiring five profit warnings in 12 months. The company’s executives had only the vaguest idea of how they were trading, and it took five years before recovery was complete. Sir Ken hung on, but his power had gone.

He once famously rejected the suggestion of appointing any non-executive directors, responding that he could employ two more checkout girls for the same price. The exchange rate is more like four to one today – and there are five non-execs on the Morrison board. Sir Ken would not have considered this as progress.

Very Careful Transactions needed

Venture Capital Trusts have long been the stock market’s Cinderella. Now it seems that Cinders is coming to the ball in a tax-driven coach, should you go too, or are you joining when the best of the party is over?

The combination of a 30 per cent credit on subscriptions and tax-free dividends has attracted £6bn into VCTs since their launch in 1995. As the tax relief on pension contributions has been cut, more money has poured into VCTs – the inflow in the first eight months of this financial year is up by a half to £170m, and the tax-driven fund-raising season is only just starting. Titan VCT, already the biggest with a £380m portfolio, expects to raise £120m by April.

Whatever the original expectations, most VCTs have morphed into high-risk, tax-free annuities, with elderly buyers attracted by 5 per cent-plus yields in an age of zero returns. Dividends have typically come ahead of capital growth.

The rules on which businesses VCTs can invest in have recently been tightened, causing managements to grumble and some to suspend further fund-raising, concerned at the lack of suitable qualifying investments. Those businesses that do qualify are likely to be smaller, higher risk and less cash-generative than in the past. Maintaining dividends to VCT shareholders will get harder.

The managements argue that unearthing their little gems is labour-intensive, which may explain why the pressure on fees felt elsewhere in the fund management business has yet to penetrate VCTs. Despite its size, Titan still operates on a two-and-twenty model, which yielded over £7m to managers at Octopus last year.

The combination of generous fees, fewer qualifying investments and a rush of new capital is not an obviously attractive one for continuing the decent returns many VCTs have returned in the past. The old adage that you should never invest purely for tax reasons looks relevant here.

Blowing their own trumpet

Congratulations to Aida Abou-Rahme and 139 others, newly-promoted at Morgan Stanley this week. From now on they are all managing directors. This happy band “exemplify what it means to be a leader” at the bank. Well, not all of them, surely. In How to Run a Bassoon Factory, Nigel Balchin explained that the managing director is the one who knows where the factory is, and even goes there sometimes. The bank thanks the newbies for their “dedication and integrity”. It is unlikely to present them with copies of the book.

This is my FT column from Saturday

 

 

 

 

Mi dispiace, ho sbagliato numero.*

Well, what did BT’s CEO, smouldering Gavin Patterson, expect? Italy is ranked 60th out of 176 countries in Transparency International’s corruption index, worse than Romania or Hungary. The “improper” management behaviour there had been going on for years, and would probably be going on still but for the call from a whistleblower.

The BT board must now decide how far up the hierarchy the buck should stop, and if the £530m hit (“only” £500m in cash) had been the worst of last week’s telegraph from the former nationalised phone company, it might not be so bad for a business of BT’s size. Unfortunately, there was worse.

Failing to co-ordinate Tuesday’s profit warning with Friday’s quarterly report looked tactically inept, serving to focus attention on a strategy which looks increasingly unconvincing. BT, as its millions of customers know only too well, is making telephone landlines – still more or less essential – more expensive every year. The latest inflation-beating increases came last Friday, only six months after the previous round.

The “free” footy, which spearheaded BT’s push into content, is now to cost many subscribers money, as it has not proved the must-have that we were led to believe when BT started bidding against Sky for the rights. Now another expensive round looms. With Sky likely soon to be 100 per cent owned by the Murdoch megasaurus, this could be the equivalent of double-or-quits for BT.

The company’s luck in being allowed to buy EE has been offset by the ominous weakening in demand from the public sector. The knife-catchers for BT shares at around £3 hope this is just Brexit-driven delays rather than cancellation, and point to re-affirmation of the policy to raise the dividend by 10 per cent a year for reassurance.

Saeed Baradar of  brokers Louis Capital, who recommended selling the shares before this week’s shocker, is not reassured. If BT has to pay up for football, then the forecast dividend will consume all the company’s cash flow. Considering the Italian disaster, that is risky: and dividends that are not earned are not sustainable.

*So sorry, wrong number

They see sense on the North Sea

The tv pictures of the (almost) empty oil storage buoy dominated the evening news, as Greenpeace’s gallant protesters resisted big oil’s fire hoses. Shell never stood a chance. Threats to firebomb its forecourts forced the company to abandon its UK government-approved plan to dump the Brent Spar in the Atlantic.

Instead,  it was expensively broken up, and with the environmentalists in full cry, 15 nations and the European Commission produced a convention requiring the sea bed to be returned to its “pristine” condition. The later revelation that Brent Spar contained almost no oil destroyed the credibility of Greenpeace, but by then it was too late, and the rest of us are about to get the bill.

It has taken over 20 years, and the prospect of massive tax credits for North Sea clean-up operations, for the politicians to notice. Meanwhile, the platforms have grown their own ecosystems, sheltered from predators and, more urgently, from industrial fishing. Far from being industrial monstrosities, they are valuable environments.

Some of us have made this point many times, but now it’s fashionable. Even Ed Davey and Jonathon Porritt are seeing the light. Sir Ed might more productively have noticed when he was energy secretary in the coalition, but we must rejoice at a sinner that repenteth, especially when it saves the taxpayer money.

Kindly take the money

One of the Bank of England governor’s more bizarre remarks last year was that Britain was reliant on the “kindness of strangers” to fund the country’s chronic trade deficit. Those strangers have seen the value of their pounds plummet since he said it, but the loss does not seem to be putting them off. Last week they kindly put up £23bn to lend to the UK government for 40 years, and the lucky few successful buyers will be rewarded with a return of 1.87 per cent. History says this is a high-risk investment at this price, but it is surely stretching things to suggest that the buyers are doing it out of kindness.

 

This is my FT column from Saturday

It is a quarter of a century since the last representatives of the Pearson family retired. The new professional managers inherited a collection of the some of finest assets in the world, in the shape of Chateau Latour, Lazard Brothers, Penguin, Longman, Madame Tussauds and, of course, the Financial Times.

Goodness, the big investors said to the professional managers, that will never do. We make the asset allocation, and we don’t like conglomerates. Your job is focus on one business and sell the rest.

Over the next 25 years, the professionals obeyed the investors. Yet, as the late Nicholas Berry put it: “These were the ‘fake owners’, not the real ones of the past. The fake owners were interested in the share price. The real owners cared about a long-term value, which was certain to increase from these trophy assets.”

This week it has become shockingly clear that the professionals would have created more long-term value by taking their salaries and lying on the beach, as the business, now focused on education in America, faces an existential threat.

Yet as my colleague Paul Murphy pointed out on the first day he could after the sale of the FT, at the end of the last century Pearson had all the ingredients to become what Bloomberg is today. In addition to the paper, it had a newswire, an on-line markets business and a company statistics archive. Instead of investing, everything was sold off, culminating in the paper itself.

That the sales fetched good prices served to disguise problems elsewhere. However, that this week’s admissions took so long, when similar businesses were warning of trouble, suggests that the Pearson management has failed tactically as well as strategically.

This is a cautionary tale for those advocating a spin-off of Primark from Associated British Foods, or a break-up of the Daily Mail group, for example. As Mr Berry might have said: Beware of fake owners, for they will mislead you.

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No incentive to help others

The 2015 annual report from Bovis Homes devotes 15 pages to directors’ pay. Its magnificent mixture of thresholds, incentives, targets and rewards is a triumph of the remuneration consultant’s art. With hindsight, however, it is possible to see a few cracks, rather like those appearing in some of the company’s new homes.

Those stories of botched work and unfinished houses which produced the “Bovis house of horrors” headlines are reminiscent of the days before Polish workers transformed the building trade. The telltale crack in the remuneration report is the CEO’s failure to earn his customer service bonus.

A year ago Bovis shares were already worst-in-class in its peer group. This raised the pressure on the executives, and the result was the Christmas fiasco of paying customers to move into unfinished homes in a doomed attempt to avoid missing an arbitrary target. Russ Mould of AJ Bell Investment suspects the bonus structure with its reward for return on capital is to blame.

Well, maybe. The long-serving CEO has now gone and the company is promising another pay review. Bovis has achieved the baleful double of lousy share performance in a housebuilding boom and delivering a sub-standard product. Those carefully-crafted incentives benefitted neither shareholders nor customers. So cui bono? Oh, wait a minute…

The consultants’ consultants

It’s hard to know whether to laugh or cry at the decision by McKinsey to buy 100,000 sq ft at the old Mount Pleasant postal sorting office, now being redeveloped into snazzy new offices.

It’s reassuring when an international business sees sufficient life in London after Brexit to commit to a new HQ here, but there’s the old saw that you don’t call in management consultants, you contract them like a disease. Judging by the way the business has mushroomed, it’s contagious.

For its office design, McKinsey might study Boston Consulting Group’s new space in New York. To encourage the top dogs to get out more, their offices are windowless, while the hoi polloi have neither conventional desks nor telephones. The (open) plan will also measure how long each consultant goes without speaking to anyone. Naturally, BCG has brought in consultants to do this. Without conscious irony, the firm is called Humanyze.

This is my FT column from Saturday

It’s such a disappointment for the gloomsters. The plunge in sterling after the June vote was going to produce a surge tide of inflation to overwhelm static pay packets. Shoppers would be reduced to window-shoppers, and even though we never believed George Osborne’s silly pre-referendum scare stories, a bleak midwinter loomed for the high street.

It hasn’t turned out that way. The major retailers are reporting a decent Christmas, and the supermarkets seem finally have come to terms with the upstart invaders. Even Marks & Spencer appears (not for the first time) to have stopped the rot. The nearest thing to a shock this week was John Lewis warning that this year’s bonus for employees will be lower than last year’s. Sales are not the same as profits, but the tone is everywhere upbeat.

In short, something has gone unexpectedly right on the high street. It’s certainly not inflation, the food retailer’s friend, since prices are barely changed. Tesco cannot make much from selling champagne at £8 a bottle, but the falling pound was supposed to make imports dearer, not cheaper.

The pessimists are reduced to repeating “just you wait”, but each month the inflationary surge fails to arrive makes it weaker when, or if, it finally does. The shopkeepers’ failure to follow the script shows that supply chains can always be improved, and that raising prices in a competitive environment is hard.

Premier Foods, purveyors of Oxo cubes, Ambrosia creamed rice and profit warnings, is trying, demanding “mid-single-digit” price rises. Perhaps we are prepared to pay more for Mr Kipling’s cakes, but Premier is risking a Marmite moment in a market that is transparent, competitive and highly resistant to price rises. Expect more of an inflationary dribble, then, than a surge.

The £1.3bn swimming pool

.You can tell that a project is in trouble when its proponents are reduced to statistical drivel, such as “it will cost the equivalent of a pint of milk a year.” Who could object to the Swansea tidal project at that price? And it’s a lovely lagoon, full of happy splashing holidaymakers as well? Why, let’s get on building it right away!

It was probably too much to expect an injection of reality into this £1.3bn fantasy scheme from Charles Hendry’s report, given his record at the now-defunct Department of Energy. Ominously, he views the lagoon as merely a prototype for even grander barriers all over the coast. Prototypes are expensive, of course, in this case needing bigger subsidies, and for longer, than even the dreaded Hinkley Point nuclear power station.

Be reasonable, argues Mr Hendry. It’s only subsidised for the first 60 years. For the following 60 the power would be “subsidy free”, the justification for his silly pint-of-milk sums, and long before then Britain would be leading the world in pouring concrete into estuarial ooze. That’s after we learn how to stop the pond silting up, and to build salt-water turbines that last 120 years. What’s not to like?

 

Alternative asset corner

It’s so hard to find value these days. Shares look dear, bonds are absurdly expensive and who knows what the gold price should be? The pound looks cheap, but that’s not much help if it’s your currency. So here are a few suggestions:

A grand circle box at the Albert Hall combines rarity with prestige, and the remaining 849 years left on the lease allows the buyer to take a reasonably long-term view. Quite close to the Royal box. Useful earner if you skip the last night of the Proms. Seats 12. £2.5m

Robert Maxwell’s yacht, delicately described in the brochure as “designed and built in 1986 for an experienced owner looking for the most spectacular yacht to cruise the seas.” She comes complete with a new name and specially strengthened handrails. Mirror Group pensioners could club together to find the £25m price tag.

Wimbledon debentures, perhaps at their seasonal low point in January, with the 2016/20 Centre Court series down from a trade at £125,000 in November to £113,500 just before Christmas. That’s for four years of Andy Murray, the right to buy the follow-on series at the issue price (£50,000 for the 2016/20 series) and just the one seat. Better buy two.

This is my FT column from Saturday

How long ago it seems, that post-referendum panic in the UK stock market. The pound plunged and the crowd ran into “safe havens” in the form of government debt, ditching those risky, tricky shares. On July 13, this column pointed out the folly of this strategy. At that moment, buying and holding the UK government’s 10 year bond  guaranteed an annual return of just 0.9 per cent.

This is called the risk-free rate by actuaries and others who should know better. It is nothing of the kind: given the ever-present threat of inflation, these levels of yields could be better described as reward-free. The true risk in holding these “safe haven” investments has been harshly exposed as the long bull market in fixed-interest stocks seems finally to be over. In six months, the price of the 10-year gilt has fallen by nearly 4 per cent.

In contrast to the unsustainable prices of government stocks, the column highlighted what pension fund advisers might describe as “unsafe havens.” The Great Brexit Panic had thrown up opportunities, and the bold investor did not need to be a brilliant stock-picker, or to bet on the next technology unicorn.

Here was the portfolio of half a dozen large, mostly dull companies, chosen not quite at random. They don’t come much duller than Aviva, except that the shares which were 360p then are 478p now. Housebuilders were hit particularly hard in the panic, and Persimmon has risen from £13.60 to £17.40. Lloyds Banking Group shares were 50p then, 64.2p now and BP are 496p from 455p. Even the dowager of the British high street is showing signs of revival, as Marks & Spencer shares are 353p against 291p then. British Land, whose shares fell (but unfortunately not very far) when open-ended property funds had to suspend redemptions, is 636p from 570p.

Buyers who account in euros have similar gains, as sterling recovered its fall against the single currency. In dollar terms, the gains are trimmed by the pound’s 6 per cent decline since 13 July, but as the wave of US buyers of UK assets shows, sterling now looks significantly undervalued from across the Atlantic. When Britain seemed to be going to hell in a (miner’s) handcart in 1985, the pound fell to $1.04. Over the next 20 years, it doubled.

The companies in this unsafe havens portfolio are paying dividends in a cheap currency which will return more in two years than for the entire decade of holding government stock. They are no longer the bargains they were during the panic, but the 10-year gilt still looks too expensive for anything other than a quick trade. Governments round the world are letting their deficits rip, which means much more borrowing. And there’s nothing like a quick paper loss to discourage the buyers from the next issue.

Subsidy farming update

How do you make Hinkley Point’s mythical nuclear power station look cheap? Answer: commit to paying even more for other sources. No, not the Swansea tidal lagoon (not yet, anyway) at £120 per megawatt hour, but the brave new world at Drax, a mere £100. The Hinkley Point juice, if it ever arrives, will cost £92.50 for a longer contract, or rather more than twice the current wholesale price for electricity.

Drax is abandoning the abundant coal on its doorstep, while the rules discourage building power stations to exploit super-abundant gas. Instead, it is burning wood pellets, shipped across the Atlantic and stored in special domes to discourage spontaneous combustion. The massive subsidy is needed to make the sums add up, and Drax shares have perked up no end since the European Commission decided it wasn’t unfair. The customers are not being consulted.

Even all this subsidy farming is not enough to keep the lights on. A cold snap could see businesses being asked to run dirty diesel generators to ease the demand on the electricity grid this winter, while a group of British MPs has concluded that the annual bill for emergency reserves, needed when the wind fails to blow, will be twice the £10-£15 per household official estimate.

The root cause of this nonsense is the 2008 Climate Change Act, passed near-unanimously by parliament in an orgy of self-congratulation, committing to an unattainable CO2 reduction by 2050. Act in haste, repent at leisure.

This is my FT column from Saturday.

Investment trusts are notoriously resistant to change. When performance is good, there is no need for it; when performance is bad, the directors tell themselves that it’s just short term. Change usually needs an outside disrupter, and so it has proved with Alliance Trust, the formerly self-satisfied kings (and queen) of Dundee.

It has taken a new board for Alliance to admit that it’s not much good at investing. In future, it will pay others to do it, becoming a conventional investment trust with a retail fund administration business, Alliance Trust Savings, on the side. It was less this blinding flash of insight than the pledge to get serious about the shares’ discount to net asset value (NAV) that produced the positive response to the review last week.

ATS’s fixed fees appeal for larger self-administered pensions and Individual Savings Accounts. It is finally profitable, but is subscale against the likes of Hargreaves Lansdown, and too small to make a meaningful impact on Alliance’s NAV. The decision to keep it looks like an interim one.

At the other end of the investment company scale, on Monday the shareholders of Dolphin Capital Investors vote to decide whether it’s worth going on. The record is grim, but these votes usually expect the answer yes. In this case the board is urging shareholders to vote against continuation. Instead, the directors propose winding up the business, distributing the proceeds and putting themselves out of a job. Please don’t, says chairman Andrew Coppel, call it turkeys voting for Christmas.

Sky’s (almost) the limit

Rupert Murdoch doesn’t believe in playing safe. His latest attempt to pay £10.75 to win 100 per cent of Sky has the usual hallmarks of a gambler. Rather than make a straightforward bid for the 60.9 per cent that his 21st Century Fox does not own, the offer is by a scheme of arrangement.

This will save a little money, and avoid having a potentially troublesome small minority if an offer failed to reach 90 per cent acceptances. However, it also means that Fox cannot vote its shares, and the scheme requires a 75 per cent majority of outside shareholders voting in favour. In other words, holders of 15.2 per cent of the Sky shares could stymie the deal.

In practice, voting never approaches 100 per cent of those eligible, so if Jupiter, Royal London and Standard Life could persuade a few more holders to join them, the scheme fails. Since Mr Murdoch is unlikely to give up, the long-term risk in revolting seems modest, but the short-term risk helps explain why the Sky share price remains so far below £10.75.

The position of the minority is weakened by the bizarre decision of Sky’s independent directors to endorse the price before the announcement, but the Sky bulls are unabashed. Polo Tang at UBS argues that the shares are worth a magnificent £13.70, as the returns from the investment in mobile start to appear. That looks like pie in the, er, Sky, but a bump in the offer seems a worthwhile bet. After all, Mr Murdoch may not be immortal.

Not too bad for a journo

In 1969, Daily Mail & General Trust put up £2,000 to launch a magazine covering the euromarkets. Patrick Sergeant, then the Daily Mail’s City Editor, had the idea, and with his colleagues put up £200. It never needed any more. You may not be an avid reader of Euromoney. You may only have ever seen it lying about the City’s swisher banking halls. But now DMGT is to scoop £350m by selling down its holding in Euromoney Institutional Investor, from 67 per cent to 49 per cent.

DMGT is a curious beast. All the voting shares are held by the Harmsworth family, but an outsider, Paul Zwillenberg, is in charge. This sale is his first big move as CEO, although holding 49 per cent makes no more commercial sense than 67 per cent. Barclays has struggled through the financial implications of the move from subsidiary to associate. After the head-banging maths, it concludes: “This does look a positive for the story, even if it comes at a fairly heavy cost to the financials.” That’s one way of looking at a truly brilliant long-term investment.

This is my Financial Times column from Saturday

They were told about the risks, but the temptation to gamble is so hard to resist, especially when you think you know more than you really do, and the price looks as though others have got it wrong. Yes, it’s the tale of the mug punters, who have seen the value of their bets tumble by a third or more, as shares in IG Group, CMC Markets and Plus500 all collapsed.

The surprise, then, is not the nasty loss but the valuation punters had put on these spread betting groups. Last February the Financial Conduct Authority publicly warned them about their behaviour, and now it has told them to break their nasty habits. Given that over four-fifths of the bets they take lose their customers money, in some cases much, much more than they imagined was possible, even the most supine authority might one day decide that we needed protection from ourselves.

The industry’s argument that foreign-based competitors would treat the customers worse looked unconvincing when last month Cyprus beat Britain to the regulatory punch on contracts for difference.

The FCA’s argument that so-called binary bets meet no obvious investment need might apply to all sorts of weird derivatives which seem to exist purely to further the interests of the promoters. Fortunately for the watchdog, binaries are classed as actual gambling, and are thus someone else’s problem.

Considering our national addiction to betting, we need a rather sharper regulator than the Gambling Commission to bring order to this slippery industry. Co-incidentally, a cross-party parliamentary group last week recommended cutting the maximum stake on fixed-odds betting terminals from £100 to £2. The group pointed out that the bookies have made £1.75bn this way in the last year, although it did not add that compulsive gamblers will always find another way to lose their money.

After the announcement CMC responded, through gritted teeth, that it “looks forward to working closely with the FCA over the coming months.” The mug punters like Fidelity, Legal & General and Henderson who bought the shares at twice today’s price can only hope they don’t lose much, much more than they imagined was possible.

Elementary, my dear Watson

The single market in goods and services with the rest of the European Union is jolly important, and we must fight to preserve it after we leave. Well of course; Britain is a trading nation, and the shuttling of goods across the Channel makes both sides richer. But services? London leaves the rest of Europe standing in financial services, but our continental partners, led by Germany and France, have successfully protected their domestic champions against British-based invaders.

The awkward truth is that there is no single market in financial services any more than there is in plumbing or child-minding. Each member state has its own rules, yet the myth has somehow grown up that this is a valuable single market in one of the few things we do really well, and is at risk from Brexit.

This myth has moved Stani Yassukovich, distinguished banker, former chairman of the Cirencester Park Polo Club and one of our finest imports, to suggest inserting an exchange in the forthcoming Sherlock series: “But Holmes, what was the significance of the single market in services in the EU?” “The significance, my dear Watson, is that there isn’t one.”

I promise not to pay the bearer

Those 1000 rupee notes you’ve been hoarding will shortly become worthless, when even the Indian central bank will refuse to accept them. Urjit Patel, the governor, explained that they remain as a liability on the balance sheet “as of now”, although if it refuses to honour them, it’s an odd sort of liability.

Perhaps Mr Patel has been studying the actions of the Belgian central bank. Its currency has long since disappeared into the euro. Holders of the lower denomination franc notes are told that the bank can’t be bothered with trivial sums, and declines to change them. Inflation may have nibbled away the value of our British pound, but at least the Bank of England does promise to pay the bearer on demand, however old the notes.

This is my FT column from Saturday