Last week an interloper joined the FTSE100 index. Scottish Mortgage Investment Trust has little to do with Scotland and nothing to do with mortgages nor, indeed, the British economy. Its investments are almost exclusively overseas. Its largest UK-listed investment, Prudential, is not even in the top 20 holdings.

However, if you want to get something back from Amazon for putting your local shops out of business, Scottish Mortgage is one way to do so, since 10 per cent of the £5bn fund is in Amazon shares. James Anderson, who manages the trust for Baillie Gifford,  can invest wherever in the world he fancies he can see long-term growth. His third-largest holding is the perpetually money-guzzling machine that is Tesla Motors, so holders must have faith as well as patience.

Few fund managers actively brag that they prefer short-term speculation, but Scottish Mortgage, founded in 1909, makes a better case than most for sticking to a long-term view. The impressive performance shows that this approach seems to work. What most definitely does work is low fees, 0.3 per cent to the management, and total ongoing charges of 0.45 per cent of net assets.

Other investment companies use the excuse of the cost of globetrotting to justify charges of more than twice that. A wide-ranging survey for Morningstar showed that the best predictor of future performance of an investment fund is the cost to the investor, so while we’re constantly told that past performance is no guide to the future, the level of fees most certainly is.

Scottish Mortgage’s other long-term approach has been to resist the temptation to change its name, a great help to less sophisticated investors. It’s been rewarded with a share price that, highly unusually, is a premium to its net asset value and now, a place in London’s top index.

Help to Buy, or help yourself

Jeff Fairburn would very much like the government’s Help to Buy scheme to continue. This is hardly a surprise. Short of pouring the money straight into Persimmon’s bank account, it would be hard to find a more lucrative bung for the housebuilder he heads.

Nearly half the homes it built in 2016 attracted a slice of the £4.6bn scheme, where buyers need find only 5 per cent of the price of a new home. Persimmon sold its output at a 25 per cent margin, pushing up profits by almost as much last year. Since the immediate post-referendum panic, the shares have risen by a half. Mr Fairburn is full of the joys of spring.

It’s less clear whether the rest of us should share his sunny view. Help to Buy has artificially stimulated demand and served to spur prices, as some of us predicted at the time. Even today, £4.6bn is quite serious money for the taxpayer to find, and Persimmon is only an extreme example of the benefits flowing straight through to housebuilders’ profits. Besides, as a Hometrack analysis showed last week, the biggest numbers of these subsidised houses are going up where they are least needed.

In the longer-term, this scheme may have other unpleasant side-effects. Those buying now may be grateful, but could discover that when they come to sell, the potential (non-subsidised) buyers are rather harder to find. They could see their 5 per cent deposit wiped out.  Thus do we reap the baleful results of another crowd-pleasing scheme from our former chancellor. Let us hope his successor can avoid them this week.

 

Where there’s blame, there’s…

Have your investments suffered an accident? Are your shares in the 99 per cent club? Then the Aussie lawyers at Slater & Gordon may not want to hear from you. They specialise in chasing for compensation, and their shares have suffered a nasty fall over a broken acquisition,  tumbling from A$8 two years ago to 7 cents today. The loose financial paving stone that tripped them up was the purchase of bits of the up-like-a-rocket-and-down-like-the-stick  Quindell, a similar UK practice. Well, accidents will happen, but the £673m Slater paid looked careless, almost negligent, at the time. FTAlphaville had been all over Quindell with awkward questions for months beforehand, as the share price slithered. Legal action is inevitable. Of course.

“Success breeds complacency. Complacency breeds failure. Only the paranoid survive.” Thus the late Andy Grove, who built Intel into the world’s dominant microchip maker. Last week one of the UK’s most successful companies received a billion-volt jolt when FTAlphaville forced Kraft-Heinz to admit to hitting on Unilever.

The company’s response was brisk. Get your thieving hands off us! We don’t fancy you at any price! Don’t you know we’re a national treasure? The reaction was enough to force Kraft’s backers into an ignominious retreat.

Under Paul Polman, its Dutch CEO,  Unilever has successfully blended a long-term policy with its enthusiasm to become a good corporate citizen. Now, as if to disprove that he is not complacent after eight years in the job, he has launched a “comprehensive review” of the empire, promising a shorter long-term policy.

This sent the City’s dealmakers into a frenzy: share buybacks, hiving off foods ‘n’ fats, a takeover of Colgate, spin out home care and refreshment…there is no end to the exciting things they would like Unilever to do. Just don’t mention those life-changing fees.

It’s true that Mr Polman did look a trifle smug when he compared Unilever to a non-governmental organisation for doing good. Less pontificating on global warming and more on the joys of Magnum Espresso Black would be welcome. His sensitivity to criticism was once exposed during a tetchy press conference when asked whether he had considered buying a Unilever product for his thin skin. And yet…the bigger danger now is that Mr Polman decides that only a dramatic gesture will demonstrate that success is not turning into complacency.

This is not a company in crisis. There is no convincing case for radical reform merely to follow City fashion. Us Unilever shareholders are a loyal lot, with 70 per cent of the shares being held for more than seven years, but Kraft’s assault has exposed the share structure with its Dutch Siamese twin as a possible poison pill (Berenberg’s analysts say not) which is ripe for reform. Dealing with that, and bringing the long term a little nearer, is surely enough for now.

A merging market, or not

It is now a year since the bosses of the London Stock Exchange and Deutsche Bourse agreed that their businesses would be better together. Conveniently, the London CEO Xavier Rolet announced that he was buzzing off, leaving his Deutsche opposite number, former Goldman Sachs banker Carsten Kengeter, in charge.

The little matter of the British referendum was, we were told, irrelevant. Traders could save €450m a year from posting one set of collateral rather than the two they need today, and since the shareholders in the exchanges reckoned that much of that gain would not be wasted on the customers, they voted to merge.

How long ago it seems. Brexit turns out not to be quite so irrelevant after all, as was pointed out here (more than once). This week the British MPs debated the issue, and did not much like what they saw, while Margrethe Vestager is about to rule on whether the EU will allow the deal. The exchanges have been offering desperate further concessions to help her see things their way.

This deal was initially described in Inside London as horse and rabbit pie, and concluded: “The Deutsche CEO is clearly a hungry man, but on these terms he should not be allowed to eat the rabbit.”

Cheltenham’s for racing, apparently

After Lloyd’s of London, Cheltenham racecourse. Next month’s festival may find more punters actually watching the races, rather than fighting each other to reach the bar(s). In order to discourage fighting, customers will be limited to buying four alcoholic drinks at a time. Expect a brisk secondary market (many of the visitors from the City do this sort of thing every day) in nil-paid drinks rights for the thirstier punters to bid for. As for Lloyd’s, its ban on daytime drinking only applies to its staff. Those with particularly awkward underwriting propositions should still seek their man in a select bar nearby – unless he’s gone to Cheltenham, of course.

This is my FT column from Saturday. Since then the penny seems to have dropped with the London Stock Exchange that Ms Vestager is a woman with a mind of her own who can see a potential monopoly a kilometre away.

Remember “Nuclear power? No thanks”? That sunny, smiling sticker which was almost standard on the back of every Citroen Deux Cheveaux? How we smiled at such naivety. Nuclear power was the future. The fume-belching little 2CV may have gone the way of the Trabant, but after another grim week for the nuclear industry,  it seems those stickers may have been right after all.

A financially viable nuclear power station looks increasingly like a mirage. Even the eye-watering guarantee from the UK taxpayer for Hinkley Point C is insufficient to cover the risk that building it will bankrupt EDF. Toshiba’s woes have claimed the scalp of its president. Hitachi is signalling that its project in Anglesey needs government backing to proceed.

It’s telling that after 60 years of mostly successful operation, commercial viability still eludes the nuclear power industry. Perhaps we have been lucky to have avoided serious accidents, and the decommissioning costs were hugely underestimated, but the combination of ever-rising safety demands and cheap hydrocarbons has destroyed its economics. Appealing for fresh state aid looks like a desperate last throw of the nuclear dice. If an industry cannot finance its own projects after half a century of development, it may be time to try another industry.

Fortunately, other industries are available. The cheapest and quickest fix is to build gas-fired power stations, to tap into worldwide abundance and increasingly diverse supply, even before domestic fracking gets going in the UK. Unfortunately the artificial barriers imposed by today’s energy policy are preventing this subsidy-free solution. For the longer term, the price of solar energy continues to fall and smart meters that really are smart will start managing the demand side of the equation. Even offshore wind looks a better bet than nuclear, as battery technology evolves.

Instead, we have a cat’s-cradle of subsidies to generate electricity and, through grants for electric cars, subsidies to use more of it. This was self-evidently stupid, even before the impact of the seismic changes across the Atlantic, where cheap energy is a cornerstone of Trumpenomics. Subsidising “green” power generation in the UK will not prevent our competitiveness decreasing as America pumps up its output of oil and gas.

Abandoning nuclear means facing reality on the likely path of future carbon dioxide emissions. It means repealing the Climate Change Act, with its arbitrary targets for dramatic cuts, passed near-unanimously by parliament in 2007 in an orgy of self-indulgence. Legislate in haste, repent at leisure.

Cazenove’s star buy

Mining analysts tend to tell their clients to buy at the top (when everything looks wonderful) and sell at the bottom (when prices are depressed enough to threaten bankruptcy). Cazenove’s 51-page tome on the joys of digging fertiliser out of Yorkshire at least avoids this trap, since the price of Sirius Minerals has more than halved in six months. The brokers think the shares could now more than double.

There’s plenty there to mine, but it’s underneath a National Park, so must be spirited out without disturbing the landscape. The proposed solution is a 23-mile underground conveyor, which would be a world first by about 22 miles. The mechanics scarcely bear thinking about.

The financing is almost as heroic as the engineering, with over 4bn shares, a convertible bond, and a royalty deal on top of the debt. Those who paid 20p a share in the last finance round are 2p a share down already, and can only hope that Caz is right, and this is Sirius’ darkest hour.

 

Quite right, quite meaningless

So, Rolls-Royce. A £4.6bn loss and an unchanged dividend. Something wrong here, surely? Aren’t dividends supposed to reflect what the company earns, rather than some sort of semi-obligation? Ah well, you see, £4.4bn of the loss is a write-down of currency hedging, not cash at all, merely a book-keeping exercise to trim the hedges to their market height after the fall in sterling. It’s as if you had to set a fall in the value of your house against your income. The accounting rules oblige Rolls to do this and thus, as the profit and loss account becomes more and more accurate, it means less and less.
This is my FT column from Saturday

Bouncing Bob Dudley was on surprisingly good form last week. Putting Deepwater Horizon and that silly spat about his rewards for failure behind him, the BP CEO invited the analysts to raise their eyes to the sunlit uplands ahead. The company is back to doing what it likes best, prospecting for more oil.

This is an expensive occupation. For BP to be able to make enough money to sustain the dividend, it now says it needs an oil price above $60 – and the price today is a rather soggy $55. Last month BP’s own 2017 Energy Outlook argued that the industry faces a prolonged glut and subdued prices.

Its record here is, well, patchy, since the 2015 Outlook completely failed to see the collapse in the oil price which took place almost before the ink was dry. Nevertheless, it’s on firmer ground when looking at supply, and now argues that we already have enough discovered oil to last until 2050, even given rising consumption.

That may still not be pessimistic enough. Last week Myron Ebell, a recent adviser to Donald Trump, swept through town, signalling that his former boss is determined to make America self-sufficient in oil and gas. The combination of advancing fracking technology, falling costs and major new discoveries in the lower 48 states, spurred on by Trumpenomics, make this highly likely.

The consequences of an America self-sufficient in oil and a significant exporter of gas are profound. The creaking cartel of oil producing countries could withstand surging US output only if Saudi Arabia was prepared to take the strain to support the price. With the latest OPEC agreement looking rocky, the kingdom is already being forced into the role of swing producer, against its wishes. With a stuttering economy and the need to prepare its oil monopoly, Aramco, for a public offering, there are limits to the Saudis’ ability to cut back production.

BP’s survival, recognisably the same company despite a bill of $62bn for the Deepwater disaster, is a corporate wonder of the age. However, unless the oil price surprises on the upside, the survival of the company’s current dividend would be another one. This is why BP shares yield 7 per cent at today’s exchange rate. The market doesn’t quite believe.

 

The gold-coloured brick standard

Gold mining must rank as one of mankind’s more futile occupations. Nearly all the gold which is dug up so expensively is destined to be buried somewhere else, and if the metal’s trade body has its way, we shall soon learn how much of it is buried under the streets of London.

The London Bullion Market Association estimates that $26bn of bullion is traded every day in the City, but with most transactions directly between buyer and seller, it doesn’t really know. This is not at all modern, so the LBMA is pressing for transparency, at least as far as stocks of the stuff are concerned. The Bank of England alone is thought to be sitting on $150bn-worth.

Sadly, only a few bars belong to the UK taxpayer.The rest is a useful little earner from owners who have confidence that the BoE will look after it. So while ownership changes all the time, sometimes on paper, nowadays more often in pixels, the bullion slumbers peacefully in the vaults.

More than any other, the gold market is built on confidence. The Association thinks greater transparency will help build it further, attracting more business to London, and it could be right, although those buying as an insurance policy against armageddon would surely want actual metal. A paper certificate might not command the same respect in a global crisis.

Much of the world’s excavated gold is thought to be in Fort Knox, but nobody can be sure, since the US government will not allow the auditors in. There may be nothing more there than millions of gold-painted bricks inside a fancy security system.

Would it matter if Fort Knox turned out to be empty? In theory, its gold backs the greenback. In practice, there has been no connection since President Nixon broke the tie. Apart from wondering where it all went, would we, or the US taxpayer, be any worse off? These are deep waters, Watson…

This is my FT column from Saturday, inexplicably printed with the gold piece first.

 

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