The Harmsworth dynasty has lost none of its capacity to set puzzles for the stock market. This week, the current scion, Jonathan Rothermere, pulled another financial rabbit from his portfolio with a plan to take his company, Daily Mail & General Trust, private. Everyone had great fun pointing to the Daily Mail’s own coruscating campaign against private equity, but since he already has all the votes, the outside shareholders have limited leverage if they don’t like the plan.

Before they decide, they will have to work out what it means. As usual, this is not easy. Indeed, when it comes to impenetrable financial engineering, DMGT’s recent constructions would put the most ingenious private equity planner to shame. It is barely two years since it finally divested its residual holding in Euromoney, a business started by Rothermere’s grandfather with a £5,000 loan from the parent, and now worth £1.1bn.

That divestment involved outside investors getting 0.19933 of an Euromoney Share, 68.13p in cash, and a reduction of 0.46409 of an A Share for each one they owned. The “insiders” got 25.53p in cash, and each of their A shares was reduced by 0.03946 of a share. It may be possible that the outside shareholders could do the maths there, but it was almost impossible to work out which side got the better deal.

Something similar is at work this week. The group is effectively being broken up, as a result of enthusiasm from buyers for some of the bits, none of which have much to do with the Daily Mail, and everything to do with the entrepreneurial streak which runs through the dynasty. Earlier investments and disposals include property search company Zoopla, education technology group Hobson and, finally, second-hand car business Cazoo, now about to be floated in New York. DMGT proposes to give the outsiders the Cazoo shares and use its own share of the money to buy them out.

Rothermere’s father Vere was, perhaps inevitably, called “Mere” (though not to his face) but the soubriquet was not deserved. The newspaper business was never very profitable when the trades unions called the shots, but the long-term return from investing in DMGT has been outstanding. Even in the last 10 years, Morningstar calculates that the shares have returned 12.2 per cent annualised. Many shareholders will be reluctant to see the business disappear from their portfolios. Some may face a capital gains tax liability that the insiders are trying to avoid.

The outsiders have no votes, but are not entirely without clout if they think the deal is too mean. They cannot be forced to accept an offer, and a scheme of arrangement would require 75 per cent acceptances from them to take out the rest. The price was curiously unmoved on the announcement, but had risen strongly to today’s £11.10 in the weeks beforehand. It’s the sort of movement that might raise reporters’ suspicions. Perhaps not on the Daily Mail in this case, though.

Going out with a Bang

It seems like something from another world. Indeed, it is so long ago that there’s a generation for whom the expression “Page 3 Girl” is meaningless, with the Mail on Line’s Sidebar of Shame its nearest current equivalent. In 1987, in an inspired piece of mischief, The Sun’s City Editor organised a protest by these girls (with their clothes on) to harrass the chairman of the London Stock Exchange, with “Goodison must go” emblazoned across their T-shirts.

Nicholas Goodison, who died last week, had fought a doomed campaign to keep the LSE out of the 20th century, preparing a million-document defence against legal action from the Office of Fair Trading, which had sought to end fixed commissions on share trades. Up against the ferocious director-general, Gordon Borrie, Goodison knew he never stood a chance, but understood that this would mark the end of the division of labour between stockbrokers and jobbers (market-makers).

The change destroyed the cozy carve-up, but precipitated unexpected windfall gains for the partners in the broking houses, and swimming pools all over Surrey, as the banks rushed in to buy their businesses following the City’s “Big Bang”. What looked from the outside to be a technical rule change has had a profound impact, with competition creating wealth on an unforeseeable scale.

Goodison failed to see it himself, missing the opportunity to buy the London Financial Futures Exchange. He considered it too marginal, too expensive and rather vulgar. In fact, it represented the next step in the financialisation of the West’s economies, a process that has produced ever-expanding markets in ever-more exotic derivatives ever since. What had seemed to some like a disruption which would threaten City jobs has turned out to lay the foundations of a world-class industry. You could say that Goodison got the right answer for the wrong reason, rather like the protest from those Page 3 girls.

If only they had shareholders

It’s John Lewis and (fewer) Partners. The department store which had for so long seemed to be a model of how retailing should be done is swinging the axe again. This time it’s 1,000 from what is delicately described as “a layer of management” who will join the 4,423 partners who have been let go since the start of the pandemic. This will, we’re told, allow the business “to reinvest in what matters most to our customers.”

Ah yes, reinvest. The systemic problem with a partnership structure is that it has to generate its own risk capital, since there are no greedy outside shareholders to stump up when the going gets tough. Generating it from cutting costs is a long process, especially given the price of paying people to go away.

Sharon White, the whirlwind chairman since February last year, cannot be accused of lacking courage, and there remains a deep well of goodwill towards this business. However, it is not as deep as it was, and on-line shopping has done for the “Never knowingly undersold” mantra. Plans to turn car parks and unwanted stores into flats are all very well, but residential development is another business. It, too, requires capital, and Croydon Council has proved that it is potentially disastrous. There is no rescue if she gets it wrong.

There has never been a financial food fight quite like this one. Wm Morrison now has three buyers fighting to get to the supermarket checkout, and a share price 50 per cent higher than it was at the recent annual meeting – at which the shareholders savaged the directors for their full-fat pay policy. So is Morrison a National Treasure, full of laughing, happy employees toiling away on the company farms, its fishing trawler and its freehold stores, to be preserved as a symbol of all that’s best in British food? Or is it a commercial enterprise in a highly competitive market, whose customers will go wherever their view of price, quality and choice takes them?

The current leading bid from an outfit called Fortress is 252p a share, along with a clutch of warm, fuzzy but not legally enforceable agreements to keep things just as they are; no financial engineering here, honestly. The Morrison directors, perhaps believing they are also part of Fortress’s glittering future, have rather foolishly been seduced into recommending it. Lurking in the wings is Apollo, another private equity group, which may, or may not, bid more. Perhaps they will say they love the executives even more than Fortress does, and promise to behave even better in the fields.

Or perhaps they will bring the question back to earth, by simply bidding more, and propose to run the business to maximise profits. Legal & General, a big Morrison shareholder, is already having an attack of the vapours at the thought. Andrew Koch, its senior fund manager, worries that Fortress may be bidding “for the wrong reasons”, whatever they may be. However, his request for more details of the Morrison property portfolio is the least the Morrison board can do now.

L&G is a fan of ESG investing, and under CEO Nigel Wilson has shown great imagination in building assets to match long-term liabilities. Its vast share portfolio, on the other hand, is mostly in passive tracker funds, where investments are made mechanically to match chosen indices. It seems quite possible that Apollo will offer more for Morrison, without the green and pleasant land stuff, offering L&G the choice of looking woke or getting the best price for its policyholders (who will not be consulted either way).

The Morrison board, having made the mistake of accepting the Fortress price, has a variant on the same problem, should a bid from Apollo materialise. It’s hard not to sympathise, though, given the ever-growing pile of bureaucratic garbage that quoted companies must deal with. This week Peter Harrison, the CEO of Schroders (with £570bn under management, much of it in active rather than passive funds) called for a reform of the rules. The UK governance code is “written at the expense of public companies” and could be “very onerous” on them, pointing at everything from disclosure requirements to remuneration rules. Actually running the business is taken for granted.

That is all on top of the tax advantages of private equity. In an era of administered interest rates, debt is dirt cheap and can be offset against corporation tax on profits, unlike equity. To make matters worse, the executives at private equity businesses routinely have a “carried interest” which is a seven-figure payday thinly disguised as a capital gain, and which attracts tax at 28 per cent rather than the 45 per cent on income. Small wonder, then, that the Morrison executives can see the broad sunlit uplands – and not necessarily on the company farms.

A new Shell game

There are only two numbers that really mean anything in the bloated accounts of big oil; the debt and the dividend. Everything else is adjusted, restated, subject to interpretation or plain incomprehensible (just take a look). The analysts may be diligent and make detailed projections ahead of the figures, but they’re almost as much in the dark as the rest of us.

So confidence in both those numbers matters. You would hardly think so from Royal Dutch Shell’s latest update. In March last year the board panicked and slashed a dividend that had not been cut for half a century by two-thirds. Perhaps the directors thought the end of the oil world was nigh, or they feared that all that debt would overwhelm them. Who knows?

When the world failed to end, six months later, they decided they had overdone the slashing, and raised the next quarterly payment, although only by 4 per cent, with an ambition to keep it going up. Last quarter they raised it again, but Jessica Uhl, still Shell’s chief financial officer, warned that “we are not anticipating a further increase” in the dividend for this year.

Well, it’s a fast-moving world, oil, and that was then. Now we have a new strategy. Shell has noticed that the oil price has gone up quite a lot, and so it can let the shareholders have between 20 and 30 per cent of cash flow, either by higher dividends or share buy-backs. The previous strategy, to get debt down to a mere $65bn, has been “retired”, although we are not told what has replaced it.

This is pathetic. It is high time CEO Ben van Beurden, whose strategic purchase of BG at an inflated price gave Shell the debt problem in the first place, was himself retired. He might start to redeem himself before he does by pulling Shell out of the Netherlands to escape the judicial over-reach of the Dutch court in ordering the company to cut its CO2 emissions. Oh, and his successor might find a finance director who could see beyond the end of her nose, too.

Rishi Sunak was busy announcing the launch of green bonds this week. These are the same green bonds that he announced in the Budget, and in neither case was there any indication of what they are, how they will work, and whether they are a good idea. In this dance of the seven green veils, we have got to about number three, accompanied this time by 31 pages of lyrical prose which only lacked a Vaughan Williams soundtrack to complete the picture of sunlit zero-carbon uplands ahead.

Green Savings Bonds “will be critical in tackling climate change and other environmental challenges, funding much-needed infrastructure investment, and creating green jobs across the UK”. Of course. The “framework” might even help businesses looking to tap this source, if they can wade through what has become the standard regurgitation of How Green Was My Government, if only aspiration could make it so.

Nowhere are the real questions answered, because deep down we know that green bonds are a con. They either con investors into putting up capital for a return below what they can already earn by lending to the government, or they con the taxpayer by having incentives for holders which make them more expensive than other government borrowing. There are fancy ways that either can be disguised, as has been practised for years with premium bonds, where holders are essentially betting the interest for the (almost zero) hope of a big prize.

It is possible that enough savers will want greenery so bad that they will accept near-zero interest on their money in return for a warm glow from simply holding the bonds, although gathering £15bn this way could be quite a challenge. The historical precedent is War Loan, which was finally paid back, in much depreciated pounds, in 2014. The money was originally invested by savers who were urged to “save your way to victory”, helped by the lack of other homes for their money in wartime. Perhaps Mr Sunak has something similar in mind, like “save your way to save the world”, or perhaps he will just go on announcing that they are coming, because his helpers can’t answer the awkward question above.

Going cheap: finest Columbian

Greenwash of the week: no more coal to be burnt in the UK to make electricity from 2024. This, apparently, sends out a clear signal to everyone else to follow suit. You can see how successful this has been so far by the hundreds of new coal-fired stations being built in China, India and elsewhere in the Far East, where the need for affordable energy is rising rapidly.

Well, we must do our bit. Drax, once the UK’s biggest coal-fired station, built on a near-inexhaustible supply of the stuff, is now burning wood pellets imported from the US, a switch which produces a fine stream of subsidies from the taxpayer for what may, or may not, be a marginal cut in CO2 emissions. Ivan Glasenberg is doing his bit, too. Glencore, the mining company he built, is helping Anglo American and BHP to pacify the green hordes by taking their Columbian coal businesses off their hands.

To see how keen the vendors are to wash out the black stuff, consider: by the time the deal closes late next year, the business will have generated so much cash that the $588m Glencore is paying for the two-thirds it doesn’t own will have effectively shrunk to $230m. The price to the Anglo and BHP shareholders of compliance with the mob has never been higher.

As Mr Glasenberg has pointed out, sloughing off unfashionable coal this way makes no difference to the amount that gets dug. It merely transfers the ownership to obscure businesses (unlike Glencore, of course) who have a rather more, er, flexible approach to how they operate and are less exposed to the climate activists. Investment in new coal mines has fallen as big players have been bullied out, and the price is at a 10-year high as a result. Something similar is happening in oil, where western companies have cut back exploration, and the price is rising in anticipation of shortage. The state-owned operators in Russia and Saudi Arabia can hardly believe their luck.

As for Mr Glasenberg himself, he has decided that 19 years in charge is long enough, so this week was his last. His reign has been entertaining, as long as you weren’t a shareholder. As he plunged into mining, the shares wilted. They have never again seen their 500p flotation price exactly a decade ago, and survived a near-death experience in 2015 which required an emergency share issue. Despite the coal cash flow, they do not look particularly attractive at today’s 314p. Glencore grew fat on its ability to trade commodities. Making money from digging them out has proved a whole lot harder.

Not very competitive

Andrew Tyrie always was a square peg for a round hole. A ferocious chairman of the treasury select committee, he was always too feisty and outspoken for ministerial preferment. When he quit parliament, and resurfaced as chairman of the Competiton and Markets Authority, we had high hopes he would wake it up. Alas, after two years he was out. Now he has fired a broadside at it from the Centre for Policy Studies which, while undoubtably deserved, may just bounce off.

Apparently, two-thirds of businesses have no idea what the CMA does, while too much of its work is delegated from the board to groups of executives, resulting in it starting cases “that have little strategic justification or connection to the lives of ordinary consumers.” He advocates “greater openness to consumer complaints, through the introduction of a simple online form to alert the CMA to rip-offs in products and services.” A simple form! The very heaven in our bureaucracy-choked world, where lifting a pencil requires a risk assessment.

Like so much legislation designed before the digital age, the legal framework for competition and consumer protection policy is “struggling to keep pace with the growing power of online platforms, and the scope for the growth in consumer detriment in much of the economy that they make possible.” It’s a familiar refrain, and hard to disagree. It would have helped had he still been in the chair to push the changes through.

With hindsight, Wm Morrison was a sitting duck, nicely trussed up and oven ready for a private equity buyer. A poor share performance, low yielding assets in its own farms and a balance sheet stuffed with freehold shops was attractive enough even before considering the delicious cash flow that characterises food retailing.

The Morrison directors had already been softened up after a bruising clash with their shareholders just a fortnight ago, when a stonking 70 per cent of votes cast rejected the remuneration report. The shareholders – or rather, the big institutions who control the votes of their underlying investors – objected to the cynical way the calculation of bonuses had stripped out the impact of Covid on the bottom line. Ahead of the annual meeting, the rem. com. had been widely pilloried.

The bid approach from private equity has produced a screeching U-turn in the coverage. Suddenly, Morrison is a national treasure which must be protected from the Barbarians at the Gate. Goodness, after Asda has fallen to an unknown pair of petrol station operatives, bought with borrowed money, whatever next? Sainsbury’s? Tesco, even? Then all our leading supermarkets will be in the hands of financial manipulators, and then where would we be?

Well, calm down dear. As with almost every other commercial activity, competition is the lifeblood of food retailing, and with Lidl and Aldi both signalling expansion, there is no shortage. Still, it might be the moment to ask why private equity is on the march, not just in the aisles. Directors of big plcs are very well rewarded, but private equity offers them the chance to become seriously rich for doing effectively the same job. Rather than the incomprehensible bonus set-up of quoted companies, the private equity executives generally have a (relatively) modest basic pay. The real reward comes with “carried interest”, potentially many millions.

Private equity typically loads a business with much more debt than the public markets would tolerate. At today’s interest rates, that debt costs peanuts, so any improvement in profit is dramatically amplified. The interest cost can be set against trading profit, further reducing the corporation tax bill. The carried interest is linked to profit, and for the icing on the cake, the payout bears capital gains tax at 28 per cent, rather than 45 per cent for higher incomes.

There’s another added bonus: the ESG brigade is on the march in the public markets. They are barely concerned whether profits are enough to sustain the business, but are putting pressure on those big (proxy) shareholders to look woke and use their votes to help save the planet. Tracker funds are easy targets, because they are not really interested in the performance of individual shares, as long as they stay in the index being tracked.

The green blob has found it much harder to put pressure on unlisted companies. So: a quieter life, fewer distractions from running the business better, and the prospect of riches. It will take a visit from the ghost of Sir Ken Morrison to persuade the board to turn all that down. Unlike him, they are just hired hands, and at least some of the senior executives will keep their jobs, with the prospect of serious money in front of them. After some token resistance, and a modest increase in the price, it’s likely that Morrisons’ days as a quoted business are over.

The chancellor, with his City background, knows how the tax rules favour debt over equity, the key factor tilting the playing field towards private equity. This is not new, but is particularly acute in an era of administered near-zero interest rates, and the proposed rise in corporation tax will make the balance even worse. If he chose, he could change the rules towards equity capital, which can accept the risk of setbacks, and against debt, which is only concerned with avoiding losses. If this takeover produces sufficient clamour for change, then he might actually do something about it. Too late to prevent Morrison from disappearing from public view, though.

Off the financial rails

And so, with a heavy heart, we come again to the wretched HS2*, the white elephant currently charging its way underneath Chesham and Amersham (stopping only to lose a safe Tory seat) before going on towards Birmingham, leaving destruction and waste as it goes. The cost of this crazy railway, a monument to an era that had passed long before the first sleeper has been laid, has gone up again, this time by an estimated £1.7bn.

The Department for Transport has produced the usual drivel: “Our focus remains on controlling costs, to ensure this ambitious new railway delivers its wealth of benefits at value for money for the taxpayer.” Somebody inside DafT is surely having a laugh.

The £1.7bn extra is just for the first phase, from London to Birmingham, a distance too small for the higher speed to make much difference to the journey time. The increase in cost is more than twice the money the government pledged with much fanfare for the north west, where the need for improvement is shockingly obvious, but for HS2 it is little more than a rounding error.

The project has its own momentum, its own gravy train if you like, as shown by the PR blitz this week that accompanied the start of work at Old Oak Common, inconveniently sited between Heathrow and central London. Yet even now it is still not too late to admit that HS2 is a financial folly and stop it. The FT reported that Douglas Overtree, the proper engineer who looked at the project for the government last year, only recommended continuing because £9bn had already been spent.

He was quite wrong about that. Even in the unlikely event of the line being built for its latest estimate of £106bn, we are far from the financial point of no return. Stopping it now would save tens of billions of pounds, even after compensation payments to contractors. Indeed, rather than take the money, they might be profitably employed instead on the dozens of other rail projects which are actually worth doing.

*My railway correspondent IK Gricer writes: MSL stood for Manchester Sheffield and Lincolnshire and for Money Sunk and Lost. When it built its extension to London it changed its name to Great Central: Gone Completely. So it proved.

Will there ever be a better moment to signal the end of the wretched Triple Lock? This crowd-pleaser for geriatrics guarantees that the UK’s old-age pension will rise each year by the greatest of the Consumer Prices Index, average earnings, or 2.5 per cent. Introduced in 2010, it got the rickety coalition government round the next political corner and has cranked up the relative value of the payment no end. Now, though, there’s a roadblock ahead, as wages bounce back following the lockdown. The figure for the relevant annual rise in average earnings could be as high as 8 per cent as employees come off furlough and employers bid up for staff.

That would not only be ruinous for the public finances – adding about £5bn a year to spending on top of a 2.5 per cent increase – it would be a statistical freak following last year’s plunge in wages. More to the point, it looks like a grossly unfair windfall at the expense of the rest of the population who were forced to make personal sacrifices to try and protect the people who are getting the money. A more cynical calculation might conclude that we are still a long way off the next election, and even without Jeremy Corbyn, old (conservative) voters are unlikely to defect to Labour in large enough numbers to upset the sums.

If the political cost of a clear breach of this manifesto commitment is still considered too great, then future payments could be frozen until the CPI catches up with this year’s jump in earnings. If the pessimists are right, this might not take very long, as inflationary pressures are clear to see, from building materials and commodities to second-hand cars and electronic components. Pubs, restaurants, hairdressers and businesses which have had to borrow to stay alive will raise prices, otherwise they are simply working for their creditors. The labour shortage will also drive up their costs. The history of UK inflation shows that it is slow to get going, but once started requires crisis measures to stop.

So has Rishi Sunak the confidence and clout to end the iniquitous lock? Even arch-inquisitor Andrew Neil was unable to force a definitive answer from him on GB News this week, but breaking it would reassure those of us who fear that, working for a prime minister who has no idea about finance, the chancellor is powerless to bring public spending back to stability. An acid test, if you like.

Just don’t ask

Dangerous things, referenda (we know, we know). A month ago, polls showed that voters in Switzerland were 60 per cent in favour of approving the changes to their lifestyle needed to get to carbon neutrality by 2050. Nearly all the newspapers, commentators, politicians and the middle classes were on board. After all, they said, without action to curb global warming, the Alps would have no snow on them by then. This week the vote took place, and 51.6 per cent voted No.

It was the Swiss equivalent of the Brexit vote, and will cause as much trouble, so what happened? The few dissidents pointed out just how painful the move would be, especially for those outside the major cities. There would be no more oil or gas home heating, motor fuel and car purchase costs would rise punitively, flying would be restricted and expensive, and a ruinous carbon tax would be applied. The pain would fall on those least able to bear it.

Nothing that was being proposed is much different from what the citizens of the UK are being asked to bear, in our merry dance to the energy poverty that cutting back hydrocarbons entails. The difference is that the UK government dare not spell out the true costs, and it double-dare not ask us in a referendum. The Treasury is working on a document to give us some idea of the necessary extent of our sacrifice on the green altar, but no realistic assessment will ever see the light of day. It’s too painful to publish.

How very Wise

Pricing companies coming to the stock market for the first time is an art dressed up as science. The bankers do due diligence (or say they do) prepare detailed reports, go round big investors to assess the appetite for the stock, and collect fees, but this only disguises the fact that they often have hardly a clue. Too many recent flotations have left the sponsors looking silly, either because they were far too optimistic, (Deliveroo) or because their estimate of demand was hopelessly inadequate (Darktrace).

One answer is a direct listing, where the company is not raising money. It produces the numbers and then invites interested buyers to find a price at which some existing shareholders will sell. In the old days of the Stock Exchange it used to be called an introduction, and was rather frowned upon, particularly by those hoping for a cut of the action on launching a new issue. Now the irritatingly-named Wise, which grew up with the perfectly serviceable name of TransferWise, is trying the direct listing route.

Wise is no market minnow. Its owners expect it to be worth as much as £6bn, or a mere 55 times last year’s earnings. At that value it hardly looks a snip until you look into the price gouging on an epic scale that the banks practice on retail international money transfers. Not only do they charge commission, but there’s usually an uncompetitive exchange rate to start with. Wise specialises in these transfers. It has $75m of this $2tn market which is overdue for disruption. It may be that this upstart will force better behaviour onto the banks. Unless and until it does, it will warrant the eye-watering valuation that fashionable tech companies find themselves awarded.

So, farewell then, Dungeness B. Its French owners finally threw in the nuclear towel this week, admitting that after spending £200m finding out, the power station is just too expensive to fix. Thus another miserable chapter in the story of Britain ‘s adventure in nuclear generation draws to a close, at least as far as output is concerned. The workforce will be engaged for years trying to dismantle it safely.

The Advanced Gas-Cooled reactor (AGR) at Dungeness was hailed as a British triumph 55 years ago when the Minister of Power (sic) Fred Lee, told parliament “we have hit the jackpot this time.” It is only 35 years since the subsequent financial disaster was chronicled brilliantly by Walter Patterson in a pamphlet called “Going critical.” Readers today would not know whether to laugh or cry, as the latest version of a world-beating design rises like an incubus on the Somerset coast.

It may be possible to build a nuclear power station to time and at an affordable cost, but neither the British nor the French (at Hinkley Point) have yet worked out how to do it. This matters quite a lot. Covering the English countryside and all possible offshore locations with windmills will not get the UK even close to carbon neutrality by 2050. Without oil and gas, only nuclear power can possibly fuel the Brave New Green World.

The problem is as much one of perception as cost. Nuclear power is astonishingly safe. Even when the Fukushima plant in Japan was overwhelmed by the tsunami, only three people suffered high levels of radiation. Yet the regulators in the UK keep raising the safety bar, adding to the cost and complexity of plant design. At present, rising safety costs are outpacing design improvements.

As usual, the UK is tempted to put public money into fanciful solutions. The latest grand plan is for mini-nukes (coming to a site near you) perhaps building on Rolls-Royce’s (experience with nuclear-powered submarines. Rolls’ new chairman is confronted with a balance sheet choked with debt and a business case in vendor finance that Covid has destroyed. She might well conclude that playing with terrestrial nukes is a gamble too far.

Whether or not the minis can be made to work, the legal obligations self-imposed by the Climate Change Act 2008 are practically impossible to meet, almost regardless of how much money is thrown at fossil-fuel alternatives. If wishing could make it so, the government might just as well legislate for continuous sunshine in May – starting in 2050.

Gasping for a fag

Shares in BATS got a little cheaper this week, even though the price barely twitched. With the sort of upbeat statement that would have reassured shareholders in, say, Unilever, CEO Jack Bowles went on about “creating brands of the future and sustainable value for all our stakeholders” before concluding: “The momentum across the business is strong, and I am excited about the future for BAT.”

The missing word in his statement was “tobacco”. This missing word is why the shares are getting steadily cheaper. Tobacco is a truly resilient business, with BAT’s sales expected to rise by 5 per cent this year, while the yield at £28.50 a share on the last four quarterly dividends is 7.8 per cent. The next payments are not expected to go down.

The problem, of course, is that fund managers everywhere – aside from the trackers, who have a convenient excuse – find that it’s just too much trouble to explain why they should hold tobacco shares. It’s so much easier to cross the industry off the list, or if the terrible weed is there in a freshly-managed portfolio, to simply dump the stock. This approach has allowed a polystyrene cup baron called Kenneth Dart to build up a stake of 6.6 per cent without anyone noticing.

We don’t know what he expects, since he has not talked publicly to the press since 1993, but perhaps he has noticed a remarkable market anomaly. The fashion-conscious fund manager may eschew the shares, but the bond market is still smoking. Last September, for example, BAT raised $1bn for 30 years, paying 3.984 per cent. As the analysts at Ash Park group pointed out recently, since us shareholders seem so ungrateful for the dividends, why not spend the same money buying in the shares instead? At today’s price, that would buy the entire company in nine years. Long before then, Mr Dart might find himself the owner of one of the finest cash-generating businesses on the planet.

Are you incandescent or just cross?

The UK government is fiddling with the light switch again. This time, it’s off with those flickering compact fluorescent lights (CFL) and time to turn on the light emitting diodes (LED). Governments of various hues have form interfering in the light bulb business. In what was spun as a way to save electricity and thus the planet, the old incandescent bulbs were outlawed from 2007 in favour of the slow to light, twisted strip light that is the CFL. Never mind that the old ones cost pennies apiece, while the new ones cost pounds, chancellor Gordon Brown could polish his greenery.

This little triumph has cost consumers perhaps £2.75bn, and it turns out that the money has been entirely wasted. LEDs were about to displace the old bulbs anyway, while the hated CFLs never lasted as long as the makers claimed. Today, LEDs have two-thirds of the market, and would have displaced everything else as the technology advanced. Virtue-signalling at maximum luminescence, DEFRA is now banning halogen bulbs and the CFLs it forced us to buy last time, trying to take credit for something that is happening anyway. Easier than dealing with real problems, of course.

It is, as I know from personal experience, no fun being a shareholder in Royal Dutch Shell. The shares are cheaper today than they were at the start of the millennium. Still, there’s always the dividend. Oh, hang on. The board cut that for the first time in half a century in March last year, betraying all the signs of collective panic by the directors. This year they started repairing some of the damage, raising it at a rate which will take a mere 29 years to reach the previous level.

That self-inflicted wound was bad enough, but last week things got a good deal worse. A judge in charge of a lower court in The Netherlands decided that she knew better than her own government and commanded Shell to cut its emissions of carbon dioxide by 45 per cent by 2030 from the 2019 levels. Shell’s goal of zero by 2050 – an aspiration, really – was considered inadequate. She did not explain why 45 per cent is a magic figure, or how she could make up new law on the hoof. Apparently Shell has a “duty of care” for the environment, whatever that means.

The company is appealing, of course, to overturn the idea that any judge can rule that any company’s plans do not comply with her idea of a better world, regardless of what the law actually says. Given the way the windmills are turning, it seems perfectly possible that the superior courts in The Netherlands will endorse her ruling. After all, just think of the warm, green glow the judges could give themselves by confirming it.

Shell would have no choice but to comply. Or rather, it would have no choice but to comply in The Netherlands. The question of whether to damage the interests of the shareholders more widely is trickier. Shell is an Anglo-Dutch company, and the last time the Dutch tried to dictate terms to a similarly structured company, the whole thing blew up in their faces. The attempt to ambush the Unilever shareholders into going to Rotterdam (sic) ended with it decamping to become a unified UK-based company. The process of moving to London, the obvious HQ for both companies, turned out to be quite straightforward. Shell should study the playbook.

That is not all the board should study. Ben Van Beurden, the (Dutch) CEO has signalled his departure. He is unlikely to be much mourned by the shareholders. BG Group, the key acquisition of his reign, was designed, he told us at the time, to safeguard the dividend. That sounds like a cruel joke today, as the company struggles with the debt beurden (sorry) taken on to pay for the deal. He should have gone last year when the failure of his strategy became apparent with the dividend cut.

Andrew Mackenzie took over as chairman in March, so he has a one-time opportunity to reshape the board and jolt the executives out of their complacency. He promised to “profitably accelerate Shell’s transition into a net-zero emissions energy business”. The key words here are “profitably” and “net-zero”. The long-suffering Shell shareholders might look at the share price and conclude that the two goals are mutually exclusive.

Amigoing down the drain

Amigo Holdings, the company tells us, is “a provider of guarantor lending services.” It is also on the brink of insolvency, for which the rest of us should be profoundly grateful. Guarantor lending is the polite description of a business which lends to you because some creditworthy friend or relation will step in if you fail to keep up the payments, which accrue interest at 50 per cent APR. The scope for moral blackmail is plain.

Yet Amigo was valued by the market at £1bn when it came to market at 296p less than three years ago. The share price is now twitching around 9p, as the company staggers under the weight of claims for compensation from borrowers. Their claims are effectively “You shouldn’t have let me borrow the money” mixed with “I didn’t realise that I had to pay up if my mate didn’t”.

Many are driven by the almost equally odious claims managers who take a cut of the compensation. As consumer protection is progressive, with ever more rights and fewer obligations, these managers are having a wonderful time. The Financial Conduct Authority is leading the charge, most recently opposing Amigo’s plan to cap compensation payments.

The Amigo case has distracted attention from the underlying problem of what is delicately referred to as sub-prime credit. The poor, or those with poor credit records, sometimes need to borrow and need an alternative to advances from unsympathetic men with baseball bats. Some legitimate players in this tricky industry are convinced that the FCA has it in for them, lowering the bar for compensation and encouraging the ambulance-chasers. None of us would mourn the passing of Amigo, but squeezing out the law-abiding players is hardly in the interests of those who the banks won’t touch.

Now there’s an idea…

Do not confuse Scottish Investment Trust with Scottish Mortgage Investment Trust, although the long-suffering shareholders in the former must wish they had. Scottish Investment has been such a miserable underperformer for so long that even the board has noticed. The in-house managers were determined not to follow the crowd, but unfortunately they have picked the wrong stocks for the £700m at their disposal, and the game is now up. So the board is inviting proposals from outsiders which are “designed to deliver, over the longer term, above index returns through a diversified global portfolio of attractively valued companies with good earnings prospects and sustainable dividend growth.” A brilliant idea. Why did nobody think of it before?

If you have not heard of Engine No1, you soon will, It’s not Thomas the Tank Engine, but a somewhat opaque group which has inflicted structural damage on ExxonMobil, once the world’s most valuable company. Engine’s proposals at the annual meeting this week may have looked like tilting at windmills, with its $50m stake in a $500bn company, but it spent over $30m soliciting support, and despite Exxon matching that, the company lost.

The dissidents have won dramatic board changes to bounce an oil company into cease looking for oil. Exxon’s board might have thought it could stall the Engine, but it has been blind-sided by an unintended consequence of the rise of tracker funds. Three of them hold a fifth of Exxon shares between them, while other big pension funds and the UK’s Legal & General, running before the wind, are sympathetic to greenery.

There is an interesting twist here. The managers of trackers couldn’t care less about the performance of individual shares, but actual shareholders care greatly, and oil shares have been lousy investments for a decade. As a disappointing part of your active portfolio, you might think some of the blame should fall on the extremely well-paid directors, and that a good kick up the greenery is just what’s needed.

Trackers are the extreme example of the rotten core of fund management – managers are rewarded by the quantity of money in the pot, not how well they do with it. These (also well-paid) executives have no incentive to fight the green tide. Rather, they hope to pick up a few billions more to manage from starry-eyed investors by displaying their commitment to “fighting the climate emergency”.

The pension funds may have a longer horizon, but by the time the shortfall from lousy investment decisions impact their funds’ solvency, today’s managers will be long gone. If they can be tracked down in their comfortable retirement, they can always point to this week’s most bizarre document, the Damascene conversion of the International Energy Agency. From having been a cheerleader for hydrocarbons, it has suddenly decided that the game is up. Apparently, oil is yesterday’s fuel, the price will collapse as we embrace the brave new green world, and energy companies must adapt or die.

The IEA has given itself a cop-out by predicting one last hurrah for the oil price, as short-term demand exceeds falling supply. Predicting the oil price has made every expert look foolish over the years, and for all its many sums and handsome charts, it’s unlikely that the IEA is immune. In the Daily Telegraph Ambrose Evans-Pritchard has written a splendidly satirical piece, maintaining that “slashing CO2 emissions and switching to renewable energy is not a ‘cost’ or a constraint on rising affluence: it lifts global GDP growth by 0.4pc a year over the course of this decade. World output is 4pc bigger in real terms by 2030.”

This modern variant on Keynes’ suggestion for creating employment by having one gang dig holes and another fill them in shows how far from reality the green hysteria has taken us. As no politician dare admit, trying to get the UK to net zero will involve a serious cut in living standards, particularly for the poorest in society, and make no measurable difference to the level of CO2 in the atmosphere. Perhaps before then we will have worked out how to live on a warmer planet.

A really bad idea from the OECD

In the Chateau de Muette in Paris, the well-paid employees of the Organisation for Economic Co-operation and Development had a brilliant idea. Why don’t the advanced nations of the world agree a minimum rate of corporation tax? At a stroke, the scope for companies to play off one country against another would be dramatically cut, allowing the charms of each to be properly considered. As a “first step” towards a uniform tax regime across the G7 countries, we would be on the road to raising an extra $100bn for states to spend. Joe Biden thinks it a great idea. What’s not to like?

Well, just about everything. Setting the minimum would be relatively easy at present, with most rates clustered around 25 per cent (the UK is on the way there), but $100bn is quickly spent by governments, who would then be casting about for more; an international proposal to raise it would be hard to resist. Besides, the OECD’s suggestion, despite being a decade in the making, fails to address the real problem.

The tech giants, which currently pay very little tax, would continue to book profits in places like Puerto Rico that would either laugh at the idea of an imposed tax rate, or demand permanent subsidies from elsewhere to replace their lost revenue. Caribbean countries have little offer businesses but sun, sea and low tax rates. Switzerland and Singapore would apply their own rules, as usual. Ireland and Luxembourg might be bullied into charging more, if the European unioncrats could ever agree for long enough to force them.

The UK Treasury has resisted joining in the tax’em fun. Amounts paid by the likes of Google or Amazon in the UK are derisory, and a uniform G7 rate would not necessarily raise any more. Holding out against any Biden proposals until that changes looks like a sensible strategy. No other country has the power to take the techies on, and it is highly doubtful whether the US President can get anything controversial through Congress.

Of course, as the OECD boffins do not say, they are unfamiliar with the idea of taxation themselves. A hangover from the age of the post-war Marshall Plan, the idea of an institute to study economics was a novelty. They are now ten a penny, and the OECD has long outlived its usefulness, except to the employees. As the site points out: “Salaries are exempt from income tax in most member countries.”

Rail news

A sense of proportion has never been the Department for Transport’s strong suit. This week DaFT proudly announced a suspiciously-precise £317m upgrade for railway lines in the north of England. The spending is long overdue to ease the misery imposed on travellers struggling across the Pennines, if it ever happens. While we wait, here is a pub quiz question: How many miles of HS2 does £317m buy? The answer is ONE.

Car rental is a pretty cut-throat business. Anyone with a car can play, but ask for a brand name, and the answer is likely to be either Avis or Hertz, with their global reach and the belief that they will still be in business when you bring the car back. Perhaps that is why last May, when Hertz filed for Chapter II bankruptcy, lots of small investors bought the shares for little more than $2 apiece.

They know nothing about investing, scoffed the experts. They are wasting their money, just because they had heard of the company. Then a funny thing happened. The Hertz failure, it soon became apparent, was like one of those claims following a car crash that wasn’t your fault. When the pandemic panic struck in March last year, the value of second-hand cars plummeted. The financially-stretched company had borrowed more to buy them, using their value as collateral. As that fell, the creditors demanded more collateral, which Hertz did not have. There was no choice but bankruptcy.

But almost immediately, car values started to recover along with the share price of this supposedly worthless company. Hertz discovered that it had unissued shares in its treasury, and asked the court whether they could issue them to the market. In a 4000 word judgement, while describing the shares as “worthless” the permission was granted. The prospectus for the sale said: “we expect that common stock holders would not receive a recovery through any plan”. The Financial Times decided: “The proposition is a fantastical one.” On the prospects of a return for the buyers, “impossibility is the word that springs to mind.”

Then the Securities & Exchange Commission stepped in and spoiled the fun. You can’t do this! You’re bust! Bankrupt companies can’t issue shares! SEC chairman Jay Clayton did not put it quite like that, instead telling CNBC that “We have let the company know that we have comments on their disclosure…in most [of these] cases they do not go forward until those comments are resolved.” The share issue was stopped.

It’s pleasing the way markets have of making fools of the experts, and as the financial crisis at Hertz passed, suddenly the business looked worth buying, and private equity wasps were round the jam jar. The winners of the auction value the business at $7.43bn, the shareholders get cash and warrants potentially worth $8 a share, and the price has rebounded to a very satisfactory $6.80. America being the land of lawyers and litigants, the next chapter after Chapter II is likely to be legal action against the board, for blundering into such a calamity in the first place.

Matt Levine, Bloomberg’s brilliant commentator, ate humble pie this week, although his original verdict was less dismissive than the FT’s. From the Pink’Un itself, now the impossible has happened, well, No FT, No Comment.

Just a Bit of a sell-off

One of the whackier free-market ideas espoused by the great F A Hayek was to tackle the idea that states should have a monopoly on issuing money. This offended his central belief that everything works better under the lash of competition, which drives innovation, keeps business (reasonably) honest and benefits the many rather than the few.

He was chided for this extension of his philosophy but now, in a funny sort of way, it seems to be coming to pass with the invention of the crypto coin. There are now said to be 9856 different versions of these things, with bitcoin being dominant (he wouldn’t like that either) as promoters have seen the chance to make what they themselves will doubtless still think of as a quick buck.

The earlier promoters of Bitcoin argued that it was both a store of value, freed from the government printing press, and a medium of exchange, two key features of a credible currency. It has not quite worked out like that. As both, Bitcoin’s value has swung violently. Even in the brief window when Elon Musk said he would take payments for Tesla cars in the coins, it was obvious that the price would be the number of coins that corresponded to the dollar price of the car, whatever that number was at the point of sale.

Now that a small cloud, no bigger than a man’s hand, marked inflation appears on the horizon, our confidence in paper money will be tested again, and monopoly governments will resort to the printing press if it seems the least painful option. It’s not hard to see why. Even inflation-wracked currencies are the most convenient medium of exchange, in ways that Bitcoin can never be, however mainstream it becomes. After all, we have had an alternative to fiat money for longer than fiat money has existed. It’s called gold.

She’s getting on with it, at least

The new broom at Aviva was busy doing more good work this week. Amanda Blanc is cleaning house “at pace” as she promised when she took over at the perennially underperforming insurance conglomerate. The latest move is to wind down its £366m UK Property Fund, which closed to redemptions as the pandemic struck, and has never reopened.

The virus trapped about £11bn in these property funds. Some have since re-opened, but many investors got a nasty surprise at the bid price. The Aviva fundholders will have to be patient. They should see 40 per cent of the current value of their investment back in July, but may have to wait for two years for the rest.

Meanwhile, the Financial Conduct Authority has launched a review of these wretched vehicles, which promise instant money back while investing in property, which as any fule kno, is a sticky business at the best of times, and can be unsaleable in a crisis. It would be tricky to ban their sale outright, as common sense suggests, but other solutions smack of square pegs in round holes.

Forcing sellers to wait locks them in to an out-of-date price, while keeping a slug of cash to cover redemptions will inevitably affect performance. Investment trusts are far more suitable for smaller investors determined to get into commercial property. Open-ended funds can close without warning, while the closed-ended trusts are always open – although you may not much like the price you are offered.

How much is Pascal Soriot worth? No, not how much has he in the bank, but how much would be a suitable reward for doing his job brilliantly well? Astra Zeneca, the company he heads, has saved thousands, perhaps millions, of lives with its Covid vaccine. With generous help from the UK taxpayer, it has produced a pharmaceutical miracle in record time. Yet this week some of the shareholders were revolting, voting against his pay packet. Talk about gratitude…

Mr Soriot would not be headed for the poor house, even if every shareholder had voted against the rem. com. proposals to add the odd couple of million to the maximum he could be paid, from £15.4m to £17.8m. It’s the principle of the thing, says the Investment Association, the fund managers’ trade body. There is a limit to the multiple of the CEO’s basic salary that is considered reasonable as a maximum bonus, and this is well past it. The members were urged to vote against the motion. Two of the IA’s larger, if less successful members, Aviva and StndrdlfAbrdn had declared their hands in opposition.

Others are not so sure. That exceptional performance justifies exceptional rewards has been a generally accepted principle in the top persons’ remuneration game. It has had the unintended consequence of producing galloping inflation in CEO salaries, as no self-respecting board wants a CEO who is not in the top quartile (by pay, and hence by ability). So it is not so much the size of the pay packet as the way the Astra directors bent the rules in his favour that has moved the faceless IA to action.

The board’s explanation is weak in the extreme, and it is hard not to conclude that the rem. com. members were simply dazzled by what Astra under Mr Soriot has achieved, and were scared of losing him to some US pharma group. This is corporately unhealthy, since it gives the CEO too much power. Making a $39bn acquisition as Astra did last December is no reason for a bonus. The work to justify that chunky investment starts now.

Even though 40 per cent of the Astra shareholders voted against his deal, the result does not oblige Mr Soriot to rush back from his Australian home and resume his duties in person. The votes are purely advisory. Yet they probably signal the beginning of the end for him at the helm. Having endured abuse from the European Union for not producing enough of a vaccine that some member states didn’t want to use, and now from the shareholders, it would be no surprise if he decided that enough was enough, and departed – taking his gleaming new bonuses with him, of course.

Full house

This being the annual meeting season, pay disputes with shareholders are everywhere. This week trades unions and the High Pay Centre have written to the big investors urging them to vote against salary packages where the gap between the CEO and the worst paid employee in a company is particularly egregious. Sadly, the writers have missed the point. Top investment managers have no motive to call for restraint, since many are beneficiaries themselves.

Still, while few disputes are on the scale of Mr Soriot’s, for sheer chutzpah the award to Mark Ridley, CEO at estate agents Savills, takes some beating. To get his maximum bonus, profits had to top £120m. The lockdown outturn was just £85m. Jolly bad luck on Mark, you might say. After all, Covid was hardly his fault, and we’re all in this together.

Except we’re not. The board awarded him £350,000, as a sort of “pluckiest loser”, claiming that the agency had increased its market share. And before you burst into tears, the committee deemed that he had made 90 per cent of his other targets, so he gets a further £500,000. No wonder the IA issued a rare “red top” notice urging a vote against. It made no difference. Four-fifths of the shares were voted in favour of the remuneration report.

Homeowners don’t do care

“Proposals on social care reform will be brought forward” said Her Maj this week, at that point probably wondering whether she had been handed a speech almost as old as she is by mistake. In a less respectful environment, Denis Skinner or his equivalent might have shouted: “No they won’t!”.

Our Dear Leader said he had a plan for social care reform when he came into office. It’s since become clear that he has no more idea of what to do than anyone else, but the mention in the Queen’s Speech has set the usual hares running. Nobody doubts that care of the elderly is both hopelessly inadequate and rapidly getting more costly, as more people live longer. Nobody doubts that any solution is ruinously expensive.

However, the mammoth in the ice block here is the politically toxic one of home ownership. Did you slave to pay off the mortgage over 25 years so you could pass on “the family home”? Or were you just lucky to have bought with borrowed money just as prices were taking off like never before? The truth is that the mortgage might have been a struggle to start with, but inflation quickly took the sting out of it, while the house just got more valuable. You did nothing.

The other truth is that the very notion of passing on the family home is a self-deceit. With a very few exceptions, the children don’t want to live in the house left to them by their parents. They don’t want to live together, and as soon as the last oldster dies, the property is sold and the proceeds divid up between the survivors.

There is no logical reason why an inherited house should be treated any differently from an inherited share portfolio or art collection, but then logic and housing policy are distant relations, here as in so many other ways. A rational approach, using the equity in the house to pay for the care of its lucky owners, would generate enough to allow the state to pick up those who had no wealth to contribute. It is also why the prime minister’s phantom plan warranted just nine words in the speech. Perhaps the nine words in the next speech might be: “Proposals on social care reform will be shelved (again)”.