issue 29 – AUGUST 2017 www.masterinvestor.co.uk
The UK's no.1 free investment publication CLIMATE CHANGE CURSE OR OPPORTUNITY? plus... Carillion's collapse THE LESSONS FOR INVESTORS Small caps, big potential THE BEST FUNDS AND TRUSTS TO GO SMALL REITs Vs buy-to-let WHICH ONE IS RIGHT FOR YOU? Frontier markets THE WILD WEST OF INVESTMENT 2 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk
Untitled-1 1 20/01/2017 14:17 WELCOME Dear Reader,
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Master Investor Ltd. Editorial Contributors Disclaimer Suite 88 Filipe R. Costa Material contained within the Master Investor Magazine and its website is for general information pur- 22 Notting Hill Gate poses only and is not intended to be relied upon by individual readers in making (or refraining from Richard Gill, CFA making) any specific investment decision. Master Investor Magazine Ltd. does not accept any liability London W11 3JE Victor Hill for any loss suffered by any user as a result of any such decision. Please note that the prices of shares, United Kingdom David Jones spreadbets and CFDs can rise and fall sharply and you may not get back the money you originally invested, particularly where these investments are leveraged. Smaller companies with a short track John Kingham record tend to be more risky than larger, well established companies. The investments and services Editorial Jim Mellon mentioned in this publication will not be suitable for all readers. You should assess the suitability of Editor Swen Lorenz Tim Price the recommendations (implicit or otherwise), investments and services mentioned in this magazine, and the related website, to your own circumstances. If you have any doubts about the suitability of Editorial Director James Faulkner Samuel Rae any investment or service, you should take appropriate professional advice. The views and recom- Creative Director Andreas Ettl Carl Shave mendations in this publication are based on information from a variety of sources. Although these are Alan Steel believed to be reliable, we cannot guarantee the accuracy or completeness of the information herein. As a matter of policy, Master Investor Magazine openly discloses that our contributors may have Nick Sudbury interests in investments and/or providers of services referred to in this publication.
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Untitled-1 1 20/01/2017 14:17 issue 29 – AUGUST 2017 www.masterinvestor.co.uk
The UK's no.1 free investment publication CONTENTS ISSUE 29 – AUGUST 2017 CLIMATE CHANGE CURSE OR OPPORTUNITY? Feature
plus... Opportunities in Focus – Climate change: Curse or Carillion's collapse 010 THE LESSONS FOR INVESTORS opportunity? Small caps, big potential THE BEST FUNDS AND TRUSTS TO GO SMALL Future-oriented investors (i.e. all of us) need to get on-trend with climate change. REITs Vs buy-to-let WHICH ONE IS RIGHT FOR YOU? This is about your grandchildren's future. And it's also about your current portfo- Frontier markets THE WILD WEST OF INVESTMENT lio, writes Victor Hill.
on the cover
020 Dividend Hunter – Important lessons from the Carillion disaster
Carillion, one of the UK's largest sup- port services contractors, is in trouble. John Kingham explains why the warn- ing signs were there to see for years in advance.
026 Funds in Focus – The small-cap funds with big potential
Nick Sudbury uncovers some of the small-cap funds and trusts best posi- ALL OTHER TOPICS tioned to deliver sustainable growth in the wake of Brexit. Mellon on the Markets – New "highs" for early investors 006 The Macro Investor – Inside the mind of a Master Investor: Jim Mellon talks Juvenescence, his favourite 030 stocks, and the future of the marijuana industry. Frontier markets: The Wild West of investment
With emerging markets no longer offering investors the easy pickings they once did, adventurous inves- tors are now turning to their more risky cousins – frontier markets. 066 Bricks & Mortar – REIT Vs buy-to-let in a post- Brexit world Each has its advantages and drawbacks 036 From Acorns to Oak Trees – Three small-cap IPOs to liven – but how are REITs and buy to let likely up a quiet summer to be affected by the uncertainties of Brexit? Carl Shave of Just Mortgage Richard Gill, CFA, looks at three interesting small-cap companies which have recently Brokers investigates. listed on the markets during these traditionally quiet summer months.
4 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk All other topics
042 Forensic Forex – Don't rely on Draghi to keep the euro 074 Read to Succeed – weak Super Investors
Author and trader Samuel Rae explains why he remains bullish on the euro in light of Richard Gill, CFA, reviews Super Inves- the recent economic upturn in the eurozone. tors, a book by Moneyweek journalist Matthew Partridge which analyses Chart Navigator – When charts go wrong – but can still be the strategies of a select handful of 046 professional investors who manage to right consistently beat the market over time. This month, veteran trader David Jones identifies some examples where the classic charting approaches didn't work – or at least didn't work straight away.
052 Death & Taxes – The generation game – Financial planning for Millennials 076 The Final Word – Bonds: a warning from history Alan Steel of Alan Steel Asset Management looks at the financial outlook for Millennials and how they can set themselves up for financial prosperity. Having spent 10 years at the bottom of the hill, central bankers look like they'd like, finally, to start marching back up. But if they mishandle things they could end up crashing the bond market, writes Tim Price.
058 How to Invest Like... Joseph Piotroski Filipe R. Costa distils the investment strategy and insights of Joseph Piotroski, the value investor behind the Piotroski F-Score, one of the most widely used formulas in value investing.
Best of the Blog 070 Markets in Focus We look back at some of the most popular pieces from the Master Investor Maga- 074 zine website during the month of July. Market data for the month of July.
4 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 29 – AUGUST 2017 | 5 BY JIM MELLON
mellon on the markets New "highs" for early investors There are three of us Mellons currently trying to get books out ahead of each other: my fa- ther is finishing one on African Bangles; my brother in law is close to completing a magnum opus on the future of media; and I am pleased to say that, albeit delayed, Juvenescence is coming out on September 25th and is currently being formatted. Christmas presents in our family this year are a no-brainer, and will be circular. At least all three of us know we will have a few sales, if only to ourselves!
On the subject of Juvenescence, I a limbo like state. They contribute you to cross a bridge to ultra-long am off to San Francisco with my old significantly to inflammatory disease life in the not too distant future. best friend Anthony Baillieu to meet and their removal, at least in part, is my new best friend Aubrey de Grey demonstrably life extending in ani- Of course, if we all live as long as I (Google him!) and my dear colleague mal models. think we can, then we will need good Greg Bailey. We are all spending the investments to sustain ourselves. day at the Buck Institute of Aging – We are also visiting another com- The gradualist approach to raising not to be rejuvenated ourselves, but pany involved in senolytics, and will the pensionable age (to 68 in 2030 in to understand more of the amazing be looking to make an investment the UK) is ridiculous. Governments science that is coming out of this in it for our venture, Juvenescence need to wake up and recognise that institution. Limited, which is jointly owned by people are going to live much, much Greg, Dec Doogan (formerly head longer, and that older workers will One of the key senolytic drugs in of drug development at Pfizer, the not only be hired (especially as the development, being trialled by world's biggest drug company) and pool of younger workers shrinks) but Unity Lifesciences, first emerged at myself. We have collectively recently will be required. the Buck. In a nutshell, senolytics invested a largish sum in a venture are among the first of several com- called Insilico Medicine, which uses Retirement ages of 80+ are going pounds that will add significantly deep neuronal networks (aka AI) to to be commonplace, as are cente- to human lifespan in the next ten enhance medical discoveries, and narians. or twenty years. While more fully we have capitalised a JV with Insilico described in the new book, these called Juvenescence AI which will It is important for people to recog- are drugs that clear so-called senes- look to discover five new chemi- nise that this trend to Juvenescence cent cells from tissues. Senescent cal entities a year for several years, will result in a whole new approach cells become more prevalent as we using AI. These are exciting times to life. No longer will we will live age, and are cells that are neither in the field of longevity, and believe the three-stage life as described in dead nor healthy, but which exist in me, staying healthy today will allow Andrew Scott and Lynda Grafton's
6 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk MELLON ON THE MARKETS
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“RETIREMENT AGES OF 80+ ARE GOING TO BE COMMONPLACE, AS ARE CENTENARIANS.”
brilliant book, the 100 Year Life, but we will go on a very different course. Born learn, earn, retire and expire will be replaced by a life that encom- passes multiple careers, continuous education, and very different types of work. In Juvenescence, we outline portfolios that can take advantage of I have railed about how this manipula- I spent a day this week with my friend those trends. The portfolios we out- tion distorts the price clearing mecha- Lorne Abony, a truly brilliant business- lined in our previous biosciences book, nism, keeps zombie companies afloat, man, and the boss of Fast Forward Cracking the Code, have smashed the contributes mightily to wealth inequal- (LON:FFWD). He was describing – over returns of all the indices since it was ity, and funnels excess returns to peo- tea and not anything stronger, I has- published in 2012 and we are hopeful ple who are the least deserving – the ten to add – the business of medical of doing the same with the guide port- idle rich. That era is coming to an end. marijuana, in which Fast Forward has folios we have included in this book. an investment. It's going to be a huge And although oil prices have been in business, and one has to think that the In the meantime, the FANGs have retreat (and will continue to be), thus big vice companies will buy up all the begun to crack, and not before time. masking the upward trajectory of infla- serious marijuana companies in due Sure, Facebook produced stellar quar- tion, inflation is nevertheless beginning course. terly results and still looks robust; but to emerge in subtle ways pretty much Amazon, that convenient machine of everywhere. That's why gold remains a Legalisation of soft drugs has to be the perpetual profitless prosperity, pro- top pick and it is acting very resiliently future, and there is no doubt that mar- duced terrible results – only a third of in the face of still fairly buoyant equity ijuana will rank as a major business the profits expected – and Alphabet markets. once legitimised. demonstrated what I have long sus- pected: that these big internet com- Regular readers may recall that for the That's coming soon, and new "highs" panies might end up like banks: reg- past three months, I've suggested buy- must be envisaged for early investors. ulated, fined and slow growing, with ing the euro (yes, the currency of the steadily declining returns on equity. evil and doomed empire!) against the Happy hunting! I would stay short of all of them and dollar, for mostly technical and valua- look elsewhere for value. You'll have tion reasons. It's risen enough for now, Jim Mellon to look pretty hard, because there isn't I feel, and I would sell the euro against much of it about. the dollar and indeed consider buying sterling against the euro. The good news for followers of Mas- Click here ter Investor (and you guys now make Japan remains my favourite stock to follow us one of the UK's most widely read market, though Sony (TYO:6758), my Jim's trades financial publications) is that the era of favourite pick, has run enough, and on Twitter negative yielding bonds appears to be among the big stocks I would buy over, and those who took our advice Hitachi (TYO:6501), which is a kind of to sell or short such bonds will have Japanese GE, instead. done very well. Bond yields in major economies have been moving up, Gilead (NASDAQ:GILD), another top About Jim albeit slowly, but I am sure there will pick at Master Investor, produced be a bond crash in the not-too-distant OK results in the latest quarter and Jim Mellon is an entrepreneur future. After all, central banks are remains outstandingly cheap. Its HCV and former fund manager. With a beginning to taper, and hence the sin- franchise is stabilising, its HIV domi- substantial international property gle biggest buyer of bonds worldwide nance continues and I love the look portfolio and interests in a variety – the governments issuing them them- of its JAK inhibitor in development of companies, Jim is a highly expe- selves – are retreating from the crazy with Galapagos (AMS:GLPG) (another rienced and successful investor. manipulation of the past few years. favourite).
8 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk 8 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk BY VICTOR HILL
opportunities in focus Climate Change: Curse or Opportunity?
Climate change is a reality. The glaciers are melting and the sea is getting hot- ter – with intractable consequences like rising sea-levels. But, that said, the cli- mate models are inexact and we don't know by how much temperatures are going to rise and how rapidly. This is largely a matter of reasoned conjecture. What we know for sure is that climate change is going to be the biggest challenge of the 21st century.
We also know that we have to sive stimulus that forced mankind anism which is subtly sensitive to address man-made global warming to abandon the dirty habits of the even fractional changes. The rise by reducing our carbon emissions, previous 200 years and to engi- of one degree has been enough to which have been rising steadily since neer a quantum leap in efficiency. start melting the Greenland glacier the beginning of the industrial revo- And some of the technologies we which has, in turn, shifted the dis- lution. This means that we have to are developing to combat climate tribution of water across the sur- re-engineer almost all the technol- change will come in handy when face of the Earth. This has already ogy on which we have been reliant we colonise Mars. Future-oriented caused the North Pole to shift east- for so long. New industries such investors need to get on-trend. This wards by about one metre since as renewable energy and GMOs in is about your grandchildren's future. 2005 – though that is the least of our farming are now imperative. And it's also about your current port- concerns. More importantly, sea lev- folio. els are rising, possibly rapidly, and Recently I have written in these pages extreme weather events are becom- about the advent of zero-emissions The bad news first… ing more common. electric cars and even aeroplanes. But how will the electricity to power Since the industrial revolution – let's The reason for the rise in temper- these machines be generated? Does say, since about 1800 – mean global ature is that there is more carbon renewable energy (from solar, wind temperatures have risen by an esti- dioxide (CO2) in the atmosphere on turbines and other sources) have a mated 1.1C (one point one degree account of mankind's burning fossil future if real prices are allowed to centigrade). Or so the scientists tell fuels, which are hydrocarbons such prevail without government sub- us. That doesn't sound like very as coal, oil derivatives and natural sidy? And what technologies are much. If I asked you to turn the tem- gas. As more CO2 is pumped into being developed to reduce carbon perature up by one degree in your the atmosphere, it contributes to the emissions in other high-carbon emit- office or your car, would you even greenhouse effect – a hypothesis ting industries such as agriculture? notice? that was first postulated by Jean-Baptiste Fourier in 1827. In 100 years' time climate change But the entire eco-system of planet This is that greenhouse gases trap may come to be seen as a mas- Earth is a fabulously balanced mech- heat in the atmosphere (CO2 is the
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“IN 100 YEARS’ TIME CLIMATE CHANGE MAY COME TO BE SEEN AS A MASSIVE STIMULUS THAT FORCED MANKIND TO ABANDON THE DIRTY HABITS OF THE PREVIOUS 200 YEARS AND TO ENGINEER A QUANTUM LEAP IN EFFICIENCY.”
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“CURRENTLY, HUMANKIND EMITS ABOUT 42 GIGATONNES OF CARBON DIOXIDE EACH YEAR. OF WHICH FIVE GIGATONNES LAST YEAR WAS PRODUCED BY THE USA – THOUGH CHINA IS NOW THE BIGGEST EMITTER BY FAR.”
most conspicuous, but there are many others which are even more extreme in their effect, like methane). Without greenhouse gases (as on the Moon), most of the heat on the surface of the Earth would dissipate quickly into space: too high a density of greenhouse gasses (like Venus) and the Earth would become an uninhabitable inferno.
Remarkably, CO2 accounts for only 0.041 percent of the Earth's atmos- phere (that is 410 parts per million or ppm), although it has increased from The Paris Accord of concentrations of around 280 ppm in A big-hitting molecule December 2015 1800 – that is a 40 percent increase. Of course, there have been times in the In 1861 John Tyndall discovered A one percent rise in temperatures long history of the Earth when there that CO2's three atoms vibrate is one thing. But the climate models was more CO2 in the atmosphere, and when hit by certain photons. Pho- which have gained orthodoxy suggest we know that there were times when tons from the sun pass straight that, if emissions of CO2 continue to there was no ice at the poles. (Fossils through the atmosphere, but increase at the current rate, the total of warmth-loving crocodiles have been when they hit the Earth's surface increase in temperatures vis-à-vis the found in Northern Canada). But sci- they bounce back as infrared 1800 baseline could be 3.6C by 2100. entists think that the current level of photons – that's heat to you and That level of increase would transform concentration is the highest for at least me. This heat is then absorbed the entire surface of the Earth. 800,000 years, and possibly for 20 mil- by CO2 molecules in the air. As a lion years. result, the more CO2 (and other In December 2015 195 nations gath- similar greenhouse gases such as ered in Paris for talks on climate Very approximately, one quarter of methane, nitrous oxide, CFCs and change agreed to take sufficient man-made emissions of CO2 and ozone) the more heat is retained action to limit the global temperature other greenhouse gases are produced in the atmosphere instead of be- increase to 2C. The Paris Accord is by transportation (cars and planes); ing released back into space. extremely vague about how much of one quarter from agriculture (espe- their existing emissions each country cially meat and dairy) and forestry; When we burn hydrocarbons like must cut, but the aspiration to limit the one quarter from electricity produc- coal, CO2 and methane are re- temperature rise implies that the large tion (particularly coal-powered); and leased. Some of this is absorbed emitters in the developed world must one quarter from industry. Currently, by plants and returned to the soil. make significant cuts in the immedi- humankind emits about 42 gigatonnes Some is absorbed by the oceans, ate future. In practice, this has already of carbon dioxide each year. Of which and some is stored in rocks. But happened. The USA is back to its 1992 five gigatonnes last year was produced these natural processes cannot level of emissions, partially thanks to by the USA – though China is now the keep up with the rate at which hu- shale gas generation. The UK is in the biggest emitter by far. mans are releasing greenhouse same ballpark. gases by burning fossil fuels. And Global warming is not uniform. Polar each molecule of CO2 that we For the global temperature increase to Regions are affected more than tem- produce can remain in the atmos- be capped at 2C it is reckoned that total perate zones; and nights are warming phere for thousands of years. global emissions should peak in 2020 faster than days. and be reduced to near zero by about
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2070. That is ambitious, but probably his French counterpart that he might land will be needed to grow biofuels not impossible. reconsider. and where extreme weather events are more common? One answer is President Trump's decision on 01 June Agriculture undoubtedly by the judicious use of to withdraw the USA from the Paris genetically modified seeds (GMOs). Accord is of more symbolic than prac- In the UK spring is beginning nearly Biologists are already developing tical significance. It's more about the two weeks earlier than it did just 50 crops that can capture more of the message it sends to China and India years ago; and autumn one week later. sun's energy, make their own nitrogen and other large, rapidly growing econ- Great news for British farmers and the fertilizer and resist drought, flood, salt, omies. That said, China has shown a vineyard managers of Kent and Sus- pests and diseases. very serious attitude towards climate sex. Moreover, higher concentrations change and has some of the most of CO2 are making the planet greener, Carbon capture and ambitious plans to switch to renewa- particularly in drier areas because storage bles of any country. (Assisted, cynics plants and trees thrive on CO2. Climate will add, by a US$100 billion Green Cli- sceptics argue (see below) that this is Based on concrete commitments for mate Fund which developed nations good news. Supporters of the standard emissions reductions it is unlikely that are supposed to make available to model argue against it. They say that, we shall be able globally to reduce car- developing ones.) in Australia for example, extra vegeta- bon emissions to zero by 2070. That tion is reckoned to be sucking up water means that we shall have to suck CO2 Mr Trump's supporters might reflect and thus reducing river flow by up to out of the atmosphere in huge quan- that, according to the Environment one thirdi. tities in order to not to exceed the 2C Defence Fund, solar and wind power limit. To be more precise we shall need generators are creating 112 jobs in The real culprit in agribusiness is meat to suck out 600 gigatonnes of CO2 the US for every one new coal worker. production. We are reliably informed out of the sky before the end of this In any case, California, which is the that the best way to reduce our carbon century. world's sixth largest economy in its footprint is to give up meat – especially own right, has declared for the Paris beef since cattle emit huge quantities The best way to achieve this is to grow Accord. China and the EU immediately of methane through their rear ends plants which are then burned to pro- swore to cooperate more closely on (perfectly naturally, of course). duce energy. Such plants suck CO2 out climate change. And the US cannot for- of the atmosphere as they grow; when mally leave the Paris framework before The problem will be: how to feed a they are burned the CO2 released is 05 November 2020 – by which time Mr growing global population in a world captured and stored underground Trump himself may be history. More- where much fertile land has been lost before it can escape. over, in July, Mr Trump recently told to rising oceans, where vast tracts of Another idea is to fertilise the oceans so as to produce blooms of algae which “IF WE CANNOT FIND AN EFFICIENT WAY would absorb CO2 from the atmos- phere and then drag it to the bottom TO REMOVE CO2 FROM THE ATMOSPHERE of the ocean when they die. But what ON A GARGANTUAN SCALE WE ARE JUST about the danger to marine life?! If we GOING TO HAVE TO ADAPT TO GLOBAL cannot find an efficient way to remove CO2 from the atmosphere on a gar- WARMING.” gantuan scale we are just going to have to adapt to global warming.
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Alternative perspectives is not man-made. They point out that bly more dangerous, both economically the Earth's surface temperature has and ecologically, than climate change So far what I have sketched out is basi- obviously fluctuated very widely over itself. This is not the same as arguing that cally the standard model of climate geological time – long before human climate has not changed or that mankind change theory which is held almost beings were around. And it is true that is not partly responsible. That the climate universally by academic scientists and the last great ice age came to an end has changed because of man-made car- green activists. There are other views. in Europe and elsewhere, with massive bon dioxide, I fully accept. What I do not glaciers that covered much of Britain accept is that the change is or will be First there are those who deny that cli- melted completely roughly thirteen damaging, or that current policy would mate change is happening at all. They thousand years ago – all this without prevent it. claim it is a "hoax" – a conspiracy ped- human help. (Though Stone Age trog- dled by leftists and loonies who seek lodytes, as far as we know, did not go Lord Ridley thinks that carbon dioxide to undermine the capitalist economy on protest marches against climate emissions are doing more good than based on hydrocarbons. These people change.) harm, largely because of the CO2 fertil- are happy to deny the evidence. If you isation effect, which boosts crop yields, point out that the glaciers are percep- Some of these sceptics blame sun spot and contrary to the received wisdom, is tibly melting – we can measure and activity as the main driver of climate actually helping forestation. record this – they will point out that change. Again, mainstream science some glaciers in New Zealand and Nor- emphasises a correlation between In support of this view Indur M way are actually getting bigger – which CO2 concentrations in the atmosphere Goklany, an eminent climate scientist is true. If you adduce that Arctic sea ice and global temperature: the increase of Indian heritage who works for the is retreating – the North West passage in CO2 since 1800 is almost certainly US Department of the Interior, wrote is now navigable to shipping – they will due to humans' burning fossil fuel. a paper called Carbon dioxide: the good tell you that there was record amount news in 2015. Mr Goklany argues that of Arctic sea ice last year, or the year Third, there is a middle position which the assessments used by policy mak- before. (Of course, it depends when has been articulated by scientists such ers have overestimated the effects of you draw the baseline). as Matt (Lord) Ridley and others. Lord global warming, underestimated the Ridley has argued for a "lukewarm" direct benefits of carbon dioxide, and They are adept at pointing out anoma- view of climate change which is that underestimated man's capacity to lies in the temperature data and it does it is happening but that it is not neces- adapt to it. unfortunately seem true that some sarily all bad. He is adamantly opposed over-zealous adherents of the stand- to state-subsidised renewable energy Lord Ridley gave the 2016 Global ard model have been guilty of tam- which he considers damaging to the Warming Policy Foundation annual pering with temperature data. These economy and the environment. In a lecture on Global warming versus climate change deniers are not taken report for the Global Warming Policy global greening, in which he argued seriously in the scientific community. Foundation in 2013 he wrote: that there was now considerable sat- ellite evidence to support the global Second, there are those who argue I have come to the conclusion that cur- greening hypothesis. Inevitably, Lord that climate change is happening but it rent energy and climate policy is proba- Ridley's views on climate change have been criticised by Friends of the Earth because he has connections to the coal industry – he is a landowner who, unlike most of us, actually owns a (dis- used) coal mine! (He can't help being a Viscount who has inherited estates in Northumberland.) That does not detract, in my view, from his status as a scientific thinker.
I might add that there is a school of thought emerging that climate change is only one problem amongst many. Some see the problem of plastic in the oceans and the deleterious con- sequences for marine life as an even greater problem; or the calamitous decline in biodiversity. I know I'm courting controversy here by so much as suggesting there are different views which should be heard. As a placard at a recent anti-Trump protest asserted: Not even Hitler questioned climate change!
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“THE PARIS ACCORD WAS PREDICATED ON A MODEL WHICH STATED THAT, IF THERE WERE NO FURTHER EFFORTS TO REDUCE GREENHOUSE GAS EMISSIONS, THEN THE WORLD WILL BE 3.6C HOTTER IN 2100 THAN IT WAS IN 1800.”
Climatic modelling reduce greenhouse gas emissions, as February this year America's Na- then the world will be 3.6C hotter in tional Oceanic and Atmospheric The basic science of global warm- 2100 than it was in 1800. Association (NOAA) was accused of ing is relatively uncontroversial: the manipulating data by a self-styled Earth is warming because of hu- These models, while they are re- "whistle-blower"ii. mans' burning hydrocarbons. But by garded as sacred by the climate co- how much and how rapidly? gnoscenti are subject to criticism. Estimates of sea level rises are par- The systems in play are non-linear, ticularly controversial since some To answer these questions, the sci- multi-factorial and highly complex, models ignore the likely evaporation entific establishment relies on cli- like the weather itself. The notion of much glacier melt water into the mate models – sophisticated com- of "CO2 equivalence" – that is, how atmosphere. puter programmes into which they much more warming is attributed input assumptions about future to a kilogram of methane relative Just to be clear, I am not a climate carbon emissions going forward up to a kilogram of CO2 – is contro- change denier: but I know enough to the end of the century. The other versial. Further, the temperature about financial risk models to be critical input is the temperature data data the scientists use has been aware that the output of all so-called recorded over the last 50 years or questioned. In November 2009 "black boxes" should always be re- so. What comes out of the model (just before the Copenhagen Cli- garded warily. Both financial risk and is a single number – an estimate of mate Summit) the University of East climate models draw heavily on prob- the temperature increase at a future Anglia Climatic Research Unit was ability distributions at assumed levels date. The Paris Accord was predi- accused of Climategate – of adulter- of confidence – which carry methodo- cated on a model which stated that, ating historic temperature data for logical problemsiii. if there were no further efforts to its own purposes. And as recently
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Adaptation strategies
There are an increasing number of influential thinkers who argue that we can take measures not only to survive but to thrive in a warmer world. First, we should invest more in sea defences. Second, we need to plant more trees on high ground and build bigger storm drains to manage increased rainfall. Third, we need to manage our fresh water resources more carefully. All of these things are possible given judicious management and the right technology.
“BOTH CHINA AND INDIA ARE INVESTING HEAVILY IN RENEWABLES.”
A UK flood contractor, the services of which are in demand across the pond…
Outgoing New York City Mayor Michael Bloomberg announced a $20 billion plan in June 2013 to build new levees and sea walls in New York City. Large parts of New York and the surround- ing metropolitan area were still recovering from the damage wrought by Hurricane Sandy in Renewables station every weekvi. But it seems that late 2012, which caused dam- both China and India are investing iv age estimated at US$19 billion . Last year, only about 10 percent of heavily in renewables. Indeed, China Amongst the beneficiaries of this global electricity production came now boasts the global market leaders programme was a little known from renewables – principally solar for both photovoltaic panel production Worcestershire-based company panels, wind turbines, geothermal and and wind turbines (see panels). founded in 2007 called UK Flood other related technologies. But that v Barriers Ltd (private). The com- is growing fast – about 55 percent of For the ecologically inclined, switch- pany has already rolled out ma- new capacity was in renewables. Mean- ing off electrical devices at home and jor flood defence installations while, overall emissions attributed to switching to low-energy bulbs, while across the UK and has interna- electricity production seem to have worthy, will have minimal environmen- tional ambitions. For a major stabilised. Despite Mr Trump's best tal impact, unless you are getting your listed UK construction company efforts, coal-powered electricity gener- electricity from renewable sources. developing expertise in flood ation is in decline, not least in the US. Unfortunately, however, as I explained defences, consider Kier Group in a recent article referring to the work PLC (LON:KIE). The company has In recent years there was an argument of the eminent climate change scien- already delivered a £30 million by climate sceptics that cutting back on tist the late Professor David MacKay, flood defence programme for the the use of hydrocarbons in the West the idea that we could sustain all our city of Exeter. was pointless since China and India needs by switching to renewables is were opening a new coal-fired power delusional.
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The top solar panel Canadian Solar (NASDAQ:CSIQ). perovskite cellsviii. Trina Solar, Wuxi manufacturersvii Shares on the Ontario-based solar Suntech and Oxford Photovoltaics panel manufacturer jumped 24.3% (private) are already working on this. Trina Solar (NYSE:TRA (ADRs) & in June, as its prospects surged. Q1 FRA:TR3) is a Chinese company, 2017 results were not as poor as Other major players in this space located in the province of Jiangsu, analysts expected. Revenue rose to watch include JA Solar Hold- with numerous operations in the slightly to CAD677.0 million, and on ings (FRA:YI2A), Hanwha Q Cells USA. Founded in 1997 the company an adjusted basis net earnings were Co. (NASDAQ:HQCL (ADRs)), develops and produces solar tech- CA$6.0 million, or $0.10 per share. First Solar Inc. (NASDAQ:FSLR), nology. In the past few years Trina Short-term news flow is positive, but Yingli Green Energy Holding Co. Solar was listed repeatedly on For- Canadian Solar's scale has not gen- (NYSE:YGE (ADRs)) and Shunfeng tune's Top 100 of the world's fastest erated consistent profits. The com- International Clean Energy Ltd growing companies. Trina Solar has pany is breaking even in a high de- (HKG:1165) and ReneSola Ltd developed a vertically integrated mand environment, and its CAD2.4 (NYSE:SOL). Note the profusion of supply chain, from the production billion debt burden is a cause for Chinese participants. of ingots, wafers and PV cells to the concern. assembly of high quality modules. Total SA (EPA:FP) the French oil ma- In late June it was announced that Jinko Solar Holdings Co. (NYSE:JKS). jor, boasted that it had become the Trina was supplying India's second On 20 July Jinko announced a pro- world's second-ranked solar energy largest solar power facility at Kur- gramme of collaboration with operator as a result of its acquisition nool, Tamil Nadu. The company's Greatcell Solar (ASX:GSL) of Aus- of a 60 percent stake in SunPower share price has done well over the tralia and the Nanyang Technical Corporation (NASDAQ:SPWR) of last year but is only now back to University (Singapore) to develop the USA for US$1.38 billion in April mid-2013 levels. a new generation of PV cells called 2011.
Cutting our carbon footprints
According to a recent DEFRA study published in Environmental Research Letters we have to do more than recy- cle our waste, turn off appliances and use low-energy light bulbsix. It argued that the public should be advised to abjure air travel, live car-free (saving about 2.4 tonnes of CO2 per car per year), eat a plant-based diet (a saving of 0.8 tonnes per person) and have smaller families. David MacKay esti- mated in 2009 that if we subscribe to the doctrine of contraction and convergence (the idea that eventually all countries should emit the same amount of CO2 per person per year) the UK will have to cut average emis- hold already uses much less electric- emissions.) But the rising cost of elec- sions per person from 11-12 tonnes ity than ten years ago because appli- tricity will act as a drag on growth. The per year in 1990 by 85 percent to 1-2 ances are more efficient and houses UK already has one of the highest elec- tonnes by 2050x. are better insulated. Electrification will tricity tariffs in Europe and this is a con- help because petrol engine cars are siderable competitive disadvantage, I know people that aspire to this – but about 25-30 percent efficient while especially in energy-intense industries they are a minority. Most of us want to electric cars are about 85-95 percent such as steel production. go on more holidays and would find efficient. But beware the potential life challenging without a car. Person- Jevons Paradox whereby savings in effi- As for family sizes, fertility rates have ally, I don't think this target is realistic ciency are eroded by more waste and already fallen in Europe and North unless we all live in yurts, go around on increased demand unless checked by America – the baby boom is currently bicycles and become vegans. Such a the price mechanism. not here but in Africa. Ultimately, global programme may be a hard sell for the carbon emissions will only begin to fall hapless politicians. Rising electricity prices will reduce when the global population peaks, and demand. (I wonder if any of Mrs May's then hopefully begins to fall towards One mitigation effect will be increased advisers explained that capping elec- the end of this century. Many believe efficiency – the average UK house- tricity prices would increase carbon that that will be too late.
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The catastrophists Some doomsayers foresee the loss who probably has the highest IQ of the Gulf Stream – which would of almost anybody alive today, also The most extreme supporters of actually make Britain colder – and voted for Jeremy Corbyn. the standard theory argue that we the collapse of the Asian and African are in mortal danger of imminent monsoon cycles. climatic catastrophe. New Scientist tells us that three massive glaciers Again, if the permafrost of Siberia are in rapid retreat. In Antarctica the and Canada thaw, huge reserves of Thwaites glacier is melting fast. In sunken methane – the most pow- Greenland both the Jakobshavn and erful greenhouse gas – could be Zacharie Isstrom glaciers are in peril. released into the atmosphere, thus Scientists tell us that if these three accelerating global warming. glaciers alone melted completely then they would release enough wa- Recently, one of the world's most ter to raise global mean sea levels prestigious scientists, Cambridge's by two metres. That would affect an Professor Stephen Hawking, joined estimated US$882 billion of property the catastrophist bandwagon. He in the USA alone. thinks that, as a result of President Trump's abandonment of the Paris With less sea ice in the Arctic Ocean, Accord, climate change could get the sea is likely to absorb more heat, out of control to the extent that the which in turn will inhibit ice forma- Earth could resemble Venus. It is not tion in winter. This is what scientists clear over exactly what time frame call a negative feedback loop. More- Professor Hawking thinks this might over, the amount of sea ice in Po- happen. I take comfort from the lar Regions drives ocean currents. fact that the illustrious Professor,
The top wind turbine 2015. Be aware that the stock has pany to catch up and create a big manufacturersxi lost about 18 percent of its value four group of dominant manufactur- over the last twelve months and hit ers. So far, however, the market has Vestas Wind Systems A/S a 21-month low in early July. That not cheered on the merger. On 19 (CPH:VWS). Some 8.7GW of Vestas said, wind power is one of its most July the company announced it was turbines were installed in 2016. That rapidly growing divisions. contracted to build a 23MW wind was 16 percent of all onshore wind park on the island of Tenerife for installations last year driven by a big Xinjiang Goldwind Science & Tech Canary Islands-based energy prod- increase in business in the US. The Co Ltd (SHE:002202 & HGK:2208). ucts distributor DISAxiii. Danish wind turbine manufacturer Goldwind rolled out 6.4GW of new continues to pursue a global strat- capacity in 2016, virtually all of which Enercon GMBH (private) is the mar- egy with projects commissioned in was in its home market of China, ket leader in the German domestic 35 countries, more than any other where Goldwind further extended its market and installed one half of all turbine maker. In late June CEO An- market share. Overall installations in new German wind turbine capacity ders Runevad announced plans to China were 22.8GW last year, down in 2016. expand in the Middle East and the 21 percent from the record 29GW in Asia-Pacific regionxii. The Company is 2015. The shares have roughly flat- Nordex Group (FRA:NDX1) ranked profitable. Its shares are up about 28 lined since early 2016 and are well in sixth place last year, after its percent year-to-date at time of writ- down on their 2015 peak. merger with Acciona Windpower. ing, trading at a multiple of about This German manufacturer devel- 16.5. Siemens Gamesa Renewable ops, manufactures and distributes Energy SA (BME:GAM). Spain's wind power systems. Once again, General Electric (NYSE:GE). GE, the Gamesa completed the merger with the share price performance has huge US conglomerate, was the sec- Siemens Wind (the wind turbine op- been disappointing – shares are ond placed wind turbine generator eration of Siemens AG (FRA:SIE)) down by about 50 percent over the last year with 6.5GW of new capacity in March 2017. Last year Gamesa last twelve months. rolled out, 0.6GW more than in 2015. came in fourth place for onshore While GE narrowly lost its traditional turbine installations. Almost one Other major global players include lead in the US market for newly in three of Gamesa's new wind Guodian Changyuan Electric commissioned turbines to Vestas, turbines were installed in India. Power Co. Ltd (SHE:000966) of it increased its global presence to The merger of Siemens Wind and China and CS Wind Corporation 21 countries in 2016, up from 14 in Gamesa will allow the joint com- (KRX:112610) of South Korea.
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Action
I explained in the March edition of the MI magazine why you should only invest in oil majors which are diversi- fying into renewables. Most of their reserves of hydrocarbons going for- ward will have to remain in the ground. That represents a massive disinvest- ment out of fossil fuels.
That said, renewables, of which only solar and wind power are in wide- spread operation, remain almost entirely dependent on government Consider including a couple of the top renewables. Rather, we are likely to subsidy regimes which are fickle. The solar producers in the long-term por- see a huge increase in nuclear power share prices of the PV panel producers tion of your diversified equity portfolio generation over the next three to five and the major wind turbine manufac- on a very selective basis. In addition, decades for which currently only the turers have, overall, done poorly over you might add at least one wind tur- French are well positioned to meet. the last two years. We can be sure, bine manufacturer – especially if you That is one reason why President however, that the producers of solar are underweight on China (see panels). Macron has already set a target date panels and wind turbines – the hard- You may also wish to add at least one of 2040 for the total electrification of ware of renewable energy – will con- heavyweight civil engineering contrac- vehicular transport in his country. I tinue to enjoy increasing demand for tor which understands state-of-the-art wrote about nuclear power technology the foreseeable future. flood defences. I am convinced that in the October 2016 edition of the MI this is going to become huge in the UK magazine. EDF (EPA:EDF) is still, far and elsewhere. and away, the global leader in nuclear power technology. “AGRICULTURE Agriculture will occupy a renewed cen- WILL OCCUPY trality in the global economy as climate change impends – as I argued in the About Victor A RENEWED January edition of the MI magazine. CENTRALITY One leader in GMO technology I men- Victor is a financial economist, tioned then is Bayer AG (ETR:BAYN). consultant, trainer and writer, IN THE GLOBAL with extensive experience in com- ECONOMY AS Regrettably, there is no practicable mercial and investment banking way that the massive increase in elec- and fund management. His career CLIMATE CHANGE tricity generation capacity that we will includes stints at JP Morgan, Ar- IMPENDS.” require for the migration of vehicular gyll Investment Management and transport from hydrocarbons to elec- World Bank IFC. tric will be furnished entirely from
i See New Scientist, 24 June 2017, article by Michael Le Page, page 28. ii See: http://www.washingtontimes.com/news/2017/feb/5/climate-change-whistleblower- alleges-noaa-manipula iii For anyone interested in this topic I strongly recommend the work of Nassim Nicholas Taleb e.g. The Black Swan, Penguin, 2008. iv See: https://www.theverge.com/2013/6/11/4420408/mayor-bloomberg-20b-plan-nyc-defenses-climate- change v See: http://www.infrastructure-intelligence.com/article/may-2017/making-waves-flood-defence-here- and-across-pond vi See What about China? By Alastair Sawday, 2008. vii According to https://www.pv-tech.org/editors-blog/top-10-solar-module-manufacturers-in-2015 viii See: https://www.pv-tech.org/news/jinkosolar-starts-perovskite-cell-rd-collaboration ix Reported in the Daily Telegraph, page 1, 12 July 2017. x Renewable Energy without the Hot Air, David JC MacKay, UIT Cambridge, 2009. xi See: https://about.bnef.com/blog/vestas-reclaims-top-spot-annual-ranking-wind-turbine-makers xii See: http://www.japantimes.co.jp/news/2017/06/23/business/worlds-biggest-wind-turbine-maker- vestas-sets-sights-asia-pacific-middle-east-markets/#.WW9xBOmQzIU xiii See: https://renewablesnow.com/news/siemens-gamesa-secures-23-mw-wind-epc-deal-in- tenerife-576573
18 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 29 – AUGUST 2017 | 19 BY JOHN KINGHAM
Dividend Hunter Important lessons from the Carillion disaster
Following its demerger from Tarmac Group in 1999, Carillion has given its shareholders fantastic returns year after year. Perhaps the best example of this is its dividend, which grew every single year, going from 2.7p in 1999 to 18.4p in 2016. That's equivalent to a growth rate of 12% per year, every year, for 17 years.
But now that growth has come to These tasks are often bundled are likely to negotiate hard and an end, and that's putting it mildly. together into a large, long-term con- go over the details with a fine Following a recent negative trading tract between the client and Caril- tooth comb. This can also crush update, the company suspended lion. For example, Carillion is a 50% profit margins and can lead to its dividend and the share price col- partner in a joint venture to design, clients refusing to pay, if the lapsed by more than 70% in one day. build and manage new army bases terms of the contract are not So what went wrong? How does a over the next 35 years, in order to sufficiently met. seemingly successful company go support the return of almost 19,000 from hero to zero in such a dramatic overseas UK troops. 3. Expenses relating to the con- and rapid fashion and, perhaps tract lie in the future and are more importantly, how can we avoid This dependence upon large, long- therefore uncertain. If expenses owning companies like Carillion just term contracts is typical of busi- increase beyond expectations before they blow up? nesses in the support services sec- the service provider can quickly tor, but there are many problems find itself locked into a loss-mak- Let's start by looking at the compa- with this model. For example: ing contract for many years. ny's business model. 1. These contracts can be worth a 4. Competitors may indulge in A risky business chasing large, lot of money, so competition for "suicide bidding", where they long-term contracts them is fierce. This can reduce charge the client less than it will profit margins to wafer thin cost to fulfil the contract. This Carillion is involved in financing, levels. can help them win business and designing, building and operating keep their workforce busy, but it large pieces of infrastructure such as 2. The contract represents a large can reduce margins across the buildings, roads and railways. expense for the client, so they whole sector, especially with a
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“THE LATEST TRADING UPDATE ANNOUNCED CONTRACT WRITEDOWNS OF £845M, WHICH IS A HUGE SUM FOR A COMPANY THAT ONLY MAKES POST- TAX PROFITS OF ABOUT £150M PER YEAR.”
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client like the government which often awards contracts to the low- est bidder.
As a result, construction and sup- port service companies often have low profit margins and are prone to contract writedowns when things go wrong (i.e. the expected income from a contract is suddenly reduced, either because of increasing expenses or the client's reluctance to pay up).
In Carillion's case, the latest trading update announced contract write- downs of £845m, which is a huge sum for a company that only makes post- tax profits of about £150m per year.
However, in my opinion the lesson here is not to avoid construction or support service companies. Instead, I would say the first lesson is to treat “HERE’S MY TAKE ON LARGE them with care. Be aware that con- tracts can go bad, and when they do it ACQUISITIONS AND ACQUISITION SPREES: can be extremely costly. Here's a gen- I DON’T LIKE THEM.” eral rule of thumb I like to follow:
INVESTMENT RULE: Carillion's profitability over the last Massive debts used to finance Be extra careful with decade was just 7%, so it's definitely massive acquisitions companies that depend on below average. It's also below average large, long-term contracts relative to other construction and sup- Between 2004 and 2011, the company port service sector stocks, where the went on a massive acquisition spree. In order to reduce risk, what I look average profitability is 8.4%. The idea was to expand away from the for in construction and support ser- UK by acquiring companies with over- vices companies is: 1) Good profita- Here's my rule for profitability: seas operations, and to expand away bility, which shows that the company from construction by acquiring sup- isn't forced to compete primarily on INVESTMENT RULE: Don't port services businesses. price; 2) A robust balance sheet, which invest in a company if its makes it easier to deal with major con- ten-year profitability is In both respects the acquisition spree tract writedowns when they do occur. less than 7% was successful, and during that period the company spent more than £1.3 So how does Carillion stack up on these Carillion would have made it past that billion acquiring other companies, two primary requirements of good rule, but only by the skin of its teeth. including Mowlem (construction), profitability and a bombproof balance Planned Maintenance Group (support sheet? Let's start with profitability. Low profitability, combined with the services) and Eaga (energy efficiency company's high risk business model, products). Low profitability was a sign of was a good sign that investors should weakness have been super-cautious about Here's my take on large acquisitions investing in this company. and acquisition sprees: I don't like I measure profitability using post-tax them. They can create all sorts of (net) return on capital employed, aver- Even so, Carillion does just about problems if the acquirer attempts to aged over the last ten years. Among scrape past my profitability test, so integrate large numbers of new peo- dividend-paying FTSE All-Share com- that test alone would not have been ple and processes into its existing panies, the average profitability using enough to stop me from investing in business. They can de-stabilise an oth- that approach is about 10%. the company. Clearly some additional erwise steady core business as man- checks are required if we're to avoid agement forget the old core business That's an easy baseline to remember: this sort of value trap in future. and instead chase dreams of rapid If a company's average net return on acquisition-driven growth. Finally, they capital employed over the last decade So what about Carillion's balance have a nasty habit of requiring lots of is less than 10% then it's below aver- sheet; was it as strong as it should debt. age. If it's above 10% then it's above have been? The short answer is no. The average. longer answer is more interesting. Here's another rule that I like to use:
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“HGCAPITAL HAS A TRACK RECORD OF DELIVERING SIGNIFICANT UPLIFTS TO THE CARRYING VALUE WHEN IT SELLS ITS HOLDINGS.”
INVESTMENT RULE: Don't that Carillion was a relatively recent million in 2005 to £813 million in 2012. invest in a company if it conglomeration of previously separate At the same time, debt interest pay- spent more on acquisitions business would have been yet another ments went from £5m in 2005 to more over the last decade than warning flag. than £30m. it made in profits If I'd been looking to invest in Carillion In 2011 this would have ruled Carillion at any point in the last couple of years, “FOLLOWING ITS out as an investment. At that time it had I would have been extremely cautious spent more than £1.3 billion on acqui- at this point of the analysis because of ACQUISITION SPREE sitions during a decade where it only its risky business model, its low profita- CARILLION NEVER made £750 million in profits. That's a bility and its highly acquisitive past. But REALLY MANAGED TO dangerously large ratio of acquisitions so far I haven't seen a knock-out blow; to earnings. something that would have made me REDUCE ITS DEBTS BY say "no way" to the idea of investing MUCH.” However, by 2017 that particular in this company. But that's about to alarm bell would have stopped ring- change. ing because the company has become I'll put that into context. In 2012 the far less acquisitive in recent years. So A very important point is that a large company's earnings (post-tax profits) this rule would have also failed to rule chunk of the £1.3 billion acquisition over the previous five years had aver- Carillion out as an investment in recent spree was funded with debt. The com- aged about £135 million. That means months and years. However, the fact pany's total borrowings went from £90 its £813 million debt pile was more
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than six-times its recent average earn- ings. In contrast, the average debt/ earnings ratio for dividend-paying FTSE All-Share stocks is about four.
So despite being a company with a risky cyclical business model and below average profitability, its debts were above average. That is not a bril- liant combination.
Of course, that was in 2012, but follow- ing its acquisition spree Carillion never really managed to reduce its debts by much. By the time its 2016 results were published in March 2017, Carillion's borrowings were £689 million com- pared to five-year average earnings of £140 million. This gives the company a debt/earnings ratio of 4.9 today. That's the sort of ratio I might just about accept from a defensive company like Unilever, but I think it's too much for a cyclical sector stock. Here are my two rules for the debt/earnings ratio:
INVESTMENT RULE: Only invest in a cyclical sector stock if its debt/earnings “THIS PENSION DEFICIT IS UNLIKELY ratio is below 4.0 TO EVER BE ELIMINATED WITHOUT A INVESTMENT RULE: Only MASSIVE RIGHTS ISSUE.” invest in a defensive sector stock if its debt/ earnings ratio is below 5.0
In fact, given the high risk, low profita- bility nature of Carillion, I would prob- ably insist on an even lower debt/earn- ings ratio. Perhaps a limit of 3.0 would be more appropriate than 4.0. To get to that level, Carillion would have to reduce its present borrowings by more than £260 million.
If these debts were Carillion's only financial problem then I would say that the market's reaction to the recent negative trading statement was over- done. I would say that the suspended dividend was probably a good thing and that the dividend cash (totalling around £80 million a year) should instead be used to reduce debts. Within three or four years the debt pile could be brought down to more sen- sible levels and the dividend could be reinstated.
But excessive borrowings are not the only problem with Carillion's balance sheet. In fact, there's another problem which I think is far more serious.
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A massive pension scheme that a £76 million deficit if you're making Yes, management managed to stay threatens to swallow the whole annual payments of £30 million, is it? one step ahead of its pension demon company for almost 20 years, but at the first I'm sure that in 2006, Carillion's man- minor stumble the company has fallen When Carillion split from Tarmac in agement didn't think that between into its grasp. 1999 it took with it several defined 2006 and 2016 they would pay almost benefit pension schemes related to £450 million into the pension fund, A few years ago, following an almost current and past employees. only to see the deficit grow to more disastrous investment in Balfour than £800 million. Beatty (which ran into serious prob- In Carillion's annual report for 2000, lems largely because of its enormous the total liabilities of these schemes Carillion only earns about £150 mil- defined benefit pension), I started came to £430 million. At the time the lion per year (in a good year), so it using this pension-related rule: company's average post-tax profits has already paid the equivalent of were around £32 million, so pension three years of earnings into its pen- INVESTMENT RULE: Don't liabilities were more than 13-times sion schemes over the last decade, invest in a company if its earnings. That's a massive pension and yet it still has the equivalent of at pension/earnings ratio is liability, but at the time it wasn't a least another five years of earnings to higher than ten problem because those liabilities were go. In fact, the company has already easily covered by pension assets of committed to pay around £50 million That rule isn't a silver bullet, but it £557 million (as long as pension assets a year into the pension until at least should help steer you away from com- exceed pension liabilities, everyone is 2029, if required (which it probably panies with potentially dangerous pen- usually happy). will be). sion liabilities.
By 2005, those pension liabilities had In my opinion, this pension deficit is A ticking time bomb, if ever there more than doubled to £964 million. unlikely to ever be eliminated without was one That was partly because of additional a massive rights issue. I just cannot pension liabilities that came with see Carillion coming up with the nec- In summary then, Carillion ran into acquisitions, partly because retirees essary amount of cash solely from its problems because it was an unhealthy were living longer and partly because business operations. Perhaps the best cocktail of high risk factors, including 1) interest rates had fallen (lower inter- option would be a massive rights issue a dependence upon large contracts; 2) est rates increase the present value combined with handing the pension weak profitability; 3) a history of large of future pension liabilities). However, schemes off to an insurance company. acquisitions; 4) high debts and 5) a earnings had barely changed and so But that's not for me to say. massive pension liability. the pension/earnings ratio had grown to 28. This is way, way, way higher than What I will say is that this massive pen- If you can avoid companies with those most other companies. But still, there sion liability was a clear sign that Caril- features then you could end up sav- was little urgency, despite the pension lion was a very, very risky investment, ing yourself a few sleepless nights and surplus turning to a net deficit of £48 right from the very beginning in 1999. perhaps a lot of money as well. million.
By 2006, the deficit had grown to £76 million and management had agreed to begin making regular deficit reduc- tion payments of around £30 million per year until the scheme was in sur- plus once again. I'm sure that seemed quite reasonable at the time. After all, it isn't going to take long to eliminate
About John
John Kingham is the managing editor of UK Value Investor, the investment newsletter for defensive value investors which he began publishing in 2011. With a professional background in insurance software analysis, John's approach to high yield, low risk investing is based on the Benjamin Graham tradition of being systematic and fact- based, rather than speculative.
John is also the author of The Defensive Value Investor: A Complete Step-By-Step Guide to Building a High Yield, Low Risk Share Portfolio.
His website can be found at: www.ukvalueinvestor.com.
24 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 29 – AUGUST 2017 | 25 BY NICK SUDBURY
funds in focus The small-cap funds with big potential
Last year's Brexit referendum has created a huge amount of uncertainty for British busi- nesses and the election of a minority Conservative government has muddied the waters even further. The lack of political leadership has made it difficult to assess the long-term economic impact of our departure from the EU on domestically focused companies, many of which tend to be at the small-cap end of the spectrum.
The fall in the value of sterling since are susceptible to competition are formance, 11 of the 19 constituents the referendum has provided a ma- extremely vulnerable and could fail are available on double-digit dis- jor boost to the large caps in the FTSE altogether. counts. 100 index, which on average derive 70% to 80% of their revenues from The quality of some of these stocks The investment trust analysts at overseas. UK smaller companies is evident from the fact that a few Winterflood report that the sector have received less of an advantage of them appear amongst the larg- has a weighted average discount to as 60% of their business originates in est holdings of several of the most NAV of 11%, whereas the less do- this country, but if the economic out- highly rated funds. These include the mestically sensitive trusts in the UK look improves and the pound recov- high growth, premium drinks maker All Companies and UK Equity Income ers it would be the small caps that Fever-Tree; Dechra Pharmaceuticals, sectors are trading on tighter aver- would be the main beneficiaries. which makes products for vets; and age discounts of 5.8% and 2.7% re- NMC Health, a private sector health- spectively. When choosing a small cap fund it is care operator in the UAE. essential to make sure that the man- If the UK economy turns out to be ager has excellent stock selection According to FE Trustnet, the UK more resilient than many people skills, as the range of possible invest- Smaller Companies investment trust expect, or the Brexit negotiations ment outcomes is enormous. Many sector has generated average one, go well, it is likely that many of the of these businesses operate in niche three and five-year share price total small-cap trusts would generate markets and are hugely profitable, returns of 35.5%, 51.5% and 139.8% strong returns and be positively re- whereas those with high debt or that respectively. Despite this strong per- rated.
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“THE QUALITY OF SOME OF THESE STOCKS IS EVIDENT FROM THE FACT THAT A FEW OF THEM APPEAR AMONGST THE LARGEST HOLDINGS OF SEVERAL OF THE MOST HIGHLY RATED FUNDS.”
Sustainable growth
Winterflood recommends Black- Rock Smaller Companies (LON:BRSC), a £567m investment trust that has been managed by Mike Prentis since September 2002. It has an impressive long-term record and has outperformed its benchmark in each of the last 14 financial years.
Prentis has put together a diversified approach with the key themes in- portfolio of 166 holdings with the 10 cluding: advantaged cash flow com- largest accounting for 20% of the as- pounders, growth businesses with sets. Up to half of the fund can be highly predictable revenues, and invested in AIM-listed stocks with the high potential micro-caps. The big- weighting at the end of February be- gest holdings include the likes of CVS ing 39%. Group, Dechra Pharmaceuticals and Avon Rubber. The manager aims to identify com- panies that have five sustainable Over the last five years the shares growth characteristics, namely: good have generated an impressive total management, strong market posi- return of 170%, which is well above tion, sound balance sheet, cash gen- the sector average of 134% and the erative, and a track record of growth. 131% from the FTSE Small Cap ex In- vestment Company index. They are Companies are selected from the currently available on a discount to bottom up using a stock-picking NAV of 12.6%.
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A differentiated approach Smaller Companies Trust (ASL) that was launched in December 1990. This Their other pick from the sector is is different to most of the other funds “ABERFORTH the £101m River & Mercantile UK in the sector on account of its value in- IS BY FAR THE Micro Cap Investment Company vestment style. At the end of June the LARGEST SMALL- (LON:RMMC), which was launched portfolio consisted of 83 stocks, with in December 2014. It focuses on the the 10 largest accounting for 26% of CAP INVESTMENT micro-cap end of the spectrum that is the assets. These included: FirstGroup, TRUST, WHICH normally defined as companies with Vesuvius, Northgate and the wealth MEANS ITS SHARES a free float market value of less than manager Brewin Dolphin. ARE TYPICALLY MORE £100m. Aberforth is by far the largest small- LIQUID THAN MOST OF Philip Rodrigs, the fund manager, cap investment trust, which means its THE PEER GROUP.” believes that this part of the market shares are typically more liquid than can often be overlooked or under-re- most of the peer group. It has a decent searched, but historically has gener- long-term record with a five-year share stock picker and there are several that ated better returns. He is a bottom up price total return of 148% and adds have built up strong track records in stock picker and has put together a diversification on account of its value the sector. One of the most highly re- concentrated portfolio using River and bias. The shares are yielding a decent garded is Harry Nimmo, who has run Mercantile's distinctive PVT (poten- 2.2% for the sector and are trading on the Standard Life UK Smaller Com- tial, valuation, and timing) approach. a discount of 12.3%. panies fund since it was launched in This has led him to build his largest January 1997. positions in stocks such as Blue Prism Open-ended small-cap Group, MaxCyte and Microgen. funds Nimmo invests in companies with strong balance sheets and low levels Over the last 12 months the fund has There is a much wider degree of choice of debt. He targets high quality busi- generated a share price total return amongst the open-ended funds with nesses that can deliver sustainable of 61%, which is well ahead of its peer FE Trustnet listing 46 in the UK Smaller growth and that have a competitive group and benchmark. The shares are Companies sector. These have gener- advantage with a good management trading on a 3.4% discount to NAV, ated average one, three and five-year team that is in for the long term. which is close to the average for the returns of 32.8%, 42.8% and 115.4% last 12 months. respectively. A lot of funds in the sector are highly di- versified, but Nimmo has put together The investment trust analysts at Nu- A good small-cap fund requires an ex- a concentrated portfolio of 49 stocks. mis prefer the £1,192m Aberforth perienced manager who is an excellent The 10 largest positions account for
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38% of the assets and include the likes of Amino Technologies, Next Fifteen and is only up about 33% over three of NMC Healthcare, JD Sports Fashion, Communications, Victoria and War- years. Dechra Pharmaceuticals, Cranswick paint London. and Fever-Tree. His other fund, Marlborough UK Micro These sorts of companies are at the Cap Growth, sits in between the other Since the fund was launched in Janu- higher risk, higher return end of the two, as he will only invest in companies ary 1997 it has returned over 1,200%, spectrum and have the potential to with a market value of less than £250m which is more than double the sector deliver considerable growth, although at time of purchase. This holds 271 average. This has contributed to the the fund has had a relatively slow start stocks and is up 47% over three years. exceptional growth in assets under management, which now stands at al- most £1.4bn. FUND OF THE MONTH and consists of all companies with a market cap of at least £100m that Nimmo also runs the £291m Standard The Henderson Smaller Compa- are outside of the FTSE 100 index. Life UK Smaller Companies Trust nies Investment Trust (LON:HSL) (LON:SLS), which has a similar portfo- was launched in December 1887 and At the end of May Hermon had put lio. The recent performance of the two has been managed by Neil Hermon together a diversified portfolio of funds has been broadly the same, but since November 2002. It has outper- 113 holdings with the 10 largest the investment trust is more expensive formed its benchmark in 12 of the accounting for 22% of the assets. with ongoing charges of 1.13% versus last 13 financial years and over the These included stocks such as NMC 0.89% for its open-ended equivalent. last five years has generated an ex- Health, Bellway, Melrose Industries ceptional share price total return of and the Paragon Group. Marlborough man 178%. Despite the economic uncertainty, Another excellent small-cap manager Hermon is an excellent stock picker Hermon believes that smaller com- is Giles Hargreave who runs the £1.4bn and looks for 'growth at a reasona- panies' balance sheets are stronger Marlborough Special Situations, ble price'. His aim is to identify com- than during the 2007 financial crisis, the £137m Marlborough Nano-Cap panies with good growth prospects, dividends are well supported, and Growth and the £895m Marlborough solid financial characteristics and there continue to be good opportu- UK Micro Cap Growth funds. strong management that are trad- nities to invest. ing at a valuation that does not fully His Special Situations fund was reflect these strengths. The typical Henderson Smaller Companies is launched in July 1995 and invests in holding period is five years. recommended by Numis and the smaller companies, new issues and manager is also highly regarded companies going through a difficult The manager and his team visit over by the analysts at Winterflood. The period with good recovery prospects. 400 companies a year to assess po- £734m investment trust is yielding It operates in the smaller companies tential holdings first hand. There is 2.1% and the shares are trading on sector, but has the flexibility to take plenty of scope as the investment a discount to NAV of 14.7%. advantage of opportunities in the large universe includes the mid-cap stocks and medium cap areas of the market. Fund Facts The fund consists of a diversified port- folio of 201 different holdings, with Name: Henderson Smaller Companies Investment Trust (HSL) the 10 largest positions including Type: Investment Company Fever-Tree, JD Sports Fashion, Dechra Sector: UK Small Cap Pharmaceuticals and NMC Health, all Total Assets: £734m of which also appear in the top hold- ings of Standard Life UK Smaller Com- Launch Date: Dec 1887 panies. Current Yield: 2.1% Gearing: 9% At the end of May, 45.2% of the fund Ongoing Charges: 0.44% was invested in small cap stocks and 17.9% in the micro caps, with most of Manager: Janus Henderson Investors the rest in the mid-caps. The fund has Website: www.janushenderson.com returned just over 200% over 10 years.
Marlborough Nano-Cap Growth was launched in October 2013 and pro- About Nick vides exposure to a 160-stock portfolio of micro-cap companies, with the man- Nick Sudbury is an experienced financial journalist and trader/investor ager only initiating an investment if who has worked both as a fund manager and as a consultant to the in- the business is worth less than £100m. dustry. He has an MBA and is also a chartered accountant. Its main holdings include the likes
28 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 29 – AUGUST 2017 | 29 BY FILIPE R. COSTA
THE macro investor Frontier Markets The Wild West of investment
"There are over 100 countries in the world that don't have a proper stock market yet, so there will be new countries, but it will take time."
- Hertta Alava, fund manager for FIM Asset Management, 2017
Twenty years ago, most of the coun- engaged in the process of becoming Taking a more risk-aware point of tries that became part of the group developed countries. But a frontier view, we can see frontier markets as now known as emerging markets market is a particular type of emerg- emerging markets with certain hand- were in the process of detaching ing market which is more developed icaps. While the degree of openness themselves from the underdevel- than the group of the least devel- and accessibility to foreign investors oped world. But they are now in the oped countries but less developed is in general high, it is more limited process of moving towards devel- than the main group of emerging than in emerging markets. Equity oped world status. As an asset class, markets. Because of this status, fron- markets in these countries are char- it is becoming ever more apparent tier markets are sometimes referred acterised by small market capitali- that the window of opportunity is to as pre-emerging. sations and low annual turnovers. shrinking for emerging markets. At the same time, economic and What adventurous investors need In general, three groups of frontier political stability is below what can is the young life blood these coun- markets can be identified. The first is be found in emerging markets. All tries once had. They need to travel composed of countries with a lower this means that liquidity risk, coun- back in time just a little bit further, development level than emerging try risk, currency risk, and legal risk which means investigating a group markets; a second group includes are present to a higher degree than of countries called frontier markets. countries with a development level in emerging markets. that is close to emerging markets A new asset class? but are just too small to be included Investment thesis in the group; and a third group Frontier markets are a sub-group of includes countries with investment In general, higher risk should come emerging markets, in the sense that restrictions, which are in the process with higher expected returns. they're both developing countries of loosening them. This group of countries is in a pro-
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“IF RISK IS WELL MANAGED, INVESTORS MAY FIND THAT FRONTIER MARKETS OFFER A COMPELLING COMBINATION OF YIELD AND CAPITAL GROWTH.”
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cess that will turn them into the new In terms of stability, many positive emerging markets in a few years and steps have already been taken. In into the new developed countries in a terms of monetary policy, for example, few decades. They have already taken we observe that most of the frontier many steps to disconnect from the markets already have a central bank group of the least developed coun- that acts similarly to central banks in tries and offer the potential for growth the developed world. These central emerging markets once offered. If risk banks pursue rigorous control over is well managed, investors may find inflation, support policies to foster that frontier markets offer a compel- economic growth, bring the necessary ling combination of yield and capital liquidity to the market, and extend growth. access to credit. Because internal funds are not enough to support investment needs, investors are assured that cen- tral banks in these countries will keep “IF AN EFFICIENT a very tight exchange rate policy, as PORTFOLIO IS a means of increasing confidence in the country for foreign investors, and ALSO A WELL- thereby attracting foreign capital. DIVERSIFIED ONE, IT SHOULD HOLD How to invest in frontier markets SOME FRONTIER MARKETS Buying equities in Nigeria, Bangla- desh or Mali isn't particularly easy for EQUITIES.” someone living in the UK or the US. Direct access to these markets may be costly, or indeed not possible at all. Frontier markets are smaller and have One reasonable option to circumvent a younger work force. They are among the difficulties is to purchase American the fastest growing economies in the Depository Receipts (ADRs), which are world and are going to maintain that securities listed on US exchanges that momentum for many years, as a result track foreign securities. But this would of an adjustment process. GDP growth not only reduce the pool of investible rates in countries like Vietnam, Ivory frontier market assets, it would also Coast, Niger, Nigeria, Mali, Guinea Bis- lead to a deficient exposure to them. sau, Bangladesh, Slovenia and Roma- emerging markets asset class. But the nia, range from 5.1% to 8.2%, at a time A much better alternative is to get few that exist are sufficient to gain a when growth is 1.1% in France, 1.7% exposure through ETFs, which invest decent exposure. in Germany and 2.0% in the UK. The themselves in a diversified portfolio of unemployment rate is very low in Viet- frontier market equities from many dif- One of the most important frontier nam, Niger and Bangladesh and still ferent countries, and usually carry very markets indexes is the MSCI Frontier manageable in all the other cases. At low costs for investors. If I was writing Market Index, which invests across 29 the same time, while the developed this column 10 years ago, no ETF would frontier market countries and includes world is plagued with negative yields, exist on frontier markets. Even today, 116 constituents, covering 85% of the interest rates are much higher in these the range of options is limited, as fron- free float-adjusted market capitalisa- countries. tier markets are often included in the tion in each country. Consequently, this index is a very good proxy for the whole gamut of frontier market equi- ties. The largest country exposures of the index are Argentina (20.4%), Kuwait (19.7%), Vietnam (12.6%), Morocco (7.4%), and Bangladesh (6.4%).
While not directly investible, the MSCI index serves as a proxy for some ETFs. The best example is the iShares MSCI Frontier 100 ETF (NYSEARCA:FM). This ETF currently holds 131 securities, including the largest 100 market capi- talisations. Because it tracks the MSCI index, its country exposure is similar to that of the MSCI index.
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(NYSEARCA:FRN), which tracks the BNY Mellon New Frontier Index. It seeks opportunities based on an evalu- ation of macro trends like GDP growth, per capita income growth, inflation rates, privatisation of infrastructure and social inequality. The ETF imposes on itself a country cap, which reduces country concentration, but gives more exposure to smaller markets.
While all three options are valid, I believe the first one to be the more representative of frontier markets, as the MSCI indexes have a strong record of representativeness.
A few words on risk management fallacies
The correlation between the three ETFs considered above and the S&P 500 for the last three to five years is slightly less than 0.50, which is low A second option is the db x-trackers MSCI. It additionally includes equities enough to offer diversification bene- S&P Select Frontier UCITS ETF from Panama, which is part of stan- fits to any portfolio holding traditional (LON:XFSD), which tracks the S&P dalone indexes in MSCI, and Georgia, equities. But what about correlations Select Frontier Index. The exposure which is not part of any MSCI indexes. with emerging markets? differs from the iShares ETF because The fund holds 40 constituents among S&P has a different frontier markets 12 countries. One way of determining correlations country list. This fund includes equi- with emerging markets is to use the ties from Pakistan, which is now con- A third option is the Claymore/ iShares MSCI Emerging Markets ETF sidered to be an emerging market by BNY Mellon Frontier Markets ETF (NYSEARCA:EEM), which tracks the
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performance of the MSCI Emerging Markets index. Interestingly – and sup- porting the thesis that frontier markets are a new and separate asset class – the correlation between the emerg- ing markets and the frontier markets iShares ETFs are around 0.50, while the correlation between the emerg- ing markets ETF and the S&P 500 is 0.75. This corroborates the idea that emerging markets are today closer to developed countries than to frontier markets.
“FRONTIER MARKETS ARE THE NEW EMERGING ECONOMIES.”
The constitution of an investment port- folio is a two-stage process, in which a portfolio of risky assets is first chosen and later mixed with riskless assets. In the first part, it doesn't matter at all how much risk an individual is willing to take. The chosen portfolio of risky assets, in which all individuals should invest, is composed of all possible asset classes, in a way that it is not pos- sible to improve expected return with- out increasing the risk level. Given the mild to low correlation of frontier mar- Shutterstock.com kets with the S&P 500 (and even with emerging markets), adding these equi- cient portfolio of risky equities with time. The developed world no longer ties helps to achieve higher returns for riskless bonds in the desired propor- offers an abundance of long-term the same level of risk. To that extent, tions. If an efficient portfolio is also opportunities due to the current stage frontier markets equities may be suita- a well-diversified one, it should hold of development and the ageing pop- ble for most investors. some frontier markets equities. ulation. Frontier markets are the new emerging economies that have already Only in the second stage of portfo- Time to be a pioneer? entered an adjustment process but still lio construction should one take into offer the opportunities once offered by consideration individual preferences A successful long-term investment emerging markets. Today's less liquid and constraints, which will dictate the is about being able to identify the small caps from frontier markets will exact proportions of the risky portfo- main macro trends and ignore the become tomorrow's new blue chips. lio chosen above and riskless bonds short-term noise. The risk profile and Through a well managed portfolio to (or money market equivalents). Indi- expected returns of an asset are not diversify risk, investors can have access viduals at the beginning of their sav- time-independent, and what some- to a promising future and counterbal- ings life will hold a lower proportion of times appears risky in the short term ance the lack of good opportunities in bonds, and maybe even take on some becomes safer over longer periods of the developed world. leverage to amplify expected returns of the risky portfolio; whereas individ- uals at later stages of their savings life About Filipe would reduce exposure to the risky portfolio and hold substantially more Filipe's specialisation is monetary policy, macro issues and behavioural bonds. finance where he allies the practical experience of several years of trad- ing with academic credentials. Filipe in fact teaches courses on Financial Reducing investment risk is not the Markets and Monetary Economics at the University of Oporto, Faculty result of investing in low risk equities, of Economics, helping traders maximise profits and better manage risk. but rather the result of mixing an effi-
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The value of investments can go down as well as up and you may get back less than you invested originally.
Seven Investment Management LLP is authorised and regulated by the Financial Conduct Authority. Member of the London Stock Exchange. Registered office: 55 Bishopsgate, London EC2N 3AS. Registered in England and Wales number OC378740. 34 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk BY RICHARD GILL, CFA
From Acorns to Oak Trees THREE SMALL CAP IPOs TO LIVEN UP A QUIET SUMMER No long introduction from me this month. Instead let's get straight on with looking at three interesting small cap companies which have recently listed on the markets during these traditionally quiet summer months.
ANGLING DIRECT business by acquiring interests in a last financial year 45% of revenues number of small independent fishing came from the retail store network, There aren't many sports which tackle shops in the Norfolk area. But with 42% derived from the Angling offer the possibility of taking home a big break-through came in 2003 Direct website, which has a database dinner when you've finished playing. when a large premises was acquired of c.235,000 customers. The balance But angling, one of the most popular in Norwich, which was then branded of sales was split between third party participation sports in the UK, is one under the Angling Direct name. Fur- websites and from providing fishing of them. According to the latest sur- ther acquisitions and store openings tackle to the UK insurance industry vey by Sport England, 106,200 peo- have been seen since then, with the for the settlement of claims under ple went fishing once a week in the company now having 15 retail "des- household insurance policies. 12 months to September 2016. And tination" stores around the country, with around 1.2 million rod licences supported by a 30,000 sq ft central Fishing for growth currently issued every year, many distribution centre in Rackheath, more people are getting their tackle Norfolk, which was opened in 2015. Angling Direct floated on AIM on 13th out at some point in the calendar. July and raised a total of £9 million in The Angling Direct stores sell a range an oversubscribed placing at a price One company taking advantage of of over 21,500 fishing tackle prod- of 64p per share, with £1.6 million this market, estimated to be worth ucts including reels, tackle, rods, bait, of that going to selling sharehold- around £570 million in equipment accessories and numerous other ers (including the founders and CEO sales, is Angling Direct (LON:ANG). products to help anglers to catch a Darren Bailey). The net proceeds to The company, founded in Norfolk in carp, snatch a salmon or hook a had- the company of around £6.6 million 1986, claims to be the largest spe- dock. The company also sells a range will be used to advance an immedi- cialist fishing tackle and equipment of almost 200 products under its ate aim to build a £50 million+ rev- retailer in the UK. Founders, Mar- own brand 'Advanta', which was for- enue generating business. While the tyn Page and William Hill, began the mally launched in March 2016. In the company admits in its admission
36 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk FROM ACORNS TO OAK TREES
“ANGLING DIRECT INTENDS TO ACT AS A CONSOLIDATOR OF WHAT IS A HIGHLY FRAGMENTED MARKET IN THE UK.”
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“CURRENT TRADING LOOKS TO BE GOING WELL, WITH RETAIL AND ONLINE SALES GROWING BY A RESPECTIVE 46% AND 71% IN THE FIRST THREE MONTHS OF THE YEAR.”
document that the size of the fish- ing equipment market is marginally decreasing, it doesn't believe that this should hinder its growth plans.
The strategy has two approaches, with acquisitive and organic growth both targeted. On the acquisitions side, Angling Direct intends to act as a consolidator of what is a highly frag- mented market in the UK, with an esti- mated 2,300 fishing tackle retailers operating around the country. This will be supported by new store open- ings (three this financial year and five per annum targeted after that), along with continued investment in the web- site. Online sales have grown by 188% over the past three financial years, with the directors believing that the Growth over the past few years has growth investors Angling Direct is a central distribution centre can sup- been impressive and with the company speculative buy. port online revenue in excess of £25 now building up scale, being backed by million given selected further capital good infrastructure, and having the Nexus Infrastructure investment. financial resources from the IPO fund- (NEXS) raising, it looks to be in a good position to become one of the market leaders It was a good pay day for Michael Mor- of the angling industry. Of the money ris and Keith Breen, respective CEO raised £1.4 million is being used to and Key Account Director at Nexus redeem preference shares. So after, Infrastructure (LON:NEXS), when accounting for net debt of c.£1.5 mil- they listed their business on AIM last This strategy has worked well over the lion as at 31st January 2017 the com- month. The two entrepreneurs banked past few years, with group revenues pany should have net cash of around £28.9 million after selling a stake in growing by 89% to £21 million from £3.7 million to execute its strategy. the company, which they have run 2015 to 2017 (financial year end Jan- together for over 17 years, via a plac- uary). However, due to pricing pres- The current market cap of just under ing at 185p per share. But following the sure and investment in infrastructure £40 million puts the shares on a his- deal they still have a combined 43.1% (including the distribution centre) pre- toric multiple of around 70 times. That interest in the business, which they are tax profits only grew by 31% over the is a high figure but I believe investors looking to continue growing further. same period to £0.56 million. Current should focus on the long-term oppor- trading looks to be going well, with tunities here, with the £50 million sales Nexus of services retail and online sales growing by a target providing some indication of the respective 46% and 71% in the first near to medium term potential. If that With a history going back 40 years, three months of the year. figure is achieved I believe net profits Nexus Infrastructure is a leading pro- of around £2.5 million will be achieva- vider of specialised infrastructure Good catch? ble, reducing the multiple to nearer 16 services to the UK housebuilding and times, not bad value if current levels commercial sectors. It operates via two Shares in Angling Direct have done of growth continue. Income investors divisions: very well since IPO, rising by 46% to will be disappointed however as prof- the current 93.5p. Most of these gains its are expected to be reinvested back Tamdown – founded in 1976 this have come in the past week on no into the business, at least in the short division provides a range of special- news and very little trading volume, to medium term. ised infrastructure and engineering suggesting the shares are particularly services to the UK housebuilding and illiquid. However, I do see a number of On balance, while the shares are commercial sectors. These include car- attractions. expensive at the present time, for rying out earthworks, remedial work,
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building highways, substructures and basements, creating drainage systems, as well as constructing reinforced con- crete frames. It counts among its cus- tomers a number of blue-chip firms including nine of the top ten largest UK housebuilders.
Keith Breen joined Tamdown in 1985, followed by Michael Morris six years later. Then in 1999 the business saw a management buy-out backed by pri- vate equity giant 3i. From then until 3i Connex has also seen rapid growth, CAGR of 50.4% to £11 million. How- fully sold out in 2006 the business grew increasing revenues from £2.1 million ever, the six months to March 2017 revenues from £19.7 million to £52.6 in 2012 to £23.3 million in 2016. saw revenues slip by 5% and adjusted million. net profits down by 35%, with the com- Building value pany blaming difficult market condi- TriConnex – was launched in 2011 in tions as a result of the EU Referendum order to take advantage of deregula- Nexus has a long history of profitable causing a slowdown in tendering activ- tion in the UK utilities sector and the growth and even remained profita- ity and contract delays. structural demand for delivery of util- ble during the recent recession – an ity networks on development sites. As impressive feat given the downturn Nevertheless, one of the strengths of of today the business designs, installs seen in house building during that the business is its strong order book, and connects gas, electricity and water time. Between 2012 and 2016 reve- which has grown from £63.5 million networks and has recently started to nues increased from £60.5 million to in 2012 to £187 million as at 31st May offer fibre connections, on residential £135.7 million – a CAGR of 22%, with 2017 as a result of Tamdown increas- and commercial developments. Tri- adjusted operating profits up at a ing market share and the contribu- tion from TriConnex, which started to generate meaningful revenue in 2013. Representing 16.5 months of revenues on a historic business this provides excellent future earnings visibility.
At IPO Nexus did not raise any money for itself but already has a strong bal- ance sheet to support its growth strat- egy, along with excellent levels of cash flow. Aided by advance customer pay- ments in the TriConnex business group cash flow conversion in the last three financial years has averaged 110%. The plan is to use that cash to pay dividends (see more below) and to support a number of growth plans. These include gaining market share in existing areas, expanding into new geographic areas, taking advantage of opportunities in affordable residential and the non-res- idential sectors, along with considering complementary acquisitions.
On the housebuilding side there look to be many opportunities for growth, with industry body the Construction Products Association estimating that annual private housing starts in the
38 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 29 – AUGUST 2017 | 39 FROM ACORNS TO OAK TREES
“NEXUS HAS A LONG HISTORY OF PROFITABLE GROWTH.”
UK will increase from approximately 148,000 in 2016 (178,000 including public homes) to 158,000 (192,000 including public homes) in 2019. In utilities, the company believes that TriConnex is the first company to pro- vide all four utility connections, with the recent deregulation in the UK utilities sector continuing to provide growth opportunities.
Safe as houses?
Having closed the first day of dealings at 191.5p Nexus shares are currently trading at 186.5p, slightly ahead of the est company, ASOS (LON:ASC), have IPO price and capitalising the business risen from just over 3p to the current at £71.1 million. On net profits of £8.4 £58 over the past 14 years. And shares million posted in the last financial year in boohoo.com (LON:BOO), now AIM's that puts the shares on a very unde- second largest company, have surged manding multiple of just 8.5 times. If from a low of 22p to 237.5p since the we strip out net cash of 9.1 million as beginning of 2015. So it is definitely orous and stand out from the crowd at at 31st March 2017 then the multiple worth looking at the latest company value for money prices." For example, falls to just 7.4 times. We point out that operating in this fast growing sector to its typical customers might be looking the cash position as at 30th September list on the markets. for an outfit for going out on Saturday 2016 was £22.6 million, the lower fig- nights, racing days and more formal ure in March reflecting the seasonality Multiple choice events such as weddings and proms. of working capital. In the UK alone, the business targets a Founded in Glasgow in 1993, QUIZ market which is estimated by analysts Nexus has a progressive dividend pol- (LON:QUIZ) is an omni-channel and at business intelligence outfit Verdict icy, with its current intention being to international own brand operating in to be worth £8 billion per annum. pay annual dividends based on a div- the women's value fast fashion sector. idend cover of 3 times adjusted net In corporate speak "omni-channel" Like its peers QUIZ is a fast growing profits. An interim dividend of 2.1p means that the company sells online business, with revenues up by a CAGR per share has been announced since and, unlike Asos or boohoo, also has of 21% to £89.8 million between 2015 listing, with the ex-dividend date being a number of physical stores. Online, and 2017. EBITDA grew at CAGR of 17th August. Assuming profits in the the company operates through a web- 30.6% to £10.3 million over the same second half are in line with last year site & apps and on the high street has period. Online and international chan- then we are looking at a final dividend 73 standalone stores and 165 conces- nels are the fastest growing areas for of around 4.4p, implying a total yield sions in the UK and the Republic of Ire- the group showing respective CAGRs for the year of c.3.5%. land. The QUIZ brand is also present in of 42% and 64.2%. Growth has con- 19 countries through 65 international tinued to be strong since the year end Offering growth, value and income, franchise stores, concessions and in March, with sales up by 37% in the Nexus Infrastructure looks like a wholesale partners. period to 31st May, with growth of long term buy and hold. 118% in the online channel and 16% The QUIZ brand has a focus on occa- across its standalone stores and con- QUIZ sion wear and dressy casual wear, cessions in the UK and the RoI. aimed primarily at 16 to 35 year olds. Many small cap investors will know just The company offers a range of cloth- Family Fortunes how much money can be made from ing, footwear and accessories, with investing in fashion retailers targeting the strapline that it helps to, "empower QUIZ listed on AIM at the end of July a youth audience. Shares in AIM's larg- fashion forward females to look glam- raising a total of £102.7 million at a
40 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk FROM ACORNS TO OAK TREES
“QUIZ HAS THE POTENTIAL TO DELIVER SIGNIFICANT GAINS OVER THE COMING YEARS.”
new products to its stores and web- place. I also note that the balance sheet site within two to four weeks from the is strong, with the net debt position point of order and reorder successful of £2 million as at 31st March having lines quickly by focusing on very short been reversed into a net cash position lead times. following receipt of the IPO proceeds.
Deal or no deal? The policy on the dividend is a pro- gressive one, with a one third/two As I write this article shares in QUIZ thirds split between the first and sec- have only been trading on the markets ond halves. Although no guidance has for a few hours. But investors have been given as to the level of the pay- taken well to the issue, with the price ment, the first dividend is expected to having advanced by 23% to 198p. That be announced for the second half of capitalises the business at £246 million. the current financial year.
In the last financial year the company Overall, while the shares might look made a net profit of £6.6 million which fairly pricey, I believe that QUIZ has the price of 161p per share. This was a puts the shares on a historic PE mul- potential to deliver significant gains big pay day for the existing owners tiple of 37 times. Given valuations in over the coming years as per Asos and however, with £89.8 million net being the wider sector (ASOS on a historic PE boohoo. Investors should be warned banked by a number of selling share- of 94 times, boohoo on 106) I do not however that with expectations hav- holders including CEO & Founder Tarak believe that looks too stretched at all, ing been set high, even a small miss Ramzan and his family. The company especially given the rates of growth on market forecasts might see a sharp itself came away with a £10.6 million, being seen, potential for future expan- pullback in the shares. Speculative the vast majority of which it is looking sion and infrastructure recently put in buy. to invest in marketing and advertising, along with capex, working capital and broadening the product range.
Specifically, QUIZ is looking to open c.20 new stores in the UK over the next 24 months along with the same number of new concessions. Overseas, the two year plan is to open interna- tional websites in Spain, the US and Australia, standalone stores in Spain, concessions in Cyprus, the US and Central America, as well as further expand in the Middle East and the Far East, including China. Online there will be increased marketing activity, with plans to open international websites, partner with third party platforms, and develop and improve the existing mobile channel.
To support the planned growth QUIZ About Richard has recently made significant invest- ment in its supply chain, IT systems Richard Gill is an investment analyst with over a decade's experience of and stores, including opening a new analysing small/mid cap equities. Richard qualified with the Chartered 180,000 sq. ft. distribution centre near Financial Analyst (CFA) designation in 2012 and was awarded PLUS Mar- Glasgow. This has helped the company kets Financial Writer of the Year at the 2008 PLUS Awards. He has been a to maintain a competitive advantage, judge at the Small Cap Awards from 2013 to 2017. as its supply chain is able to introduce
40 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 29 – AUGUST 2017 | 41 BY SAMUEL RAE
forensic forex Don't rely on Draghi to keep the euro weak The currency markets can be tough. With so many different inputs feeding into market sentiment and such a varying degree of sentiment driving buy and sell decisions, even the most carefully crafted fundamental analysis can seem futile.
The utility of technical analysis in gardless of what's happening in the tant elements of my strategy, risk overlooking the fundamental inputs region that represents the currency management. The patterns that sig- is, to a major degree, why many trad- I'm banking on, or against. I primarily nal entry determine the loss I stand ers ignore the news and events side focus on the major pairs not because to take if a trade goes against me (for of the equation altogether. Breaks they are more widely covered or that the most part); but my fundamental of major levels will often precede a I have an opinion on the major econ- analysis – and specifically, a bias I sustained run in the direction of the omies that underpin these pairs, but form on each of the majors ahead of break. To the technical analyst, the because volume across the majors is time – dictates how much reward I direction is largely irrelevant. Cour- consistently high and this improves chase. Indirectly, then, this bias also tesy of the ability to get in both long the accuracy of the candlestick pat- dictates my risk positioning. If I hold and short at the touch of a button, terns and, by proxy, the reliability of a bullish bias in the USD and I get a in the currency markets a trader can the entries. long entry signal in the USDJPY, I will jump in on a downside break and enter towards a relatively wide tar- ride it out to a predefined take profit I have employed this strategy for get (say, a 2:1 or a 3:1 ratio as com- target just as easily as he or she can many years, as regular readers of pared to my risk). If the same pair open a long position on a break of a this column and of my various other throws out a short signal, I will still major resistance level. Even the as- works will likely already know, and enter, but I'll chase a 1.5:1 or a 2:1 set in question doesn't really matter it's served me well all this time. This ratio. – a EURUSD long entry is no differ- doesn't mean fundamental analysis ent at root to a EURGBP long when can't have a place in a technical trad- To illustrate this strategy in practice, you're ignoring the real world inputs. er's toolbox, however. In fact, it plays I'm going to walk through a trade I'm a very important role in mine. watching out for confirmation on At core, I am a technical trader. I and highlight where both the techni- look for candlestick patterns at key Specifically, I use fundamental analy- cal and fundamental aspects of my levels to signal entries and I enter re- sis to dictate one of the most impor- strategy come into play.
42 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk FORENSIC FOREX
“ANYTHING DRAGHI DOES IS GOING TO STRUGGLE TO HAVE A LONG TERM BEARISH IMPACT ON THE VALUE OF THE EUROPEAN CURRENCY.”
miqu77 / Shutterstock.com
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Take a look at the chart below. It's a and rejected twice over the last couple If I see a break of this latter level, I will weekly candlestick chart showing ac- of years – once in October 2015 and enter long on the break. My stop loss is tion in the EURUSD across the past again (almost, but close enough for dictated by the level that I mentioned thirty-six months. rock and roll) in May last year. If the first, 1.1700. Because I'm bullish on the price breaks through this level, it's a Euro, I will stretch to a 2:1 ratio, which Many argue right now that the major bull signal and the EURUSD will gives me an upside of 200 pips and a strength of the Euro is centred on almost certainly run to 1.1800. Some take profit at 1.2000. For comparison's Draghi's actions throughout the re- will enter long on this break. I might on sake, if I was bearish EUR, I might chase mainder of 2017 as regards to QE. To the lower timeframes. On the monthly 1.1900 at the outside. an extent, of course, this is true, and chart, however, I'm waiting for 1.1800. it's an opinion I subscribed to as re- Let's see what happens. cently as a few weeks ago. Now, how- So here's the trade… ever, I believe that anything Draghi does is going to struggle to have a long term bearish impact on the value of About Samuel the European currency (within reason, of course). Having completed his Economics agement driven approach to the fi- BSc Degree in Manchester, Sam- nancial markets – a strategy that is A spate of recent data has suggested uel Rae quickly discovered that the described and demonstrated in his the European economy is picking up retail Forex industry was for him. Diary of a Currency Trader. and while the region's equity markets A short foray into the corporate may be struggling based on micro in- world drove him to search for an puts (German car manufacturers be- alternative to the more traditional ing accused of price collusion, for ex- ways of making a living, and in ample) this weakness is very unlikely becoming a retail trader he has to filter through to Euro valuation. I achieved exactly that. think that the feed through of the QE programme that's been implemented Through persistent market partici- over the last twelve months is going pation and extensive education he to boost the currency for the next six has grown to become a specialist months at least and, if Draghi contin- in both fundamental and technical ues to go easy on the region, for the analysis. next six months after that. His personal trading style com- So, I've got a bullish Euro bias. Now I bines classic candlestick analysis look at the key levels. 1.1700 is a strong with a simple, logical and risk man- resistance level that has been tested
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44 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk BY DAVID JONES
chart navigator When chart signals go wrong but can still be right
I have probably mentioned this before but I have been a technical analyst/chartist for more than 20 years. And as with many things in life, the older you get, the more cynical you be- come about certain things. If you are writing a textbook on charting, or selling an expensive training course, it is very easy to come up with a stack of perfect examples that worked time and again and would have delivered profits by the bucketload. You can sit there and scroll back through hundreds of historical examples to find the right chart to illustrate the prin- ciple. If only you had a time machine to go back and buy or sell...
Many chart signals end up not actu- what happens when it doesn't work ally working of course. Trend lines initially, it will add an extra angle to break when they should hold, sup- “PERVERSELY, WHAT our trading and investing approach. port cracks when the price is meant HAPPENS AFTER to bounce, and double tops often A PARTICULAR Let's look at a couple of basic ten- don't top. Perhaps not surprisingly CHARTING SETUP ets of charting. There is of course there is not so much focus out there the well-worn phrase (which I com- on these failures. And I think the rea- FAILS CAN ACTUALLY pletely support) "the trend is your sons for that don't necessarily have END UP REINFORCING friend". Trends are a very good thing to be particularly malicious, or an at- THE INITIAL VIEW OF and can last for many years. Plenty tempt to pull the wool over the eyes A MARKET.” of investors and traders look to iden- of the wider investing public. If you tify these trends, jump on board and are writing about moving averages, hopefully ride them as far as possi- or head and shoulders patterns, or happens after a particular charting ble. And the trendline is a popular Bollinger Bands, then you are going setup fails can actually end up rein- way of identifying the trend – but to tend to focus on the near perfect forcing the initial view of a market when that trend line breaks, many examples to get your point across. – that has admittedly proved to be would see that as a sign that the wrong so far. Like everyone else I will trend is over. This is not necessarily But there is also some value in identi- now go back in time to present some the case and this sort of signal can fying the classic charting approaches examples that help make that case... actually be an even better opportu- that don't work – or at least don't But hopefully, armed with the knowl- nity to get on board. Let's look at a work straight away. Perversely, what edge of what is meant to work and recent example.
46 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk CHART NAVIGATOR
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This is FTSE 100 banking business Standard Chartered (LON:STAN). The trend shown ran from February 2016 but you can see that after March of this year progress started to stall, culminating in a decisive move through that trend line in April. Classically this would be treated as a sign that the trend is coming to an end.
But wait a moment. The share price doesn't actually know it is sitting on its trend line. The definition of an uptrend is a succession of higher highs and ing time a little bit too quickly. Perhaps losing some of its momentum – but it higher lows and, looking at that chart, this is just a buying opportunity, with was not the end of the trend. The buy- we still have that. The last major high the assumption that those major lows ers came back in and at the time of was set in February of this year and the will hold again. Let's see what hap- writing, the Standard Chartered share most significant lows below that were pened next. price had pushed back up to those re- in the 600p to 650p area. So, whilst the cent highs. A great example of why a trend may be losing some momentum, That was indeed the case. The break of classic chart pattern failing can still give the break of that trend line may be call- the trend line was the share temporarily us an opportunity.
48 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk CHART NAVIGATOR
On a similar theme is the break of ple trading the Dow would be watching ten expected to push lower. But, what support. This is one I have used exten- this level for the possibility of another if this doesn't happen? Already, during sively for short term trades and whilst bounce. The traditional approach is this ten minute period, the current can- of course it does not work all the time, that if support breaks, then this is a dle has pushed below the support but it really does offer low risk/high reward VERY BAD THING. A level where buyers then retreated back above – this could opportunities where the potential had seen value in the past and stepped be the first signal that this is a false sig- gains are a multiple of the risk. Let's in to stop any decline has not worked nal and we should be looking to buy use a short term trading example to this time around, and the market is of- rather than sell. What happened next? illustrate the point.
The chart shows the Dow Jones index – a very popular one with the thousands of short-term traders out there. Each candlestick on the chart represents 10 minutes worth of trading. The far right of the chart is 11 July 2017. It can be seen that Dow has broken a previous low – the one highlighted that was set on 6 July. This had been a big level and the market had rallied around 150 points higher from here. Plenty of peo-
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Over the next 20 minutes (two candle- sticks) the Dow recovered. It is look- ing more and more like this is a false “IN A STRONG TREND, A TEMPORARY SLIP signal so a trader viewing it this way BELOW THE MOVING AVERAGE CAN BE ANOTHER could be a buyer, with a stop loss un- OPPORTUNITY TO BUY IN.” der that extreme low for today. As it turned out, this would have delivered a very profitable trade when we look another rally. Three trading days later The usual words of caution are worth at what happened over the next few it had moved more than 300 points reiterating at this point – no strategy days. higher – so buying after that failed works all of the time. But, even if set- break would have resulted in a decent ups like the above only work half the That false break marked the low point chunk of profit versus a relatively small time, the gains should more than out- before the Dow Jones set off on yet initial risk. weigh the losses.
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To wrap things up, let's take a look at the perennial investor favourite, the moving average. Traditionally, when “WHATEVER YOUR FAVOURITE APPROACH the price moves above a moving aver- TO CHARTING THE MARKETS, WATCHING age this is a buy signal – and when the price moves below the moving aver- FOR FAILURES LIKE THIS CAN STILL BE A age it's a sell signal. But, yet again, the PROFITABLE APPROACH.” share doesn't know where the mov- ing average is! So in a strong trend, a temporary slip below the moving av- line. Added to this, it has not broken erage can be another opportunity to any previous lows. Of course, this time buy in. Here's one to keep an eye on could be different – no trend goes on in the weeks ahead: Compass Group forever. But the recent performance (LON:CPG) and its 50 day moving has been encouraging and it could be average. another example where there is a low risk/high reward opportunity to buy Compass has a long term uptrend into that longer term multi-year trend. going back to 2008, but the chunk of the trend we will focus on here is from You can apply this "failed/not failed ap- 2015, with the moving average and proach" to many classic chart set ups, trend line applied. and over various time frames – as has been shown by the three examples Broadly speaking the share price has here. For the more aggressive inves- stayed above the moving average line tor or trader this can clearly increase for most of the chart – but it did have the number of potential trading or a prolonged period below it at the investing opportunities in the mar- end of last year. However, the price kets. Never forget – it is important to to charting the markets, watching for stayed above the trend line, pushed remain disciplined of course. In the failures like this can still be a profitable back above the moving average and Dow above, for example, if the index approach. When plenty of people are rallied higher still. This could be what had ended up slipping back below that expecting one outcome as a result of a is happening at the moment. The price initial low then the trade would need market move, and this doesn't happen, has slipped below the moving aver- to be closed for a manageable loss. then their view too may shift – some- age but remains well above the trend But whatever your favourite approach thing that you can use to your benefit.
About David
David Jones qualified as a technical analyst in 1995 and started his City career as a currency analyst. He then went on to work for trading companies CMC Markets and IG Group as Chief Market Strategist. Since leaving the industry in 2013 he has been a presenter on BBC5Live's Wake up to Money programme and the Chartist for Shares magazine. He is an active trader and private investor.
50 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 29 – AUGUST 2017 | 51 BY ALAN STEEL
Death & Taxes THE GENERATION GAME Financial planning for Millennials
According to the bean counters at As to the UK savings ratio, when I buy assets." the ONS (Office for National Statis- was at secondary school a ratio was So what's an asset or investment ac- tics), we're not saving enough. Ap- something divided by something cording to the ONS? Investments in- parently it's the worst UK savings else. So how do the ONS calculate clude stocks, bonds, bank accounts ratio in 50 years. The savings ratio their ratio? According to the Gods of and hiding money under the mat- fell to a measly 1.7% in the first All Knowledge (Google) it goes some- tress. Capital gains are not included. quarter of 2017, down from 3.3% thing like this: Eh? Bank deposits suddenly qualify in the final quarter of 2016 – and as investments as do bitcoins stuffed all the way down from around 10% under the mattress? And they don't at the time of the Financial Crisis. “NO MATTER measure increases? Really? Are they And "experts" think it's got some- being serious? thing to do with Millennials spend- WHAT ing too much. Shame on them. GENERATION So the low savings rate is the fault of WE BELONG TO, the generation cohort now known Before you start panicking, this is as "Millennials", who allegedly have the same ONS who a couple of years HUMAN NATURE been short-changed by us "lucky back conceded that their UK GDP NEVER CHANGES.” Baby Boomers"? They say that, un- quarterly reports had been wrong like Baby Boomers at the same age, for the last 15 years, thanks to a Millennials have no money left to calculation error. Mind you, skewed save. It's also reported that Millen- economic reporting happens else- "The Savings Ratio is expressed as nials (formerly known as Generation where. Last month the US equiva- a percentage and is computed by Y or Echo Boomers if you're won- lent of the ONS admitted their origi- dividing average household savings dering where they disappeared to) nal calculation of 2017's first quarter by average household disposable were traumatised by the 2008 Great GDP growth had just been re-exam- income. Both are calculated by gov- Financial Crisis. (And we weren't by ined and was initially reported as ernmental statistical organisations. the risk of being vaporised during the 50% too low. Actually that's not what Average household savings reflect Cuban Crisis when we were only 15?!) they said. They just said it should the portion of average household have been +1.4% instead of +0.7% income not spent on average cur- Not to put too fine a point on it, at and hoped we wouldn't notice the rent consumption and is instead in- their age us Baby Boomers suf- difference. vested in capital markets or used to fered decades of high taxes, double
52 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk DEATH & TAXES
“THE EARLIER YOU START THE BETTER. SAVE IT MONTHLY. AND KEEP IT GOING. DON’T STOP.”
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digit inflation up to 26% a year, scary stockmarket crashes in 1973 and 1987, mortgage rates up to 16% and re- peated recessions, not to mention con- stant threats of a third world war. Our university education might have been free to some, but by Jove we've paid for it big time ever since. But still some of us managed to save despite constant broken pension promises.
The generation game
When I started secondary school a good six years before "The Who" re- corded their stammering defence of younger g-generations, my teachers said we were the worst class they had ever c-come across. Unruly, lazy, badly behaved, and thick as mince we were. And we believed them. Until our lovely Latin teacher let us into the big secret. Every new intake was told they were the worst ever. Sound familiar? “I HAVE BECOME CONVINCED THAT UNDERSTANDING DEMOGRAPHICS IS THE And he also assured us that the prac- tice of older generations criticising BE-ALL AND END-ALL OF INVESTMENT their immediate successors went back SUCCESS.” at least to Ancient Greek times. And ap- parently it was the norm for the young to blame their elders at the same time. Some twenty years ago I had a long Same thing of course. When you're Nature's way, I suppose. conversation with a Personal Finance thirty-odd there's even more demands editor who acknowledged my beliefs and distractions for your after-tax in- I have become convinced that under- about the financial impact on econ- come. So our conclusion was that no standing demographics is the be-all omies by 47-year-olds, as first wave matter what generation we belong to, and end-all of investment success, sim- Boomers were then. He wanted to human nature never changes. We be- ply on the basis that if demand exceeds ask how folks in their twenties should have financially exactly the same at supply the prices of assets will rise . And invest. I asked him what he invested different times in our lives. Go check. secondly, because every generation in when he was their age. Nothing, And we only think about saving for re- behaves the same financially at differ- he replied. He was too busy enjoying tirement when we hit our forties when ent stages of their lives – as Harry Dent himself. Why did he think anything we wake up to the realisation that our showed, despite what others wrote had changed? OK, he said, what about dream of retiring at 55 is just a pipe- about alleged generational differences. thirty-year-olds then? dream. Nothing changes.
The fact remains though that those Baby Boomers who saved for a de- cent retirement income have done it the hard way. They've started saving early, forcing themselves to save first then spend what's left, and made use of all the tax breaks available with pen- sion contributions doubled up by em- ployers, not to mention tax free roll-up plans investing in stockmarket assets. As Yogi Berra said, "It's not rocket surgery".
Where to start?
Warren Buffett's right-hand man, Char- lie Munger, said the best way to invest is to start young and instead of hoping to invest what's left after your monthly
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spend, first decide how much you'll company. Bezos says he's often asked top of your net contribution and grows save, then spend what remains. That's what's going to change in the next 10 without any tax on capital profits? It's what I did when I was 28 and I've never years, but never asked what's not go- called a Pension plan. But don't let looked back. ing to change. And he says the second that put you off. Get an IFA to help you question is the more relevant of the make sense of it all. Here's a tip. Go learn The Rule of 72… two. I'd suggest it's even more relevant now! That's the easiest way to under- when it comes to investing. Despite be- By the way it's reckoned some Millen- stand the Power of Compound Inter- ing battered from all sides with "new" nials have access to up to four parents est. Albert Einstein called compound products and "services", the best way and even more grandparents thanks interest mankind's most important dis- to invest for Millennials is to copy what to the increasing divorces endured by covery. Take an investment return net worked for us Baby Boomers and for large numbers of Baby Boomers. Go of tax and divide it into 72. That's how those even older than us. And keep it chat them up and encourage them long it will take to double your money. simple. to stick away extra contributions into 0.25% per annum in a Cash ISA? 288 your pension pots. They can put away years to double. 10% pa? Seven years. much more than you'd think, and have 14%? Only five years. You choose. “WHEN YOU’RE their contribution for you increased by a friendly taxman. If you're paying According to various demographic YOUNGER YOU higher rate tax you can even get some survey definitions, Millennials are now CAN AFFORD TO extra tax back too. aged between 20 and 40. Some will TAKE MORE RISK have student debt. To handle this well Given the generous annual allow- I suggest you check out Martin Lewis's AND BUY FUNDS/ ances now available from ISAs, your excellent "Student Loans Mythbusting" INVESTMENTS generous Boomer relatives could post on MoneySavingsExpert.com. help you stick away an extra £20,000 MORE EXPOSED TO a year to make up for the worrying As to saving, once you've decided to VOLATILITY.” years of student debt. But be sure to follow Charlie Munger's advice to start have that invested properly into stock- early, and got to grips with the simplic- market funds. What about cash ISAs? ity of the Rule of 72, what next? The earlier you start the better. Save it I hear you ask. They're pretty useless monthly. And keep it going. Don't stop. as a long-term wealth-building vehicle Keeping it simple: Some And how about getting others to add these days, unless you fancy living for things don't change to your savings? Employed? Get your a couple of hundred years or more to employer to stick away funds for you benefit. First, a lesson from Jeff Bezos, the CEO too. They'll pick up tax relief anyway – of Amazon.com. Amazon was 22 in and so will you. What other investment And what about the Help to Buy ISA? July, which makes it a classic Millennial can add up to an extra 67% a year on The rouble is that these are designed
54 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 29 – AUGUST 2017 | 55 DEATH & TAXES
“START YOUNG AND INSTEAD OF HOPING TO INVEST WHAT’S LEFT AFTER YOUR MONTHLY SPEND, FIRST DECIDE HOW MUCH YOU’LL SAVE, THEN SPEND WHAT REMAINS.”
by academics with more complicated the Technology sector. The FTSE 100 But "passive" investors would do well rules than a game of Quidditch. Best Index, however, has Tech exposure to remember the words of US expert of luck if you can find a way to use it of less than 1%. Considering world investor Wade Slome: "If you follow the to your advantage in saving for a prop- demographics, the long-term technol- herd you will be led to the slaughter- erty purchase. I'd stick to the stockmar- ogy wave and the probability of expo- house." ket ISA, and if you can get the oldies to nential growth over the next 20 years, cough up more, either buy a place now tucking away some AXA Framlington Finally unless you have a special gift for with a mortgage, or rent and invest Tech, or Baillie Gifford Global Discov- successful investment, and a surgically even more. ery (to mention a couple I hold myself) removed amygdala to stop you panic wouldn't be a bad idea. buying and selling at the wrong times, But where to invest? What have I I'd find a mentor to help you along the learned since 1973 as an IFA? First set Lately there's a growing majority of long and winding road to true financial up your pension plan, ISA, and other investors and commentators saying independence. And in years to come, I tax effective growth investments, all you're better just sticking your savings hope people will b-be talkin' 'bout your of which can invest in the same places into "cheap" Index trackers and ETFs. wealth c-creation. and funds if you want. Dripping in monthly is better for various reasons – but mind the charges! And thirdly, when you're younger you can afford to take more risk and buy funds/invest- ments more exposed to volatility. A rough rule of thumb is that they'll grow far more over time if you let them be. But do take advice!
Having said that, it's true it's worth hav- ing exposure to investments which roll up "income" such as dividends. Over the past 20 years the total return of the FT All Share Index was 240%. Without dividends being rolled up (i.e. the price performance alone) that falls to 77%. That means that more than two thirds of the total return is from reinvested income. Mind you, to show the benefit of contrarian fund management, In- vesco Perpetual High Income net of all costs over 20 years is up almost 600% (source: Lipper stats).
Mixing equity income funds with a couple of Technology funds for Mil- lennials could be even better. The US S&P 500 Index is over 20% exposed to
About Alan
Alan Steel rose to prominence in the financial sector after being the first person to put pen to paper to accuse Equi- table Life of rampant mis-selling. A true champion of the ordinary saver/investor, Alan founded Alan Steel Asset Man- agement in 1975, and now has over £1 billion under management. Visit the company website at www.alansteel.com.
This is the personal view of Alan and is not advice. Readers should take personalised independent advice on such matters.
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Job No: 53802-129 Publication: Master Investor Size: 297x210 Ins Date: 01.04.17 Proof no: 1 Tel: 020 7291 4700 BY FILIPE R. COSTA
HOW TO INVEST Like... Joseph Piotroski
"I think I'm a value investor at heart."
— Joseph Piotroski
A scientific value investing company is worth more as a portfolio veal little about the reasons why such approach of assets than as an ongoing concern, stocks have been left behind by inves- which is usually a sign of significant un- tors. A stock may be out of favour and Finding unfashionable, oversold, un- dervaluation. thus trade at relatively low prices due loved, boring stocks is a relatively easy to a lack of momentum, an unfavour- task. All it requires is a stock screener But while price ratios like price-to-book able market environment, or even as selection showing shares ranked by re- are useful when searching for the most the consequence of an overreaction to turn from lowest to highest. With the unloved (if not hated) stocks, they re- some negative event. During the 1990s, help of a few price ratios, investors can for example, the traditional economy do even better and shortlist a few po- fell out of favour because of the tech tential buying candidates among a list revolution. Later, upon the bursting of of a few thousand. One particularly “THE F-SCORE the tech bubble, investors realised how useful and widely used ratio in that re- STRATEGY superior traditional stocks could be. gard is the price-to-book ratio, which DEVELOPED BY compares the market price of a share JOSEPH PIOTROSKI But sentiment is not always the main with its book or accounting value. The reason behind depressed price ratios. lower this ratio, the less an investor is HELPS INVESTORS A stock may trade at low prices due to paying for the company's assets, and DISCRIMINATE deteriorating future prospects. If prof- the cheaper the stock is. When the ra- AMONG LOW PRICE- its are declining, the company is losing tio is below one, investors are paying TO-BOOK VALUE market share, margins are contracting, less for the company's assets than can and there is no indication of a poten- be obtained from selling them sepa- STOCKS.” tial reversion, it is likely that low prices rately. Technically, one could say the would turn into fire-sale prices some
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“WHILE THE WIDER S&P 500 RETURNED AN AVERAGE ANNUAL COMPOUND RATE OF 10.06% DURING THE LAST 100 YEARS, THE F-SCORE STRATEGY CONSISTING OF HOLDING A LONG-SHORT PORTFOLIO OF VALUE STOCKS HAS RETURNED AROUND 23.00% PER ANNUM.”
time soon. In such cases, the low price in finance. While there, he lectured a a position as an assistant professor ratios may just reflect poor, but nev- course in financial accounting, which of accounting. While at Chicago he be- ertheless realistic, expectations about further enhanced his interests in re- came associate professor of account- the future. When using the price-to- search and teaching. ing. In 2007 he moved to Stanford book ratio to select value stocks, we University to take a similar position. are unable to discriminate among the After graduating, Piotroski moved to Although Piotroski is still more of an very different situations mentioned the University of Michigan, where he academic than an investor, his F-Score above. Rather, we're relying on the law served as a senior research assistant strategy is one of the most valuable of averages, which states that some and graduate instructor between 1994 investment strategies, one that has stocks will recover while others don't. and 1999 and received his PhD in ac- often been reported to outperform But on average they are expected to counting. His research would culmi- market averages by a large margin, outperform. nate with publication in the Journal of even during the Financial Crisis. While Accounting Research in 2000, under the wider S&P 500 returned an average Today, I'm going to present our read- the title "Value Investing: The Use of annual compound rate of 10.06% dur- ers with the strategy developed by an Historical Financial Statement Informa- ing the last 100 years, the F-Score strat- investor and academic who solved this tion to Separate Winners from Losers". egy consisting of holding a long-short puzzle. First presented in a scientific The paper describes a value investing portfolio of value stocks has returned paper in 2000, the F-Score strategy de- strategy that is today known as the around 23.00% per annum. Over a veloped by Joseph Piotroski helps in- Piotroski 9-Point F-Score, or simply period of 20 years, an initial invest- vestors discriminate among low price- the F-Score. Mostly unknown at first, ment of $100,000 would have grown to-book value stocks. In contrast to the Piotroski's work was later promoted by to $680,127 if invested in the S&P 500 blunt tool that is the price-to-book ra- Forbes, Bloomberg and other financial and to $6,282,062 if invested according tio, it allows for the construction of a outlets, extending its reach from the to the F-Score strategy. more selective portfolio with improved academic community to the invest- odds of a turnaround. ment community. Piotroski's F-Score strategy
The strategy developed by Piotroski Piotroski left Michigan in 1999 for the While the price-to-book ratio is a good has been a significant contribution to University of Chicago, where he took way to shortlist buying candidates, academic research, providing evidence against the efficient market hypothe- sis and in support of the behavioural finance framework. It has also greatly served the investment community, through improving the expected an- nual returns from the "plain vanilla" value strategy by 8.80%.
When investing meets accounting
Joseph Piotroski has a background in accounting. In 1989 he obtained a bachelor's degree in the field from the University of Illinois and additionally became a CPA in the state of Illinois. He then started a career as an accountant at the firm Coopers & Lybrand, where he worked as a senior tax associate be- tween 1989 and 1992. However, crav- ing more learning, he enrolled with the University of Indiana to pursue an MBA
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“MOSTLY UNKNOWN AT FIRST, PIOTROSKI’S WORK WAS LATER PROMOTED BY FORBES, BLOOMBERG AND OTHER FINANCIAL OUTLETS.”
1) Return on assets
The first profitability measure comes from the evaluation of return on as- sets, which is defined as the net profit obtained by the company before ac- counting for extraordinary items, scaled by total assets at the beginning of the year. When return on assets is positive, the signal is "good" and a score of one is attributed. If return on assets is negative, the signal is "bad" and a score of zero is given. it's still insufficient as an investment nal is interpreted in a binary form, as strategy. Although several academics being either "good" or "bad" depend- 2) Operating cash flow have shown the superiority of such ing on its implication to expected fu- a value strategy, 57% of the selected ture performance, which is converted The second measure comes from the companies tend to underperfom over to a value of one or zero respectively. cash flow statement, and measures a period of two years. Further discrim- The aggregate signal measure, named cash flow from operations, which is ination is therefore needed to sort be- F-Score (originally F_Score), is the sum defined as cash generated from op- tween strong and weak companies. of the nine binary signals. This ag- erations scaled by total assets at the gregate signal is designed in a way to beginning of the year. If the figure is The main aim of Piotroski was to in- measure the overall quality or strength positive, then the company is generat- vestigate whether a financial state- of a company's financial position. The ing funds internally and a score of one ment-based heuristic, when applied higher the number, the stronger the is given. If the company is depleting its to out-of-favour stocks, could discrim- financial position. The final decision cash reserves, the score attributed to inate between companies with strong to buy should rely on the strength of the signal is zero. prospects and companies with weak the number, with a value of 8-9 being prospects, such that it could enhance a strong buy signal, and 0-2 a strong 3) Change in return on assets the mean portfolio returns obtained sell signal (the exact cut-offs may be by a value strategy based on selecting tweaked to reflect market conditions Piotroski wants not only to capture a stocks with low price-to-book value and industry specificities). financial picture but also its changing (in the academic world: high book-to- dynamics. For this goal, he includes the market value). Value investors like Ben The first group of signals are aimed change in return on assets. If return Graham (issue 13 – April 2016), analyse at measuring profitability. Historical on assets increases from one year to financial statements thoroughly, as records show that value firms gen- another, a score of one is given, other- a way of filtering the noise out of the erate poor profits in general and are wise a score of zero is recorded. data. But such an operation always re- often unable to finance their invest- quires a high degree of expertise and ment operations internally. The aim 4) Accruals unlimited resources. The beauty of Pi- of Piotroski here is to identify those otroski's strategy is that it can be much companies which are able to generate In general, the profits achieved by a more easily implemented. funds from their operations or that, at company should translate into cash the very least, have seen their position generated from its operations. But Piotroski identifies nine fundamental improve of late. Piotroski uses several sometimes companies inflate current signals to measure three important ar- variables to measure profitability: re- profits at the expense of future profits eas of a company's financial condition: turn on assets, cash flow from opera- through positive accruals. In the spe- profitability, financial leverage/liquid- tions, change in return on assets, and cific case of distressed companies and/ ity, and operating efficiency. Each sig- accruals. or companies that in some way have
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been sold down, the incentive to do it an inability to generate sufficient inter- measures a change in the asset turno- is greater (to prevent covenant viola- nal funds to service current and future ver ratio as the current asset turnover tions, to help raise more money etc.). obligations. This fact highlights a poor ratio (total sales scaled by total assets One way Piotroski learned to detect financial condition: otherwise the firm at the beginning of the year) less the this kind of situation was by comparing wouldn't be issuing equity at such un- prior year's asset turnover ratio. cash flow from operations to return on favourable conditions. The signal gets assets. The accruals variable is equal a score of one when no common eq- The final aggregate F-Score results to the current year's net income be- uity is issued during the year, and zero from summing-up the individual bi- fore extraordinary items less cash flow otherwise. nary scores varies between 0 and 9. from operations, both scaled by total Piotroski's research shows that the assets at the beginning of the year. The last group of variables is an at- greater the score the higher the ex- When accruals are greater than zero, tempt to measure changes in operat- pected returns, meaning that investors cash flow from operations is less than ing efficiency. The measures target the can unfold a strategy of buying stocks return on assets, which is a bad signal, decomposition of a change in return with scores between 8 and 9 and sell- and translates into a score of zero. on assets, and include the following ing stocks with scores between 0 and 2. When the opposite situation occurs, two signals/variables: the score is one. The above 9-point F-Score strategy 8) Change in gross margin should be applied to a pre-filtered list A second group of variables is com- of stocks. "I show that the mean return posed by signals aimed at measuring One way of improving the return on earned by a high book-to-market inves- leverage, liquidity and source of funds. assets is by extracting more value from tor can be increased by at least 7.5% These measures identify changes in each unit sale. That may be the result annually through the selection of finan- a company's capital structure and its of increasing sales prices, falling fac- cially strong high book-to-market firms ability to meet future debt service obli- tor costs, or falling inventory costs. Pi- while the entire distribution of realized gations. As most value firms are finan- otroski attributes a score of one, when returns is shifted to the right", Piotroski cially constrained, Piotroski assumes the change in gross margin is positive, claims in his research. That means that that increases in leverage, decreases in and zero otherwise. He measures this the strategy is aimed at fine-tuning an liquidity and the use of external financ- change as the current gross margin ra- already filtered list filled only with high ing are in general "bad" signals. Three tio (gross margin scaled by total sales) book-to-market companies (low price- variables are considered by Piotroski, less the prior year's gross margin ratio. to-book value ratios). The first step, as presented below. before applying the F-Score, is to rank 9) Change in asset turnover ratio stocks by their price-to-book value ra- 5) Change in leverage ratio tio, from lowest to highest and select A second way of improving the return only the first quintile (top 20% of the This variable should measure changes on assets is by means of selling more list). Piotroski analysis starts just after in long-term leverage. Piotroski meas- for each unit of assets. Put another way, this preliminary selection. As a final ures leverage as the historical change the company is able to generate more step, investors can also apply a filter in the ratio of total long-term debt to sales for the same assets, or the same to select only small to medium-sized average total assets. When positive, sales with less assets. When this hap- companies, as Piotroski demonstrates the score is zero and when negative pens, operating efficiency is improved, that these are the stocks usually offer- the score is one. and a score of zero is given. Piotroski ing the largest returns.
6) Change in liquidity (or current ratio)
An improvement in liquidity is as- sumed to be a "good" signal about the company's ability to service current and future debt obligations. Piotroski measures a change in liquidity as a change in the current ratio. When pos- itive, the score is one; when negative, the score is zero. The current ratio is defined as the ratio of current assets to current liabilities at fiscal year-end.
7) Change in the number of shares
In general, it is not wise to raise equity when share prices have been falling, because the cost of equity is very high at such a time. The only reason to raise capital under such conditions is due to
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“ALTHOUGH PIOTROSKI IS STILL MORE OF AN ACADEMIC THAN AN INVESTOR, HIS F-SCORE STRATEGY IS ONE OF THE MOST VALUABLE INVESTMENT STRATEGIES.”
Developing a strategy in the real world
While it sometimes may be hard to find equities with a very low price-to-book value ratio, in Piotroski's world it would never constitute a problem because his strategy is set in relative terms. The data is initially split into quintiles, ranked from the lowest price-to-book value ratio to the highest. Only the top quintile of data is selected, that is, only the 20% with the lowest price ratios. This step is absolutely crucial. All Pi- otroski's research departs from a top quintile selection of equities, which corresponds to the "naive" value in- vesting case.
The next step is to apply the 9-step Piotroski strategy and rank the results using the calculated F-Score. This score can be obtained programmatically us- ing either an online screener or some investing software package. In general, stocks with an F-Score between 8 and 9 are buy candidates, and stocks with a score between 0 and 2 are sell can- didates. This strategy adds on average 7.5% in annual returns over the naive strategy (based on the 1976-1996 back- tests conducted by Piotroski). But, as mentioned above, investors can still do better if further trimming the data sample to smaller companies. Piotroski shows that such a strategy enhances annual returns to 8.8% above the naive strategy. The simpler way of trimming the data is by arbitrarily choosing a cut-off value based on common sense and experience about what constitutes a small cap. More refined ways may involve splitting the data into terciles, ranking stocks by market capitalisation from lowest to highest, and choosing as cut-off the value of the first tercile.
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The list that follows is an example of the application of Piotroski's strat- egy on LSE equities. Seven stocks are selected, all with an F-Score of 8 and with market capitalisations ranging from £13.1m to £106.3m. Notice that all the companies are currently priced far away from their 52-week high, which reflects their out-of-favour mo- mentum.
Final remarks
Piotroski's approach is a relatively sim- ple application of fundamental analy- sis to rank oversold, low price-to-book companies, in terms of their overall profitability, liquidity and operating efficiency, to then be able to select a portfolio with improved expected returns. Piotroski has built a strong accounting-based value investing ap- proach on top of the more naive strat- egy consisting of unconditionally buy- ing low price-to-book stocks.
Piotrioski's approach shifts the distri- bution of returns earned by an inves- tor, adding up to 8.80% to the average performance of the more naive low price-to-book strategy, when an inves- tor selects only small companies with the highest F-Scores.
From the perspective of an individual investor, who is always constrained in About Filipe terms of available resources, Piotroski's strategy is highly valuable, because it Filipe has been a contributor to Master Investor since the earliest years. doesn't require a deep and thorough His specialisation is monetary policy, macro issues and behavioural fi- analysis of thousands of financial nance where he allies the practical experience of several years of trad- statements. With the help of good ing with academic credentials. Filipe in fact teaches courses on Financial software, which may cost between £25 Markets and Monetary Economics at the University of Oporto Faculty of – £125 per month, any investor can im- Economics, helping traders maximise profits and better manage risk. plement Piotroski's strategy.
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Bricks & Mortar REIT Vs buying to let in a post-Brexit world Property has long been seen as one of the safest forms of investment and, on the whole, is likely to continue to be so. However, recent political upheavals in the UK mean that more thought needs to be given before jumping on the property gravy train as we once would have. Britain's vote to leave the European Union – and this year's hastily called General Election – mean uncertainty in the coming years. That uncertainty will inevitably affect the wider economy and, more specifically, the property market.
There are currently two principle property portfolio to generate prof- and 24%. The Index has been turbu- ways to invest in property in the UK. its for shareholders. REITs enjoy a lent since, with a limited recovery of The first is to buy shares in a real special corporation tax exemption 5.56% from July 2016 to July 2017. estate investment trust (REIT). The on rental profits, in exchange for other is to invest directly in buy-to-let which they must comply with a num- Still, many investors believe there property. The former largely invests ber of rules – including a require- is an inherent stability in REITs that in commercial and retail property, ment to pay out 90% of property prevailing economic and political while the latter tends more towards income to shareholders annually, factors might rattle, but will not residential property, but neither is and that investors' dividends are shatter. With strong balance sheets set in stone. Each has its advantages treated as property income and and low leverage, dividend yields and drawbacks – but how are REITs taxed accordingly. are favourable when compared to a and buy to let likely to be affected by 10-year government gilt bond, and the uncertainties of Brexit? The market reacted unfavourably it's clear that some investors have in the immediate aftermath of last taken advantage of the post-ref- REITs June's Brexit vote. The FTSE NPRA/ erendum share price drop to invest NAREIT UK Index – representing the in REITs. REITs are a relatively new form of UK real estate AIM market – was property investment in the UK, first down 15.63% by mid-July 2016, with This is a sector that UK and interna- legislated for in the Finance Act the main REITs – including British tional investors continue to monitor 2006. They are companies or groups Land, Derwent London, Great Port- closely. The property market overall of companies – which must be listed land Estates, Hammerson, and Land hasn't reacted well to the Brexit deci- on the stock market – that manage a Securities each down between 13% sion, and lower property prices post-
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“DESPITE THE PROPERTY MARKET AND STOCK MARKET UNCERTAINTIES THAT BREXIT INTRODUCES, REITS HAVE SHOWN THEMSELVES TO BE RESILIENT AND ARE LIKELY TO CONTINUE TO BE SO.”
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Brexit – other than in areas that are widely accepted to have been in a sus- tained price bubble, such as parts of London – could be good news for REITs looking to expand their portfolios.
Some analysts have argued that there is also an inherent flexibility in REITs. The property market isn't a single, homogeneous entity but rather com- prises a variety of sectors with their own flows in demand, price and profit- ability. In the past few years REITs have been seen to take an agile approach; either spreading investment across sectors to mitigate uncertainty, or alternatively focusing on a single prof- “DEMAND FOR HOUSING IS CONSTANTLY itable sector. Hammerson, for exam- GROWING, AND IN THE ABSENCE OF A SHARP ple, sold its office property portfolio in INCREASE IN HOUSE-BUILDING THIS COULD 2012, in favour of focusing on its retail properties. LEAD TO A GREATER DEMAND FOR RENTAL PROPERTY – GOOD NEWS FOR BUY-TO-LET Overall, despite the property market INVESTORS.” and stock market uncertainties that Brexit introduces, REITs have shown themselves to be resilient and are It is demand for rental property that est rate hikes – could lead to some likely to continue to be so. Their poten- could be the factor that makes or investors defaulting on their buy-to-let tial for investing in different property breaks the buy-to-let sector after mortgages. With buy to let accounting sectors provides a degree of stability, Brexit. Uncertainty in the property for one in five mortgages, this would and future property market conditions market means that both buyers and potentially be disastrous for the wider may even allow the potential for cau- sellers are reluctant to make a move housing market and economy. tious growth. until a clearer view of the future eco- nomic landscape emerges. At the same A final consideration for buy-to-let Buy to let time, demand for housing is constantly investors is the recent changes to growing, and in the absence of a sharp taxation and stamp duty. The former Direct investment in buy-to-let prop- increase in house-building this could means that it's now only possible to erty is a different kettle of fish. Even if lead to a greater demand for rental claim tax relief on mortgage interest at you don't manage your let properties property – good news for buy-to-let the basic 20% tax rate, even if you are yourself, it is often a more hands-on investors, provided rent increases a higher or additional-rate taxpayer. job than the invest-and-forget option don't outstrip tenants' ability to pay in A 3% surcharge also now applies to of REITs. While REITs are likely to go the post-Brexit economy. Stamp Duty Land Tax (SDLT) on buy- through Brexit against a relatively to-let properties and second homes. stable backdrop of taxation and reg- On the other hand, rental demand These factors, in combination with ulation, buy-to-let investors will have might be affected by other demo- Brexit-related uncertainties, may give to deal with it in the context of recent graphic shifts that could occur follow- some potential investors pause when changes to tax rules, which limit ing Brexit. At present, immigrants are considering buy to let as an option. the amount of tax relief that can be three times more likely to rent prop- However, one potential solution is to claimed against mortgage interest. As erty than UK nationals, and tougher operate your buy-to-let business as a most buy-to-let investors operate in controls on immigration – or simply limited company, rather than a person- the residential sector, they may also smaller numbers of foreign workers ally owned venture. Not only does this be more exposed to post-Brexit house and students willing to stay in the mitigate the recent change in tax rules, price fluctuations than investors in UK – could have a very real impact it would deliver further efficiencies due REITs. on demand. Reduced rental demand to the corporation tax rate reducing to – especially if combined with inter- 17% in 2020. There are a number of factors that could work in favour of buy to let. Brexit uncertainty is – for now – undoubtedly About Carl doing its part in keeping interest rates low, and the availability of relatively Carl is a seasoned commentator on financial matters and one of the minds cheap mortgage finance, in combina- behind Just Mortgage Brokers. He has worked in the mortgage industry tion with a moderate drop in house for over 20 years, first working for a high street lender, before departing prices, could present opportunities for to setup and run his own branch of mortgage brokers 15 years ago. investors to build their portfolios.
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Austerity – or Boris Johnson opines that the ready and bung some dosh in Catastrophe…? public sector pay cap of one the direction of local govern- percent per annum should be ment, the NHS, and any other The minority UK Conservative scrapped. Michael Gove be- spending department with a government is under pressure to lieves that the British people sob story to tell. loosen the fiscal purse strings. need a break. Numerous other Does that mean the dream of Tory luminaries have also re- Since the election, the Tories, balancing the budget remains no cently told Chancellor of the still in government but clinging more than a dream? Who would Exchequer Hammond that he on for dear life, are running benefit? Will taxes have to rise? should ease up on closing the scared. Some think that they And what are the risks? Cardiac deficit and cut the nation some might buy popularity – and time arrest in the Gilts market is a real slack. In other words – borrow – by easing up on the aim of bal- possibility. more than he is borrowing al- ancing the books by 2025. This
70 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk BEST OF THE BLOG
“IN SIGNALLING AN END TO AUSTERITY BORIS & CO. ARE STEALING THE OPPOSITION’S CLOTHES.”
objective, and the cheese-paring of In signalling an end to austerity Boris spending commitments associated & Co. are stealing the Opposition's with it, generally goes by the name clothes. Labour and their Green side- Click here of austerity. kicks loathe austerity, full stop. The to read the Scottish Nationalists, with Presbyte- full article In the current climate, every tower rian righteous indignation, regard block that goes up in flames, every austerity as a moral abomination. The tardy ambulance, every bungled Lib Dems think it would be jolly nice criminal investigation by the plods if there wasn't quite so much of it. and every delayed and overcrowded train are blamed on austerity. Al- How did we get here? most any imaginable administrative cock-up has the same cause. By Victor Hill
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The UK technology trust small British tech companies have the delivering market-beating potential to deliver structural growth in returns a low-growth world. “MANY SMALL BRITISH TECH Technology is transforming the world One of the easiest ways to benefit is the and changing the way we do things. Herald Investment Trust (LON:HRI), COMPANIES HAVE Until a few years ago developments which delivered 40% growth in NAV THE POTENTIAL like robotics, artificial intelligence and over its financial year to the end of May TO DELIVER virtual reality were rarely to be found and whose shares are trading on a 19% outside of science fiction, but many discount. STRUCTURAL of them are now part of our everyday GROWTH IN A LOW- lives. Katie Potts, the manager of the £911m fund, is in the enviable position of hav- GROWTH WORLD.” Investing in companies at the cutting ing the cash available to help finance edge of these new technologies of- expanding listed tech companies. She fers a high return/high risk profile that has been meeting two or three a day, 2 of the best UK-focused might be suitable for younger inves- but has been exercising caution with recovery stocks tors with an active interest and good a total of 30 deals completed last year working knowledge of these areas. and a further 38 YTD. Recovery stocks can be among the most profitable investments. One rea- The main danger is if the hype gets By Nick Sudbury son for this is that the market usually ahead of the reality, as is the case with expects disappointing financial per- some of the giant US tech companies formance from them, which generally and in particular the FANG stocks – means low valuations. If the compa- Facebook, Amazon, Netflix and Google nies in question are able to beat mar- Click here (now Alphabet) – where valuations ket forecasts and deliver a sustained to read the have been bid up to ridiculous levels. turnaround, it can lead to above-aver- full article age valuations. The end result is often Fortunately it is a very different picture a high profit for investors. on this side of the pond where many One recovery theme for the long term could be UK-focused companies. The UK economy faces perhaps its biggest challenges since the financial crisis due to Brexit, and stocks which rely on it for the bulk of their revenue could see their financial performance suffer.
Within this theme, retailers may offer the most significant recovery poten- tial. CPI inflation has hit 2.9%, which is 1.1% above wage growth. Histori- cally, an inflation rate which is signifi- cantly ahead of wage growth causes consumer spending to come under pressure. Individuals will either hold back on spending on a wide range of discretionary items, or trade down to cheaper options on consumer staples.
The effect of this on retailers can be devastating. In search of higher sales, an investment in pricing often follows. While this may help support like-for- like (LFL) sales for a time, the effect on margin can be negative. Alternatively, retailers seeking to maintain margins are likely to see sales fall as their rivals slash prices in a bid to appeal to con- sumers who are becoming increasingly price conscious.
By Robert Stephens, CFA
72 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk BEST OF THE BLOG
One demographic that is often over- looked in trading is the difference be- tween the sexes. On Wall Street and in Canary Wharf it is common to see men in business suits that trade and make deals. That is certainly the stereotype, at least. The numbers agree as eFinan- cialCareers pegged female traders to comprise 15% of all traders at invest- ment banks. Among the world's great- est investors, there is simply no female representation at all. So why is that and how is it changing?
The first and most obvious answer is that, in the past, women had a par- ticular role to play, and it wasn't in the Darren Grove / Shutterstock.com workplace. So that explains the 20th century. In the 21st century, though, can't be one of your target audiences"; most jobs that are open to men are "you need to focus on professional open to women, and expectations are traders and investors". changing. If a man can do the job, so Click here can a woman. Since finance tends to to read the Investors and traders hail from all fall under "STEM", especially for quan- full article sorts of backgrounds. Some are pro- titative roles like trading and investing, fessionals, working as full-time trad- it seems there is a trend of women not ers in gleaming skyscrapers, spending being well-represented generally. most of their time analysing stocks and Are women better news. Others are professionals, but By Ruzbeh Bacha traders and investors than work from home. Others are quite pas- men? sive, only checking their stocks once a quarter, and they spend most of their Back in 2015, when I was raising funds time working other jobs. Some are old, for my FinTech start-up CityFALCON, I some are young. Some are interested Click here mentioned that our most active user in making a profit as fast as possible, to read the on the platform was a woman who not caring about the companies, while full article traded from home while her family others are there for the dividends and was out. I would never have imagined to share in the profits of companies the reaction that I got then: "this clearly they believe in.
72 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 29 – AUGUST 2017 | 73 BY RICHARD GILL, CFA
read to succeed Super Investors Lessons from the Greatest Investors in History from Jesse Livermore to Warren Buffet & Beyond by Matthew Partridge
Since the Great Financial Crisis, the Durham, before doing a masters and of those included, such as Nick Train, active fund management industry a doctorate in economic history at the Warren Buffett and Neil Woodford, are has come under increasing levels London School of Economics. He has still successfully making money for in- of criticism over the ability of pro- taught at Goldsmiths, University of vestors in the present day. fessional fund managers to do what London, as well as spending time at they are paid to do – beat the mar- various investment banks and a well- For each "superinvestor", Partridge be- ket. Study after study has shown known economics consultancy. gins with a short introduction on the that active managers fail do this on individual, followed by a discussion of a consistent basis, with their perfor- their investing career, including what mance often getting worse as time “PRIVATE approach they had to making money goes on. To take just one example, for themselves or their clients and in 2016 just 42 out of 259 (or 16%) INVESTORS shareholders. As well as looking at the of funds in the IA UK All Companies ARE SHUNNING best trades of their career the author sector managed to outperform the also examines some of the less suc- benchmark FTSE All-Share Index. So THE HIGHLY cessful decisions that each investor it's no surprise that private inves- PAID, POORLY made, which is useful for reminding tors are shunning the highly paid, PERFORMING readers that even those at the top of poorly performing managers in fa- the game can get it wrong sometimes vour of low cost and often better MANAGERS.” – just like the rest of us. performing index funds. Each chapter concludes with a four fac- But surely if there are a select handful Train to Bolton, Fisher to tor rating system (using a "hotel style" of professional investors who manage Price star rating out of 5) which aims to com- to consistently beat the market over pare the investors against each other time, their strategies are well worth Based on MoneyWeek's popular to determine who is the most impor- examining. This is exactly what au- "Great Investors in History" column, tant. Firstly, their overall performance thor Matthew Partridge does in Super the core text of the book contains 20 is rated, with the focus being on how Investors. chapters which examine and discuss they fared against the wider market. the careers of a score of professional Consistency is also important for this Partridge plies his trade as a finan- investors. Many of those covered are measure, with those who went bust cial journalist, writing for MoneyWeek now plying their trade in stock mar- at some point during their career be- magazine. He is also a trained histo- ket heaven, with Partridge going as far ing rated lower. Next, their longevity is rian, completing a degree in econom- back as the late 18th century to analyse analysed, with the best superinvestors ics and history at the University of exceptional wealth creators. But some having successfully plied their trade
74 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk READ TO SUCCEED
(and trades) over several decades. In- book is supposed to highlight ways fluence is the next determining factor, that investors can copy winning trad- looking at what contribution they made ing strategies readers should note that to the industry as a whole in terms of Ricardo's actions are today considered inspiring others to follow their styles or to be highly illegal! perhaps from their contribution to in- vestment or economic theory. Finally, 10 key lessons to take Partridge marks the superinvestors on away ease of replication, or in other words how simple is it for other investors to The book concludes with a summary copy and implement their investment of the ten key lessons learned from all style. of the superinvestors and how readers can use them to increase their own wealth. For example, unlike many aca- demics, Partridge points out that many “SUPER INVESTORS of the superinvestors have demon- IS A GREAT ADDITION strated that markets can consistently TO THE INVESTMENT be beaten over an extended period LIBRARY.” of time. And there are many roads to achieving this, with some investors covered in the book are exceptional, focussing on a value based approach, Graham is the best investor of all time. some buying shares in companies op- While he doesn't get a perfect score (18 The 20 investors covered in the book erating in fast growing sectors and oth- out of 20 stars) and ranks equally with represent a wide range of investment ers having a preference for businesses index investing pioneer Jack Bogle, his styles, from value investing, venture with strong brands. The author argues ability to beat the market by a large capital, growth investing and other that the approach readers take should amount and his influence on those more exotic strategies. Whatever their be based on a strategy that matches who came after him make him worthy own unique take on things, they have their own skills and resources. of the accolade. all made their own significant contribu- tion to investment history. Another lesson is that the best inves- A Super Read tors are flexible in their approach, of- Take for example David Ricardo, the ten changing or adjusting their invest- Super Investors is a well written, enter- 18th/19th century financier and econ- ment styles over the course of their taining and informative book that will omist who made a fortune by trading careers. To take one example, the great appeal to the amateur and profes- government bonds during the battle John Maynard Keynes moved from as- sional investor alike. Private investors of Waterloo. Trying to gain an informa- set allocation and leveraged currency will learn how to apply the various tional advantage, Ricardo hired an as- trading to become a very successful techniques covered in order to in- sistant to observe the battle and send value investor. And "father of value in- crease their wealth, while fund man- the news back to him. With the battle vesting" Benjamin Graham sometimes agers can gain useful insights on how going well for the British, government stuck with his holdings long after they those at the top of their profession be- bonds would be expected to rise in stopped being value stocks. However, came so successful – they might even price. But suspecting that other trad- Partridge warns that too much flexi- want to apply the rating system to ers would know he had the full story Ri- bility could be dangerous, especially themselves to see how they compare cardo employed a devious strategy by if the investor doesn't have the skills against their rivals. All in all, Super In- first selling bonds and, with others then required to take on a new approach vestors is a great addition to the invest- following him, driving down the price. – value investors moving to being day ment library. He soon reversed course and bought traders is a classic example. the bonds at knock down prices, even- tually making enough money for him Talking of Benjamin Graham, the au- About Richard to retire from active trading. While the thor argues that, while all individuals Richard Gill is an investment analyst with over a decade's ex- EXCLUSIVE BOOK OFFER perience of analysing small/mid cap equities. Richard qualified Get 20% off RRPSuper Investors. with the Chartered Financial An- Visit www.harriman-house.com and use the promo code: alyst (CFA) designation in 2012 and was awarded PLUS Markets MASTERBOOK17 Financial Writer of the Year at the 2008 PLUS Awards. He has Code can only be used on the Harriman House website. Minimum order of been a judge at the Small Cap £5 required. P&P will be added at the checkout. Awards from 2013 to 2017.
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the final word Bonds: a warning from history
One of the most intriguing investment books I have ever read is Forty centuries of wage and price controls: how not to fight inflation. You can download a free PDF copy of this highly recommended book here.
Forty centuries is a history of market coinage. During the fifty years prior is a grimly uniform sequence of rigging. As its title suggests, govern- to AD 268, for example, the silver repeated failure. Indeed, there is ments try their hand at this ruse on content of the Roman denarius coin not a single episode where price a pretty regular basis – and it never fell to one five-thousandth of its orig- controls have worked to stop in- ultimately works. inal level. The monetary system duly flation or cure shortages. Instead fell into chaos and trade collapsed. of curbing inflation, price controls Perhaps the most instructive histor- add other complications to the ical example is that of the Edict of Diocletian tried currency reform inflation disease, such as black Diocletian. Shortly after this Roman and when this failed, introduced his markets and shortages that re- Emperor ascended to the throne famous Edict on prices and wages. flect the waste and misallocation in AD 284, commodity prices and First he introduced a new copper of resources caused by the price wages took off. The reasons for this coin which was almost worthless. controls themselves. Instead of inflation are attributed to, variously, Then he fixed the maximum prices eliminating shortages, price con- a vast increase in his armed forces to of beef, grain, eggs and clothing, trols cause or worsen shortages. repel barbarian hordes; a huge gov- and ordered that anybody who sold By giving producers and consum- ernment building programme; an his goods at higher prices would be ers the wrong signals because expansion in taxes and government executed. "low" prices to producers limit officialdom; and the use of forced la- supply and "low" prices to con- bour in his public works. Diocletian Prices still rose. sumers stimulate demand, price himself, in time-honoured manner, controls widen the gap between blamed the "avarice" of merchants The clue to the message of Forty cen- supply and demand. and speculators instead. turies lies in its title. As David Mei- selman asks in his foreword to the Despite the clear lessons of his- The authors of Forty centuries, Rob- book, tory, many governments and ert Schuettinger and Eamonn Butler, public officials still hold the erro- put the blame for the inflation on What, then, have price controls neous belief that price controls something a little more prosaic: a achieved in the recurrent struggle can and do control inflation. They massive increase in the money sup- to restrain inflation and overcome thereby pursue monetary and fis- ply due to the debasement of the shortages? The historical record cal policies that cause inflation,
76 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk THE FINAL WORD
“THERE IS SOMETHING RATHER WONDERFUL ABOUT THE ABILITY OF FINANCIAL MARKETS ULTIMATELY TO WRESTLE THEMSELVES FREE OF THE CLUTCHES OF HUBRISTIC BUREAUCRATS.”
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convinced that the inevitable can- surdly high level given the fragility of more closely towards that of Japan not happen. When the inevitable the economy, sterling was ethnically during its own lost decade. does happen, public policy fails and cleansed from the ERM – but only af- hopes are dashed. Blunders mount, ter the Bank of England had sustained I keep a certain letter to the editor and faith in governments and gov- losses of over £3 billion (how quaintly of the Financial Times near me at all ernment officials whose policies tiny those figures seem from the per- times. It was written by a Mr Takashi caused the mess declines. Political spective of 2017). They were big figures Ito of Japan on 17 August 2010. It reads and economic freedoms are im- then, though. One commentator at as follows: paired and general civility suffers. the time said it was as if the UK Treas- ury had spent the afternoon lobbing "Sir, 'Can the Fed prevent Japa- There is something rather wonderful schools and hospitals into the North nese-style deflation, a period of fall- about the ability of financial markets Sea. ing prices associated with economic ultimately to wrestle themselves free stagnation, from taking hold?' is a of the clutches of hubristic bureau- common refrain nowadays. crats. As Jeff Goldblum's Dr. Ian Mal- colm observes in the film Jurassic Park, “THIS IS HOW The US Federal Reserve's obses- life finds a way. REVOLUTIONS sion with Japan is pretty disastrous. First, Alan Greenspan opened the I saw a pretty good example of this HAPPEN.” taps wide for too long, fearing Jap- early on in my career. Back in Septem- anese-style deflation, which fuelled ber 1992, the Bank of England was the housing bubble that led to the desperately trying to keep the pound As Mrs Thatcher once suggested, you recent financial crisis. Now, fearing sterling in the European Exchange Rate cannot buck the market. the lost decade plus, the Fed is prob- Mechanism, despite the fact that the ably going to keep easing until some British government had put it in at the But nobody told our central bankers. different but unpleasant outcome wrong rate. As part of its inflation strat- Messrs Yellen, Carney and Draghi did is the result. Stagflation perhaps, or egy, the government had elected to not receive that memo. It would ap- hyperinflation? shadow the Deutsche Mark. But (West) pear that they never read their copy Germany was experiencing inflation- of Forty centuries. Since 2008, mone- This is so ironic, because for so long ary pressure due to its recent reunifi- tary policy rates and government bond people have sneered at the Japa- cation with East Germany, and so its yields have been suppressed and kept nese for their inability to steer their interest rates were higher than were at artificially low levels in order to re- economy to recovery. Perhaps be- appropriate for a British economy then flate the system. All that those trillions cause they have sneered so much, in recession. of dollars, pounds and euros worth it is no longer possible to admit that of QE (assisted by its comparably evil after a huge housing bubble bursts, Something had to give. Ultimately, twin, ZIRP) seem to have achieved is to there is nothing to do except suffer after the Bank hiked rates to an ab- accelerate the economies of the West many years of economic indignity.
78 | ISSUE 29 – AUGUST 2017 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk THE FINAL WORD
The fixation with Japan was not helpful during Mr Greenspan's watch, nor I fear will it be of much use this time. The Japanese may be different, but they were not stupid."
I love that phrase "many years of eco- nomic indignity". It is fantastically Jap- anese. Over here we would say some- thing more crudely honest, like "a Depression".
So we have had a decade of mone- tary illusion and, for want of a better phrase, wage and price controls – and there is not, frankly, a whole lot to show for it other than artificially boosted stock markets, bond markets and property markets. In the process of manipulating stock, bond and prop- erty prices, our central banks have made those who own assets richer (at least in nominal terms) and have con- sequently made those who don't own assets poorer. They have also added to economic inequality by making prop- erty essentially unaffordable, perhaps forever, to those just starting out in their careers.
This is how revolutions happen. It is “NOW THINGS GET INTERESTING.” when high profile businessmen re- portedly indulge in binge-drinking ses- sions that culminate in their vomiting you for precisely nothing, let alone debted; they didn't prevent suffi- into fireplaces. Meanwhile, as Graeme a job with enough salary to make cient house-building in the South Archer nicely puts it, good that debt: then of course you East of England and they most require small punctuations of pleas- certainly didn't cause the financial If you survive by surfing the gig econ- ure. Like, ooh I don't know, spend- crash which has left all of our wages omy, writing your blog and tweeting ing the weekend at "boss" Glasto, so iridescently stagnant. your podcast, in-between cycling up shouting f**k the Tories along with Barnet Hill to deliveroo a pizza to your new best friend, the fat con- Now things get interesting. Having the smug marrieds-with-mortgages troller of Channel 4 News. spent 10 years at the bottom of the at the top of it; if the concept of hill, central bankers look like they'd owning a home feels as realistic as I don't entirely mock; there's some- like, finally, to start marching back up. holidaying on Mars; if the "financial thing in it. Life isn't easy for young The Fed has already taken baby steps security" you seek involves paying people and they didn't invent the to normalise US interest rates, but off the student loan you took out wretched university con-machine if they mishandle things they could to pay for a course that qualifies that's left them pointlessly in- end up crashing the bond market. The same holds for Mark Carney and Mario Draghi and for the comparably About Tim indebted UK and euro zone. The bond market is now massively bigger, by Tim Price is manager of the VT Price Value value, than it was in 2007. There's a rel- Portfolio (www.pricevaluepartners.com) and evantly poignant line in the filmA Night author of 'Investing Through the Looking to Remember as the Titanic starts to slip Glass: a rational guide to irrational financial beneath the waves and it dawns on the markets'. ship's captain that there are 2,200 on board but only room in the lifeboats for 1,200 souls:
I don't think the Board of Trade reg- ulations ever visualized this situa- tion. Do you?
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