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General Election 2015: Whoever Wins, Britain Loses plus... uK General Election How to position your portfolio for post-Election volatility When Disney met issue 02 - MAY 2015 Lucasfilm Disney shares feel the www.masterinvestormagazine.co.uk Force of Star Wars FEATURING... David Buik Zak Mir interviews a City Legend The Mind of the Master JIM MELLON SHARES HIS LATEST ROBBIE BURNS JIM MELLON ALPESH PATEL EVIL KNIEViL THOUGHTS ON THE MARKETS WELCOME I write to you in the wake of the 2015 Master Investor conference, which was by all accounts the best and most well attended in the event’s history. I would like to say a huge thank you to all the 3,800 people who attended on the day. It will be hard to raise the bar again in 2016 – but that is exactly what we aim to do!

Issue no. 2 of Master Investor Magazine once again brings you a broad array of insightful articles about investing, trading, and navigating the markets in what Moneyweek’s Merryn Somerset-Webb rightly referred to as extraordinary conditions. What’s more, our authors are doing their best to identify some common misconceptions. CONTACTS

For example, it’s commonly thought that “you can’t lose with property”. However, everywhere in Advertising the world, property suffers regular periods of underperformance. On page 22, I give the example of [email protected] Germany, where between 1975 and 2003 prices did not move an inch once inflation is taken into con- Editorial Enquries sideration. You’ll also learn why 80% of all residential property in Germany is unlikely to gain any real [email protected] value over the coming 20 years - and how you can focus on the remaining 20%! Subscriptions This issue is once again filled with comment and analysis that may help you to make sense of markets [email protected] and identify new opportunities. For those of you who like to do your own research, turn to page 82 to read about a fascinating new book that lays out why some of the best value opportunities might just be in your own back yard. Gervais Williams delivered a keynote speech to a jam-packed auditorium at the Master Investor show last month, and anyone who missed it is advised to catch up on his thinking FOLLOW US by getting his latest book.

A substantial part of the rest of this issue is focused on the UK General Election and how it may influence your investments. This is the most unpredictable election the UK has experienced in living b w O memory, and our authors Filipe R. Costa, James Faulkner, Robert Sutherland Smith, Nick Sudbury and Samuel Rae are offering you their viewpoints on how to prepare for the aftermath.

I hope you have also been making ample use of our newly launched website, www.masterinvestorma- EBOOK AVAILABLE gazine.co.uk, where we are posting new material on a daily basis. You’ll find articles from some of the authors that you already know from the magazine, but also new authors that we will be adding to our FOR DOWNLOAD now! growing line-up of contributors over the coming months (interested in writing for us – email [email protected]). Get the latest copy of Robbie Last but not least, we have relaunched our daily market report in a format that I hope you find more Burn’s new book informative, more useful, and more visually appealing. To sign up to the free market report, please the Naked Trader, subscribe by clicking HERE which has just been published! Until next month, Best regards, To get The Naked Trader 4 click the link below.

Swen Lorenz, Editor www.nakedtrader.co.uk

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Burnbrae Media Ltd. Editorial Contributors Disclaimer Material contained within the Master Investor Magazine and its website is for general information purposes only 101 Finsbury Pavement and is not intended to be relied upon by individual readers in making (or refraining from making) any specific 4th Floor, London Alpesh Patel Zak Mir investment decision. Master Investor Magazine Ltd. does not accept any liability for any loss suffered by any user EC2A 1RS, UK Filipe R Costa Swen Lorenz as a result of any such decision. Please note that the prices of shares, 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. Simon Carter Simon Cawkwell Smaller companies with a short track record tend to be more risky than larger, well established companies. Editorial James Faulkner Adrian Kempton- The investments and services mentioned in this publication will not be suitable for all readers.You should Samuel Rae Cumber assess the suitability of 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 Editor Swen Lorenz Robert Sutherland - Wendy Salisbury suitability of any investment or service, you should take appropriate professional advice. The views and Editorial Director James Faulkner Smith Bill Blain recommendations in this publication are based on information from a variety of sources. Although these Creative Director Lee Akers Jim Mellon Nick Sudbury are 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 interests Copywriter Simon Carter Maria Psarra in investments and/or providers of services referred to in this publication. Dave Evans Printed in the UK by The Magazine Printing Company

issue 02 - may 2015 050 Alpesh Patel on the 054 Fund Manager in 059 European Banks – Time www.masterinvestormagazine.co.uk Markets Focus – Hugh Hendry for Some Creative De- struction?

In the first in a new series of articles, Filipe R. Costa profiles Hugh Hendry, the Bill Blain of Mint Partners gets Schumpe- fund manager Alpesh Patel serves up bad boy of the hedge fund industry. terian with his analysis of the European CONTENTS his fundamental rules for traders. banking sector. 070024 078020 074

046 Small Cap Corner – 078 Best of the Blog Tomorrow’s Jam Today

Small-cap anorak James Faulkner hunts We look back at the most popular piec- down three stocks that could be about to es from the Master Investor Magazine election special articles hit the big time. website during the month of April.

024 Whoever Wins, Britain Loses 062 Best of the Evil Diaries 082 Book Review – The on the cover Future is Small Our resident economics guru Filipe R. Costa explains why whoever wins the UK General Election, the UK is in for a tough time regardless. Highlights of Simon Cawkwell’s (aka Swen Lorenz reviews top fund manager 06 The Force is Strong with Evil Knievil) trading and gambling Gervais Williams’ new book on why this One The Limpopo Dispatches – Election and Other Fevers exploits in recent weeks. small-cap stocks are set for a period of 030 prolonged outperformance. Disney feels the Force as it reveals its Robert Sutherland-Smith reports from the banks of the Limpopo. This time latest Star Wars trailer. We take a look at the venerable old gent takes a look at which blue chips stand to gain from any what the Lucasfilm acquisition means for School Corner – The Final Word – weakness in the pound. 066 084 042 Disney shareholders. Maria’s Golden Rules FTSE, or not FTSE? 086 No Country for Rich Men for Trading CFDs Adrian Kempton-Cumber calls it as David Buik Interview 034 it is. This time, Adrian examines the Trader Maria Psarra looks at how to 012 Remember when the rich were “squeezed until the pips squeak”? They’re about prospects for the FTSE in the wake of avoid tripping up with CFDs. Zak Mir interviews a City Legend – and a to squeak again. the election. 070052 gentleman to boot! 037 Fund Corner – Think the Unthinkable Shaken, not Stirred Markets in Focus Mellon on the Markets 070 088 017 In his debut piece for Master Investor Magazine, Nick Sudbury takes a look at how fund managers are positioning themselves for volatility in the wake of the Market data for the month of April. Inside the mind of a Master Investor: Antique specialist Wendy Salisbury Election. Jim Mellon updates readers on his latest explores the bubbly world of investing trades and investments. in vintage cocktail shakers. 040 Currency Corner – Election Uncertainty Only has One 059 Outcome in the Cable Around the World in a 020 Trader and author Samuel Rae gives his prognosis for Sterling in the midst of Technology Corner – Dozen Properties – Part 2 074 Election uncertainty. Social Networks for 80% of German residential property is Traders unlikely to gain any real value over the Zak Mir gets Technical with the Sterling/Dollar coming 20 years. We find out how to get 042 Master Investor’s resident technology expert Simon Carter gives his rundown in on the other 20%. Zak Mir offers a chartist’s perspective on the outlook for the Sterling/Dollar. of the top social networks for traders.

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The Force is Strong with this One “If I were being cynical, I’d say When Met that George Lucas has been short- changed by this deal.”

By James Faulkner

Being a huge Star Wars fan, I confess to having felt a pang of child-like excitement upon hearing that Disney had released a new trailer for the first instalment of the third trilogy in the franchise. Although it certainly piqued my interest, I had been somewhat underwhelmed by the first ‘teaser’ trailer, which was painfully laconic in terms of what it revealed. But perhaps that was always the best way to play it: keep the fans guessing and wanting more.

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If the last trailer underdelivered, the latest one did the opposite. We were treated to screenshots of key characters in what was an altogether more fluid and cogent appetiser for the film. I challenge any Star Wars fan not to admit to having felt the hair stand up on the back of their neck upon witnessing the Millennium Falcon fly into the engine shaft of a star destroyer; or at the reappearance of a geriatric Han Solo and Chewbacca after an absence of more than three decades from the silver screen.

But apart from the fans, the people who can also look forward to many an exciting year ahead are Walt Disney Co. shareholders. Disney stock jumped 1% on the back of the release of the new trailer – a move that was enough to add $2 billion to the company’s market cap- italisation. To put that into context, Dis- So how much is the Star What’s more, the global middle classes ney bought Lucasfilm for $4.05 billion are set to more than double by 2030 (ac- back in 2012. If the Star Wars franchise Wars franchise really cording to analysis from Reuters), thus can add that much value on the back of worth to Disney? bringing a whole new potential market one trailer, what might it add over the of budding Star Wars enthusiasts. next decade of films and merchandis- Disney has allocated a ‘useful life’ of 40 ing? If I were being cynical, I’d say that years to its Lucasfilm intangible assets, With this in mind – and considering the George Lucas has been short-changed so that gives us a clear indication that fact that there hasn’t been a Star Wars by this deal. Disney expects a lot of mileage out of the movie released for ten years – the new franchise. After all, Star Wars has been batch of Star Wars films could eas- The deal follows Disney’s acquisitions around for almost 40 years already, so ily become the highest grossing films of Pixar studios for $7.4 billion in 2006 why shouldn’t it be around for another of all time. Star Wars is currently the and Marvel comics for $4.2 billion in 40 years? With the last film in the fran- fifth most successful film franchise of In addition to the films themselves, 2009, and is part of a strategy to grow chise, The Revenge of the Sith, having been all time, with total worldwide box office there is also the whole consumer phe- “Given that Avatar made $2.8 bil- its stable of entertainment franchises released ‘a long, long time ago’ in 2005, receipts of $4.4 billion. But consider that nomenon emanating from them. An from the core Disney portfolio. Examin- Disney believes that there is “substan- the top four franchises – Harry Potter, article from Forbes in 2011 noted, “Star lion in 2009, I don’t think it would ing the Disney Co. accounts, we find that tial pent-up demand” for new material. Marvel, James Bond and Tolkien’s Mid- Wars’ initial release was followed by an- be outrageous to suggest that Dis- the $4.1 billion price tag for Lucasfilm As a Star Wars fan myself, I can confirm dle Earth – have all had films out much other five blockbuster films and a mini- ney could conceivably recoup the was allocated as follows: $2.6 billion to that they’re right in that assumption. more recently, in a market where ticket industry of tapes and DVDs, toys, video entire price tag for Lucasfilm in a identifiable intangible assets, $2.3 bil- prices are now much higher and global games and books. Taken together over lion to goodwill, and ($0.8 billion) for a But the real opportunity surely lies in audiences much larger! Given that Av- its 30 years of cultural dominance, the single film.” deferred income tax liability. The 2014 bringing Star Wars to a new genera- atar made $2.8 billion in 2009, I don’t Star Wars franchise has earned more annual report states that “The goodwill than $22 billion.” Sales have now sur- tion of fans, along with opening up new think it would be outrageous to suggest In the new world where content – something which is show- reflects the value to Disney from lev- passed $30 billion, according to more markets and geographies to the fran- that Disney could conceivably recoup cased perfectly in its success with Pi- eraging Lucasfilm intellectual property recent estimates. Content is King, Disney chise. Since the last film was released the entire price tag for Lucasfilm in a rates of the Caribbean, a franchise that across our distribution channels, taking in 2005, hundreds of millions of peo- single film. holds the crown jewels was created entirely out of a theme park advantage of Disney’s established global With its extensive distribution and crea- ple have joined the ranks of the middle ride! reach.” It strikes me that $2.3 billion is a classes of the emerging economies. tive infrastructure, Disney should easily With Star Wars being but the latest jewel seriously conservative estimate for this be able to move the Star Wars money- in the crown, Disney is in a supremely Although Disney stock trades on a trail- potential. It therefore seems that rather making machine up a few gears, es- strong position in today’s digital world. ing 12-month P/E of around 24x, this than purely extracting the highest price pecially as it seeks to capitalise on the The market is beginning to understand rating looks well-deserved in light of tag for Lucasfilm, Lucas himself was release of the new films from the end of that entities that have a strong creative its position within the industry and its primarily motivated by stewardship 2015 onwards. and distribution presence are highly prospects for future growth. The shares considerations. Put simply, Lucas want- valuable assets – and Disney’s portfolio are, in my opinion, a long-term strate- ed Disney as much as Disney wanted is arguably the best out there. Moreover, gic hold. Lucasfilm. Disney has shown itself to be a master- ful creator, acquirer and reformulator of May the Force be with you... always!

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FUND MANAGER IN FOCUS FUND MANAGER IN FOCUS

Zak Mir Interview david buik

Zak : David Buik, City Legend, are there I think in fact there was more flare. Flare I think a number of people did get carted any qualifications required for this type as well as ability. Flare was very important. on that move, but I mean even you will find of job if someone wants to follow in Somebody who could smell markets in their that all the central banks, whether it be the your footsteps? nostrils, whether they were going up, down, Fed, the Bank of England, or the Bank of Ja- moving. Whether there was long-term pan, are incandescent with rage against the That’s a very difficult question because they value. Today, as you know – you only have Swiss authorities for giving them absolutely don’t come more of a Luddite than myself, to look at the percentage of business that is no notice, so that a movement of that nature nor more uneducated for that matter – the done technically on screens, whether they’re could be massaged into the market. It was only exams I ever passed were seven GCSEs. auctions or programme trades – it’s regret- really an unforgivable thing. I fear that time has rather moved on since table but somewhere between 40 and 50 then. I mean that by today’s standards I per cent of trades are done by mathemati- Zak : That is assuming that the central would be described, and quite rightly so, as cians. And it’s got nothing to do with flare banks actually know what they are do- completely unemployable. So it’s quite hard or whether you think the market could tank, ing. From the Euro/Swiss debacle, and to answer the question. You don’t need the or whether you think the market’s got more obviously from our own ERM situation, brains, as you know, of a rocket scientist to value in it. It’s “This is what the algorithm pegging currencies is a failed strategy. do what I do. You just need a little bit of con- says…”, which I find very depressing. It’s As Mrs Thatcher said, “You can’t buck fidence, a little bit of experience and a bit of certainly, from my perspective, not a mar- the market.” knowledge – and the ability to communi- ket I would particularly like to be working in cate. The greatest joy that God ever gave an- 2015. You can’t buck the market. But all you can ybody in this world as far as I’m concerned say is that the quality of regulators today is good company, and if you feel comfortable in comparison to even seven years ago is in good company or all company, the job is “You can’t buck the substantially higher. There are also more of actually very easy. market. But all you them, and the leadership is much stronger can say is that the than it was then. No doubt, this is helped by Zak : Actually, you have answered what quality of regula- the fact that they had support from the gov- was a very difficult question I know tors today in com- ernment at a very, very, high level. So you – almost cheeky. But there are in fact parison to even are getting quality people like Andrew Bai- many points arising from what you seven years ago is ley at the Prudential Authority of the Bank have said. The first one is qualifica- substantially of England, and Martin Wheatley, who’s tions in the City. These days you need higher.” had his moments as well, but again I would more and more qualifications, while describe as a quality individual. So I think to until about 20 years ago some could get compare what’s going on today and what into the City with no qualifications at Zak : Sorry, but do these algorithms went on seven or eight years ago, or longer all. Couldn’t it be argued that the City work? We had the Euro/Swiss debacle than that, is probably unfair. was a better place before the advent of earlier this year. Presumably, most got qualifications overload? carted on that move? Algorithms or not.

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of hundred people. This I find terribly, ter- I mean the only thing that concerns me would be completely unsatisfactory in the Zak : That is because we have got the ribly sad. I really do. The idea that we should gravely at the moment – and I am hugely current circumstances. But this goes to a CEO fat cats, the bonuses, and sky high not be involved in investment banking is just concerned about it – is when something’s subject that you and I have no time to deal commissions from fund managers, the utter nonsense, as far as I’m concerned. If gone wrong we always overcompensate with, which is the lack of professional- latest section of the City community to you need to have more capital in that part in this country. And we are over regulating ism in the world of politics. The number of get it in the neck. of the business, but under the same banner, now. people who’ve actually had a job, have had then so be it. I’ve got no problem with that. any commercial experience, any leader- Yes. I don’t have a problem with regulation. But Zak : Let me be unfair, because you ship experience, is extremely limited. That’s what I do have a problem with is when peo- could say that between those few who because if you have experience, you auto- Zak : In terms of charges and things like ple slam the door in the face of flare. I find can trade or invest successfully and matically are labelled with having a colour- that, where is it going to end? It could that completely and utterly illogical and ri- those who regulate, it is always going ful past. Things go wrong with people who be the case within ten years that there is diculous. And it’s political pressure, it’s the to be the latter who are one step behind actually do things. hardly any point in getting involved in establishment, because they feel that their the curve. They will always be shutting the business of providing financial ser- only way of getting themselves heard is to the door after the horse has bolted. vices at all. The death warrant is being thump the tub, and think that they’re mak- “this business of go- issued as we speak. ing a tremendous contribution to society. Yes, but you know from what happened ing up the aircraft They’re not. Where we’re woefully weak is eight years ago, the first thing is we want gangway and turning Well yes, I think you can be negative in your 650 members of parliament, where prob- no repetition of that at all. But on the other left, and heading off attitude and the way you put things across to Hong Kong or Zog or ably 500 haven’t got a clue about the com- side of the coin, to hear after 52 years in the is the immediate hurdle that we all have to wherever it might be, mercial world. That is really detrimental to City of London that there will be in a year’s face. And I don’t think you’re exaggerat- because the tax is bet- serious decisions being made on regulation time no investment banking in the Royal ing a point. But people seem these days to ter and you’ll be al- and on commercial practice. Bank of Scotland at all! There is also a very lowed to do it – that’s only learn when serious mistakes and er- badly shaved down Barclays Bank where just a myth.” rors of judgement have been made. As we most of the exposure will be in New York. know, this business of going up the aircraft “Where we’re HSBC is battered, scared and bruised by gangway and turning left, and heading off unfair treatment out of the United States of Zak : Eventually. to Hong Kong or Zog or wherever it might woefully weak America, and also issues with the authorities be, because the tax is better and you’ll be al- is 650 mem- else is far greater. So when something goes make to you really and truly today however over here will almost certainly transfer the Even Richard Branson has had a few failed lowed to do it – that’s just a myth. What will bers of parlia- wrong it’s going to go horribly wrong. What emotional I want to feel about the idea of valuation of their investment banking bal- businesses under his belt. But it seems to be happen is the capital will be appropriated I’m saying is, what strikes me here at the a Labour Government, or a Labour coali- ance sheet away to Asia. They are already that the press are very unforgiving on any to other parts of the world. This is why it’s ment, where moment is that we don’t have any balance. tion, or any government at all, is the fact complying with the Chinese laws by sending blemishes at all. very sad. And you know, the European Un- probably 500 We do not want what happened before the is decisions in the United Kingdom are not 1,000 staff up to Birmingham to run their ion will learn by its draconian stance and by haven’t got a financial crisis, no doubt at all. But what we made domestically anymore. Mr Cameron retail banking. This means that we are ac- Well again you’re going back to things that the hopeless interpretation of regulation be- do want is the ability that if there is good is incapable of controlling immigration, the tually turning to the likes of Goldman Sachs, – and I’m substantially older than you are, ing done on a global basis. Even the Bank of clue about the business around, or people have flare to cre- world outside decides what happens about Morgan Stanley, JP Morgan Chase, Deutsche but if you recall – even in the days of Pat- England thinks regulation should be done on commercial ative business, that they should be given an currency flow. Pretty much every decision Bank and UBS saying, “Fill your boots and do rick Sergeant, and Ivan Fallon, and all these a global basis. I do not. How can you possi- world.” environment to do it with decent regulation. about anything that happens is a global it in London”. I think it’s just terribly, terri- other great financial doyens of the past, bly compare the criteria that is required from one. Therefore who wins or whatever coali- bly sad. I don’t condone bad behaviour but even Nigel Lawson when he was Business British banks over here – we’re basically Zak : May 7th is fast approaching, and tion it is, there’ll be a different emphasis on we have gone completely over the top in my Editor of the Sunday Telegraph 50 years mortgage lenders – to countries in Spain Zak : Just to be cheeky once again. in terms of the General Election result the type of business, or the business envi- humble opinion. ago, is that they were on the whole lacking and Portugal and France where they can’t You are not exactly a fan of the Euro- Nigel Farage is hoping that he will have ronment. But anybody who thinks because in what we call communications. They had even spell it? So how you could possibly have pean project. But how much better is a say in the outcome. So is Alex Sal- we’re going to have a Labour government Zak : What is the answer? Who is going no Bloomberg, they had no Reuters, they the same criteria for regulation? I don’t un- the Westminster project. It looks as mond. Is there any happy scenario you that the whole world is, or the whole of the to change this, because on the political had no wall-to-wall television, they had no derstand. That’s where I think they’ve made though it is absolutely in tatters. Not can think of in terms of what is going United Kingdom is just going to fall over, I side it is very difficult? You have a situ- technology. Therefore the quality of jour- a serious error of judgement. We’ve waited just the scandals and historic hor- to happen? think just deludes themselves. It’s not going ation where the general public really nalism was down to the Cheshire Cheese in for everybody else to dance and sing from rors, but the whole model of the second to happen. It’s going to be twice as tough to doesn’t understand the City, so it is up Fleet Street. You know, you poured a couple the same hymn sheet. That’s just nonsense. house and the expenses. The only plus No. I mean basically my political affiliations make any money, and the concern is that of to the politicians to play it by ear. It is of bottles of claret down your Gregory Peck, point with Westminster is to be ruined will come as absolutely no surprise to you course unemployment will go up because just something they are lumbered with got some information and went back to Zak : I am going to put you on the spot by your own people rather than people at all. And, you know the idea that I would incentives will go down, and therefore peo- unless there is a scandal such as PPI, the office to write a story. Life is very much again. In terms of a wish list, if you were who are abroad. Indeed, you don’t hear have Ed Miliband as my Prime Minister ple won’t invest and without investments Libor or Forex manipulation, when more sophisticated now, and the quality of King David of Buik, are there any obvi- of as many scandals from Brussels as is not one that fills me with great joy, and you’ve got very little chance of creating they are forced to act. journalist that you have, as you well know ous things you would change? Glaring you do from Westminster. even if I wasn’t at the advanced age of 71 I wealth. But I’m afraid a Labour-led minor- yourself, in my humble opinion is very high. things that we have wrong in 2015 and certainly wouldn’t be able to do backwards ity government or any Labour-led govern- Well you know the politicians of today, re- They are a very unforgiving bunch because which we maybe did not have before in We won’t, for the simple reason that you can summersaults. ment has to learn by its mistakes, because it gardless of colour, creed, or anything else, they pick holes in everything that’s going, the City? add Paris, Frankfurt, Brussels, Amsterdam, doesn’t believe what business, industry and have to be prudent. They can’t afford not to which is what they’re paid to do, as a result Rome, Madrid, list them all together, and Zak : And you would not have two commerce tells it. take a measured judgement on these things. of which they are very, very critical and the What we have in the City basically is that the they won’t make up the size of London as a kitchens either. In other words, any kind of uncontrolled risk actual support for the financial services in whole of the City of London now is tarred by financial centre. If that’s the case the qual- the financial press is extremely limited. the brush of the ailments of maybe a couple ity of risk management for want of anything No, I wouldn’t. The point I was going to

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Zak : You are saying that the optimistic The same as we have at the moment? Is Well, another year, and another Master Investor. This year was side of that is just that money flows and that the best scenario do you think? external political contingencies will “Ed Miliband’s particularly special, as we had 3,800 people through the door, and a probably govern this country alongside Well I think you’re writing a script that eve- heart is prob- huge amount of publicity. Over the years, I’ve made new friends at Labour in a way? rybody in the City would love to have. But ably in the I’m not certain it’s going to happen be- the show and it’s always great to welcome them back. Any government. I honestly generally because one thing that concerns me hugely is right place, believe it’s the same for a Conservative-led that the campaign which has been under- cause he has a coalition. What I do say is that the emphasis way now for some weeks, clearly Lynton massive social My slides will be linked to this ar- would be different. Currently the UK is a ter- Crosby has got the Conservatives singing ticle (see right), so I won’t go into rific environment to do business. I actually from one hymn sheet and that hymn sheet conscience for too much detail, as the presenta- believe in my heart, because he’s never given says, it’s the economy stupid. Well that’s which nobody tion itself will soon be on the mag- me any reason to disbelieve it, that Ed Mili- all very well, but you know basically if you could possibly azine’s website. The magazine is band’s heart is probably in the right place, live outside the South East of England and now the format for all of the vari- because he has a massive social conscience be chastised or London, and some of the very richer parts ous publications produced under for which nobody could possibly be chastised of Manchester, they haven’t seen this huge criticised for.” the Ancien Regime, and we are in- or criticised for. The trouble is with him he’s rally. And therefore you have to give them vesting heavily in content. Its ob- not balanced, he is anti-business, and that hope. What I don’t think either party has got jective is to get away from the rant comes across a vibration very, very strong the slightest idea of how to do – and don’t rag tone of other people’s ‘work’, wherever you go and whoever you talk to. ask me because I don’t have any idea either I haven’t found anybody who’s said, “You – is how you close the gap between those and to genuinely provide balanced know you can trust him and he really is on who have become very rich in the last 10 comment and analysis. business’s side”. He’s not. I think Ed Balls is years. It hasn’t been since the Conservatives pragmatic. I think his macroeconomic out- have been in, it’s since the last 10 years and We won’t ever get everything – or even “this is the best time ever to be alive, and the look is probably not unsound. But his micro- there have been those who’ve not seen their close to everything – right, but our mundanity of everyday life and its struggles management of it and understanding what standard of living rise at all. And that is, I guiding principles are, firstly, to do our should be seen in that context is required to keep incentive going, is to keep think, a huge problem. And even if Miliband best, and secondly, to eat our own cook- people going back to the world and invest- is not plausible, which he is to me, if he can ing wherever possible. Sure, the droning sound of economic against the Euro. I like Hewlett Pack- ing in business, industry and commerce. He get that message across who knows what’s forecasts, the hunt for yield and return ard for recovery; I have recently recom- doesn’t get it like Ed Miliband but he does going to happen on 7th May. I’d like to think I am truly grateful for so many people in a triple zero (growth, interest rates mended HSBC, but it is close to target understand the big picture. He might be David Cameron and George Osborne, 100 coming to make this by far the big- and productivity) world may seem tedi- now; and amongst smaller companies, I many things, Ed Balls, stupid he’s not. per cent deserve another chance because of gest show for investors in the UK and ous and grinding, but quite soon, we will like Portage Therapeutics in Canada, in what they’ve achieved in very, very difficult I guarantee you that on 23rd April 2016 live in a different type of world. which I have a key interest, as well as Zak : Do you think that we are prob- circumstances. Whether they’ll be given it, I we will have some spectacular stuff for Synergy Pharma in the US. ably going to have a coalition, prob- have my doubts. you to see and hear. Meantime, we have to eat, so I am go- ably a Conservative coalition, because ing to reiterate some of my key trades. All negative yield bonds are shorts, and I they have done enough to prop up the Zak : Thank you, David. Hopefully, we As I said in my speech – one based I have closed out the Euro short that would lighten up on gilts and US Treas- housing market and the jobs situation? shall speak again soon largely on the Fast Forward book – this has served us so well in the past year; I uries with immediate effect. A Cameron coalition second term, with is the best time ever to be alive, and have gone short Apple (notwithstanding business as usual? the mundanity of everyday life and its great results in the first quarter); and I struggles should be seen in that context. am heavily short the Swiss Franc

16 | www.masterinvestormagazine.co.UK | may 2015 may 2015| www.masterinvestormagazine.co.UK | 17 MELLON ON THE MARKETS

“All negative What Jim read this month... yield bonds are shorts, and I “Tech titans’ latest project: Defy death” would lighten up Jim is a firm believer in the rise of human life-expectancy, but maybe he has set his sights even further… Forget the Fountain of Youth, the Picture of Dorian Gray, or the on gilts and US Holy Grail, the search for immortality is over, today’s tech titan billionaires now believe Treasuries with they can create it using technology and data. immediate effect.” “The biggest question for pension planning: how long until you I am certain that US interest rates are going to die?” rise soon, and as a result I would be very wary of the overall US market. Meantime, I remain Until the tech titans crack eternal life, this is something we all need to consider at some point. Our life expectancy has been at the heart of many financial transactions over the long the Nikkei, for a further 10-15 % from decades, but with longevity the norm, the whole system is being revised. The article this point. Japan is transforming itself quite looks at some interesting solutions and Jim’s book Fast Forward is quoted as an ‘upbeat’ quickly and I wouldn’t worry too much about outlook on things. all the blather on demographics and stasis.

The fact is, Mr and Mrs Mikimoto are chasing yield and return, they have huge savings, in- “The innovators: build and launch your own satellite … for £20,000” adequate pensions, and they are replaying the

stock mania of the 1980s. This article from The Guardian takes a look at 25 year old founder of the PocketQube Shop, Tom Walkinshaw, who is looking to open up the next generation of space tech- In the precious metals complex, I plump for nology to amateur innovators by selling satellites the size of smartphones, for the silver; it is a leveraged way of dealing with comparatively accessible sum of £20,000. tail risk and as such provides good insurance. I won’t follow Merryn Somerset Webb into the Chinese markets, though she may be right; it seems too much of a pass the parcel game to “The Secrets of Unicorn Companies” me. Salim Ismail explores the secrets of Unicorn companies (companies that soar to a $1bil- In the past six weeks, I have made four speech- lion valuation and beyond) and the 100 most scalable organisations. Ismail theorises that Unicorns share a unique scaling structure which allows them to prosper exponen- es and am delighted now to go to Spain (pre- tially, identifying and implementing that structure is the key to $1billion success. … ceded by a quick trip to Kiev, which I will report on) and take some time off. Of course, I will still be keeping in touch both with you and the wider world, but at least my voice gets a rest. A cryptocurrency fit for Wall Street” The link to my slides follows below, and you Gillian Tett looks at the latest chapter in the bitcoin saga. Wall Street financiers are now can look at the key themes at your leisure. looking beyond retail payments and donations, so far the mainstay of cryptocurrency, to wholesale financial transactions and back-office markets settlements. Robotics (Fanuc and Kuka) and life sciences are my favourite areas.

Happy Hunting!! Out of the Ashes: Can civilisation reboot without fossil fuels? Jim Mellon Lewis Dartnell, UK Space Agency research fellow at the University of Leicester, dis- cusses themes explored in his latest book The Knowledge: How to Rebuild Our World From Scratch (2014). He looks at how the world will cope when we run out of fossil fuels, and surprisingly, it’s not all doom and gloom.

18 | www.masterinvestormagazine.com | april 2015 Around the World in a Dozen Properties (Part 2) Around the World in a Dozen Properties (Part 2)

This is the second in a 12-part series of ar- Around the World in a Dozen ticles by Swen Lorenz, reporting on easy- Properties (Part 2) to-access investment opportunities in high quality real estate around the world. This month, Swen has travelled to Ger- many to seek out an investment suitable How to get in on the for private investors. German Property Juggernaut By SWEN LORENZ

20 | www.masterinvestormagazine.com | april 2015 april 2015 | www.masterinvestormagazine.com | 21 Around the World in a Dozen Properties (Part 2) Around the World in a Dozen Properties (Part 2)

You’d have to have spent the last few Berlin experienced a first wave of for- German Government’s commitment to portfolio – i.e. 106,000 apartments – are years under a rock not to have heard eign buying between 2005 and 2007. Af- continue to pump billions of Euros into located in Berlin. More than 87% of the of Germany’s booming property mar- ter a temporary dip during the financial developing the country’s capital into a portfolio is in locations that are dynamic ket. After many years of being ignored crisis, these foreign buyers have now major European hub, that will change growth regions, with an additional focus by real estate investors, since 2005 the returned. Their favourite investments eventually. Unemployment in Berlin is in and around Hanover, Frankfurt, and German market has come onto its own. are apartments in the fashionable Mitte still higher than the national average, Cologne/Bonn. district, where foreigners make up 70% but economic growth is also outpacing Prices for residential property in some of all transactions. Brits and Russians the national rate. Berlin will eventually Buying shares in DW offers easy ac- areas of Berlin have risen by a factor of account for a substantial part of these become an economic powerhouse; it’s cess to the Berlin opportunity. It takes 4-5 over the past decade; Munich can transactions, the latter together with only a matter of time. away the hassle of individual ownership now keep up with some of the prici- Ukranians and other Eastern Europeans of property, and instead gives inves- est real estate locations in the world; who are looking for a safe haven desti- Whereas 42% of the population in Ger- tors access to the efficiencies that only and the country has been discovered by nation. Mitte is also a no-brainer for ex- many as a whole owns a property, in a large real estate holding has when it private equity investors, such as Brit- pats who actually want to live in Berlin. Berlin the figure is currently only 15%. comes to managing a portfolio on a day- ish firm Terra Firma, which bought a That statistic only has one way to go to-day basis. There is also a high level of six digit number of apartments across In the Mitte district, prices have now ris- with the increasing economic devel- liquidity, given the current market valu- the country, but has since then moved en to a level where some high-end ap- opment of Berlin. A growing culture of ation of EUR 7 billion. on through floating them on the stock partments are changing hands for near- ownership always contributes to price market. “A large-scale study estimated that ly EUR 20,000/sqm, which is near the growth, and helps stabilise a market What’s the downside? only 20% of Germany’s residential rate for similar locations in other large during economically difficult periods. In essence, the macro trend is clearly in I’m here to investigate whether or not capitals. However, Berlin as a whole is Shares in DW were trading at a signifi- property has any prospect of increas- still cheap, and that’s what investors favour of long-term value appreciation. it’s still a good time for private investors ing in value by more than the rate of cant discount to the underlying net asset to invest in this market. should pay attention to. value during the times of the financial inflation over the coming 20 years.” How to get in on the Berlin crisis. In 2007/08, the share price fell Some common miscon- investment opportunity from EUR 30 to just EUR 3, showing that even residential property investments ceptions about the Ger- are already standing empty. The Gov- Some areas remain at- Buying your own apartment in Berlin can suffer a fair amount of volatility if man market ernment is now discussing large-scale tractive for the long term is an option, especially given that the purchased through a listed company. demolition work to deal with the issue. cheapest apartments are available from Since then, the share price has recovered Investors interested in property invest- You wouldn’t want a property promoter No matter how strong Germany is eco- just EUR 100,000 upwards and financ- to EUR 25, which is above the current net ments in Germany need to keep in mind to sell you an apartment in an area that nomically, its property market is any- ing is not hard to get. However, very few asset value of approximately EUR 20 per just how large and diverse the country has a bleak economic future - and there thing but a one-way street. As a mat- people want the hassle of looking after share. Investors are currently so keen on is. In a country with 80 million resi- are many such places! ter of fact, between 1975 and 2003, tenants in another country, with a dif- investing in German residential proper- dents, which previously was split into inflation-adjusted property prices in ferent language and legal system. ty via the ease of a listed company, that A large-scale study estimated that only two separate nations, you inevitably end Germany didn’t go anywhere. Just like they are willing to pay a premium to get up having a broad spectrum of property 20% of Germany’s residential property in on the opportunity. with any other market, it’s important to Across the entirety of Berlin, residential One alternative is to buy into one of the sub-markets. Some do not lend them- has any prospect of increasing in value get both investment quality and timing property is priced at an average of EUR listed residential property companies. selves to property investment at all, and by more than the rate of inflation over Although prudent investors would ob- right. 2,000 to EUR 2,500 per square metre. These are mostly the result of some it is quite likely that the percentage of the coming 20 years. That renders the viously prefer to invest at a price that That’s just a third of what’s being paid large-scale privatisations of residen- such unsuitable locations is much bigger other 80% of the country entirely unin- is near (or ideally below) the net as- The number one real estate location to in London or Paris. In terms of youth- tial property portfolios in the 1990s than is widely believed. teresting for investment purposes. set value, it’s clearly possible that DW look at in Germany is Berlin. A quarter ful population, economic vibrancy, and and 2000s. The German national rail- shares will continue to rise, given the of a century after the Wall came down, cultural offerings, Berlin is nearly cer- way, Municipal governments and some The country has a lot of rural areas and Also, don’t under-estimate how taxes, strong fundamentals of the Berlin mar- Berlin has turned itself into an edgy and tain to eventually catch up with Paris large corporations historically held huge mid-sized cities that labour under con- bureaucracy and regulation can affect ket. Equally, a new financial crisis of vibrant global capital with an interest- and London. That’s where the opportu- property portfolios, and eventually de- tinued structural weaknesses, particu- your investment. Germany is a country any kind, such as a collapse of the bond ing historic and cultural legacy. If you nity lies. cided to sell them. They first ended up larly ageing populations. In a growing of traditionally strong protections for visit for a weekend, you’ll find majestic in the hands of private equity investors, market, could lead to the shares quickly number of these areas, there are now tenants. The booming property market coming off. historic architecture across the entire Already a sought-after location for and later found their way onto the stock tendencies towards negative population is great for investors, but 58% of Ger- city centre, newly gentrified apartment start-ups, Berlin will eventually succeed market. growth, with the young leaving for the mans still rent rather than own. The The only certainty, it seems, is that blocks in areas that were previously oc- in what it has utterly failed at thus far. large urban areas and the old remaining majority feels left out and will fight Berlin is well on the way to becoming a cupied by communist flats and buildings The city’s average income is currently Among the biggest such companies is behind - which becomes a self-rein- increasing prices and rents in the poll veritable European capital. If anything, from the Third Reich – and there are 8% below the national average, which Deutsche Wohnen (literally: German Liv- forcing cycle that is hard to break. booths. Even now, regulation makes it still countless construction cranes for- ing), which owns and manages 147,000 visit for a weekend and witness it your- difficult to get rid of tenants that have of course also hinders price growth for esting the skylines, indicating that more flats and 2,000 commercial units. self! It’s well worth the short flight from turned into a problem. Imagine owning residential property. In Chemnitz, the third largest city of the change is still to come. the UK. state of Saxony with 240,000 residents, a property and not just ending up with Of the 30 companies making up the Unlike many other such companies, DW a staggering 30,000 apartments a tenant from Hell, but also finding out Next month: Swen will be visiting Hong German DAX index, not a single one is has a clear focus. 73% of the entire that the law is basically set against you. Kong. domiciled in Berlin! Thanks to the

22 | www.masterinvestormagazine.co.UK | may 2015 may 2015 | www.masterinvestormagazine.co.UK | 23 UK General Election: Whoever Wins, Britain Loses UK General Election: Whoever Wins, Britain Loses

“Not only is the current account deficit ob- UK General Election scenely large and the government deficit per- sistently positive but also the household fi- Whoever Wins, nancial position is deteriorating.” Britain Loses By Filipe R. Costa

The Election Day Is current account deficit amounts to 5.6% and no government, either from Nearing… “The public sec- left or right, has been able to plug the tor runs a deficit leak. It is true that the economy is Five years have passed since the growing, but that is mostly the conse- last General Election and the UK is of 5.8% while the current account quence of an epic central bank inter- preparing for a new one. All par- vention and bold fiscal moves, which ties involved are now aggressively deficit amounts have been generating present relief marketing their political plans with to 5.6% and no but at the cost of mortgaging the fu- each of them greatly amplifying its ture. Growth has been created out of strengths while trying to cloak its government, either from left or artificial fundamentals and not based weaknesses. The fight will be fierce on previous savings. Such a strategy is and eventually extend past the Elec- right, has been running out of fuel. tion Day, as neither the Conserva- able to plug the tives nor the Labour party are likely …But the Main Problems to grab a majority. Political leaders leak.” like Tony Blair, Margaret Thatcher Persist and John Major, who were able to pound being the first casualty. But while lead their parties to a majority, are David Cameron praises the recovery of “A ticking time bomb” is the expression part of the past, as the new govern- the British economy from the Great Re- the perma-bear Albert Edwards (of ment will most likely either have to cession and Ed Miliband promises extra Societe Generale) uses when referring rule with an unstable minority or to funding for the NHS and a cut in Univer- to the UK economy’s “twin deficit” of seduce an ally. But, with the Liberal sity tuition fees, the UK economic recov- more than 10%. Not only is the cur- Democrats likely to lose a few seats ery is hiding severe problems that have rent account deficit obscenely large and with the SNP and UKIP not being not been seriously tackled by either par- and the government deficit persis- first choices for either the Conserva- ty. Time is running out, as Britain has tently positive but also the household tives or the Labour party as coalition been spending much more than it gen- financial position is deteriorating. partners, markets are heading to- erates for many, many years. The public wards turbulent waters, with the sector runs a deficit of 5.8% while the

24 | www.masterinvestormagazine.co.UK | may 2015 may 2015 | www.masterinvestormagazine.co.UK | 25 UK General Election: Whoever Wins, Britain Loses UK General Election: Whoever Wins, Britain Loses

Economic growth has been the result of more capital goods at a time the pref- unsustainable fundamentals led by asset erence goes in favour of consumption price increases, which in turn have been goods. fuelled by uncontrolled credit creation and government spending. Thereby, The investment in capital goods is not asset price inflation is neither the con- financed by savings and at the same sequence of any kind of economic im- time there is no decrease in current provement nor of any kind of change consumption. The central bank “fools” in the country’s savings position, but households and businesses into taking rather a transmission mechanism the wrong decisions. At a time the economy central bank uses to boost economic should be getting rid of past excess ca- growth. But the Bank of England, being pacity, liquidating some of the unprofit- a modern central bank, has lost control able projects and relying more on con- over money, which is now in the hands sumption goods, it will produce capital of commercial banks. The problem is goods. In the present it looks like the that these banks act in their own in- problem is solved but then, when reality terests, which are rarely aligned with sets in, we will have excess capacity and the country’s long-term sustainability. a new recession will take hold. We need Banks do tend to add too much credit consumer wealth to follow economic when there is no need for it, leveraging growth; otherwise what we really have the economy to unsustainable levels. is no more than thin air and leverage, which will create a bubble that always The economy is led by a feedback price ends with a burst. With all this in mind, effect. Higher prices lead to more credit, I think it is fair to say that the Bank of which in turn leads to more credit and England would have its fair share of re- additional price rises. But such Ponzi sponsibility in the next crisis to come. schemes sometimes break and prices stop increasing. At that point, such is the …But It Is Not Alone leverage taken by the economy (government, private sector and households) While the Austrian School may be right, that no one is able to repay the exist- sometimes it is costly to allow the econ- as these annual deficits add to a growing ing debt. The equity market crashes, the omy to liquidate excess capacity, as it debt pile. “the question we economy shrinks and a large recession would certainly generate unemployment sets in. and could lead to serious recession. For Smoothing the business cycle as advo- should ask is this: the sake of long-term stability and sus- cated by Keynes is a justifiable policy Is the British Gov- tainability, allowing a recession to take option. Government reduces taxes and ernment “invest- The Bank of England Is place may be a small and necessary price increases spending when the economy Part of the Problem… to pay for past excesses; but for the sake is sluggish but then reverses the policy ing” to generate of a political party being re-elected that when the economy is fast growing. But future income?” Then comes the central bank again, cut- is certainly too large a price to pay. So, has that really been the case so far with ting interest rates, purchasing assets en no government will weigh long-term Britain? masse and trying all kinds of tricks to risks as they weigh short-term ones. Now suppose you spend the same boost asset prices again. In the end, the And that is the main reason why the UK Just suppose you earn £10,000 in even £6,000 in odd months but that you save interest rate will never reflect the un- is heading towards disaster. A two-digit months but just £2,000 in odd ones. On nothing in even months. You will then derlying economic conditions on which For the government, lower interest rates cations of investment into capital goods twin deficit is a huge problem, but not average, you earn £6,000, even though end the year with a deficit of £24,000. investment and consumption decisions means paying lower prices for new debt instead of consumption goods. For the today or tomorrow. Today the sun will there is a cycle behind it. That is not Now add years of deficits and you have should be based, and will contribute to issues no matter how much debt is in the Austrian School, the lower interest rate continue to shine, as the global easing much different from the business cycle. the situation of the British government. the growing imbalances. pile. Again, it is no surprise that despite is the result of an increase in the savings has been contributing to a decrease in Think about it as the boom-bust cycle, That is obviously unsustainable. Unless its pledge to balance the public finances, rate in the economy. Households are the issuing costs for gilts while sterling with the even months representing the at least part of the extra “spending” is For households, lower interest rates are David Cameron completely reversed the willing to consume less in the present has been trading within an acceptable peaks and the odd ones representing in the form of “investment” to expand an incentive for them to engage in too idea three years ago, as the incentive to to consume more in the future, thereby margin. Only when it is too late, will the troughs. Keynes would advise you your potential to generate a higher fu- much credit, which will translate into spend was too great to miss. leading to a decrease in the interest rate. the British government do something. to proceed as follows: borrow £4,000 ture income, you will become ever more higher prices (in particular house prices) But what about when the decrease in the When that time comes, the adjustment in odd months to keep a spending level indebted until everybody realises you and at the same time completely erode For businesses (and pushing the Aus- interest rate is artificial? Then the inter- will be much more painful, as Southern of £6,000 and save £4,000 in the other are bankrupt. Therefore, the question any incentives to save. It comes as no trian School of Economics thinking into est rate no longer reflects an increase in Europe knows all too well. No one can months. This procedure allows you to we should ask is this: Is the British Gov- surprise that the savings rate is negative the table), lower interest rates decrease the savings rate and businesses will in- sustain deficits for an unlimited period, smooth your spending while keeping ernment “investing” to generate future for households in the UK. the cost of capital, leading to larger allo- vest in longer-term projects to produce your finances in shape. income?

26 | www.masterinvestormagazine.com | april 2015 may 2015 | www.masterinvestormagazine.co.UK | 27 UK General Election: Whoever Wins, Britain Loses

To quote The Economist: “Britain is on a consumption binge. The household savings rate is negative, according to one estimate, and household debt is forecast to balloon in the next five years. If that happens, Brit- ain will grow as forecast, but at the cost of running down its wealth. It will be heading for a crisis”. The government is spending rather than investing and has been doing that for years, by consuming the country’s present wealth. So rather than creating a future the government is de- stroying it just for sake of the present looking better than it really is. With the Bank of England helping the government with a 0.5% interest rate and with hike in the country continues to be the ECB just having approved a large- pushed into the distant future, the scale asset purchase; the yields on the pound may be pressed in the second half “Overall, the British government debt are improving when the first rate hike from the Fed is British econo- overnight, as investors are angrily seek- likely to occur. my now seems ing anything with returns above zero. The 1.57% currently offered by the 10- better than at year gilt is a massive premium over the the peak of the negative Swiss rates or over the zero- Great Reces- yielding German bunds, in particular at sion, but such a time the pound looks robust against the euro. Thus, the British Government observation is issuing debt at ever lower rates, de- hides the real spite the debt as a percentage of GDP value having risen from 43.7% in 2007/08 to of the 90.6% in 2013/14 (see chart to the right). improvement?” Whoever Wins, Britain Loses It is time to look at the past and rec- ognise that we can no longer finance growth with credit and debt, which has Overall, the British economy now seems only been possible due to an artificially better than at the peak of the Great Re- low interest rate level, but that, at the cession, but such observation hides the same time, has been leading to huge real value of the improvement. Invest- investment mistakes that drive the ing after saving is very different from economy from boom to bust. House- investing before saving. Without saving, holds and the government are consum- the cost to finance the extra growth in ing more than they generate and thus the present will be too high to pay in the At the same time, even though the eroding wealth. Productivity gains have future. No matter who wins the Gen- large-scale asset purchase programme been modest over the last few years eral Election, the next government will is not beneficial for the euro and thus when compared with other countries. have the difficult task of tackling the supports the pound at current levels, we Money is flowing out of the country growing imbalances. If not, the pound should not forget that the Eurozone still with the current account just hitting the will be vulnerable to what happened in has a positive current account, which worst annual deficit since records be- 1992 when George Soros “broke the Bank helps the euro in the long-term. When gan in 1948 and “the largest peace-time of England”. The current account deficit we sum all this, it makes us worried deficit since at least 1830, based on the Bank cannot continue to grow, as the pound about the future and we believe that a of England’s historical dataset”, the Office would face a quick depreciation at some currency crisis may occur in the UK and of Budget Responsibility reports. This is point. Until now the fact that all major interest rates may start rising faster the real challenge facing Britain today, central banks have been competing for than first thought, which would lead the yet sadly it is one that will be overlooked currency devaluations has prevented the vulnerable economy into recession once by the politicians and the public until it pound from being hit, but if the first rate again. is too late.

28 | www.masterinvestormagazine.com | april 2015 april 2015 | www.masterinvestormagazine.com | 29 THE LIMPOPO DISPATCHES THE LIMPOPO DISPATCHES The Limpopo Dispatches Election and Other Fevers

By Robert Sutherland Smith In which your correspondent has a bad dream about politics and the local witch doctor asks for advice whilst reaching for a cigar...

It is that time of the month, when I have had a glass or two of the jun- (a category of persons without whom convey my innermost, subconscious gle juice; or as in his case, a bottle of no respectable family was once com- thoughts to the outer world which Corny & Barrows house claret with a few plete) living indignantly in Tunbridge exists beyond the crocodile and chums from Morgan Grenfell (an almost Wells, on the promise that I never hippopotamus pre-occupied banks forgotten one time merchant bank, once darken her doorstep again. So here I and waters of the fair Limpopo. So described by a Rothschild as the “goy remain, along with Lord Lucan and with a flask of the local jungle juice merchant bank”). I am very glad that Elvis Presley, and a few flash crash - a remarkably good substitute for those top hat, white collared puritanical futures traders on the run from the General Gordon’s London Gin in Tories cannot see me asleep in the af- FBI, in the land of pure market de- my humble opinion – I climb into ternoon, for fear that they would judge tachment; a sort of Shangri-La along my hammock to nurture and nour- me to be one of those delinquent, benefit the banks of the Limpopo for those ish my innermost thoughts before scroungers - unlike those hardwork- who never wish to grow old. slipping into a dream filled sleep, ing chaps in the restaurants and clubs of slumbering in the heat of an early Westminster, with whom Ministers no The dream is not too long in coming. Limpopo afternoon. Would there be doubt surround themselves for exhaust- In it, I find myself in a kind of civil dreams of investing? Or dreams of ing, long, hard working, lunches. war England, without a king to behead something else? As it turned out it (the old Royal prerogative has been was a dream about elections which I do not want to be accused of pulling largely transferred to Prime Minis- have obvious implications for the down the blinds and just sleeping while ters) but plenty of parliamentarians currency and the amount of confi- hard working people toil at their labours. of various kinds. In my nightmare, I dence the world might have in its The fact is, I do not have a blind to pull am being pointed at by a nightmar- value in a week or two. down. A couple of shady bongo trees are ish, George Osborne figure in black, enough for yours truly! with one of those tapering top hats “We are”, as an old merchant bank- (inspired no doubt by a fashion for er, Samuel Montagu, used to say, Moreover, as a ‘remittance man’ I am quantitative easing) with a white sil- nodding off after a good lunch; “we not in receipt of government social se- ver buckle on the front. are such things as dreams are made curity benefits but a private monthly al- of”, old boy; particularly after you lowance from my maiden aunt

30 | www.masterinvestormagazine.co.UK | may 2015 may 2015 | www.masterinvestormagazine.co.UK | 31 UK General Election: Whoever Wins, Britain Loses UK General Election: Whoever Wins, Britain Loses

He is wearing a very large white col- defence capability; forgetting of course, doctor of course. His conversation will If the UK faces a prospect of a greater lar and grimly reading from the Book that this has been largely accomplished be like a light relief after all those par- degree of national un-governability, the of Austerity – it comes after Ecclesias- already, to the alarm of Capitol Hill and liamentarians and their antics.“ US already has it in the form of a Dem- “Goldman Sachs looked at 400 of tes and describes the Lord’s long term the Whitehall Chiefs of Staff. ocratic Whitehouse and a Republican the world’s largest new oil and plan for the economy – condemning “Just so” replies Bates – I mean Polly. Congress. In the US it is a time great po- my sloth and general malignance. (He Suddenly, a chap in a bad way and I merely add for the record, that Um- litical polarisation. The President is re- gas fields and found projects seems, in my dream, to confuse the na- weighed down with a suit of armour bopo’s Bouef Wellington was a triumph puted to lack the skills to get his policies representing $930 billion of fu- tional accounts with the real world of enters right and stumbles forward, cry- as great as the victory at Waterloo itself through a tribal Congress. Moreover, the real economy, which is the kind of ing “A horse, a horse, my Kingdom for a and would have won the approbation of the two year long period of Presidential ture investment that are no disconcerting thing that happens in a horse” and “which way to Leicester Ca- the Great Duke, had he been present to electioneering has just begun. It prom- longer profitable with Brent lurid sleep, and sometimes when wide thedral?” At last a king! But the wrong enjoy a serving. ises to be long, nasty and brutish. crude at $70 per barrel.” awake – as in the case of cabinet meet- one! I don’t like to tell him his horse has ings.) stampeded off with Prince Rupert of the The FT has arrived at last but I note it The current economic consensus GDP Rhine – played by the boyishly smiling is dated 1928; late again! I shall need to estimates are for 3% growth in the US David Cameron appears dressed as a Nick Clegg. Suddenly and inexplicably, listen to the distant drumming to find and 2.6% in the UK. Although the US wart free Oliver Cromwell with a brown an unsmiling Queen Victoria appears out what is happening in the equity has a deficit on current account equal to buckskin jerkin and white builder’s hard in little Brougham carriage, directed market. And they are not always right. 2% of GDP, the UK has a champion 4.5% hat marked ‘Sky News’, and is facing by John Brown (looking oddly like Alex Polly comes in to announce the local current account deficit. down Levellers, led by Ed Miliband (in Salmond) and proclaiming that she is witch doctor, who had arrived for a late a builders hard hat marked ‘NHS’), who not amused. A large body of the voting bottled Port. The idea that we shall have an unstable mistakenly reads the wrong line, by be- public then chorus in unity, “Neither are parliament and political situation after seeching Cromwell, “in the bowels of we!” “What do you think the outcome of the May might well call the UK economic Christ” to go, because he has sat there election will mean for punters, old boy?” situation into greater question, with too long – or words to that effect. Then, I wake up and find my parrot, he says in perfectly modulated received overseas holders of Sterling perhaps Polly looking into my eyes, with curi- pronunciation of that long deceased preferring the dollar above sterling. The Nick Clegg gallops on like a laughing ous concern. “Are you alright?” she asks British film actor Dennis Price, whilst dollar also has the advantage of being a cavalier, Prince Rupert of the Rhine, anxiously. reaching effortlessly for a Monti Cristo reserve and haven currency which ster- but keeps going (not having yet learnt from my cigar box marked “Home and ling is not. One can of course play the to regroup after a cavalry charge) whilst “Is it time for dinner?” I reply. Colonial’s Best“. Typical Labour sup- geared version of any such coming cur- Nigel Farage appears as the parliamen- porter I think to myself, remember- rency misalignment in the FTSE 100 tarian Earl of Manchester, with a pewter “Its bouef Wellington”, says the parrot. ing that Harold Wilson puffed a pipe in section of the London stock market. mug of foaming ale, demanding resto- public but always drew on a good Cuban ration of the sovereignty of Parliament “Not with HP sauce?!” I respond; not in private. Part of the explanation for that rests on whilst, being steadied by Major Reckless thinking clearly as a gentleman should, the fact that the FTSE100 Index meas- of the Rochester Militia. In the back- about the most important event of the Playing the Sterling game ures company performance interna- ground is the skirl of Highland bagpipes day. tionally and not domestically. Like the These would get little direct benefit price chart arguably looks ready to re- as Nicola Sturgeon, seeming remarkably in shares French Foreign Legion the FTSE 100 from a weak pound exchange rate but sume its upward trend. like Flora MacDonald, is at the head of Her interest is mollifying. Index is more foreign than British in its As we approach a UK general election benefit from any rise in interest rates, if an army of Glaswegian long pikemen. range of activities. Most of its constitu- like no other that we have known, or they were raised to defend the currency. Rolls Royce (RR.) at 1,035p is also a (“They dinna like it up them, Jimmy” is “I dreamt that Osborne had found me!” ent company activities are internation- have any history of, the market in the HSBC (HSBA), Standard Chartered natural beneficiary of a weak pound ex- their motto.) al. However, it inevitably also attracts (STAN) and Barclays (BARC), on the change rate against the dollar. This is in “Oh my God!” volunteered Polly. shape of the FTSE 100 Index has re- overseas buyers who are influenced by mained as steady as the Buffs in front of other hand, are much more plugged my opinion a now undervalued business There are parliamentarians everywhere prospects of sterling. such uncertainty. It has been trending into international markets. These latter of great scarcity value and sustainability but not a monarch in sight!? Too many Much relieved by the parrot’s non polit- up and has recently got into new share three, are much more likely to benefit with shares for the time being not sell- Regicides but no sign of Reg. (Her Maj- ical demeanour, I climb from my ham- It has a heavy weighting of oil and min- price territory. It may be true that DJ 500 from any weakening in the pound’s ex- ing at a premium. esty in fact remains aloof from the strife mock to dress for dinner, calling over ing shares, banks and pharmaceutical has led the FTSE 100 by plus 13% to 8% change value. Moreover, there is talk of by taking tea with the Saudi Arabian my shoulder “If the Tory canvasser does shares. And many of those are overseas over a year, but they have performed al- HSBC and Standard Chartered shifting Rio Tinto (RIO) at 2,958p, after a period Ambassador to the Court of St. James, ring the vine, tell him or her that I shall earners, though not all. British banks for most identically over six months – both their HQs to Asia which, if it happened, of decline, yields 4.8% and the share at Buck House, who wants to know if be voting Jungle Green this time.” example, are increasingly domestic in up around 12%. would be good for the share price, albeit price trend looks attractive. I have pre- they can have their money back.) It is an their operations and less international. less good for the UK. viously argued that it is generating prof- election battle in which parliamentar- “Very good my Lord”, replies the parrot, It seems that currency traders and their its from lower unit costs of production ian gouges parliamentarian with hard in an imitation of Mr. Bates, that would The banks you should not consider as an one eyed economist advisors are viewing HSBC logs a trailing annual dividend to compensate for the fall in the price of destructive words and harsh allusions do credit to a digitally advanced sound investment in a weaker pound environ- the outlook for dollar denominated poli- yield of 5.13% and a trailing PER of 13. iron ore. Its results are due, and I guess to the Bible. Most cruelly, Fallon says Ed mixer. ment include Lloyds (LLOY) and RBS tics and government and its sterling de- they may be better than many expect. has the mark of Cain – not Michael, the (RBS), which are much more geared nominated counterpart as having much Although WPP (WPP) only has a divi- other one – upon him, condemning him “If anyone calls, tell them I am not at plays on the prospects of the UK econ- in common. dend yield of 2.4% at 1,572p, the share for plans to destroy old Blighty’s home to visitors – except for the witch omy.

may 2015 | www.masterinvestormagazine.co.UK | 33 32 | www.masterinvestormagazine.com | april 2015 no country for old men no country for old men

“Despite five years of so- called ‘austerity’, the fiscal deficit No Country still stands at around 5% of GDP and the national debt has almost doubled for Rich Men in cash terms By James Faulkner since 2010.” In a world full of uncertainty, it is often remarked that the only certainties in life are death and taxes. Well, today we can add the following to that short list of certainties: no matter who wins the General Election on 7th May, taxes as a whole will have to go up. Despite five years of so-called ‘austerity’, the fiscal deficit still stands at around 5% of GDP and the national debt has almost doubled in cash terms since 2010. The deficit remains the elephant in the room, and still requires urgent attention if Britain is to return to a modicum of fiscal rectitude.

So how could a future government go ment– the flipside of the UK’s highly flex- upon to foot an an even greater share about plugging this gaping hole? To ible labour market – but there are also of the bill. address this question it might be use- questions regarding the level of investment ful to understand how the last govern- undertaken by UK firms, which sits below Squeezed until the pips ment attempted to fix the deficit, and many of our developed world counterparts. squeak what factors blew it off course. Given Stemming from this, the major shortfall that George Osborne’s original plans for the Coalition Government in terms of We should be in no doubt that paying tax envisaged eliminating the deficit by tax revenues has been income tax receipts, to the UK coffers is an entirely voluntary the end of 2015, it could easily be ar- which have underperformed on the back affair for the super-rich. Squeeze them gued that the Coalition Government of a persistent lack of wage growth. Com- too hard and they will leave for fairer failed miserably in its main objective. pounding the problem is the fact that the shores. Indeed, despite all the rhetoric, However, it would be churlish to ignore income tax threshold has been raised from it is not the super-rich who lie in poli- the headwinds posed by the European just over £6,000 to over £10,000, thereby ticians’ crosshairs. In fact, those who Crisis, which had significant knock- narrowing the income tax base. stand to lose most from the next round on effects on UK growth. Osborne et al of ‘fiscal consolidation’ would prob- decided it would be better to allow the This hollowing out of the tax base is one ably not describe themselves as ‘rich’. ‘automatic stabilisers’ to take up some of the major developments of recent times. We’re talking about doctors, lawyers, of the slack, rather than continue to Whilst the rich now pay an even greater accountants, small business owners push harder with austerity in the early share of the total tax take than ever before and other successful professionals – the years of the Coalition. – in fact, the “1%” pay close to 30% of the people who are sufficiently wealthy and entire income tax take – many lower earn- numerous to collectively yield a major In addition to the crisis in Europe, ers are being taken out of income tax alto- contribution, yet at the same time less the UK economy has suffered from a gether. In addition to this, the number of likely to disappear overseas. chronic productivity problem. Given ‘higher’ earners – those who fall into the that the last downturn saw fewer job 40% marginal tax rate – has grown mark- So how will the next government set losses than previous crises, it is likely edly due to ‘fiscal drag’. The alarming re- about mining this rich seam? A collec- that much of this problem stems from sult is a top-heavy tax base, at a time when tion of wealth taxes looks likely in the labour hoarding and underemploy- the wealthy are being increasingly called event of any Labour-led government.

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First and foremost, after another credit I conclude with housing, which contin- fuelled housing boom, the left-leaning “The current ues to be an all-pervasive influence on FUND CORNER parties clearly have property in their generation of the UK economy, for better or worse. sights. The so-called ‘mansion tax’ retirees have reaped Currently, we are seeing the former, but would hit anyone with a home worth the lion’s share of it has to be said that the current housing more than £2 million, although the pre- the last housing boom is yet another credit-fuelled bub- cise details of individual parties’ pro- boom and seen their ble waiting to burst. The Coalition dealt posals are as yet unclear. The lifetime benefits with the demand side via the various pensions tax relief allowance has already protected through- lending initiatives such as Help to Buy, been capped at £1.25 million, down from out ‘austerity’. but totally neglected the supply side, £1.5 million, and is likely to be reduced which remains frustrated by outdated THINK THE to £1 million. This may still seem gener- planning laws. Stoking a housing boom ous, but consider that £1.25 million will may be an easy way to deliver a cyclical only buy a pension of £27,000 per year recovery, but it does not lay the foun- (after taking tax free cash of 25%) after dations for a sustainable one. It is long- tax, which would not be considered ex- term systemic issues such as these that travagant by any stretch of the imagina- will have to be tackled if the UK is to ever tion. achieve the ‘rebalancing’ that politicians UNTHINKABLE like to talk about. By Nick Sudbury But what about those looking to supple- ment their income via investing in prop- The upcoming General Election could be a pivotal point in our history erty or shares? I’m afraid there isn’t any good news from that corner either. Un- and lead to the country leaving the EU or the breakup of the United der Labour, landlords are likely to face Kingdom, with Scotland becoming independent. It might just as eas- the loss of the tax relief they currently Investment Idea receive on mortgage interest payments, ily turn out to be a complete damp squib, which creates something of and both major parties appear likely to If, like me, you’re feeling a little Yet the Coalition’s tinkering around a dilemma if you are wondering which funds to invest in for the next reform letting rules in favour of the ten- pessimistic about the UK’s pros- the edges – dubbed a ‘top-down reor- ant. As for equity investments, investors pects, you may wish to take a few months. ganisation’ or, even more ridiculously, are likely to face higher capital gains look at the Murray International ‘privatisation’ by some – was met with and dividend taxes, which would make Trust* (MYI). Managed by Bruce Neil Woodford, probably the most feted Banks are another favoured area, yet In his final pre-election Budget, George a huge public outcry, as if it was wholly the annual ISA allowance all that more Stout of Aberdeen Asset Manage- fund manager in the UK, has warned they remain a popular political target Osborne announced a further substan- unnecessary. In a political climate where valuable. However, some commenta- ment, the trust invests globally in that a Tory inspired referendum on the given the public anger over the financial tial increase in the bank levy and the even the slightest proposals for change tors have even suggested that a future companies that Stout believes have country’s membership of the EU could crisis. removal of corporation tax relief on the are shouted down, it is impossible to government may consider capping the strong track records of growing have a big impact on the stock market, multi-billion pound fines imposed on have a constructive debate about the value of an ISA at a similar level to the cash flow and dividends. Stout is as could SNP pressure for a new vote the sector. If Labour gets in it could be very real challenges facing this vener- pensions cap, thus hitting the growing pessimistic regarding the pros- on Scottish Independence. Despite this even worse with a Miliband government able organisation. “Research number of ISA millionaires. The mes- pects for developed economies he has remained fully invested, even threatening to break up the largest do- sage is exactly this: “wherever you stash such as the UK, not least because of though the UK Equity Income sector in from Deutsche mestic lenders and to introduce a higher The UK faces similarly intractable prob- your cash, we will come after it”. their mountainous debt piles, both which he operates is likely to be one of bank levy, a new bonus tax and other lems when it comes to pensioner ben- Bank suggests public and private. He believes those most affected by new government similar measures. efits and housing policy. The pensioner- better value currently resides in policies. that stocks The curse of the sacred related benefits bill is by far the largest international equities, in particu- such as Cen- Other common holdings include tobacco cows component of welfare spending, yet it lar those in emerging markets. If Ed Miliband gets into number 10 it stocks, which make up some of the larg- receives scant attention from politicians, trica could The trust has historically tended could be bad news for utility compa- est weightings in the Woodford Equity It is often remarked that there is no real who prefer to concentrate on easier tar- to trade on quite a significant pre- nies because of his proposed policy of be worth at Income fund as well as many of his peer choice in politics any more, but the pub- gets like so-called ‘scroungers’ and the mium to net assets, which reflects capping energy prices. Research from group. Parliament has already voted to lic are also partly to blame in that they working poor. The current generation least 20% less Stout’s strong track record, but a Deutsche Bank suggests that stocks such introduce standardised cigarette pack- have forced politicians to tread a very of retirees have reaped the lion’s share period of short-term underper- as Centrica could be worth at least 20% under a La- aging from May 2016, but the Labour narrow line in a very rapidly chang- of the last housing boom and seen their formance has recently seen the less under a Labour-led government party has gone a step further and said ing world. Symptomatic of this attitude benefits protected throughout ‘auster- bour-led gov- premium all but disappear. There than a Conservative one. Utility compa- that it would impose a levy on tobacco of consensus is the ‘sacred cow’, chief ity’. Meanwhile, prospective retirees can ernment than is also a 4.2% dividend yield and nies tend to form the core of many UK firms to pay for additional staff in the of which is the NHS. The world’s third no longer look forward to the defined a strong track record of dividend equity income funds on account of their a Conservative National Health Service. largest employer (behind the Chinese benefit (or ‘final salary’) pensions of growth. high and steady dividends, but a price Liberation Army and the Indian Rail- their forebears, whilst simultaneously one.” cap could make a nasty dent in their way) is in drastic need of a major over- being saddled with the additional na- * James holds the Murray International Trust earnings. haul to make it fit for purpose in the 21st tional debt accumulated to maintain the in his ISA. century. current generation of retirees.

36 | www.masterinvestormagazine.co.UK | may 2015 may 2015 | www.masterinvestormagazine.co.UK | 37 fund corner fund corner

This would allow them to take advan- markable £25bn in assets under man- The company mainly uses ETFs and tage of any volatility and to reduce the agement. took a similar step before the last year’s “Most fund managers concentrate pri- impact of a falling market as a result of vote on Scottish independence. marily on company fundamentals and it is an unwelcome outcome, although it also The team responsible for GARS have re- possible that a bout of market volatility duced their exposure to UK equities to means that they run the risk of not fully could create some interesting new participating in a relief rally. less than 7% of the portfolio. Their remaining UK holdings have been chosen opportunities.” Analysis by FE Trustnet shows that the on the basis that they will benefit from cash weightings in Smith & Williamson strong domestic earnings outside of could lead to a sovereign credit rating the transaction costs of positioning their UK Equity Income and GLG Undervalued the financials and supermarket sectors. downgrade, the loss of safe haven status portfolio for something that may never Assets have recently been increased to The managers are also anticipating a for gilts and unwelcome attention on the happen or being caught out by misjudg- more than 10%, while JP Morgan’s UK fall in the pound, which would enhance country’s burgeoning current account ing the result. Dynamic and UK Focus funds have gone the value of their substantial overseas deficit. This would be detrimental for from a near zero exposure to around weightings when translated back into Utility companies like Centrica could be UK gilt funds, sterling corporate bond Managers that are measured against a 20%. sterling. worth around 20% less under a Labour- funds and UK equity funds that invest global market index can take a pragmat- led government, according to research from in companies with significant domestic ic wait and see approach by moving to a Global funds can take advantage of the Many UK fund managers are increasing Deutsche Bank. earnings. benchmark neutral position. One person “Many fund man- best opportunities in the world, and if overseas weightings in order to profit from that has gone down this route is Bambos agers believe that the managers are concerned about the any weakness in sterling. Another problem is the Budget deficit. Hambi, who runs the £614m MyFolio Always look on the bright outlook for the UK they can trim their the main impact The IMF recently warned that the UK’s Multi-Manager III fund at Standard Life side exposure accordingly. of the Election In the firing line next government will not be able to bal- Investments. will be to weaken ance its books by the end of the decade. Change also creates opportunities, with Terry Smith’s Fundsmith Equity, which the pound on the The pound has been in a clear down It predicts that tax revenues will be low- In his latest quarterly commentary he a prime example being the housebuild- is one of the top performing funds in trend against the US dollar since the er than forecast and that whoever is in says that his main concerns around ing sector. All the main parties have foreign exchange the Global sector since it was launched start of July, and many believe that it power will be forced to spend more than the election are the prospect of a hung announced new initiatives designed to markets.” in November 2010, currently only has a is sterling that will be the biggest los- they are currently planning. This could parliament, as well as the potential for help first time buyers get onto the hous- quarter of the portfolio invested in the er from the election. In a recent report have a negative impact on the pound an EU referendum if the Tories are re- ing ladder, which is one reason why the UK. His main allocation is to the United entitled ‘Ruling Britannia’, BlackRock and possibly on UK assets as a whole elected. He is also cautious about the UK managers of the Artemis Income fund States where he has a 58% weighting warned that the exchange rate could fall if it scares away foreign investors and because of the impact of falling com- have recently invested in Persimmon. It and there is a further 14% in Europe. further if Labour wins power with the is not unreasonable to expect companies makes them look for better opportuni- modity prices on mining stocks and the backing of the SNP. ties elsewhere. fact that sterling’s strength against the like this to benefit regardless of who It is a similar picture with Baillie Gifford euro is reducing competitiveness against gets into Downing Street, especially if Global Discovery that has an equally Their view is that an Ed Miliband gov- the country’s biggest trading partner. interest rates remain at the current low impressive record. The fund has 26% ernment would result in looser fiscal level. invested in the UK, with 39% in the US discipline. Larger current account and Most fund managers concentrate pri- and 14% in Europe, as well as various budget deficits would have the poten- marily on company fundamentals and it Many fund managers believe that the smaller allocations elsewhere. tial to undermine international investor main impact of the Election will be to is possible that a bout of market vola- confidence and this could put pressure tility could create some interesting new weaken the pound on the foreign ex- Others have gone a whole lot further. on short and medium dated gilts while opportunities. Of course it is equally change markets. This has lots of negative A weak pound could be good for companies The team at Neptune Investment Man- undermining the value of the pound on likely that some of the current valu- ramifications, but would be beneficial with a lot of overseas earnings, such as Uni- agement is one of the most pessimistic the foreign exchanges. ations may turn out to be overly opti- for UK-listed companies that gener- lever. about the impact of the election and mistic. The trouble is we won’t know for ate a high proportion of their earnings have reduced the UK component of their This might also be a problem under sure until the election result is known overseas. One such company is Unilever, Global Equity and Global Alpha funds to Time to emigrate a Conservative-led coalition that was on 8th May, and even then there is a which recently beat expectations thanks zero. The latter operates in the Flexible committed to holding an EU refer- good chance that the uncertainty will to a 10.6% boost to revenues, courtesy of Investment sector and has a first quar- A “Brexit could weigh on the UK’s economic Other funds have more flexible man- endum, especially if pressurised by a continue for many months to come. All its foreign currency exposure. The pres- tile ranking over one and three years. credibility. dates that allow them to prepare in dif- smattering of UKIP MPs in the House of ence of these sorts of businesses on the investors, professional or otherwise, ferent ways. A good example is the Tar- Commons. David Cameron has prom- will have to be quick on their feet. London Stock Exchange offers a type of Discretionary investment firm Nut- A more pragmatic view geted Absolute Return sector where the ised to hold an in-out vote in 2017 if he natural hedge for domestic events like meg has also taken drastic action. It managers aim to deliver positive returns wins power, but if he has to rely on UKIP the Election. has reduced its UK equity exposure by Given the huge degree of uncertainty in all market conditions. One of the support for other measures, he may be two-thirds and reinvested the money in about the outcome of the election and biggest and best known of these is the forced to bring it forward. Another option available to UK fund markets such as the Eurozone and Ja- the possible ramifications, it is possible Standard Life Global Absolute Return- managers is to increase their cash pan, both of which are being supported that the most sensible strategy is sim- Strategies (GARS) fund, which has a re- If a possible British exit – or “Brexit” – weighting ahead of the vote. by Quantitative Easing. ply to wait and see what happens. This was to become a serious possibility it would enable a fund manager to avoid

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me, this is the most likely) and a Labour Currency Corner minority government, both of which would precede a race to scramble together a vote by vote parliamentary alliance needed by each political leader to survive the term. It took just short of a week for the 2010 elections to resolve Election in a coalition government after Election Day, and if we get something similar (an even more sustained period is looking potentially more likely), uncertainty will Uncertainty Only be king in the sterling crosses. Regardless of the outcome, therefore, the policies of the party or parties that take the reins will not – at least in the medium-term – have too much bearing GBP/USD Daily on the value of sterling versus its major Has One Outcome in counterparts. What will have bearing is the fact that – as a result of the uncertainty – the currency markets will in- “my overarching bias in cable terpret the situation in the UK as unsta- for at least the first half of ble, regardless of whether this actually May – and likely for a few weeks the Cable reflects the fundamental situation. By Samuel J. Rae after – is bearish.” In the currency markets, uncertainty On 7th May, 2015, the polls will open for the 2015 General Election, in what virtually always translates to downside pressure. We saw it with the forming has been one of the most painstakingly dissected elections of recent times, of the coalition in 2010; we saw it when the US government ceased operations primarily as a result of the uncertainty surrounding its outcome and the a couple of years back; we saw it when spectrum of parties that could play a key role. a Malaysia airlines plane went down in Ukraine early last year; and we will see it again for the first three weeks of May The focus of this edition Generally, I approach the currency reflective of my personal political opin- in the UK. charts with some indignation towards ions. However, this is not to say that of Master Investor is, of major news releases and geopolitical they may not be aligned! So, with this said, my overarching bias course, the election, and so events. But perhaps indignation is the in cable for at least the first half of May wrong word. More apt would be to say So, let’s get to it. For me, everything is it’s only fitting that I in- – and likely for a few weeks after – is that I view these fundamental factors as rooted in uncertainty. The chance of any bearish. This is not to say I will be com- corporate a political twist secondary to what price action tells me. of the two parties achieving a major- pletely averse to entering a quick coun- into this month’s forex It’s not impossible, however, to take a ity government is almost non-existent, ter trend long position if we get the right look at how the outcome of the UK elec- and so there are a number of outcomes price action set up, but it will have me piece. Those familiar with tion might affect my medium-term di- we could potentially be faced with, and keeping a close eye out for any potential overarching trend for the year – we have level to bring 1.4 flat into play longer- my style of trading, how- rectional bias. I have talked about Shinzo further, a number of factors that could downside signals, and help me to define seen some bullish momentum in cable term. As always, I’ll be looking for can- Abe, and the implications of his stimu- influence these outcomes. ever, will be more than my risk parameters with much more over the past couple of weeks. Pret- dlestick patterns to dictate my entries lus policy in Japan, and in turn, how this confidence than I might otherwise be ty much 10 days straight of gains has and exits; in this situation, primarily aware that allowing poli- affects my dollar/yen bias in the past, Polls at the last count had Labour and afforded. brought us to trade just ahead of what I bearish pin bars around the key levels tics to influence my view of and I will attempt the same here. Conservative with around 31.6% and deem key long-term resistance around outlined. 33.7% of the vote respectively, account- What are some of the key levels we 1.5160. the currency markets flies First, I want to stress that my bias to- ing for 280 seats for the Tories and 282 are approaching in cable that I will Now let’s wait and see what happens… in the face of my technical wards any particular party strictly re- seats for Labour. be keeping an eye on? If the uncertainty described in this piece lates to how I believe that party’s policy and risk management ori- develops into some downside momen- As ever, happy trading! might affect the value of sterling versus The two most likely outcomes are a Take a quick look at the chart. The chart tum, I will be looking for an initial run entated strategy. its major counterparts – it is not Conservative minority government (for shows that – very much against the towards 1.4600, and for a break of this

40 | www.masterinvestormagazine.co.UK | may 2015 may 2015 | www.masterinvestormagazine.co.UK | 41 ZAK MIR’S MONTHLY PICK ZAK MIR’S MONTHLY PICK

Zak Mir’s Monthly Pick Buy Sterling/ Dollar Above $1.50 Targets $1.60

be the case that our currency benefits This is said on the basis of the post July Recommendation both from a relief rally in the wake of a breakdown for this market from above Summary return for Cameron and friends, as well $1.70, one where for most of the time as the unwinding of an erroneous belief the 50 day moving average served as the Even at the best of times it can be said in higher U.S. interest rates. resistance and charting feature to sell the Sterling/Dollar represents the ulti- into. The end of the bear run came in the mate challenge in the foreign exchange form of the brief early April probe and markets, something of a “north face of “it could very well rebound from below the former March the Eiger” for currency traders. Howev- be the case that our $1.4635 floor. Since then we have been er, in the run up to the 7th May General currency benefits treated to a relatively normal turna- Election, an event which is unlikely to both from a relief round, in the form of a bear trap rever- rally in the wake of sal, one that initially targeted the Janu- have a clear cut winner (nor ironically a a return for Cam- clear cut loser), “cable” is looking even eron and friends, as ary support zone/$1.50 area, and 50 day more of a challenge in terms of the pre- well as the unwind- moving average at $1.5021. diction game than one would normally ing of an erroneous expect. Of course, there are two sides to belief in higher U.S. However, even before the cross head- every cross and the post autumn period interest rates.” ed back to this implied initial target, it has witnessed a massive advance for the seemed possible that the RSI breaking U.S. Dollar, as traders believed the Fed- back above the neutral 50 level for the eral Reserve would raise interest rates. Technicals first time since the beginning of March Just how this could be possible is likely could be enough to initiate a significant to be blamed on the way that for some What is interesting in terms of the tech- intermediate rally. This is the case even reason even though on many occasions nicals of Sterling/Dollar over much of if the full decline from the summer of in the recent past central banks have the course of 2015 to date is that even 2014 is not recovered. At least at this proved to be relatively powerless in the though the cross would appear to be stage the anticipated upside is as great face of the money markets (Euro/Swiss shackled with myriad imponderables, so as the top of a rising trend channel is a good example), many of us still “be- far it has behaved itself in a reasonably which can be drawn on the daily chart lieve.” Nevertheless, it could very well straightforward technical fashion. from as long ago as January.

42 | www.masterinvestormagazine.co.UK | may 2015 may 2015 | www.masterinvestormagazine.co.UK | 43 ZAK MIR’S MONTHLY PICK ZAK MIR’S MONTHLY PICK

This has its resistance line projection currently heading as high as $1.60, a target which could be hit as soon as the next 4-6 weeks. The more than 20 years and weaker than stop loss on the recovery argument at this stage is regarded as being back below $1.50 – just below the present level of the 50 day mov- expected economic data. Sterling fell ing average. to a five-year low of $1.4623 on Fri- day morning from $1.4802 on Thurs- day. The drop followed signs of jitters in markets on Thursday as investors bought insurance against sharp swings in the value of the pound. The pound rose slightly against the euro this morning to €1.3820.

Currency traders were also unsettled by lower than expected industrial production in February that augured a growth slowdown in the UK economy. Indus- trial production rose just 0.1% in Feb- ruary due to a big fall in North Sea oil production. Economists had expected an increase of 0.3%.

Fundamentals

In terms of choosing which market to look at for the May edition of Master In- vestor Magazine, it is difficult from my perspective to have veered any further Sterling as much of the City’s real estate than looking at Pound/Dollar. This is has become a “buy to forget” type of as- because we are at the time of writing in set. The problem now is that the other the grip of a General Election campaign “the penny is side of the curve may kick in, in terms of generational importance, one that finally start- of investors being scared of a possible could take the UK in almost any direc- Labour/SNP alliance, something which ing to drop in tion. The problem is that any direction April 22nd International Business Traders had been weighing more nega- would mean that they would want to Recent Significant News from the current Conservative/LibDem terms of the Times: tive news than positive over the past in get their cash out of Prime London in a the new year, pushing the UK currency coalition seems to be one which would April 28th Bloomberg: hurry. Federal Re- The hawkish bias in the comments of down to a five-year low of 1.4565 last upset both the markets and the general serve not like the MPC members of the Bank of Eng- week. public, unless they are very much of an The pound posted its longest winning Happily, the position is that at least ac- land as revealed on 22 April drove the anti-stability mentality. being likely streak in almost a year against the dol- cording to the latest opinion polls the pound back near last week’s one-month In addition to uncertainty surround- lar, defying a report that showed U.K. Tories will be able to form a minority to raise inter- high versus the dollar, yen as well as the ing the likely outcome of the UK gen- While so-called experts may still be try- economic growth slowed more than government and it will be more of the euro, while pushing up short term gilt eral election on 7 May, disinflation and ing to rationalise the value of the Pound est rates for analysts forecast in the first quarter. same after 7th May. This looks to be the yields. downside risks to growth have all been against the U.S. Dollar in recent months, Sterling reversed an earlier decline ver- explanation for the latest push to the the rest of drag on Sterling. it would appear that the driving force sus the U.S. currency as investors down- upside for the Pound against the Dollar, 2015 and per- The minutes showed all the members here over much of the last five years has played risks from next week’s election. combined with the way that the penny been the interaction between geopoliti- see the Bank Rate rising over a three- However, of late, analysts had been is finally starting to drop in terms of the haps well into year horizon and the committee is gen- looking at the possibility of risks skewed cal issues, the City of London’s place in While two-week volatility on the pound Federal Reserve not like being likely to 2016.” erally optimistic about wage and price more towards north for the pound, rath- the world, and the strength of the U.S. against the dollar has jumped to the raise interest rates for the rest of 2015 inflation catching up with economic er than to the south, thanks to the suf- economy in the wake of the financial highest since September, a three-month and perhaps well into 2016, as it tries to growth. ficient negativity that has been priced in crisis. The de facto strategy in terms measure of anticipated price swings has ward off the effects of both deflation and ime we have sterling likely to be already. of the Conservative led coalition is that slipped to a more than seven-week low, a jobless recovery in the US economy. At squeezed higher as the prospect of a La- GBP/USD jumped to 1.5049 from near we have in London at least witnessed a showing investors are more concerned the same time, we have the same old bour government diminishes over the 1.4960 following the release of the April 10th The Guardian: major world economic centre which has about the immediate aftermath of the problem of Western Governments be- early part of May. The hope would also minutes. At the high, the pair was only become a northern Monaco, especially election than the U.K.’s longer-term ing up to the eyeballs in sovereign debt. be for Sterling bulls that if a new Tory a shade away from the 17 April one- Analysts have warned that the pound for Non-Doms. stability. They would simply be shooting them- Coalition came in again there will be month high of 1.5055 and was up 0.86% could fall further as financial markets selves in the foot if they raised interest further gains, as the “hot” money re- This has artificially boosted the value of on the day. react to the closest general election for rates in any material way. In the meant- turns to the UK.

44 | www.masterinvestormagazine.co.UK | may 2015 may 2015 | www.masterinvestormagazine.co.UK | 45 Tomorrow’s jam today Tomorrow’s jam today

small cap corner Tomorrow’s Jam Today By James Faulkner

This month I take a look at three “jam tomorrow” businesses that could soon turn into “jam today” companies. Often, a company can have an exciting product in the pipeline for years and remain relatively unnoticed until some kind of cata- lyst grabs the attention of the market and sends the share price rocketing. No- one has a crystal ball, but more often than not in these cases, such catalysts are entirely predictable for anyone willing to do the research. In the following piece, I outline the case for three companies that could be nearing catalysts of their own.

Omega Diagnostics (ODX)* is a share ring process for Visitect CD4. enhanced by the success of this prod- I called back in 2013 – to some initial uct”. Indeed, the market opportunity for success as market anticipation built up The renewed excitement comes on the Visitect is huge. The global CD4 need is on the back of positive newsflow sur- back of a recent trading update, which expected to grow substantially over the rounding its CD4 tests for AIDS, which revealed that results for the year ended next eight years as countries scale up are a vital part of patient manage- 31st March will be slightly ahead of ex- their HIV/AIDS treatment programmes; ment (measurement of CD4 T-cells is pectations, with revenues at £12.1 mil- this should see the number of tests rise required when determining when to lion and adjusted pre-tax profit at £1.4 from current levels of just over 30 mil- commence antiretroviral treatment). million. More importantly, however, lion to nearly 60 million tests by 2020. Currently available CD4 tests require Omega said it believes it has identified The estimated cost per test for Visitect flow cytometry techniques which are and corrected the root cause of the test is £1.12 versus an estimated unit selling lab-based, expensive and require cold- variability for Visitect CD4. Final con- price of £3.21. With annual capacity at chain storage for reagents. However, firmatory testing is underway, and the the Omega facility estimated at 2.5-7.5 Omega’s Visitect CD4 point-of-care firm anticipates providing a further up- million units, this implies sales poten- test does not require such infrastructure date by the end of May. tial of £8-24 million with gross margins and therefore opens up the opportu- of £5.2-15.7 million, thus underlining nity for widespread testing, particularly the scale of the opportunity for Omega. in rural areas of the developing world. “The global CD4 need is However, the firm encountered some expected to grow sub- variability in the testing efficacy of Visi- stantially over the tect, which held up the commercialisa- next 8 years as coun- tion process and sent the shares back tries scale up their to prior levels. Since then, Omega has HIV/AIDS treatment brought the process of lamination and programmes.” re-agent dispensing in-house, thereby Omega states that the “prospects for the gaining fuller control of the manufactu- Group as a whole will be significantly *James Faulkner owns shares in Omega Diagnostics.

46 | www.masterinvestormagazine.co.UK | may 2015 may 2015 | www.masterinvestormagazine.co.UK | 47 Tomorrow’s jam today THETomorrow’s OIL SERVICES jam SECTOR today

The really interesting point to note of patients is forecast to increase to over loss before tax considerably lower than Parsortix developed a separation device, from an investment perspective is that 1 million by 2021, with a commensurate forecast. In particular, Cantab Mobile which can isolate intact foetal cells in “Angle could be one to watch in 2015, broker finnCap’s forecasts currently increase in costs (source: Alzheimer’s sales continue to grow, with over 15,000 maternal blood (as opposed to merely exclude any contribution from Visitect Society). patients having now been assessed in DNA fragments) when only 1.5ml of as the firm is currently in the pro- CD4. However, the broker commented the UK. Management expects to deliver maternal blood is flowed through the cess of securing US regulatory ap- that the trading update “gives us confi- Globally the problem is even more pro- a pre-tax profit in the current year, and device. proval for Parsortix from the FDA.” dence that the moment when the time- nounced. An estimated 35.6 million peo- finnCap’s 100p target price would place to-market will become clearer is not far ple suffered from dementia in 2010, and Cambridge Cognition on a 1.8x EV/Sales However, it soon became apparent that away.” Based on its current forecasts, this is forecast to double every 20 years multiple based on 2015 estimates – still a much more lucrative opportunity for billion by 2015 - where the real excite- With the US regulatory filing underway, the broker’s 28p price target would place as the world’s population gets older. a discount to the peer group. The broker the device existed in the cancer diagnos- ment lies. Parsortix could therefore play there have been hints that Angle is pre- Omega shares on an EV/Sales multiple The annual economic cost of the disease also added that it sees progress to “an tics market. In September 2011 the firm a key role in identifying the particular paring the ground for greater things to of 2.2x, EV/EBITDA of 15x and a P/E of has been estimated at $604 billion - i.e. even higher share price as confidence in achieved a major milestone by validating therapeutic needs of a patient. come. In particular, the appointment of 20.8x – metrics which finnCap notes are more than 1% of global GDP (source: these forecasts increases”. that its cell separation device can cap- “not out of line with our peer group of World Alzheimer Report 2010, Alzhei- ture cancer cells added to blood. Angle profitable diagnostics companies”. mer’s Disease International). reported that it had “already established discussions with several of the world’s In order to bring down the cost of de- leading cancer research institutes and mentia to society, early detection and there is strong interest in such a prod- treatment is crucial. A recent publica- uct, which would not require regulatory tion found that in the UK every patient approval for use for research purposes.” receiving early assessment and treat- The company also noted “encouraging ment saved society £7,741 per annum, interest” from many of the larger medi- of which £3,600 was direct healthcare cal diagnostics companies regarding a A world leader in cognition testing, costs. In terms of an average cost of potential commercial collaboration. Cambridge Cognition (COG) has spent £25,472 per dementia sufferer per an- 25 years testing and validating its tech- num, this represents a considerable The potential market for such a product nology, CANTAB, in a clinical setting. saving. It is therefore unsurprising that is huge. In addition to the substantial Supported by over 1,000 peer reviewed both the US and the UK have made Alz- commercial opportunities available prior publications, this technology is now heimer’s disease a priority. to regulatory approval in respect of sales ready for commercialisation. The firm of product for research purposes and has also developed an iPad-based diag- Launched in the UK in May 2012 and corporate partnerships, it is estimated nostic which enables early detection of available as an app on the iPad, CAN- that major clinical markets for a simple Previously an IP management and in- memory loss and differential diagnosis TABmobile is CE-marked as a Class II CTC counting product exceed $4 billion vestment company, Angle (AGL) has re- of Alzheimer’s disease. It is currently medical device. It can be deployed in any per annum in the United States alone. cently transformed itself into a medtech in use in the UK, and forms a central GP surgery, requires no special training, As house broker Cenkos opines, “There company in order to focus solely on its component of a government-sponsored and can assess the memory function of are very few cancer patients today who cancer cell capture technology, Parsortix. pilot Brain Health service in the UK. In the patient in 10 minutes. It is paid for would not derive a potential benefit Parsortix was originally developed as the addition to this, the firm also has an on a per site basis, and the current price from being evaluated with the Parsortix first ever non-invasive testing platform existing profitable business which sup- is £1,000 per annum for a maximum device in order to not only detect circu- for the unborn baby. Pregnant women ports cognition research and drug de- of four users. During 2014 over 260 GP lating tumour cells (either before or post have a very small number of their baby’s velopment. surgeries and over 40 Clinical Commis- diagnosis of cancer) but also in terms of cells circulating in their blood - at most sioning Groups (CCGs) in the UK (out of the evaluation of treatment regimens one foetal cell for 500 million maternal Consider this astonishing fact: Alzhei- a total of 211) used Cantab Mobile. (using genomics and proteomics) and Angle could be one to watch in 2015, as Peggy Robinson to the senior manage- cells. mer’s Disease International estimates monitoring patients who are in remis- the firm is currently in the process of ment team looks prescient, as Robinson that if the disease were a country, it However, the real opportunity lies in sion and at risk of recurrence.” securing US regulatory approval for Par- was involved in the commercialisation would be the 18th largest economy in the rolling out the product internationally. “During 2014 sortix from the FDA. At present the only of none other than CellSearch, which world. Moreover, Alzheimer’s is but one With this in mind, the company opened PricewaterhouseCoopers projects that CTC system that has been approved by should provide Angle with invaluable of several different forms of dementia, its first office in the US in March, which over 260 GP the market for a more personalized ap- the FDA is CellSearch (Veridex, Johnson contacts and expertise in the field. In ad- of which Alzheimer’s is the most com- seems to already be bearing fruit. The surgeries and proach to health and wellness will grow & Johnson) which, unlike Parsortix, is dition to this, Angle secured a US quote mon. In the UK alone, it was estimated North American operation already has over 40 Clinical to as much as $452 billion by 2015. Al- unable to harvest CTCs for molecular in October 2014 through ADRs (Ameri- in 2012 that over 800,000 people suf- a healthy pipeline of contracts in the though the largest share of this market analysis, and can only be used to isolate can Depository Receipts), which should fered from dementia, with a direct cost safety and tolerability trial space that are Commissioning is projected to be accounted for by the CTCs from a limited number of can- help improve liquidity and raise the to the NHS of £3.3 billion a year, and an expected to convert over the year. Groups (CCGs) in nutrition and wellness market, it is the cer types. “It is this feature that makes firm’s profile in the medtech-hungry overall economic burden of £23 billion the UK (out of a core diagnostic and therapeutic segment Parsortix unique”, argues house broker US market. Given the scale and scope of - greater than the costs of cancer, heart Full-year results released in March of the market - comprised primarily of Cenkos, “and due to the urgent need for the opportunity here, this is a share that disease and stroke combined. showed that the company was profit- total of 211) used pharmaceutical, medical device and di- a system with the capabilities of Par- could easily soar on positive newsflow. able in H2, with sales and gross margins Cantab Mobile.” agnostics companies and expected to sortix we believe that the FDA will be With the ageing population, the number ahead of expectations and resulting in a grow by 10% annually, reaching $42 keen to drive this forward.”

48 | www.masterinvestormagazine.co.UK | may 2015 may 2015 | www.masterinvestormagazine.co.UK | 49 ALPESH PATEL ON THE MARKETS ALPESH PATEL ON THE MARKETS

ALPESH PATEL ON THE MARKETS And that’s exactly what I will do in But at the end of the day that’s what After all, if you could achieve a small this two-series guide, give every- trading is all about and that’s why it is edge in both these factors do you re- one a shortcut to the lessons that called trading. You will make choices ally need anything else? Suppose that I have learned through sweat and – effectively that’s what trades are you win 55% of the time on your tears. So hopefully you won’t have to – and some of them will go well and trades and you make 1% on your go through the same experiences to some of them will go wrong. The key winners and lose 0.5% on your losers. learn these rules the hard way. And here is to try to make more good de- Doesn’t sound too exciting, right? trust me, this saves time and, equally cisions than bad ones and also make However a sustainable performance importantly, money, lots of money. sure that when a trade goes your way like that will make you infinite prof- you will get paid more than you’d its if repeated forever. Win more and win lose if it went badly. bigger Just think how casinos – yes, casi- Trading And then repeat this simple plan nos, stay with me here - make their again and again. money: they have the odds stacked A trader should always focus on win- in their favour far less than 55% - ning more times than he loses, and most times only about 0.5% or 1% making sure that his winners make - and they just pay winners an equal him more money than his losers cost amount to what they get from losers. him. This sounds too simple and stu- roadmap pid to focus on, right? a diversion from sweat, tears and profits lost (part 1)

During my many talks over trading events, conferences and training ses- sions, I have always encountered the same question from people who are interested in dipping their toes into the markets or have just a couple of years of experience: what are the most basic and fundamental rules that one should follow when starting to get into trading and investing? Are there any very simple guidelines that will ensure that everyone and anyone has at “It makes no least a fighting chance in this game or is it just for professionals? sense trying to go against a multi-trillion dollar market because you’re angry or “you know better”, the market will

50 | www.masterinvestormagazine.co.UK | may 2015 may 2015 | www.masterinvestormagazine.co.UK | 51 ALPESH PATEL ON THE MARKETS

However, they simply repeat this process for an infinite amount of times because they know that this way they “You need to provide your- will make an infinite amount of money. That’s an easy rule to follow and it keeps self with the opportu- the focus on the bigger picture – every single trade is just another choice, an- nity to make mistakes and other step along the way. still have the chance to Never fight the market, correct them and move the market always wins forward.”

It makes no sense trying to go against a multi-trillion dollar market because Be adequately capitalised you’re angry or “you know better”, the market will wipe you out. Understand Trading is like a small business, it re- when you’re wrong on a trade and get quires starting capital. You wouldn’t out as soon as your stops are hit, never want to fund your account with such a move them or add to a losing trade. small amount that a few mistakes would wipe it out. You need to provide yourself What that means comes down to two with the opportunity to make mistakes lessons: first, that you should not get and still have the chance to correct them stuck to a losing trade more time than and move forward. what’s needed to find out that your initial idea was wrong; and secondly, that Always keep in mind that making a loss trading is a game or a business where means that you need to over-perform ego has no place. the next time to cover your loss and break even. It is crucial to understand What is really important to understand that, for example, a 5% loss requires a is that each trade is essentially a bet, 5.3% gain just to bring you up to your an attempt to get a feeling of where the original capital and so on. So each loss market is heading. And as such there are hurts more than an equal win. P.S. You can find my daily market com- levels and indications that pretty much mentary on InvestingBetter.com. See confirm the market’s intentions for the Hence having an adequately funded ac- you next month! time being, so if your trade is towards count means that you prolong the life of the opposite direction, simply get out of your trading career and allow yourself it. to make mistakes, learn from them and Alpesh is a hedge fund manager then over-perform to break into profits. who set up his asset management Don’t get fixated and try to stay in the company in 2004. His Sharescope trade “just a bit longer” only because And that almost brings us to the end of Special Edition has outperformed “it might eventually reverse in your fa- the first part of this mini-guide, but I every UK company’s fund man- vour” – it rarely does. Most of the time would like to conclude with something ager over the past decade, as well you will lose more money than you really important. Trading is one of the as Warren Buffett. He has written should and also waste time waiting for very few things in life where mistakes over 200 columns for the Finan- your luck to turn. translate to an immediate loss of mon- cial Times and presented his own ey. It’s not that you simply don’t make investment show on Bloomberg So don’t try to outsmart the market or money; in fact, you immediately see TV for three years. He is a former stomach supposedly “temporary” loss- your capital go down. So sticking to a Visiting Fellow in Business & In- es; the market will always outstretch few rules or “commandments” literally dustry at Oxford University and you to a point where your account sim- translates to preserving your capital and the author of 18 books on invest- ply can’t take it. Instead, trying to un- avoiding simple yet treacherous pitfalls. ing. Find out more at http://www. derstand what the market wants to do investingbetter.com and and calmly following it is much simpler, http://www.inter.tradermind. much safer and mostly stress-free. Happy Trading, Alpesh B Patel com

52 | www.masterinvestormagazine.co.UK | may 2015 FUND MANAGER IN FOCUS FUND MANAGER IN FOCUS

Fund Manager in Focus Hugh Hendry By Filipe R. Costa

“The contrary investor is every human when he resigns momentarily from the herd and thinks for himself.”

- Archibald MacLeish

The Last Bear Standing As a strongly committed ruthless value mostly resides in the actions taken by seeker and a self-labelled “troublemak- the devil – i.e. contrarian hedge funds “Remember the film The Matrix? Morpheus er”, Hugh Hendry could not take a pill like Hendry’s - and, of course, not in the offered Neo the choice of two pills - blue, to other than red, just like the enlightened unsustainable business they usually like forget about the Matrix and continue to live from The Matrix. As a fund manager, he to keep. in the world of illusion, or red, to live in the is one of the last standing, still willing to painful world of reality… They, as the “en- take the painful direction of being right Buying just for the sake of it while dis- lightened”, chose red, and so are convinced alone instead of going wrong with the regarding any fundamental value, in the “Buying just for that they understand everything, which has herd. Hendry believes that the market hope someone will come along later and become illusory about today’s markets. Their often deviates from rationality, as in- buy the same at a greater price was nev- the sake of it truth is Austrian economics. They know that vestors are too enthusiastic about their er in Hendry’s veins. On the contrary, while disregard- Hendry seeks out opportunities arising today’s central bankers are spinning a false- options, and are then heavily influenced ing any funda- hood of recovery; they steadfastly refuse to by a market wide mood - sentiment - from the sentiment-driven disconnects be suckered in by the euphoria of a mone- that guides them into detaching asset between fundamental value and nomi- mental value, in tary boom; and they are convinced that they prices from intrinsic values. He doesn’t nal price to make his bets. In his view, the hope someone will therefore be spared the consequences of hesitate to oppose this mood and sell that is the only way to drive value in an the inevitable crash. Everyone else, currently what others are purchasing. Such con- investment over the longer-term and to will come along drugged by the virtual simulation of pros- trarian strategies earned him a fortune minimise the risk taken. In 2008, Hen- later and buy the perity and its acolyte QE, will be destroyed, during the financial crisis when he bet dry achieved a 31% return, while most leaving them alone, to re-invest when mar- on the collapse of Greece and the bank- of the fund management industry just same at a greater kets finally get cheap. They will once again ing system. But going the contrarian struggled to survive, such was the blood price was never be masters of the universe.” route of betting against the current or- bath taken. der has also earned him fierce critics, as in Hendry’s veins. - Hugh Hendry policy makers always believe the main move forward.” reason behind a financial collapse

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Always being critical of the fictional most likely taking the thorny route en- Stars Don’t Shine Indefi- The massive leverage taken on by many would just expose them to bankruptcy optimism created by central bank in- lightened by the red pill. But that was nitely tervention and by too much credit crea- exactly the route that led Hendry to bril- had the central bank cut back its sup- tion, Hendry has more often been on the liance and which led his fund to $1.5 bil- port and allowed for fundamentals to Eclectica was always very effective at bearish side than on the bullish side. At lion in assets under management. With prevail. So, to a large extent there was managing the risk-return relationship a time central bank intervention is un- Hendry on board, Odey created the Ec- no magic there. But even though fund but faced some muddy waters when capped, everyone in the market seems lectica fund in 2002. The idea was one management is about delivering long- central banks engaged in massive bold like a “fool” waiting for a “greater fool” of maximising the long-term wealth of term profits while minimising unneces- policy action to recover from the fi- to buy assets from them at even more investors by opposing irrational pric- sary risks, there is always pressure for nancial crisis. With interest rates being “foolish” prices. Everyone, that is, but ing. The fund was very successful and in short-term performance, as investors kept near zero for too long and mas- Hugh Hendry, “the last bear standing”. 2005, Hendry and Simon Batten, a col- have limited patience, particularly when sive asset purchase programmes being But, can someone resist the temptation league at Odey, purchased the manage- they see almost any other naive strategy unfolded by central banks, the game of selling to a greater fool when central ment contract of the fund and founded ending the year with two-digit returns. changed dramatically. Such policies are banks are protecting against the down- Eclectica Asset Management, which is After getting weary of fighting the ir- detrimental for the contrarian strategies side? For how long can someone op- now independent from Odey. rational market, Hendry decided to let adopted by Eclectica and prevent pro- pose the irrational upside? Wouldn’t it the “last bear standing” rest in peace. fessional traders from driving markets be better to just join the herd and follow Today, Hendry manages Eclectica in the In a newsletter to investors, Hendry ex- towards fundamental value again. The the trend? Whiteleys Shopping Centre in Bayswa- plained: “So far in 2015, the fund is up almost 14%, fund performed very well during mar- ter and without maintaining any cor- as the conversion of Eclectica from a ket downturns, outpacing almost every respondence with investment bankers “There are times when an investor has no bearish to a bullish outlook is starting From Chronic Trouble- other hedge fund, but completely strug- or other industry professionals. Unlike choice but to behave as though he believes to pay off.” gled in 2012 and 2013, when everyone maker to Sagacious Fund many others in the industry, he starts in things that don’t necessarily exist. For us, else, spurred by central bank action, was Manager working only at 10 am after a school run that means being willing to be long risk as- Since changing strategies from contrar- Rather than theorising on markets, doing great. and a visit to the local coffee shop. He sets in the full knowledge of two things: that ian to momentum (trend following), Kindleberger adopts a very practical ap- Hugh Hendry was born in Glasgow, lives nearby in Notting Hill, but he trav- those assets may have no qualitative sup- Hendry has boosted Eclectica’s perfor- proach. He shows the history of the real Of course, the large profits everyone Scotland, in 1969 and graduated from els to the countryside at weekends with port; and second, that this is all going to end mance. While it struggled to outperform world as it happened. He clearly shows achieved in those years were generated Strathclyde University in 1990 with a his wife and three kids in a second-hand painfully. The good news is that mankind the market in 2013 and most of 2014, the how central banks and credit expansion by central bank intervention rather than BA in economics and finance. Curious- Land Rover Discovery. clearly has the ability to suspend rational fund then experienced a quick reversion have been contributing to the boom and skill. ly, he was the first in his family to at- judgment long and often.” and ended 2014 with a return of 8%. So bust economy and how a period of irra- tend university (and also one of only a far in 2015, the fund is up almost 14%, tionality is always reversed by a violent few from his school). After graduating, “I’m Taking the Blue Pill as the conversion of Eclectica from a return to fundamentals. Only those who Hendry found a job in Edinburgh at the “Unlike many others in the Now” bearish to a bullish outlook is starting to take the red pill can survive in the long- prestigious investment firm Baillie Gif- pay off. term. It is exactly because everyone is ford. At that time, he was the first non- industry, he starts working betting on the “greater fool” theory Getting a share of the easy profits that Oxbridge graduate to enter the firm. Hendry is an admirer of Kindleberger’s that a crisis is going to occur, as such a only at 10 am after a school were lying around was too large a temp- Soon, he started causing trouble and book “Manias, Panics and Crashes”, which system is no less than a Ponzi scheme, tation to be missed. Not even the most ended up moving to the City where he run and a visit to the local depicts how the global economy has been which is condemned to fail from the rampant and fierce opponent of the joined Credit Suisse Asset Management. heading from crisis to crisis, fuelled by beginning. Some are seduced by the up- coffee shop.” bull market could survive the long bull- Eventually frustrated by the fact he was too much credit expansion and irration- trend; others, while recognising its ir- ish run to tell the story. Hendry was no just one of 400 other traders planted in al behaviour. But Hendry also admits rationality, still believe they can get out exception and replaced the red pill with the company’s floor, he tried to make that the book has been detrimental to before everybody else does. But history the blue. It is certainly with a bitter taste his voice heard. But that was unwel- his investment performance. Realising tells us that when you realise a crash is that he now advises investors to “just be come and he was fired within a month. a price is wrongly formed is no longer about to occur it is probably already too long, pretty much anything” as “only a Nothing better could have happened to reason to sell or even avoid purchasing late, because at that point, markets have foolish investor would stand in the way him, as the reputation as a troublemaker an asset, as there may exist a “greater already returned to rationality. of this bull market”. Perhaps he is right. quickly seduced Crispin Odey from Odey fool” who is willing to purchase it at But it is exactly because not even hedge Asset Management, who was seeking a an even higher price. To justify his op- Sadly, Hendry has just adopted a long- funds oppose such irrational behaviour talented someone able to think by him- tions, Hendry additionally claims that term losing strategy, even if that can that it persists for longer than before, self. In 1999, Hendry was hired by Odey Eclectica’s performance has improved bring some positive performance from which results in a growing systemic risk Asset Management and started a suc- substantially since changing strategies. time to time in the short-term. Eclec- that can only end in disaster. On one cessful career that culminated with the With Eclectica already up 14% this year, tica’s assets under management have hand, it is foolish to oppose the mar- creation of Eclectica Asset Management. such a comment is hard to challenge. fallen from more than $1.5 billion to the ket, but on the other, why would anyone But he is now incurring the risk of a sys- current $300 million today, as its core pay a 2-20 fee for professional services Opposing the existing state of affairs is temic crisis and is not particularly offer- investors don’t see the long-term alpha when one can just purchase a passively never easy. A person who resigns from ing much more to an investor than one anymore. managed ETF on the S&P 500 for a frac- the herd and thinks for himself is many could get from a leveraged passive ETF. tion of the cost? times labelled as a troublemaker and is

56 | www.masterinvestormagazine.co.UK | may 2015 may 2015 | www.masterinvestormagazine.co.UK | 57 FUND MANAGER IN FOCUS EUROPEAN BANKS

Some Final Words

The man who once disturbed European Banks Nobel-Prize winner Joseph Stiglitz with a challenging “Um hello? Can I tell you about the real world?” continues to believe the world is going to crash despite having taken the blue pill for now. He believes Time for Some that financial markets are single-digit years away from a crash that will present investors with opportunities of a lifetime. “Bad things are going to happen and I still think the Creative closest analogy is the 1930s”, he says. So, it seems, the blue pill Hendry has taken was just a small dose after all. Destruction? By Bill Blain – Strategist at Mint Partners

Well placed rumours say a number of large European banks are about to pull out of investment banking and markets. Credit Suisse is said to be mulling the closure or sale its investment bank and focus on Wealth Management instead. This comes on the back of similar stories about Deutsche, Barclays and others. It feels like the era of European universal investment banking is drawing to an end. And maybe that’s a good thing. What’s not to like about creative destruction? It’s long overdue in the European banking sector.

58 | www.masterinvestormagazine.co.UK | may 2015 may 2015 | www.masterinvestormagazine.co.UK | 59 EUROPEAN BANKS EUROPEAN BANKS

Since 2007 the global finance indus- There is certainly no European bank Compare and contrast to Europe where try has changed utterly, with profound that can even claim to be pan-European the ECB still has to play to national in- implications for investors and markets. – American banks have offices in more terests, giving the impression it doesn’t “Sadly, I fear a number of European banks will re- But after seven years of fudged repairs European nations than any European understand the simple truth that an un- main mired in the past.” to the damage inflicted by the liquidity bank! fixed banking system equals a stagnant crisis of 2007 and the subsequent col- economy. What’s the real volume of bad lapse of Lehman Brothers in 2008, Eu- Most banks are facing up to the chal- loans in the banking system? 10%? How rope’s banking sector is still not fit for lenges of generating returns and growth much provisioning to come? (Clue: you purpose. Everyone has anecdotal tales in the new global market reality. The big should probably use trillions in your an- of how difficult mortgage finance has names like Credit Suisse and Deutsche swer.) The EU is trying to fix it with nods become; how hard it is for small firms are looking to increase profits and re- to non-bank lending (which is critical in to obtain business loans; or for private turns by pulling back from less optimal the US, but barely established in Europe), investors to retain wealth management businesses – which could see closures compromised stress tests, and all against services – if you ain’t got a couple of or sales of investment, commercial and a backdrop of unresolved national self- million in easily identified readies, for- retail banking divisions. The banks seek interest. get it. to exit low return, high capital trading and prime brokerage businesses. They Trillions in European banking assets are The reform of banking since the crash will optimise themselves to best address still marked at 100% on banking books. has been a fraught, confusing and dif- the current capital/regulation/funding/ In the US the hedge funds cleared the ficult process. Politicians have revelled interest rate environment. sclerotic banking arteries and bought bil- in “bash a banker” rhetoric, regulators lions of distressed US bank assets – but have delighted in producing thick and As more banks look likely to pull out of suspiciously little in Europe. Moreover, obscure rule books, while compliance the securities game because of its sub- while the Fed defibrillated securitisation officers now hold the top paying jobs. optimal nature, what does that mean for to ensure banks could keep and develop Talk to any financial CEO and they will the future of market making, investment lending, Europe banned financial inno- confirm they spend more time man- financing and the prospects for growth? vation and ended up funding banks for aging for regulators than they do for We are in an evolutionary environment. free through LTROs (Long-Term Re- shareholders. Meanwhile, markets have A recent report from banking consultants pos), which was essentially back door QE Adjusting to the new environment re- But there is a good argument to split the European Banking Embarrassment changed and become far less liquid than Oliver Wyman said that“diminishing used to prop up crashing sovereign bond mains work in progress for most Eu- simple “utility banking” from “inno- Bench. they were, leading to increased fears the returns on capital from market mak- markets – but that’s another story… ropean banks. Some will successfully vation banking”. Innovation can hap- next crash will make what we saw in ing [trading] demand even greater ef- evolve into sleeker, more nimble institu- pen outside the current banking sector. When it comes to figuring out which are 2008 look a storm in a tea-cup. ficiency, dexterity and scale to achieve 10-12% returns… more firms will trim tions by dint of reinventing themselves Spinning off investment banks to create the cheap European banking stocks, it this business, ultimately leaving an at- and new management. There will cer- shareholder value looks certain to hap- looks like the old CAMEL analysis (Capi- “after seven years tractive prize for those able to endure.” tainly be business for them – the sheer pen – there are a raft of hedge funds and tal, Assets, Management, Earnings and I’m pretty sure that among the prize volume of the project finance pipeline foreign players poised to fund breakup Liquidity) is no longer sufficient. And of fudged repairs winners will be the remaining US in- and corporate growth means there is and pick up the pieces from capital ar- the good old bank adage: “buy banks that to the damage vestment banks. Or maybe new Chinese plenty to go round. But it should go to bitrage trades. are dull, boring and predictable” is just too inflicted by the institutions that buy whatever the Euro- the most capable firms. restrictive. pean banks decide to discard. There are also more innovative ways to liquidity crisis The right firms may not be the current approach financing and trading mar- Maybe a better rule would be to buy of 2007 and the It’s interesting how US banking came “Universal” or “Regional” banks. Big kets. Fortunately, that is already hap- banks that are: “optimised for value”? In- subsequent col- out of the crisis faster, in better shape banking is under attack from regulators pening as new brokers and financial vestors have quickly adapted to likely and essentially fitter for purpose. I’d and shareholders, but it’s not enough to boutiques morph into new Merchant bail-ins on bank debt, and to the end of lapse of Lehman argue the speed at which the US sorted simply split investment banking from banks matching capital and borrowers. the Too Big To Fail banking put, but un- Brothers in 2008, out their banks is the key reason the US universal banks. It’s more subtle than derstanding “optimised for value” rule Europe’s banking now leads global economic growth. No that. I am told an industry lobby body Sadly, I fear a number of European probably means smaller banks are sim- “kicking the can down the road” from ran the numbers, and of the 17 European banks will remain mired in the past, and pler to follow. sector is still not the Fed, but a swift and brutally enforced dealers they examined, only nine would are set to become increasingly bother- fit for purpose.” recapitalisation programme, directing be able to achieve sustainable post-sep- some with more and more names join- banks into clear niches, and frankly bet- Sure, US banks have some critical ad- aration returns. ing the likes of SNS, BES, and HAA on ter regulation. It’s worked. JP Morgan vantages – their accounting rules allow Despite talk of banking union, European has seen its share of the global banking them to net derivatives, and the fact they banks essentially remain an ill-assorted fees wallet from Fixed Income, Curren- can originate mortgages and pass them hatful of sub-scale national institutions. cies and Commodities jump from 6% in on to the GSEs (Fannie and Freddie). Eu- Bill Blain is Strategist and co-head Special Situations Group at Mint Partners. Mint is a full service agency brokerage owned by, Few aspire to globalisation – but even 2006 to 18% in 2014! That is staggering ropean banks are stuck with mortgage but independent of BGC, the leading financial brokerage. Bill is a regular commentator on fixed income and financial markets. He those that do are weighted towards na- – no wonder the Europeans are giving and derivatives on balance sheet making publishes a daily market comment - The Morning Porridge. tional thinking and directives. up. their leverage look awful.

60 | www.masterinvestormagazine.co.UK | may 2015 may 2015 | www.masterinvestormagazine.co.UK | 61 THE BEST OF THE EVIL DIARIES THE BEST OF THE EVIL DIARIES

EVIL KNIEVIL (AKA SIMON CAWKWELL) the best of the evil diaries A big man with a bigger reputation, Evil Knievil famously made £1 million by short selling shares in Northern Rock during its collapse. He also uses his knowledge and experience to buy shares, often resulting in the same devastating effect.

At least three times a week, Evil provides his thoughts and musings on the markets. Now writing EXCLUSIVELY for Master Investor Magazine at http://www. masterinvestormagazine.co.uk/category/evil-diaries/.

He doesn’t just pontificate on the chart). I do not understand what it’s on about but it is claimed that it of- financial markets in The Evil Dia- “it is pointed out that if fers microbiomes. ries; he also comments on politics, one sticks microbiomes current affairs, his favourite horses/ in a yoghurt it sweetens I have no idea what a microbiome sports bets, and the occasional film the stuff, thus rendering is (and nor do most readers, come and book review thrown in for good yoghurt more palatable, to that). But it is pointed out that if measure. Here we take a look back and causes a microbial one sticks microbiomes in a yoghurt on the highlights of Evil’s diaries in reaction in the gut which it sweetens the stuff, thus rendering the month of April. reduces weight. Even I can yoghurt more palatable, and causes a see the appeal of this sort microbial reaction in the gut which 6th April of additive.” reduces weight. Even I can see the Looking in my box of write offs appeal of this sort of additive. yesterday I encountered warrants 10th April to subscribe for Ducat Ventures. I The quoted competition is led by 4D scratched my head and enquired: an Pharma (DDDD) which is capital- I have very recently commented hour later it transpired that I am the ised at 570p at £350m. On the other on the big unravel coming at Mitie proud owner of Optibiotix (OPTI), hand, Optibiotix at 32p is capitalised (MTO) and was surprised that the now 32p. Since this is considerably at £23m. On this basis the choice is stock recovered to 281p at COB last more than I ever dreamed that they clear. That noted, I freely admit that Friday. Anyway, Saturday’s DMail would be worth my first instinct was this is not my specialist subject for finance section leads on delays now to sell stock. But since the racing was Mastermind. I therefore welcome being encountered at Mitie on pay- drab I diverted my energies to asking commentary from those who claim ing up arrears of pay where Mitie had around. Apparently, Optibiotix could to know. underpaid in the sense of below the be very cheap indeed (it’s a great minimum wage.

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Ben offers his thoughts on www.bene- The problem will be that the USA will delman.org. He is terrifically clever and seek to have Mr Sarao extradited so that “the likes of Exxon and Mobil are taking a “Feast upon the cadavre.” has a modest manner. Although he is he can be framed there. I hope (but do close look since the potential of MOIL’s acre- known as The Sheriff of the Internet he not expect) that the judiciary over here age is strategically significant.” is in fact a lawyer by profession and he will ask the Americans to explain them- outlined to me an extraordinary case he selves which of course they cannot. is bringing as a class action against Fa- However, for the time being, Mr Sarao cebook. He became informed that under and family should steer clear of Disney- age minors in the USA who cannot enter world. into contract, save for essentials such as food, were sending sums of money to Facebook so to participate in com- puterised games involving virtual characters. Ben has got a US judge to agree that there is the basis of a class action. He is after $500m or so and should earn a walloping fee.

Apparently, or so the DMail comment- hed let alone shown to be economic. I ed, HMRC staff are on holiday for Easter shorted UKOG too early at around 2p, wekeend and cannot sign off the extra little guessing the shower of bull that payable (just how much is in point?) was yet to emerge and be gobbled up by and, which is even more telling, decide the public. I’ll still make a profit. how much of a fine should be levied for breach of the law. 17th April

(When the law came in (1998), a chum I had Allied Minds (ALM) pointed out 24th April of mine was running a limited liabil- to me about three months ago. It has ity company, owned entirely by him- risen from nowhere and now stands at I caught up with Andrew Monk of VSA self and losing money. He therefore about three times fair value. This, I am 22nd April Capital this morning. VSA are brokers to paid himself nothing. HMRC, as it told, is because Neil Woodford of Patient Madagascar Oil (MOIL) and Andrew is, then wasn’t known, advised he was in Capital Trust (well, would you invest in I suppose that Hounslow is the perfect to put it mildly, bullish. breach of the law in not paying himself an Impatient Capital Trust? Or perhaps sotto voce base for setting out to own what he couldn’t afford anyway to pay. the Woodford endeavour is designed to the world but Mr Sarao seems to me to I started by pointing out that Madagas- Kafka was starting to rear his head. In make one a patient?) will prop up the have behaved entirely legitimately in car is hardly the safest territory politi- those days, Kafka was merely playing at price. Now 690p, it is time to leave quam causing the Henny Pennies to give him cally speaking. However, he countered playing the bloody fool: now he is wor- celerrime. some money. that the World Bank is in there and the shipped for doing just that full time in new president of this last fifteen months the regulatory world.) 20th April I long ago decided that to the authori- seems to be delivering a sensible regime. ties’ minds (if such is the right word to Andrew may be right; I simply do not Anyway, all this is just the taster at Mi- Ben Edelman, an associate professor at describe the void between their ears) know. tie. It’s easy and economic to borrow Harvard where he lectures on the MBA manipulation is something they would stock. Feast upon the cadavre. course, stayed with me and my wife over like to be able to engage in but finding However, MOIL’s acreage is vast and the weekend, preparatory to talking in that they do not know how to do it at- could hold 10bn barrels of “heavy” oil. 13th April public on Adware Shenanigans in 2015. tribute this sin/crime to someone who This guess is a long way ahead of the It was really interesting – clearly there does. This must be the basis of Mr Sarao publicly floated figure of 1.8bn barrels It is clearly a strong buy even though it On Thursday I contacted David Lenigas is massive fraud taking place. The chief being fingered. For it seems that he and, apparently, there are widely en- taking a close look since the potential of can be argued that it is premature to get to congratulate him on his stunning villain in quoted UK is blinkx (BLNX). placed orders to sell or seemed to place countered oil seeps at surface. You can MOIL’s acreage is strategically signifi- excited. Take your choice. presentation campaign to publicise UK Seemingly, the US authorities will not orders to sell which on enquiry were make what you will of the significance cant. OIl & Gas (UKOG) and the potential bo- take action against these scum. And so withdrawn a tiny fraction of a second of that claim. I found myself wondering nanza arising at Horse Hill and environs it goes on. before they could be met. However, this what David Lenigas would make by way It is very hard to put a valuation on – his publicist will certainly get a case of lifting of the skirt deceived the Henny of presentation of this set of facts. MOIL right now but at 6p or £35m odd Foster’s for Christmas. The British like It is truly astonishing how supine the Pennies into selling and thus allowed it seems ridiculously low. Some think it him since he is so gungho. So much so authorities are both here and in the USA. weak market conditions for Mr Sarao’s This field will take serious cash tode- should be 30p or more and others think that they suspend disbelief. However, It can’t be a conspiracy to fail. It has to nimble computer to buy. Apparently, velop and the sums required are proba- that, long term, this is a 200p/300p pos- the facts remain: there is an awfully long be a general ignorance. Mr Sarao has made £27m. Good on Mr bly way beyond MOIL’s capacity to raise. sibility. way to go before this oil field is establis- Sarao. But the likes of Exxon and Mobil are

64 | www.masterinvestormagazine.co.UK | may 2015 may 2015 | www.masterinvestormagazine.co.UK | 65 school corner school corner

School Corner Maria’s Golden Rules for Trading CFDs By Maria Psarra

Ladies and gentlemen, I do realise that we were just beginning to touch upon the subject of Deadly Trading Sins with my last few articles here in the new Master Investor Magazine, so I really hope that you will forgive me for changing the subject for the current and following issues.

This follows the Traders’ Panel Rule 1 - Avoid So what do I mean by overleveraging? Discussion with my friend and Let’s start with the assumption that all Overleveraging the funds in your trading account are renowned market strategist funds that you can afford to lose (and if Do NOT overleverage your accounts, Zak Mir, which took place dur- not, then too bad, they shouldn’t have ladies and gents. CFDs are one of the ing last month’s 2015 Master been there in the first place), so the most flexible financial products ever Investor Show. maximum of these funds that should invented, but they are also one of the ever be used for the total of your open riskiest. If you do not know how to play positions is 80% at any given time. And We shall continue our trip down with fire, then just don’t. If you do not this IS the maximum. The rest (at least the Sins lane in July (and mind trust yourself, but trust someone else 20% at any given time) should just sit enough, hire them to help you. If you do you, I am no saint, I just know there in cash. You are NOT God, and as not know such a person, stay away. And how to keep my ‘sins’ out of my such cannot predict Lehman Brothers, finally… if you think you are better than Trading, and hopefully one day MF Global, a plane crashing into the the professionals, then good luck, prove you will too). So for now, let’s Tower of London, the End of the World it, and I shall give you my own money, as we know it etc. just look at my Golden Rules for seriously. Trading CFDs...

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You just have to accept that, remote as Yes, you could bring the size down so Let me give you an example. A couple of the probability of such an event may that you have the same exposure, but months ago, I was short Fresnillo and appear to be, it is definitely not zero. I let’s be honest, this is not why CFDs was making money in the trade. Then, have. I guess watching Lehman Broth- were invented – i.e. they were invented one evening, a US Fed announcement ers fail and having my money tied up in to provide short-term leveraged expo- came out stating that interest rates may MF’s liquidation helped to open up my sure/profits to those that can achieve be raised earlier than expected. Fol- doors of perception. So, coming back to them. So if you are to ever receive the lowing this, Gold shot up. For me that you and to today, if a similarly shocking benefits of this, you have to learn to meant that Fresnillo (being a FTSE 100 ‘Black Swan’ event should happen, you control the downside. Gold and Silver Miner) was also going want that minimum 20% of remaining to shoot up soon as the UK stock mar- capital discussed to get you through the As for the Futures I used to trade, our way ket opened next morning. So I went to subsequent rainy days. of trading at the time involved around the office that morning, and advised all 70 scalping trades per day; we had to be of our traders and clients to exit their Rule 2 –Position Sizing ‘’married’’ to our trading screens, and related positions. Did we lose money in react like an algorithm. These days are this? In some cases we did, yes. We for We discussed this one in one of my re- gone as any prop trader of that era will sure lost the profits we were making be- cent articles, and as I believe I have re- tell you, and such tasks are now best forehand. But so what? The reason for peatedly mentioned before, in the mar- performed by real algorithms. being in this trade was no longer there, kets size DOES matter. In short, “too big we were no longer right, so our only can kill you every time”, and too small is So that leaves us with the present, and reasonable option was to exit. And that just not worth your while. What is more, with the fact that when trading CFDs, it was OK. I can assure you that taking the by some weird coincidence, you will find is best to use trading stops. And as I dis- loss at that point made no big negative that you will always tend to lose money cussed in one of my past articles, these difference to anyone’s weekly, let alone in the trades you went “too big” with, stops should be placed at the price points monthly P&L. I can also assure you that and win money in the trades you went where the market “proves you wrong”. staying short Fresnillo after this point “too small” with. So how about you just For example, when you are long a stock would have. try to determine a suitable position size CFD, this stop price is below the support for each of your trades given the size of level you bought it against. This concludes the first four of my your trading account and risk tolerance, Golden Rules for Trading CFDs. We shall and adhere to it? Rule 4 – Be Flexible continue with the remaining six in Mas- ter Investor’s June edition. Nobody likes being wrong. It hurts, and it always comes at a price. How- Until next month, “in the ever, confident people are not afraid to markets size be wrong. So when they make a deci- Happy trading everyone!! sion, they are 1) ready to fully support DOES it without doubting it for no reason; and Until next month, matter.” 2) happy to admit that this decision was Happy trading everyone! either always wrong, or is no longer right if the conditions that led to it hap- Rule 3 – Selecting Suitable pen to change. Stop Loss Orders

Let me start by saying that I do not personally use stops when trading ‘normal’ Maria Psarra is a Senior Derivatives and Equities Trader who has headed several Advisory stocks. I also did not use stops when I Trading desks in the City over the course of her career. In her most recent role as Head of used to trade Futures intraday for my- Trading at Prime Wealth Group, Maria determined the company’s trading strategy, super- self and institutional clients. In both vised a team of experienced brokers, and advised high-net-worth individuals on suitable in- cases, the reason was the same. I could vestment strategies. Maria employs different investment styles in order to construct person- alised portfolios best suited to the risk and return preferences of her clients. Typical portfolios control the risk I was taking and exit the primarily comprise UK and European equities and equity indices, and, to a lesser extent, com- position when necessary. Stocks are not modities and fixed income exposure. leveraged, therefore for any liquid stock, the risk that you are “carrying” by buy- Maria appears on Tip TV on a weekly basis providing investment tips and market commen- ing it is 95% and below the risk that you tary, writes for a number of financial publications, and is often invited to present her views during conferences such as the Master Investor Show, the London Trading Show, and Inside have by “carrying” the same monetary ETFs Europe, Europe’s largest ETFs conference. amount in a CFD position.

68 | www.masterinvestormagazine.co.UK | may 2015 shaken not stirred shaken not stirred

“In the civilised decadence of the Roaring Twenties and Dirty Thir- ties, any person in possession of a cocktail shaker was a person Shaken ready to party.” Wendy Salisbury is a London- based antique dealer, author and broadcaster with a passion for collecting eclectic objets d’art for Not investment. “I’ll buy anything I can fit into the boot of my car if I Stirred think there’s a profit in it!” an introduction to the bubbly world of cocktail-shaker investment By Wendy Salisbury

In the civilised decadence of the Roaring Twenties and Dirty Thir- ties, any person in possession of a cocktail shaker was a person ready to party. But where did this ingenious little bar tool originate and how come everyone aspired to own one?

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The origins of the mixed drink and the having swallowed a glass of it is ready to Prairie Oyster and Singapore Sling economy picked up and Prohibition was A good quality silver plate penguin- essential accessory with which to blend swallow almost anything else!” fuelled the fire for all things fancy, for- lifted, glassmakers like The Cambridge shaped shaker sells today for around it began with the ancient Egyptians: eign and frolicsome. As Dorothy Parker, Glass Company of Ohio added flair to £1,300. Look out for the Napier label, they combined herbs, spices and alcohol Mixologists of the day experimented by the great American writer, poet, critic a new range of styles in ruby red, co- originally introduced during the holi- to make medicinal remedies. In 1520, adding fruit juices and sodas to bottled and doyenne of the witty riposte said: balt blue and emerald green glass with day season of 1936. Other shakers with Hernan Cortéz, the conqueror of Mexico, drinks such as gin, martini, vermouth recipes and measures etched or silk a good provenance are classic architec- became partial to a New World potion and whisky. Merging the flavours by “I love a Martini, but two at the most, screened on the sides. tural designs by Norman Bel Geddes. with a base of cacao which was served to moving the liquids back and forth be- Three, I’m under table him from a tall golden vessel. tween two tumblers, they soon realised Four, under the host!” Jazz Age figures frolicked around the that something a little less clumsy and circumference while golfers, polo play- In America in the late 1700s, the brewing a little more practical was needed. And In 1908, Harrods advertised two silver- ers and aviators showed off their prow- of different liquors was the precursor to so the true evolution of the decorative plated cocktail shakers in their brochure ess in paint or inlay. Cocktail shakers the punchy combos we enjoy today. But cocktail shaker began. “for mixing American drinks”. High end wielded by flamboyant bar tenders ap- how did the cocktail get its name? houses like Cartier, Tiffany, Mappin & peared in movies and became associ- “Barmen soon be- Webb and Asprey followed suit and the ated with the glamorous lifestyles of the Legend has it that a widowed innkeeper came showmen as great jewellers and silversmiths of the movie stars. The stylish shaker became a named Betsy Flanagan was having a bad they brandished time competed to design novelty shak- de rigueur symbol of sophistication and time with her chicken-rearing neigh- their shakers high ers to rival the ever-growing plethora of the good life. bours. To teach them a lesson, she stole in the air like ma- bar room accessories. their prize rooster which she killed and raca players.” So, what to look out for and what to cooked to serve to her customers. A collect? As with any purchase for in- Advertising agencies jumped onboard bunch of rowdy French and American vestment, there are only three require- with slogans like: “... puts new life into the soldiers washed the tasty meal down The earliest of these inventions were ments: quality, quality and quality. Go tired woman after a long day’s shopping” or with a drink Betsy concocted and deco- native New Yorkers much like their pro- for the luxury labels mentioned above the even catchier “... designed to boost your rated with tail feathers. As the evening moter, Mr. William Hartnett. He applied if you can afford them – they hold their husband when he comes home late from wore on and the boys got merrier, they for a design patent in 1872 for an ‘Ap- value and have more chance of appreci- work.” demanded ‘more cock tail’ and the rest, paratus for Mixing Drinks’. This was a ating than everyday examples. as they say, is history. three-piece gadget comprising a built- Barmen soon became showmen as they in strainer, a cup and a cylindrical base If you like glass, the Cambridge Glass brandished their shakers high in the that all fitted neatly together. The con- Company’s Rose Point, Gloria, Diane air like maraca players. The rapid rat- Cocktail shakers were given as Christ- traption was later simplified to just two and Wildflower patterns are popular and tling of ice cubes was a satisfying and mas and birthday presents and awarded pieces: a tall base into which the ingre- very affordable. A vintage Wildflower anticipatory sound, tempting the taste to sporting heroes. They were shaped dients could be added to chunks of ice design with a chrome lid is currently for Asprey of London is currently sell- buds with the latest creations from the like fire extinguishers, ladies’ calves for speedy cooling and a cup-shaped top sale on eBay at around £60. ing a rocket-shaped shaker for £7,500 bartender’s fertile imagination. A natu- (shake a leg?), Zeppelin airships, WW1 with a built-in sieve. The subsequent and Pullman Gallery of King Street, St. ral progression was to serve cocktails at bombs, army tanks, lighthouses, golf shaking combined the contents and the S.W. Farber’s ‘Farberware’ and Farber James’s has a wonderful, eclectic selec- home and before long, no self-respect- bags and skyscrapers inspired by the sieve stopped the ice cubes from tum- Brothers’ ‘Kromekraft’ range are also tion from around £2,000 upwards. The ing household was complete without a New York City skyline. bling into the glass. Ice could be popped excellent starter models. They are fair- auction site 1st Dibs is another great bar full of blending equipment not least in later if required. ly standard in design with an Art Deco shopping source offering a variety of of which was a collection of shiny shak- During Prohibition (1920–1933), when Farberware 12” chrome model compris- models and prices. ers. alcoholic beverages became illegal, In 1887 The International Silver Compa- ing pitcher and lid currently on sale on cocktails were still consumed in bars ny listed six sizes of the standard two- eBay for around £18.00. Books also abound on the subject for Matching drinking cups, citrus presses, called Speakeasies. The quality of the piece shaker in their catalogue. By the you to do your research before you buy. stirrers, ice picks, scoops, tongs, strain- liquor available was inferior to before turn of the 20th century, the Victorian- If you want to create a serious collec- Here’s a quote from San Francisco writ- ers and muddlers were thrown into the and there was a shift from whisky to style shaker, not unlike a tea or coffee tion, however, you’ll need to dig a little er and bartender William “Cocktail Bill” mix and the expression “Anyone for gin; the latter did not require ageing and pot, had become a bar-room fixture. deeper. The Penguin is a highly collect- Boothby’s 1891 tome: cocktails?” became music to the ears, a was therefore easier to produce illicitly. As early as 1806, in the May edition of a Grand hotels in the USA were keen to ible character as he was a 1930s mas- pleasure that could be enjoyed by men Honey, fruit juices and other flavour- New York publication entitled The Bal- compete with the British convention of cot. Dressed in a tuxedo with a hinged “Do not serve a frosted glass to a gentleman and women in equal measure leading ings helped to mask the foul taste of the ance and Columbian Repository, this Afternoon Tea so they came up with the beak that lifts up to reveal a stopper with a moustache. The sugar will adhere to them through to dinnertime ‘in high poor quality spirit. Sweet cocktails were new fangled beverage was described as slightly more outré Cocktail Hour. and pouring spout, he symbolizes the that appendage and cause great inconven- spirits’. easier to drink quickly which was quite “a stimulating liquor, composed of spirits, elegant man about town. I would guess ience.” a consideration when the establishment sugar, water and bitters supposed to be an That time of day, a pre-prandial cinq à this figure was chosen as much as for Exotic names like Angel’s Delight, Bos- could have been raided at any moment. excellent electioneering potion in as much sept, earned its reputation as a way to his ‘penguin suit’ as for his cold climate Cheers m’dears and bottoms up! ton Iced Tea, Bronx Express, Cowboy as it renders the heart stout and bold, at the fill the gap between tea and dinner. The connotation, representing a well-chilled Martini, Floridita, Margarita, Moscow The Great Depression of 1929 stilted same time that it fuddles the head. A person custom was embraced with gusto. cocktail. Mule, Prairie Oyster and Singapore Sling manufacturing and sales but once the

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TECHNOLOGY CORNER Social Networks for Traders By SIMON CARTER

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Think social networks and You can, of course, put in your own ca- veats, stops and limitations meaning you think of Facebook, “Scutify comes across as a that if your trader suddenly loses his or Twitter and LinkedIn, but her touch, you aren’t going to go to the beyond these behemoths more intelligent, wall.

are a number of thriving reasoned version of Moreover, the fact that you can follow online communities spe- Twitter.” as many traders as you wish means that cifically for traders. Mas- you can spread your investments between high and low risk strategies. ter Investor takes a look at the quirks, upsides, pitfalls and pluses of three of the biggest.

Scutify Reviews of eToro are generally good, Of all the sites reviewed in this column, and users seem reportedly happy with Scutify is the closest there is to ‘tradi- the returns. If you ignore those posting tional’ social networks combining fea- 300-400% returns (as usually this indi- tures from Facebook and Twitter with cates a high-risk strategy that will have “Collective2, or C2, is one stock market statistics to create an envi- burned out before you get to it), then of the biggest social trad- ronment that you can quickly feel com- eToro could potentially generate a tidy fortable in. little return. ing networks in terms of

When joining the site, Scutify will au- Collective2 numbers of users.” tomatically follow a number of popular accounts for you. This may seem pre- see the overall community leaning) and tools to help negate the worst side ef- Collective2, or C2, is one of the big- sumptuous, but the idea is to get you to theoretical results of strategies. All of that said, it’s not impossible to make money or to you can see that Scutify is trying to be all fects of automated trading. gest social trading networks in terms going on the site, and you can of course get strategy ideas from C2, and a number of the strategies do come with a free trial. How- things to all people. of numbers of users, and numbers of un-follow these accounts. ever, in terms of the social aspect, there are certainly better options out there. Any trader can join eToro and while you trades made, but of all three reviewed One downside is that with all of these can use the site in a number of different today, the site is the highest risk, and features, it’s easy to find yourself ways – for instance, using OpenBook to the least rewarding from a social point spending so much time on the site that discuss trading in a Twitter-like envi- of view. you forget to do any actual trading, but ronment – you’re likely to fall into one once you’ve mastered the layout and of two camps. Camp one is to use eToro The idea behind the site is that traders zoned in on your favourite features, as a trading platform. This is a real ‘put can discuss and develop strategies which Scutify could become a very useful ad- your money where your mouth is’ way can be back tested with real data (what dition to your trading toolset. of trading as any user will be able to see strategy doesn’t work with old data?!) As with most social networks, you can what you have bought and how you’ve and then put into a market place where post updates. Here, they’re called Scut- performed. other users can subscribe and automate tles, and you can post up to 500 char- eToro their own trading using that strategy. acters and an image. With this much Camp two is where the majority of us- room to express thoughts, Scutify comes As opposed to a true social network – in ers tend to sit. From this side, you are For instance, at the time of writing, the across as a more intelligent, reasoned fact the site includes links to other social more likely to follow the more success- strategy at the top of the list has been version of Twitter (where 140 characters networks – eToro is a self-styled so- ful traders from camp one, perhaps tak- back tested to February 2005 and has a is your limit). cial trading network. If you had to sum ing their tips and using them as part of 41.3% annual return on the stock mar- up what the site does in a few words it your own trading strategy. However, the ket. And for $100 a month, you too could There is also a market place, called Pre- would be this: follow traders and copy big selling point here is that if you like use that strategy. mium Scuttles, where users can sell their trades. a trader enough, you can simply click content such as eBooks and trading ‘Copy’ and your account will move into While on the surface this appears to be strategies from as little as $0.99. Add Before any automated trading alarm automated mode and mirror the moves very similar to eToro, there is no charge Twitter integration, the ability for you bells start ringing in your head, eToro made by your chosen trader(s). on that site for following traders. to create your own profile, a feature that approaches the idea with a policy of being completely open (more on which allows you to state yourself as Bullish or Furthermore, eToro’s results are based below), and provides risk management Bearish on any company (as well as on a history of actual trades as opposed

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april 2015 Best of the “GSK in its latest corporate manifestation, has been resolved into Blog three distinct areas of business activities: the discovery of pharmaceutical therapies; vaccines and healthcare.”

Robert Sutherland-Smith When I first started to put pen to paper heed of the weakness in the share price? outpaced the 14% increase in the FTSE It is estimated that the dividend payout on this pre-trading statement apprecia- Is this a share that should be taken in a 100 Index. That after all, is the thing that for Q4 will be increased by 3% making on GlaxoSmithKline: a tion of GlaxoSmithKline, the share price 1576p flood or left to float down river for is responsible for the new up-trend. an annual dividend of 80p; hence the share supported by a good was 1626. In terms of years, Shake- a better opportunity? annual dividend yield of 5% for last year. yield, a potential special speare was dead and buried by 1626. The The Q3 statement for the year ended share price now, as I resume the task, Looking at the share price chart, I see 31st December 2014 (it was published in GSK in its latest corporate manifesta- shareholder return and is 1576 – a year when Will Shakespeare that it has reached a support level on October) stated that core earnings per tion, has been resolved into three dis- potentially supportive was alive but before he had commenced an uptrend that began in January and share rose 5% to 27.9p before the pay- tinct areas of business activities: the news flow. his career as a playwright and share- off which it seems ready to bounce; a ment of dividends and the benefit, or discovery of pharmaceutical therapies; holder in the Globe theatre company. not unreasonable speculative progno- otherwise, if disinvestment. vaccines and healthcare. sis when the historic dividend yield is So, do I press on in a conviction that 5% despite the fact that in the last six The Q3 dividend was in fact maintained GlaxoSmithKline is good value or take months the share price rise of 22% has at 13p.

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Zak Mir’s AIM Stocks Momentum Plays: Clini- “it actually looks as though it is the gen, GW Pharma, Ithaca usual phenomenon we see with “crimes” While some may find that life on AIM in the financial mar- can be a little rocky at times, my take on kets: a mixture of envy, scapegoating, the best way to flourish in this particular ignorance and above space is to focus on situations where the all, the rush to close market has already got the bit between a stable door after its teeth – momentum plays. This may the horse has mean that one is focusing on the tech- bolted.” nical side, rather than the fundamentals, but going with the flow/trend is a form of investing which has historically proved to be effective, or at least simple. Of course, the trick here is not to be shy in terms of pulling the plug on a position if the money management parameters Any dips towards the 10 day line in the If there was a systemic weakness in the set when the stock was bought suddenly interim are regarded as a buy opportu- index trading it is quite pathetic it has change. nity on a technical basis. taken so long to catch up with the Hound of Hounslow – there could have been a flash crash every month in the mean- “we have wit- time. nessed an as yet untested break What market observers and indeed the of the key 200 general public are now being led to be- day moving av- lieve is that Sarao is yet another in a long erage now at line of rogue traders who started off with 488p, something Nick Leeson 20 years ago. This may be which suggests the case. But it actually looks as though that we are Sarao: Making A Monkey it is the usual phenomenon we see with looking at an Of The Markets And The “crimes” in the financial markets: a Time For The Loonie To mixture of envy, scapegoating, igno- “The second half of 2014 saw a near exceptionally Regulators rance and above all, the rush to close a Pick Up The Dollar Baton robust bull stable door after the horse has bolted. relentless rise in the Greenback, run.” I have only been to the U.S. once. It As London traders bask in the mini but now the dollar index isn’t sure was in 1991, to Los Angeles, just before spring heat wave, financial markets are We are reminded once again that regu- where to go.” Rodney King was beaten up. California, also enjoying a little quiet. The S&P 500 lators seem to be skilled in punishing/ apart from the LAPD, struck me as a is still banging on the door of the record We kick off with a solid looking con- fining the results of their own incom- great place. But you would not want to highs set earlier in the year, but there is In fact, the Canadian dollar is the best tender which comes in the form of Clin- petence. There will probably be more precarious satiation in Greece. At the get on the wrong side of the law. Indeed, no sense of urgency right now. performing dollar pair over the last 20 igen (CLIN). Here it can be seen how the to emerge from the Sarao episode apart same time, oil prices have steadily given the totally one-sided extradition trading days. stock kick started an extended bull run from a British citizen being thrown to climbed off the March lows just above rules, even those of us Brits who may The same can be said of the US Dollar. with an as yet unfilled gap to the upside the lions – the Department of Justice. $40 barrel. even accidentally find ourselves in the The second half of 2014 saw a near rein August. Since then we have witnessed It is that he will be given a dispropor- gaze of the U.S. authorities will find that lentless rise in the Greenback, but now an as yet untested break of the key tionately tough punishment, and when The latter has been of particular signifi- a one way trip Stateside will be served up the dollar index isn’t sure where to go. 200 day moving average now at 488p, it comes to trading, the “house” always cance as collapsing oil prices (as meas- quicker than you can say Star Spangled The US is still likely to be one of the first something which suggests that we are wins. ured in US dollars) have been a signifi- looking at an exceptionally robust bull Banner. This is not necessarily a reason Western nations to raise interest rates, cant factor in the dollar inflation of 2014. run, one for which the post November to quibble; it is just the way it is. but expectations are now edging further Oil prices still have some way to go to consolidation between 480p – 580p into 2016 for this to happen. Below par recover the highs of June 2014 of over should break convincingly to the upside. Those of us interested in the financial US unemployment claims, flash manu- $105 a barrel, but the recovery has been The favoured scenario at this stage is markets are reminded of this in the wake facturing PMI and new home sales on consistent over the past six weeks. that while there is no end of day close of the alleged Flash Crash perpetrator Thursday all added to the dollar’s heavy back below the 10 day moving average at Navinder Singh Sarao. The Flash Crash burden. This recovery has been a balm for the 552p, the upside here could be as great was five years ago, while the US Com- beleaguered Canadian dollar, which re- as the August price channel top at 700p modity Futures Trading Commission During this time, the euro has stead- lies heavily on oil prices as part of its ex- over the next 1-2 months. (CFTC) is focusing on Sarao only now. fastly refused to collapse despite the port portfolio.

80 | www.masterinvestormagazine.co.UK | may 2015 may 2015 | www.masterinvestormagazine.co.UK | 81 book review book review

Read to Succeed “This is a book written by someone who knows the market for smaller companies like the back of Why AIM will be the his hand.” world’s best market beyond the credit boom By Gervais Williams A book review by Swen Lorenz

Harriman House, GBP 16.99. Available on Amazon.co.uk

One of the great advantages of work- Williams naturally has a bias, given that Williams spells out the principle reasons ing for Master Investor is that you get he manages £3 billion in client assets for investigating AIM listed smaller to personally meet an incredible array that are mostly invested in this sector. companies in greater detail – ranging of high profile experts and investors – However, his track record of successful from the greater scope for misvaluation most notably at our yearly Master In- investments and his experience in the and opportunities to strike bargains, to a vestor show, where one of our keynote sector should make everyone listen up. projected increase in institutional capi- speakers was Gervais Williams, the This is a book written by someone who tal flowing into the sector – all of which award winning fund manager and small knows the market for smaller compa- is backed up by data, and written in a cap expert. nies like the back of his hand. style that is comprehensible even for those with relatively little experience. Having spent a fair bit of time sitting There are a number of compelling rea- next to Gervais and discussing the pres- sons why small caps are going to out- Whereas some authors argue that at- entations of the other keynote speakers perform their larger peers. For a start, tractively priced investments can now of Master Investor, I spent the follow- the Law of Large Numbers works against only be found in exotic countries or ing Sunday reading his book, which has large corporations. It’s so much harder have to involve complex financial in- actually been on the market since last to grow a bureaucratic, vast enterprise struments, Gervais Williams shows that November. Whereas my review might be than it is to grow a smaller, more nim- they might also quite simply be hiding considered slightly late, it’s all the more ble one. Large companies are poor at in plain sight. The smaller companies timely. innovation, whereas small companies listed on AIM are easy to access for UK can easily foster a culture of innovation investors, and may just hold a bigger ar- Shares of small companies have been and disruption. Large companies grow ray of opportunities than most investors lagging behind those of blue chips by a through acquisitions, whereas smaller currently realise. great degree, and if Gervais Williams’ companies tend to grow through organ- insights are anything to go by, this is ic growth, which is much more lucrative Master Investor rating: A highly reada- going to change dramatically. for investors. All of this comes together ble book that makes a convincing case, to make a compelling case for investing doesn’t take more than an afternoon to “The Future is small” contains an in- in smaller companies, especially during read in detail, and provides a real call to credibly broad, but also incredibly clear, times of depressed valuations. action for investors. It’s a book I’ll get Win Gervais William’s book: on 30th May, we will give away 3 copies of this book to our set of hard data about small cap stocks out again in the future. Facebook community. Friend us on www.facebook.com/masterinvestor for a chance to and how they compare with other in- win a copy. vestments.

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The Final Word FTSE, or not FTSE? By Adrian Kempton-Cumber

Two-party politics has meant that, since the war, we’ve largely had an elected dictatorship (aka ‘majority government’). We had the chance to change that, but a majority voted against the only electoral reform referendum we’ve had, effectively shutting down the debate.

If you can’t imagine that then read The ‘First past the post’ is not even-handed, The ironic thing is that Scotland has, at policies, not parties or politicians, are Spider and the Starfish by Ori Brafman and apparently we like it like that. For a least for the purposes of a joke, become what should be focussed on. and Rod Beckstrom. The royals do in- country that has been so innovative in a third world country since then: ebola, terfere in politics behind closed doors, the past, practically inventing the mod- no income thanks to low oil prices. Yet I’d like to see a system where the ideas and they are above the law. If you can’t ern system of government, we seem they could now be ruling the whole UK are celebrities, chosen by existing sys- imagine that then visit republic.org.uk reluctant to replace it with a better one. from Holyrood! tems (YouGov, 38degrees), a sequence and prepare yourself for a brutal re- Party politics is like football teams here. of electronic multiple referenda on each education! It’s seen as disloyal if you defect, even until we reach a consensus most can live if you no longer agree with the party’s “since the war, with. What we get now is often some- Want a fair world? Then forget buying values. Or, in the case of New Labour, thing most don’t want, but will reluc- Fair Trade products at the risk of desta- we’ve largely had bilising a local economy half-way round if they themselves no longer agree with an elected tantly live with. I’d abolish MPs: they’d their own party’s values! be obsolete. Each individual would have the world by creating income inequality dictatorship (aka to pass a rudimentary exam to establish there, whilst feeling smug yourself. But things could be changing. I hope ‘majority that they understand what their vote we’ll never see a majority government government’).” does, how our political system works, In a fair world you’ll be losing the ma- here again. I want every administra- and how to evaluate policies before jority of all you have, because globally tion to have to negotiate on every policy. they’d get to have a vote. we are, in relative terms, the 1%. Each The Lib Dems squandered their chance The popular left wing, right wing idea of us has around 5 times the global av- to hold sway in the Coalition, sacrificing of politics is totally out-dated. In 1945, One thing’s for certain though: if you erage. Overall they haven’t. The market’s We’re in a bull market so we shouldn’t many of their key policies. This year the it was quite reasonable to be a socialist, want fairness in the UK then you have movement reflects the global economy, expect the FTSE 100 to break that trend SNP could hold the balance of power. If support the establishment of the welfare to start at the top and abolish the mon- Meanwhile, we are stuck with things as and using the Dow Jones as a proxy for unless other markets do, which seems the Tories had supported Scottish Inde- state, the NHS and so forth. But now archy. They represent privilege and have they are, at least until 7th May 2015. that, there’s a clear correlation. It’s fair- unlikely before mid-May. pendence (as I do), they would now win that’s long since been done. Life is much more secrecy than, well than you or I are ly obvious that correlation isn’t caused every election for Westminster for the more sophisticated nowadays. Everyone allowed to know about. We don’t even I looked back at how the 18 General by the UK government! Usually the foreseeable future, so I don’t quite un- should have views that occupy right, need a head of state. Elections since the war have affected the market continues in the same direction. derstand why they didn’t. left, centre and more. As a result, FTSE100.

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The histogram shows the max variance How can we jump all over that? Well, from the last 18 election-day FTSE 100 a fixed odds boundary bet would bea closing prices over the following 5 trad- good strategy. In other words, betting “What would ing days. They are absolute values (i.e. the market will touch either 0.5% above one represents the lowest intra-day or 0.5% below the closing price on May Gordon Gekko price, one the highest, so a minimum of 7th. Another way to play it would be to -1.2% will show as a positive variance take two Covered Warrants, or two op- say? “The FTSE of 1.2% because we’re only interested in tion contracts, one in each direction 100 is a dog the variance). (one put and one call). That way which- ever direction the market moves your with fleas.” • 18 out of 18 have at least 0.5% max contract is moving faster in the direc- variance tion of the market than the other loses. Basically, a leveraged hedge trade. You One final note though, as regards the • 15 out of 18 have at least 1.0% max would have to decide your risk profile FTSE 100 generally. The DAX has con- variance to choose your strike prices and dates. sistently out-performed the FTSE, as However, a hedged trade would be great have the main US markets. As you can Since 1964 there have only been 3 times if there were any significant market see from the FTSE price chart, it hasn’t out of 13 that the lesser of the pair has moves during those days. Unlike the even really hit a new all time high if you been less than 0.5% (before that all were fixed odds bet, it would give you greater consider mitigating factors. Adjusting negligible), although to be fair they returns for a larger move than 0.5%. The for inflation, it’s slightly above where it could be in the same direction. So we can market could, of course, go nowhere, was in 1945! What would Gordon Gekko be as certain as we’re ever likely to be for the first time in 70 years of General say? “The FTSE 100 is a dog with fleas.” that a move of 0.5% is on. Uncertainty Elections. That would be rather unfor- is priced in, but for little reason since tunate! Until next time, Adrian K-C the inevitable tracking of global markets then prevails.

Description of charts

Histogram showing absolute high and low variance over the 5 trading days following each General Election.

The Price chart shows FTSE 100 and Inflation Adjusted FTSE 100. Vertical lines show the election winners, red for Labour, blue for Tories and magenta for the 2010 Coalition on a log scale. Opening price 138.1

86 | www.masterinvestormagazine.co.UK | may 2015 MARKETS IN FOCUS MARKETS IN FOCUS

MARKETS IN FOCUS commodities 1m% forex 1m% april 2015

global indexes ftse 350 bottom ftse 350 sectors bottom

forex

ftse 350 top ftse 350 sectors top

interest rates commodities

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