issue 16 – JULY 2016 www.masterinvestor.co.uk

The UK's no.1 free investment publication Time for Take-Off HOW GROWTH IN GLOBAL AIR TRAVEL CAN LIFT YOUR PORTFOLIO plus... JIM MELLON ON BREXIT MASTER INVESTOR OUTLINES A PATH FORWARD Special Dividends THE SMALL CAPS THAT PAY YOU EXTRA The Future of Medicine HOW TO INVEST IN IMMUNOLOGY AND SYNTHETIC BIOLOGY Pocket the Grey Pound THE FUNDS THAT HOPE TO PROFIT FROM AN AGEING POPULATION Superior Investor Support

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London Southeast A4 Full Page Advert Final.indd 1 29/03/2016 12:51 WELCOME Out of the EU, and into the world!

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This e-magazine was, from day one, proudly associ- ated with the campaign to see the United Kingdom leave the European Union. It was a bold step at the time. Back when we first started writing about "Brexit", the upcoming referendum had barely started to regis- ter on the mainstream media's radar. Anyone I asked about the subject told me: "The status quo always wins in referenda; there will never be a majority to leave the EU." How wrong they were! CONTACTS Master Investor isn't a political organisation, nor will we aim to call other elec- Advertising tions. We do, however, feel strongly about Britain as an investment destination. [email protected] Short-term adjustments aside, our team, on the whole, feels strongly that Britain will benefit economically from the decision to cut itself loose from the decaying Editorial Enquries political union that the EU has become. This is a nation of free enterprise, risk [email protected] taking, and innovation. The City of London is the world's biggest financial centre and one that offers countless opportunities to private investors. Subscriptions [email protected] We expect Britain's lead in the world of finance to only become bigger. With it will come an even broader choice of investment opportunities. When this nation turns its primary focus away from the low-growth EU and toward high-growth FOLLOW US markets around the world, it will open up a variety of new investment opportuni- ties that private investors will be able to exploit.

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Master Investor Ltd. Editorial Contributors Disclaimer Suite 88 Robbie Burns Samuel Rae Material contained within the Master Investor Magazine and its website is for general information pur- 22 Notting Hill Gate poses only and is not intended to be relied upon by individual readers in making (or refraining from John Cornford Nick Sudbury making) any specific investment decision. Master Investor Magazine Ltd. does not accept any liability London W11 3JE Filipe R. Costa for any loss suffered by any user as a result of any such decision. Please note that the prices of shares, United Kingdom Caroline Drewett spreadbets and CFDs can rise and fall sharply and you may not get back the money you originally invested, particularly where these investments are leveraged. Smaller companies with a short track James Faulkner record tend to be more risky than larger, well established companies. The investments and services Editorial Richard Gill, CFA mentioned in this publication will not be suitable for all readers. You should assess the suitability of Editor Swen Lorenz Victor Hill the recommendations (implicit or otherwise), investments and services mentioned in this magazine, and the related website, to your own circumstances. If you have any doubts about the suitability of Editorial Director James Faulkner Adrian Kempton- any investment or service, you should take appropriate professional advice. The views and recom- Creative Director Andreas Ettl Cumber mendations in this publication are based on information from a variety of sources. Although these are Sub Editor Simon Carter John Kingham believed to be reliable, we cannot guarantee the accuracy or completeness of the information herein. Jim Mellon As a matter of policy, Master Investor Magazine openly discloses that our contributors may have interests in investments and/or providers of services referred to in this publication.

www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 16 – JULY 2016 | 3 issue 16 – JULY 2016 www.masterinvestor.co.uk

The UK's no.1 free investment publication CONTENTS Time for ISSUE 16 – JULY 2016 Take-Off HOW GROWTH IN GLOBAL AIR TRAVEL CAN LIFT AVIATION YOUR PORTFOLIO

plus... Time for Take-Off – How Growth in Global Air Travel Can JIM MELLON ON BREXIT 016 MASTER INVESTOR OUTLINES A PATH FORWARD Lift Your Portfolio Special Dividends THE SMALL CAPS THAT PAY YOU EXTRA The aviation industry looks set to enter a glorious new era. The world is indeed The Future of Medicine HOW TO INVEST IN IMMUNOLOGY getting smaller. Here's how to profit from it. AND SYNTHETIC BIOLOGY Pocket the Grey Pound THE FUNDS THAT HOPE TO PROFIT FROM AN AGEING POPULATION on the cover 006 Mellon on the Markets Inside the mind of a Master Investor: Jim Mellon lays out a route map for Brexit. 034 Funds in Focus – If You Can't Beat Them, Join Them ALL OTHER TOPICS It is estimated that the number of older people in the world – defined All aboard the Brexit Big Dipper as those aged 60 or over – will in- 010 crease from 901 million to more than Victor Hill looks at the outlook for UK investments in the aftermath of the UK’s vote to 1.4 billion over the fifteen years to leave the EU. 2030. Nick Sudbury looks at the funds looking to capitalise on this trend. 022 How to Invest Like... John Templeton 038 From Acorns to Oak Filipe R. Costa distils the investment strategy and processes of John Templeton, the Trees – Special-Divi- man who popularised overseas diversification and ran one of the best performing dend Special mutual funds of all time.

Special dividends can be particularly Dividend Hunter – Debt-Free Dividend Investing valuable to investors. Richard Gill, CFA, 028 uncovers the small-cap companies that As demand for investment into high-growth businesses skyrockets, the City is pay you extra. looking to crowdfunding to open the door to the masses of untapped and enthu- siastic retail investors. 044 Opportunities in Focus – Forget "Pharmaceuti- 052 Chart Navigator – Take Me up the North West Passage cals" – Think Immu- Adrian Kempton-Cumber gets technical. This month, Adrian looks at the potential nology and Synthetic for global realignment should the Arctic ice cap continue to recede, and reveals Biology how investors can position themselves accordingly.

Victor Hill takes a look at two of the emerging disciplines which could trans- form medicine within our lifetimes: immunotherapy and synthetic biology.

4 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk All other topics

058 Robbie Burns' Trading Diary 082 Best of the Blog

'Naked Trader' Robbie Burns looks at how traders can – and must – remove their We look back at some of the most pop- ego from their trading activities. ular pieces from the Master Investor Magazine website during the month of June.

086 Read to Succeed – The Laws of Wealth

Richard Gill, CFA, reviews The Laws of Wealth, in which Dr Daniel Crosby at- tempts to take the behavioural finance discipline to the next level, by analysing the theory behind investment psy- chology and then suggesting ways to become a better investor.

062 The Macro Investor – The Death of Bonds Over the last few years, investors have been trying to front run central banks by purchasing bonds. However, Filipe R. Costa believes that the gains could be about to come to an end.

068 Forensic Forex – Where Next for Sterling Author and trader Samuel Rae looks at how the Brexit vote will play out in the Sterling markets in the coming months.

090 The Final Word – Soldiers of Fortune

Adrian Kempton-Cumber calls it as it is. This month, the AKC explains why there's no room for sentimentality in trading.

072 The Sorry Tale of Stanley Gibbons John Cornford uncovers the story behind the demise of the philately specialist. 078 Millennials & Money – Crowdfunding: Is It worth the Effort? The power of the masses is at your fingertips, where collective ideas, resources 094 Markets in Focus and strategies can be readily tapped into by the budding entrepreneur. Crowd- Market data for the month of June. funding can offer something for everyone, argues Caroline Drewett.

4 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 16 – JULY 2016 | 5 BY JIM MELLON Mellon on the markets

Brexhausted!

I'm now back in Spain after being in the UK on the day of and the morning after the referen- dum. Wow – what a result!

I went to the area just outside Par- too expensive. Oh, and of course, of inward migration to the UK has liament where the TV and radio this excludes bond markets, which been too high, and the strain on the stations had set up and had been are suffering from collective -delu exchequer and on public services broadcasting all night till the morn- sion and central bank manipulation. has been too severe. ing of June 24th. It was surprisingly quiet, with only a glimpse of Liam I was sure Cameron would have It is also a fallacy to suppose that im- Fox skipping down the path, and a to go – and I don't really believe migrants are net contributors to the quick handshake with Nick Ferrari he went voluntarily. I think he was public purse. My friend James Fer- and Andrew Pierce. pushed by Tory grandees. He was guson has done great work showing stupid to call the referendum in the that the entirety of the British gov- Then I held a celebratory breakfast first place, and then to deliver such ernment fiscal deficit of between at my pub in Notting Hill for (mostly) an abject set of 'reforms'. He also £70 and £80 billion is due to transfer likeminded people, though my sis- compounded matters by being such payments (the UK has already got all ter Claire didn't look too happy. This a promoter of the backfiring 'Project of its money back from the banks). was in sharp contrast to her Danish Fear', which essentially doomed the husband, Lars, who was absolutely Remain campaign. As for his mate, Of this, about 40% is payments to delighted! George Osborne, he's as toasted as workers on short working hours (16 a muffin. hours, generally) who are "topped We had been trading all night, and up", and much of that goes to EU luckily, our instinct that the Soros I was interviewed a fair bit over the immigrants, a minority of whom doomsday scenario was far too pes- last week or so, and I kept making "game" the system. This is some- simistic proved right. We covered all the economic case for Leave – one thing that needs to be addressed – of our sterling shorts, and also our that, in my view, had not been well and presumably can be in the com- DAX and S&P shorts and went long. articulated, as the Leave camp pre- ing months or years. Then, in and out, playing the range ferred to focus on sovereignty and, till the volatility abated and markets of course, immigration. My general view is that not much began to settle down. will happen immediately; life will go There is no doubt that immigra- on. The economy was already slow- My sense is there might be a little bit tion is a big issue for many people ing, with or without Brexit, and the more volatility, but that markets are who felt disenfranchised and who pound has been overvalued for too more or less accurately priced, with couldn't see any benefits from the long, especially with the large cur- the exception of the US, which is still free movement of people. The scale rent account deficit that we run, par-

6 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk MELLON ON THE MARKETS

“MY SENSE IS THERE MIGHT BE A LITTLE BIT MORE VOLATILITY, BUT THAT MARKETS ARE MORE OR LESS ACCURATELY PRICED, WITH THE EXCEPTION OF THE US, WHICH IS STILL TOO EXPENSIVE.”

6 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 16 – JULY 2016 | 7 MELLON ON THE MARKETS

citizens a year into the UK, who would have rights to work and to stay permanently. Or an Austral- ian style points system for the same numbers. In return, the EU would allow an equivalent number of British people to have the same opportunity in the EU. This would allow the absorption of immi- grants at a more acceptable rate.

2) A free trade customs Union con- tinues, but the UK is free to make its own bilateral trade deals.

3) The UK and EU agree to work to- with the US and others, believe it gether on common standards, and or not, than for the EU. This is be- a range of other issues. “A ‘PUNISHMENT’ cause we don't have all the vested interests of European nations with Why would the EU agree to this? Well, OF BRITAIN IS respect to, for instance, agricul- a "punishment" of Britain is unlikely ture and "culture" (i.e. non English) to work. It would, in my opinion, only UNLIKELY TO industries. encourage more referenda in other EU WORK. IT WOULD, countries. 2) Offer to pay £5 billion a year IN MY OPINION, into the EU budget for 10 years, A form of associate membership without requiring anything back. would restore some sort of stability, ONLY ENCOURAGE This will still be a good saving for and allow for face-saving for all parties MORE REFERENDA the UK. concerned. Other countries inclined to leave (Denmark, Sweden, Holland) IN OTHER EU 3) Immediately have a fiscal stimulus. could seek this similar arrangement. To spike Ireland and Luxembourg's COUNTRIES.” guns, go to a 10% corporate tax I intend to write this idea up properly in rate at once. This will encourage the next couple of weeks, and Master more multinationals to come to Investor subscribers will be the first to ticularly with Europe. And as for hous- the UK. It is easily affordable. get it. ing, it has been stopped in its tracks by Osborne's meddling and by the fact 4) Put the Scottish question to bed. This may just work out OK, and I am that it remains overvalued. I am pretty sure that in the same hopeful. My instinct is to buy selec- way that turkeys don't vote for tively in the next few days. So, a sterling rate of 1.35 to 1.40 Christmas, the Scots (with an av- against the US dollar seems right to erage subvention of £3,000 per My top tip short term is Lloyds Bank me. As for the stock markets – which head, a poorly diversified econ- (LON:LLOY), which fell by a fifth on ended higher on the week of the ref- omy, and a declining oil industry) the day but looks cheap and rock solid. erendum than at the start (so much won't go for independence. This, I also like the Nikkei, which for some for the doom-mongers!) – the UK and despite Nicola Sturgeon's defiant bizarre Japanese reason fell more than continental ones seem about correctly stance. In any case, they won't get the UK market on the Brexit news. priced. And Japan is mighty cheap. into the EU (Catalonia being the main reason), and they wouldn't Fun times ahead! So what will happen now? be allowed either the pound or the Euro. (The Bawbee, maybe?) Happy hunting! I think Britain will delay the invocation of Article 50 (the two year stopwatch) 5) Most importantly we need to do Jim Mellon for as long as possible, probably six a deal with Europe, in outline months to a year. In that time, there and BEFORE the invocation of will be frantic negotiations to try to do Article 50. five things: My preferred deal would be for some Click here 1) Get some outline trade deals done form of "associate" membership, to follow – and I think this could be done which might consist of the following: Jim's trades with the US, despite Obama's ill- on Twitter judged intervention. It is much 1) Visa free travel and a LOTTERY for easier for us to do such deals the admission of up to 100,000 EU

8 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk 8 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk BY VICTOR HILL All Aboard the Brexit Big Dipper! Investing in the UK Pre and Post Brexit

At 04:39 on Friday, 24 June David Dimbleby announced that the BBC forecast was that REMAIN could not now win. Cut to a beaming Nigel Farage at a party somewhere talking about the British people getting their country back.

10 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk ALL ABOARD THE BREXIT BIG DIPPER!

“WE ARE IN TERRA INCOGNITA. BUT I WANT TO PEER THROUGH THE FOG OF UNCERTAINTY AND TO SPECULATE ON POSSIBLE OUTCOMES SO THAT SENSIBLE INVESTORS CAN AT LEAST GET THEIR BEARINGS.”

10 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 16 – JULY 2016 | 11 ALL ABOARD THE BREXIT BIG DIPPER!

As the enormity of the news sunk in, a to the Scotland Act requiring that any stunned nation (actually four stunned Westminster bill which enacted Brexit nations) began to emote. The degree would be subject to the "consent" of of recrimination and acrimony first evi- the Scottish Parliament. Which Ms dent on Friday morning only got worse Sturgeon told us, in case we needed to over the weekend. Facebook almost know, would not be forthcoming. crashed at times, such was the volume of posts: many of them expressing hurt Incidentally, it is questionable whether, and apprehension; many giving vent to constitutionally, Ms Sturgeon can trig- vile abuse. An old friend of mine spent ger a second independence referen- the Saturday morning unfriending most dum without Westminster consent; of his Facebook network. The love-fest and even more questionable that she at Glastonbury went sombre (the knee- would win it given that the economic deep mud didn't help). Even London's case for independence advanced in Gay Pride march was downbeat – de- 2014 has since been trashed. Though spite the salute from the Red Arrows. many Scots, so it seems, wish to be Greeks. Mr Cameron resigned even before most City types had reached their work I will not explore here why the result stations. Mark Carney went on a live was what it was. But I observe that the international newsfeed "to calm" the torrent of contempt from the European markets with a promise of £250 billion elites was deafening. Rather than take of additional liquidity. But the markets a moment to stand back and reflect aldorado / Shutterstock.com had already gone haywire. on what has gone wrong in Europe – where a far-right candidate nearly be- concerned. (Apparently Lord (Mervyn) As a "stop Boris" bandwagon started came President of Austria last month King agrees). I thought that the City rolling within Tory ranks over the – there was a rush to judgment. Ber- types and the political establishment weekend, so the Labour Party im- nard Henri-Lévy, the esteemed French had severely underestimated the ca- ploded. Jeremy Corbyn faced the pros- philosopher, said it was the triumph of pacity of the great unwashed to turn pect of sitting alone on the Opposition ignorance over knowledge. around and bite them on the bottom. front bench. Mr Cameron, a lame-duck And I have consistently argued that the Prime Minister, was presiding over a May I remind readers where I stood UK has alternative strategies for the political class in disarray. throughout this process? I thought first future. out that the idea of referendum on Eu- With no government to negotiate with, rope was a reckless gamble. I thought If the result had been REMAIN the Eu- Mr Juncker, President of the Euro- that Mr Cameron' deal with Brussels in ro-train would have chugged on to- pean Commission ventured that the February, having promised a reformed wards a thoroughly undemocratic and UK should be jostled towards la sortie Europe, was derisory. It confirmed our illiberal destination. That knowledge in the shortest order. Frau Merkel de- suspicions that Europe was un-reform- does not make me joyous about the murred, saying that negotiations on able. I thought and wrote that Project result, however. We are in terra incog- Brexit should not be rushed and should Fear was contemptible – especially nita. But I want to peer through the not be "nasty". The French started to insofar as the impact on the City was fog of uncertainty and to speculate mutter that the UK border controls at Calais should be removed.

Meanwhile, the Scottish question was re-articulated in shriller tones than ever. If the UK as a whole voted 51.9 percent to 48.1 percent in fa- vour of LEAVE (a margin that even the über-Brexiteer Dan Hannan described as "slight"), Scotland voted 62 percent to 38 percent in favour of REMAIN. Over the post-ballot weekend Ms Sturgeon swept across the airwaves in a frenzy of busy-ness. The Scottish cabinet re- solved to open negotiations directly with Brussels (something that Brussels wisely rebuffed); to consider holding a second referendum on independ- ence; and then intriguingly unveiled an obscure House of Lords amendment

12 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk ALL ABOARD THE BREXIT BIG DIPPER!

So where might we might go from issued to foreign nationals who would here? The key issue for British busi- be assessed according to the much ness and finance is how to negotiate vaunted Australian style points system. through four scenarios which I call, in The UK would pay to get access to the order of their potential short-term neg- Single Market, like Norway. The British ative market impact: Zero Brexit, Soft would largely escape the tyranny of the Brexit, Hard Brexit and Fuzzy Brexit. European Court of Justice. Each of these has numerous variants of differing adversity. The reason that I don't think this is likely is that, if available to the UK, the Zero Brexit means that Brexit doesn't Scandinavians and the Dutch would actually happen; rather some form of agitate for a similar status. Mind you, words is devised that would entail a there may come a point where it is less very high degree of continuity between painful for Brussels to concede that the current dispensation and the next. than to risk the implosion of the entire This might come about by means of a European project. reversal of the referendum (or if it is, for example, struck down by the Supreme Hard Brexit would mean none of the Court). Tony Blair has already called in above. The Brussels elite play hardball an article in the New York Times for a and the UK retaliates. The UK is locked second referendum. Or it could entail out of the Single Market – meaning that a rearrangement of the furniture with of course we can trade but there will aldorado / Shutterstock.com mild concessions of a new deal from be tariff barriers on both sides. Free- Brussels. For example, the British gov- dom of movement in both directions on possible outcomes so that sen- ernment could be offered the notional might be restricted with holiday-mak- sible investors can at least get their right to restrict benefits to new mi- ers requiring visas. Retired British citi- bearings. grants (the so-called emergency brake). zens living in Spain would be charged for using the Spanish health system. We are faced with an extreme intersec- This all sounds rather fluffy but the (There are those who argue that this is tion between political and market risk political risks of just consigning the ref- effectively happening anyway and that stretching some way into the future. erendum result to the dustbin of his- "health tourism" is an issue for the UK Britain has voted to leave the EU, but tory might be dire. It would not be just which has not been addressed.) The until such time as Brexit treaty comes Mr Farage & Co. who would kick up a UK would be free to conclude its own into force (normally supposed to be stink. There could be a revolution. trade deals not least with the USA and two years away), the UK remains a fully the Commonwealth. It's very unlikely functioning member of the EU. We are that President Obama's successor not likely even to invoke Article 50 until would block this. we have a new PM – perhaps longer. Further, we really don't know what Fuzzy Brexit is the notion that Eu- the precise terms of the Brexit treaty rope might yet turn out to be Hotel might be (though I shall hazard a few California – you can check out, but you guesses). In fact we can't actually be can never leave. Note that each EU sure that Brexit will happen at all. member state will have a veto on the final Brexit package. It is quite possible The referendum outcome has no force that no unanimous agreement will be in British law. David Lammy MP has achieved. That means that there may proposed that Parliament just ignore never be a formal deal but rather that it – remember that out of 650 MPs we have to make it up as we go along only about 150 to maximum 200 are (something which the British are good paid-up Brexiteers. And as I write (27 at). We'd have to get used to radical June) there are 3.6 million signatures uncertainty. Mind you, life was never on a petition that the referendum certain anyway. should be re-run. (If the number of sig- natories were to get to 17 million then Soft Brexit might entail a new status One of the reasons why the pound fell that could be interesting. There is a lot while retaining most of the institu- so sharply in the days after the ref- of buyers' remorse, or so it is said. Mind tional and structural links between the erendum result was not so much the you, as I write there are more than UK and the EU. The UK could be of- angst about the future of the UK econ- 200,000 signatures supporting Londe- fered Associate Membership of the EU – omy but the fact that the foreign ex- pendence…) Or indeed it may yet turn a special status not available to others change market had called the outcome out that the devolved assemblies have states. This would ensure freedom of wrongly and had bid up Sterling to arti- the right to veto a Brexit enacted by movement but the UK would have the ficially high levels (it hit nearly $1.50 in Westminster. right to impose quotas on work permits New York on 23 June). When markets

12 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 16 – JULY 2016 | 13 ALL ABOARD THE BREXIT BIG DIPPER!

“WHEN THE DUST BEGINS TO SETTLE THE FIRST RECOVERY PLAYS MIGHT BE BANKS AND AIRLINES, WHICH ARE ALREADY OVERSOLD.”

get things wrong the downside is am- plified.

When the dust begins to settle the first recovery plays might be banks and airlines, which are already over- sold. Lloyds Bank (LON:LLOY) is al- ready looking cheap. Dealing in Bar- clays (LON:BARC) and RBS (LON:RBS) shares has been suspended as I write. This has been a drag on European bank shares – not least the Italians. They will recover – eventually. EasyJet (LON:EZJ) could easily bounce back Nieuwland / Shutterstock.com when the markets realise that the Brits will never stop taking holidays – even if European markets is probably as bad moment for a bonfire of the vanities – to they are more expensive. In this space, as in the UK. re-staff the top of the civil service with the cruise sector could prove more high calibre outsiders. attractive to higher end budget sensi- The best trade has been and gone. tive travellers. Check out All Leisure That was to have shorted the Pound In the first instance, the new Prime Group (LON:ALLG). on 21 June – as I intimated in my piece Minister should appoint Michael Gove that day. (who, whatever you think of him, has a genius level IQ) to head up a task And what about the new PM whom we force charged with the hugely com- now expect to take office by 02 Sep- plex business of negotiation. He tember? Boris Johnson is the favourite should be supported by Gisela Stuart – he was the life and soul of the Brexit – a mother-tongue German speaker. campaign. But, in the numbers game, He will most probably set out aiming he didn't seem to have done his home- for one of the four scenarios outlined work. The problem with Boris is that he above – probably Soft Brexit. We don't knows he is sufficiently intelligent to know what the Johnson-Gove game sail through most interrogations and plan is. And whether they get what to be confident that the exuberance of they want is another matter. his own verbosity (as Disraeli put it) will be enough, without getting into bor- ing old numbers. That doesn't cut the mustard with the sort of people who read Master Investor.

It would be better if the Brexiteers had Luis Santos / Shutterstock.com come out and said: It's pointless discuss- chrisdorney / Shutterstock.com ing numbers because nobody remotely Safe haven assets include US Treas- knows what they are... But from now on Lord King has just said there is no need uries, though yields are pitiful, gold numbers are critical. I have read over to panic. The economy was heading for and specific currencies, especially the the weekend that the UK, which has a downturn anyway. I wish I could say Yen. As I write the Pound is still under not negotiated a trade deal in its own that all will be clear in three months' pressure but the Yen has become the name for more than 40 years, pos- time but it will take much longer than currency port in the storm – exactly sesses no more than 12-20 senior civil that for the dust to settle. This is the what the Bank of Japan did not want! servants with the skills and experience end of the Western world as we knew Paradoxically, the Tokyo stock market to send into the fray. We will need hun- it. But where there is risk, there is is down more than virtually all of the dreds. Moreover, the entire ethos of opportunity. And, as Boris and The European bourses. And London's FTSE- the Foreign Office (and other govern- Donald will tell you, there's never an 250 index is down less than the DAX mental departments) is almost slav- excuse for a bad hair day. and the CAC-40. The downside in the ishly Europhile. Maybe this is a good

14 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk 14 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk BY JAMES FAULKNER Time for Take-Off – How Growth in Global Air Travel Can Lift Your Portfolio

Since the dawn of civilisation humans have been fascinated with the concept of flight. From the legendary flight of Icarus in Ancient Greece and the Renaissance sketches of Leonardo da Vinci, to the Wright Brothers' first successful manned flight in 1903, we have literally reached for the skies in order to fulfil our ambitions. Yet after more than a hundred years of aviation history, our enthusiasm for air travel shows no sign of abating. In fact, the aviation industry looks set to enter a glorious new era. The world is indeed getting smaller. Here's how to profit from it...

The world is spreading its bers rose by 6.5%, surpassing the ting nations of today, what's really wings 5.5% average annual growth of the striking about these predictions is last decade, according to the Inter- the growth in air travel to and from The logistics of airline travel are national Air Transport Association developing nations. According to truly astonishing. Every day close to (IATA). Incredibly, the demand for ADS Group, the organisation which 100,000 flights take off around the air travel will likely double by 2035, represents the UK's aerospace, de- world carrying approximately 10 according to PwC's recent annual fence, security and space industries, million people per day. This effec- report on the state of the worldwide passenger numbers on UK airlines tively means that a plane takes off airline industry. will grow by 80% over the next 20 somewhere around the world every years, to 218 million. However, drill- second of every day of the year. This ing down into those numbers, we adds up to over 3.5 billion individual find that the UK airline share of the aircraft journeys every year provided “THE DEMAND Rest of the World Market (that is by the current global fleet of more FOR AIR TRAVEL flights to and from the UK to markets than 25,000 commercial passenger outside N. America and Europe) is aircraft. WILL LIKELY set to grow at an annual growth rate DOUBLE BY 2035.” of 5.5%. This means an increase of World GDP growth may be slowing, 27 million passengers by 2034, with but the $1.8 trillion global aviation regions such as the Middle East, Far sector shows no sign of losing al- While much of this growth will be East and Indian Sub-Continent set to titude. Last year passenger num- accounted for by the major jet-set- drive such growth.

16 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk TIME FOR TAKE-OFF – HOW GROWTH IN GLOBAL AIR TRAVEL CAN LIFT YOUR PORTFOLIO

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“CHEAPER FUEL PRICES MEAN THAT AIRLINES COLLECTIVELY SPENT AROUND $70 BILLION LESS ON FUEL IN 2015.”

mand, sticky airfare prices, and lower input costs which haven't all been passed down to the consumer. On top of all that, the icing on the cake is that cheaper fuel prices mean that airlines collectively spent around $70 billion less on fuel in 2015 than they did the year before. In global terms, 2015 saw Asia Pacific Clearly, the strong performance owes carriers record a demand increase of a lot to the weakness in the oil price, According to the IATA, the industry's 8.2% compared to 2014, which was which has more than halved over the cost of capital is just under 7 percent, the largest increase among the three past couple of years, but there are and its expectation is for airlines to largest regions. Meanwhile, Latin other factors in play here too. Mergers achieve a return on capital of 8.6 per- American carriers' traffic rose 9.3%, and acquisitions (M&A) have helped cent in 2016. So finally, after years of and Middle-Eastern carriers exhibited increase the efficiencies of the major destroying capital, the airline industry the strongest annual traffic growth airlines, reduced the number of com- as a whole has begun to generate a at 10.5%. Even the European market, petitors, and thus decreased the over- return for investors. However, we note which is otherwise mired in stagnation, all supply of options for the customer. that even with today's elevated levels saw traffic growth of 5%, while the Other reasons for the strength of the of profitability the spread between the North American market put in a more airlines industry include strong de- cost of capital and the return on capital modest 3.2% rise.

The higher growth rates in develop- Rolls-Royce (LON:RR.) – Streamlining Operations ing markets look set to continue to be a feature of the aviation industry for Rolls-Royce shares have more than up 3% and the order book up by some time. China's government re- halved since January 2014 after £3.8 billion in 2015. Notably, 50% cently announced plans to build more the firm issued no fewer than five of Rolls' £67 billion Civil Aerospace than 500 airports by 2020, with total profit warnings in under two years. order book is for the XWB engine, aircraft (helicopters, private jets as The firm has been hit by falling de- touted by Rolls as "the world's most well as passenger and freight aircraft) mand for corporate jets in emerging efficient large aero engine", which forecast to rise from 1,874 to about markets, cuts to defence budgets puts it in good stead to capitalise on 5,000. Aircraft makers clearly have Asia and plunging oil prices that have the drive for greater fuel efficiency. in their sights, with Boeing (NYSE:BA) prompted energy companies to bagging an order for 100 of its 737 scale back investment plans. In re- A break-up of Rolls, which could en- Max aircraft from Vietnam as part of sponse, CEO Warren East is spear- tail the sell-off of the troublesome Barrack Obama's visit in May. heading a cost-cutting campaign Marine and Power Systems divi- which is targeting savings of £150- sions can't be ruled out, especially Airline profitability takes 200 million per annum, not least via now that US activist investor Value- off streamlining Rolls' byzantine man- Act has a seat on the board. At its agement structure. core, the business model of selling It has often been claimed that, in its state of the art technology with "To- entire hundred year history, the US air- While there is certainly a lot left for tal Care" servicing agreements pro- line industry has made a net profit of management to do here, we note viding considerable repeat custom zero. However, airline profitability has that Rolls' Civil Aviation segment – is a strong one. If and when Rolls is risen markedly of late. At its annual which accounts for more than half nursed back to health, there is likely general meeting in Miami last year, the of revenues and profits – has con- to be scope for considerable share IATA forecast that the industry would tinued to exhibit a robust perfor- price appreciation. reap a $29.3 billion net profit in 2015, mance, with underlying revenue up from $16.4 billion in 2014.

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B/E Aerospace (NASDAQ:BEAV) – A Permanent Fixture of the Aviation World

Along with French company Zodiac, built up with airplane manufacturers Free cash flow has been held down B/E Aerospace pretty much has the acts as another significant barrier to in recent years by spending to build market for aircraft fixtures and fit- entry to this market, which is some- out direct-to-manufacturer sales ca- tings sewn up. The firm manufac- thing of a sweet spot in the sector. pabilities and the lavatory business, tures everything from seats and B/E exhibits high levels of profitabil- but management expects free cash in-flight entertainment packages ity as R&D costs are low compared flow to move towards 100% of earn- to oxygen systems, kitchen galleys to other parts makers and pricing ings next year. With the shares trad- and toilets. Although these might power is relatively strong. ing way off 2014 highs, a prospective not be the most hi-spec parts of the 10% free cash flow yield for 2017 aircraft, they are nevertheless the Full-year results for 2015 saw B/E re- leaves shares in this market leader product of rigorous testing and are port a 5% increase in revenues and looking rather good value. produced to demanding criteria. The an 8% increase in operating income, decades-long relationships B/E has with operating margins of 18.4%.

is negligible. For this reason we believe are gradually replacing sheet metal as that investors should look elsewhere the key material in aircraft body con- to invest on the back of this growth. struction. In 2014, the global market “THE MARKET for pure carbon fibre products was But the pressure for more estimated at $1.8 billion, but that is FOR COMPOSITE energy efficient technolo- forecast to reach $3.5 billion by 2020. CARBON FIBRE gies isn't letting up The market for composite carbon fibre materials of the kind used in airplane MATERIALS OF Although airlines may be enjoying a design was $17.3 billion in 2014, and is THE KIND USED windfall from lower fuel prices at pres- set to grow to $34.2 billion by 2020. ent, there is every chance that the oil IN AIRPLANE price may rebound in the coming years. For now, aircraft manufacturers are However, should it do so, the impetus choosing not to make the fuselages of DESIGN WAS for more efficient technologies would smaller, narrow-bodied aircraft from $17.3 BILLION certainly continue to gain momentum. carbon fibre as designs will need sig- In any case, fuel remains one of the nificant modification, but usage isin- IN 2014, AND IS biggest costs for airlines, which puts creasing in components such as engine SET TO GROW TO fuel efficiency savings at the forefront blades and containment cases. With of the minds of aircraft manufacturers. the composite industry dominated $34.2 BILLION BY by a small number of large manufac- One major area of growth is the mar- turers, and with projections for 2020 2020.” ket for carbon fibre composites, which suggesting a CAGR (Compound Annual

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Growth Rate) of 11.4% for carbon fi- both are already very large companies major players include Hexcel Corpo- bres and 12.3% for reinforced parts, and are unlikely to see a transforma- ration (NYSE:HXL), which manufac- the composites sector looks likely to tional impact on their share prices. We tures everything from carbon fibre enjoy a strong performance in the believe there are less obvious ways to to finished aircraft structures; and years to come. gain exposure that could be more lu- Victrex (LON:VCT), a leading supplier crative over the long term, as the im- of a plastic polymer called PEEK, one How to Invest pact of the growth in demand is being tonne of which goes into each 787 felt much further afield than Boeing aircraft. Clearly the most obvious place to be- and Airbus. Both of these titans have gin is with the airplane manufacturers huge supply chains with literally thou- Ever advancing technology means that themselves. This space is dominated sands of companies involved in the aircraft aren't getting any cheaper – by the titanic struggle between the du- production process. Aircraft produc- which brings us to another niche area opoly of Boeing and Airbus (EPA:AIR). tion is also a global affair, with Boeing of the aviation sector: aircraft leasing. Airbus claimed to have edged ahead of 787's composite carbon fibre body These days, airlines choose to lease its rival last year as it won orders for shell, for example, made in the US, Ja- every second new aircraft that is man- more than 1,000 new planes, although pan, Italy, Korea and Australia. ufactured, as a means of helping them Boeing made and delivered more air- maintain efficient balance sheets and craft. Airbus said it had 57% of the Toray Industries (TYO:3402), the manage risk. Companies such as GE- market overall by units ordered, with largest composite producer, has a CAS (a subsidiary of General Elec- the 1,036 orders in 2015 making its cu- multi-year contract with Boeing, and tric (NYSE:GE)) and Air Lease Corp mulative order book total more than prompted by growing vehicle applica- (NYSE:AL) have built highly lucrative $1 trillion, securing production for a tions, it bought US carbon-fibre maker businesses offering hire purchase decade to come. Airbus seems to have Zoltec for $584 million last year. Other agreements similar to those available the upper hand in the market for sin- gle-aisle short-haul aircraft, whereas Boeing is doing better in the widebody market – despite the fact that its rival “AIRBUS CLAIMED TO HAVE EDGED now numbers the largest passenger AHEAD OF ITS RIVAL LAST YEAR AS IT plane in the world, the Airbus A380, in its arsenal. WON ORDERS FOR MORE THAN 1,000 NEW PLANES, ALTHOUGH BOEING MADE While Airbus and Boeing boast gargan- tuan order books and are very obvious AND DELIVERED MORE AIRCRAFT.” beneficiaries of the growth in air travel,

Thor Jorgen Udvang / Shutterstock.com

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Inmarsat (LON:ISAT) – Aviation Drives Growth at Satellite Operator

Satellite communications provider tion with end-to-end global coverage, with broadband connectivity – par- Inmarsat has had a torrid time of delivered through a single operator. ticularly into the cabins of commer- late as downturns in both the energy Meanwhile, Inmarsat's European cial aircraft – expected to see strong and marine markets have hit reve- Aviation Network (EAN) will be the growth over the coming years. It ar- nues. This has seen the shares lose first aviation passenger connectivity gues that this will be driven by the around a third of their value, which solution across European airspace increasing number of aircraft in the could prove to be a buying opportu- to integrate an advanced satellite sky, the rapidly expanding demand nity for investors prepared to take a network and LTE-based ground net- for passenger connectivity and the longer-term view. work (the latter will be operated need for more capable and sophis- by Deutsche Telekom). Aircraft will ticated operational and safety ser- The demand for satellite data ca- switch automatically between satel- vices in the cockpit. Moreover, the pacity is growing exponentially lite and terrestrial connectivity using combination of GX and the EAN is along with our insatiable appetite an onboard network communicator expected to provide Inmarsat with to consume an ever larger amount for optimal service delivery. The first the global coverage, high bandwidth of data. Increasingly, more of us are commercial EAN trials are expected and price competitiveness necessary using mobile devices while we're on in mid-2017. to compete effectively in this market. the move – and that includes while As such, short-term problems could we're in the air. In its Global Xpress In its recent first-quarter results, In- be an opportunity for investors to (GX) Aviation solution, Inmarsat has marsat posted a 15.1% rise in reve- make long-term gains. created the world's first high-speed nues at its Aviation division, which it passenger in-flight connectivity solu- said remains a major growth market,

to consumers on privately owned cars. Aircraft, like a house or an apartment, are typically funded by bank debt at loan-to-value ratios of around 75%. Air- lines will sign long-term leases on air- craft – up to 12 years – and provide all maintenance, crew and fuel through- out the term of the lease, effectively providing the lessor with a rent cheque per month for use of the asset.

Another way airlines are becoming more efficient is through outsourcing their MRO (maintenance, repair and overhaul) activities to companies like AAR Corp. (NYSE:AIR). Analysts expect the aviation MRO sector to grow at a compound annual rate of 4% over the coming decade, which should see com- makes airports a great place to sell Finally, if you find yourself compelled panies like AAR continue to secure a things as they are effectively a cap- to invest in the airline sector in spite of greater share of the market. As well as tive market and therefore allow much its chequered past, we believe that the helping airlines to become more cap- higher profit margins than would be budget operators remain the best bet ital efficient and cost effective, AAR is available on the high street. One well due to their lean cost structures and also at the forefront of implementing known British company that is in the the notion that consumers are likely numerous fuel-saving aerodynamic middle of repositioning itself as a travel to 'trade down' to them in the event improvements, such as winglets and retailer is WH Smiths (LON:SMWH), of any increase in fuel prices. Of all the body strakes, for all types of aircraft. As whose convenience newsagents are budget airlines there are only two ma- such, it should continue to see steady ubiquitous in UK train stations and air- jor players that can claim to have mul- growth as airlines continue to seek to ports. Although the firm's legacy high ti-hub networks servicing most des- cut costs and become more environ- street business continues to be a drag tinations in Europe: they are Ryanair mentally friendly. on overall performance, it has long (LON:RYA) and easyJet (LON:EZJ). ceased to be the main profit centre for Of the two, we prefer easyJet, which And what about the passengers them- the business. Profit growth has been sits on a single-digit PER, boasts a net selves? Global passenger numbers strong in recent years and the firm is cash pile of c. £300 million and offers a grew by 6.1% in 2015, well ahead of also looking to expand into overseas chunky dividend. global GDP growth of around 3%. This airports.

20 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 16 – JULY 2016 | 21 BY FILIPE R. COSTA

How to Invest Like... JOHN TEMPLETON "Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria."

— John Templeton

Buy and React that same person have avoided the one of the most successful investment temptation of dabbling in the unstop- portfolios for more than 30 years. In- In a fast-paced, ever-changing world, pable housing market in the 2000s? stead of being influenced by the Wall where everyone wants the same things With great difficulty, is the answer. Street herd, Templeton was moulded at the same time – whether we're talk- by a heterogeneous crowd of business ing about a technology gadget, a TV people from around the world, which channel, a vacation destination or a populates the Bahamas; instead of fol- group of stocks – it pays to be a con- lowing the herd, Templeton opposed trarian. In such a world, those betting it while he developed awareness of on unloved things may be anticipat- the need for a new level of portfolio ing what might be the fashion in the diversification – international diversifi- near future. But it is not easy to op- cation. He pioneered the use of glob- pose the crowd. Staying away from ally diversified mutual funds and was others' euphoria and being optimistic among the first investors to seek out when pessimism is at its maximum is opportunities in distant markets like the most difficult strategy to adopt, as Japan, several years in advance of the our actions are heavily influenced by Wall Street crowd. emotions, which are a direct result of the mood surrounding us. Therefore, Over the last three editions of the for the sake of being a successful con- "How to Invest Like…" column, the fo- trarian investor, perhaps you should cus has been on value investing. Benja- eschew a life at the luxurious 432 Park min Graham (issue 13), Warren Buffett Avenue and exchange it for a life at (issue 14) and Peter Lynch (issue 15) the sunny and distant Bahamas. How are among the most respected value could someone living near Wall Street investors that have helped to disman- have escaped the temptation of get- John Templeton started life as a US cit- tle the idea that markets are efficient at ting in on the high-flying dot-com rev- izen but then moved to the peaceful all times while investors act rationally. olution during the 1990s? How could Bahamas in his early 50s, to manage They all invest(ed) against the herd,

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“IF YOU WANT TO HAVE A BETTER PERFORMANCE THAN THE CROWD, YOU MUST DO THINGS DIFFERENTLY FROM THE CROWD.”

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buying when others are selling. But when the time to sell comes, there are a few differences among them. While “TEMPLETON SAW THE VALUE OF value investors are long-term players in general, not all agree with the ex- HIS PORTFOLIO RISE FOUR-FOLD IN act time period during which a stock JUST FOUR YEARS. WHEN HE SOLD should be kept in a portfolio. If you asked the investors mentioned above HIS PORTFOLIO IN 1943, ALL BUT FOUR about that precise time period, Gra- STOCKS HAD TURNED A PROFIT.” ham would answer: "buy and hold"; Buffet would recommend: "buy and forget"; and Lynch would say: "buy and rotate". The investor under review in this month's edition, John Templeton, would answer: "buy and react", to re- flect the need to adapt a portfolio to a fast-changing world. Value changes over time and there is no absolutely dominant asset class. Investors should quickly react to these changes.

The Foundations of a Great Investor

John Templeton was born in Tennes- see, USA, in 1912. Son of a self-taught lawyer and a cotton ginner, he at- tended Yale University, from which he graduated near the top of his class grew, pushing equity prices higher. money into several different assets. in 1934. Later, he attended Oxford Templeton saw the value of his port- University, earning a Master's degree folio rise four-fold in just four years. With so much success already under in Law. He started his career on Wall When he sold his portfolio in 1943, all his belt, Templeton co-founded an in- Street, as a trainee for Fenner & Beane. but four stocks had turned a profit. vestment advisory firm – Templeton, This early trade had already spawned Dobbrow & Vance. In 1954 he entered Templeton's skills as a contrarian in- two important commandments in the mutual fund industry and set up vestor as well as his awareness of the Templeton's trading strategy. the legendary Templeton Growth need for diversification were soon Fund, which still exists today as part revealed. In the late 1930s, after the First and foremost, you should "invest of the portfolio of funds of Franklin Great Depression, equities were trad- at the point of maximum pessimism". Templeton Investments, a global in- ing at very low prices. Templeton bor- The best opportunities arise when oth- vestment firm with more than $850 rowed $10,000 (equivalent to $170,000 ers are pessimistic about future pros- billion (£595 billion) of assets under today) and bought 100 shares of each pects, because at that point demand is management. During his tenure be- NYSE stock that was trading below at its lowest and, consequently, share tween 1954 and 1992, Templeton led $1. His total purchase comprised 104 prices are at their cheapest levels. Sec- the fund to achieve an annual average different companies. With the start ond, you shouldn't put all your eggs in performance of 14.5%. Someone who of World War II, industrial production the same basket, but instead split the invested £10,000 in the Templeton

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Growth Fund at the inception date mum pessimism. Far away from lower pan was an emerging market, far from would have had a portfolio worth £2 Manhattan, Templeton could not only Wall Street's gaze, yet offering the best million by 1992. easily oppose the Wall Street crowd opportunities available. The lack of but also find global investment op- global demand for Japanese equities In 1956, Templeton, Dobbrow & Vance portunities from the social exchange led the Japanese economy to grow merged with William Damroth and be- of information with businessmen in much faster than its equity market, im- came Templeton Damroth. In 1962, the Bahamas, where he was living. In proving fundamentals to the point of Templeton sold his stake in the com- 1962 he invested in bargain Japanese making the whole market very cheap pany but kept managing the Temple- and Canadian companies. By then, Ja- indeed. ton Growth Fund. Later he founded Templeton, Galbraith & Hansberger which was finally merged with Frank- lin Templeton in 1992. John Temple- ton, his son John Jr. and his partner John Galbraith received $570 million from the deal as they together owned 70% of Templeton, Galbraith & Hans- berger. While the original spirit has been retained at Franklin, the returns achieved by the Templeton Growth Fund have declined substantially since Templeton retired. Nevertheless, the fund still shows an average annual re- turn of 12% for a period of more than 60 years, which is an incredible perfor- mance for such a well-diversified fund.

Always in Front

Templeton always believed that "you can't outperform the market if you “SOMEONE WHO INVESTED £10,000 buy the market". "If you want to have a better performance than the crowd, IN THE TEMPLETON GROWTH FUND you must do things differently from AT THE INCEPTION DATE WOULD the crowd". HAVE HAD A PORTFOLIO WORTH £2 An investor must always find value MILLION BY 1992.” where others are unable to see it and then invest at the point of maxi-

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“BY 1970, TEMPLETON HAD A PORTFOLIO 60% COMPRISED OF JAPANESE EQUITIES. BY 1989, AT THE PEAK OF THE JAPANESE MARKET BUBBLE WHEN THE WALL STREET CROWD WAS HEAVILY INVESTED IN THE HIGH-FLYING NIKKEI 225, TEMPLETON HAD JUST 3% OF HIS PORTFOLIO INVESTED IN THE COUNTRY.”

By 1970, Templeton had a portfolio Presbyterian Church, he was dedicated a positive return after inflation and 60% comprised of Japanese equities. to his faith. But instead of being clois- taxes are accounted for. This is par- By 1989, at the peak of the Japanese tered in religious dogma, he has always ticularly important today, when the market bubble when the Wall Street actively supported spiritual progress. yields offered by many fixed income crowd was heavily invested in the Templeton was optimistic about the instruments are negative or very low. high-flying Nikkei 225, Templeton had possibility of acquiring "new spiritual While there is no dominant asset class just 3% of his portfolio invested in the information" by using the same meth- across all time periods, fixed income country. ods used in science. This led him to has performed poorly across almost all dedicate a part of his life to spiritual- time periods, when inflation and taxes Templeton's expertise allowed him to ity, writing books on several spiritual are taken into consideration. An inves- almost always identify the irrational matters and creating the John Tem- tor must at least keep his purchasing exuberance of the crowd. At the be- pleton Foundation, which encourages power over time. Second, you should ginning of the 2000s, when Wall Street research on the topic by giving away (2) invest – don't trade or specu- was heavily invested in the dot-com $70 million each year. The foundation late. While Templeton believed assets bubble, he opted to pour his money has an annual prize of £1 million, which should not be held onto forever, he still into solid commodity stocks. In 2003 is the highest prize bestowed on an in- argued against short-term overtrading. he predicted the housing crash and dividual, greater even than the Nobel A value investor believes in short-term declared the stock market broken. Un- prize. inefficiency and long-term corrections fortunately, he did not live to see it. On towards fundamentals. In the short July 8, 2008 he died of pneumonia in Templeton shared the most important term the market is a casino. Nassau, Bahamas. He was 95. investment rules behind his strategy after selling his mutual fund business. While the US stock market offers sev- 16 Rules for investment These rules first appeared in World eral investment opportunities, you Success Monitor: The Christian Science Monitor should (3) remain flexible and open- Monthly in 1993. minded about different types of in- Curiously, while Templeton was one vestment. No asset class is better than of the world's most successful inves- First of all, you should (1) invest for all others at all times, thus requiring in- tors, almost all the books he wrote are maximum total real return. The vestors to change from equities to fixed about spirituality. As a member of the main goal of any investment is to make income, from cyclicals to non-cyclicals,

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from blue chips to small caps, and from US equities to Japanese equities. Globalisation offers many opportuni- ties that should be taken into consider- ation. But, you should always remem- ber that the key rule is to (4) buy low. If you buy the same thing everyone else is buying, you'll get the same results as everyone else and then, by defini- tion, you can't outperform the mar- ket. Buying low means buying when no one else is buying, when there's no demand for that specific asset – when Investing is not like playing roulette investor who has all the answers pessimism is at its maximum. But buy- at a casino, where no strategy is bet- doesn't even understand all the ing low isn't enough: (5) when buying ter than any other. You should (8) do questions. Overconfidence is a well- stocks, search for bargains among your homework or hire wise experts known behavioural bias that leads to quality stocks. Market leaders, trusted to help you, because it makes a dif- sentiment-driven trading. A successful brands, companies with good manage- ference. investment is about erasing sentiment ment teams – all are better positioned from the trading equation. to outperform and to overcome dif- Because Templeton believes that mar- ficult times more easily. This feature kets change quite rapidly, requiring Like Benjamin Graham, Templeton ar- works like a safety cushion. investors to react to change instead gues you should do your own research of buying and holding, he advises you or pay for someone else to help you do to (9) aggressively monitor your in- it. There are no shortcuts to fast prof- “SOMETIMES YOU vestments. And, while you do that (10) its; (15) there's no free lunch. Finally, don't panic. To panic means to sell (16) do not be fearful or negative too MAY BE CAUGHT when everybody else is selling. often. The market will certainly coil IN A CRASH AND through ups and downs but on a pos- Sometimes you may be caught in a itive uptrend. Historically, stocks have LOSE 15% IN A crash and lose 15% in a single day. performed positively in almost any 10- SINGLE DAY. BUT But "don't rush to sell the next day… year time interval or even less. Bearish the time to sell is before the crash, not episodes do occur but the market is ‘DON’T RUSH TO after". You should only sell if you find bullish most of the time. Don't be over- SELL THE NEXT better opportunities elsewhere. exposed to fixed income for extended periods. DAY… THE TIME A sound investment strategy is the re- TO SELL IS BEFORE sult of a never-ending learning process. Final Words Experience will help you understand THE CRASH, NOT that this time won't be different. You John Templeton has been a pioneer AFTER.’” should (11) learn from past mistakes and distinctive figure in both invest- to generate profits in the future. And ment and philanthropy. In the lat- why not (12) begin with a prayer? As ter, he contributed to the advance of Some investors, like George Soros, a member of the Presbyterian Church knowledge in spirituality, as he always are good at converting market trends and a spiritualist, Templeton believed believed we can employ scientific into profitable trades, but that isn't that a prayer helps a person clear his methods in religious matters. In the usually the case for value investors. mind and make fewer errors during a former, he was a pioneer of global di- In general, value investors conduct trading session or in stock selection. versification across mutual funds and a bottom-up analysis and tend to ig- a leader in value investment. Temple- nore the economic outlook. From this While following sound investment rules ton's legacy helps us refine our per- comes the next rule: (6) buy value, certainly helps achieve better perfor- ceptions about what constitutes value not market trends or the economic mance, you should always keep in mind investment and helps us build a sound outlook. Then, (7) diversify, in stocks that (13) outperforming the market investment strategy. At the same time, and bonds, as in much else; there is is a difficult task. This rule works like Templeton's life gives important clues safety in numbers. If something is to a reality check to remind you that when about the role of human behaviour – be learned from Markowitz's Portfolio superior performance is achieved, there is no question that we know too Theory it is that investors can always that's often just the consequence of little about one of the most important reduce the impact of an asset's risk in the extra leverage taken. Many hedge investment drivers. In terms of invest- a portfolio by combining it with many funds will outperform the market when ment rules, the best way to summarise other assets. While market risk is un- the market rises but then be taken out Templeton's strategy is by quoting Will avoidable, specific risk is diversifiable. of business when the market declines. Rogers' famous advice: "Don't gamble. Templeton takes diversification to the These funds don't really offer alpha but Buy some good stock. Hold it till it goes highest level by mixing asset classes just beta and idiosyncratic risk. Being up… and then sell it. If it doesn't go up, from different countries. humble is also important, as (14) an don't buy it".

26 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 16 – JULY 2016 | 27 BY JOHN KINGHAM

THE DIVIDEND HUNTER Debt-Free Dividend Investing If there was a league table for reasons why companies cut their dividends, then I'm pretty sure that excessive debts would be somewhere near the top. So the need to avoid compa- nies with too much debt is important, but it's even more important for high yield investors. Why? Because high yields are usually only on offer because the company paying the divi- dend has run into problems of one sort or another.

To help you avoid debt-laden com- debt interest, debt and shareholder Because of these limitations I prefer panies I'm going to run through how equity or debt and assets. to look at the ratio between a com- I measure debt and how I measure pany's total borrowings (both short- what's "too high". After that I'll follow When I look at debt I'm more con- term "current" borrowings and up with a quick look at a handful of cerned about the affordability of a longer-term "non-current" borrow- high yield stocks from companies company's debts rather than the ings) and its average post-tax profits with little or no debt. funding structure of the company. over the past five years. So of the ratios mentioned so far, the A debt ratio for long- one relating to earnings and interest Both of those factors are more sta- term investors payments (or interest cover as it's ble than one year's earnings or in- known) would be my preferred met- terest payments and so, in theory There are lots of different ways to ric, rather than the ones between at least, the resulting debt ratio be- measure debt and some of the most debt to equity or debt to assets. tween them should be more stable common approaches are to look over time and more informative as at the ratios between earnings and However, in my opinion the inter- well. est cover ratio is too short term in nature as it compares a company's Goldilocks debts: Not too “WHEN I LOOK AT current earnings (before interest much, not too little and tax) with its current interest pay- DEBT I’M MORE ments. But both earnings and inter- Generally speaking I'm happy to in- CONCERNED ABOUT est payments can be volatile; earn- vest in a company if this debt ratio is THE AFFORDABILITY ings go up and down from one year below four, i.e. if its total borrowings OF A COMPANY’S to the next and interest payments are less than four-times its average can change with interest rates when post-tax profits over the past five DEBTS RATHER a company rolls over its debts. This years. Companies that operate in THAN THE FUNDING means that today's interest cover defensive sectors are often able to STRUCTURE OF THE might not tell you very much about carry more debt because their earn- whether a company can afford its ings and cash flows are more stable, COMPANY.” interest payments over the next few and so for defensive sector compa- years. nies I raise that debt ratio limit to five.

28 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk THE DIVIDEND HUNTER

28 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 16 – JULY 2016 | 29 THE DIVIDEND HUNTER

But those are upper limits and in most cases I prefer debts to be much lower than that.

On the flipside, companies that totally avoid debt might be operating ineffi- ciently. Most companies can comfort- ably handle some amount of debt and so – as long as a company can generate significantly higher returns on capital than it has to pay to borrow that capital – a conservative amount of debt can be more sensible than being completely debt free.

Okay, let's switch from theory to prac- tice and have a look at a few stocks which combine high yields, fairly con- sistent dividend growth and very little in the way of debt. increased in every single year and its many other places where the control growth rate has been close to 10% per of power is critically important. XP is The Restaurant Group year on average. Profitability has also listed in the FTSE Small-Cap index but (RTN): Yield = 5.1%; Growth been high with an average return on is relatively large for a small cap with rate = 10%; Debt ratio = 0.6 capital employed (ROCE) of 20% and a market value of almost £300 million. of course its debts are low, with total The Restaurant Group (which I'll refer borrowings of slightly more than £30m At first I thought power controllers to as TRG) is the largest independent compared to average profits of more would be a commodity product – i.e. operator of branded restaurants in than £50m. they're all basically the same – but ap- the UK, including brands such as Café parently that is often not the case for Uno, Garfunkel's, Deep Pan Pizza and The yield at the time of writing is high non-consumer electronics. In many Frankie & Benny's. The company has at 5.1%, so obviously Mr Market is not cases OEMs have specific require- more than 500 outlets at sites rang- happy with TRG; you just don't get a ments for power output (e.g. voltage ing from high street restaurants, pubs, 5% yield from a company with a track and other factors which I will not pre- leisure parks and airport concessions record of growing at 10% a year unless tend to understand), efficiency, weight, and is listed in the FTSE 250. the market expects that growth rate to size and various aspects relating to disappear. packaging. In these situations off-the- shelf power controllers will not do and “THE YIELD AT THE In this case TRG has recently men- this is where XP Power is focusing most tioned weakening consumer demand of its efforts. TIME OF WRITING and its outlook for next year is for IS HIGH AT 5.1%, a slight fall in revenues and profits. The company's track record is im- SO OBVIOUSLY MR Whether or not this creates a material pressive. Over the past decade it had risk to the dividend I'll leave for you to a growth rate of about 15% a year, al- MARKET IS NOT decide, but I will say that I own shares though revenue and earnings growth HAPPY WITH TRG; in TRG and currently I'm not overly pes- have slowed somewhat more recently. YOU JUST DON’T GET simistic. Dividend growth is still going strong though, with the company announcing A 5% YIELD FROM A XP Power (XPP): Yield = an 8% increase in its latest quarterly COMPANY WITH A 4.3%; Growth rate = 15%; update. Profitability has also been TRACK RECORD OF Debt ratio = 0.5 strong with average ROCE coming in at almost 20%; that's almost double the GROWING AT 10% A XP Power is a designer and manufac- average of most companies. YEAR UNLESS THE turer of electrical power controllers MARKET EXPECTS which are then fitted inside its custom- Having carried out a brief analysis I ers' products. Its customers are, for the can't see any obvious downsides, or THAT GROWTH RATE most part, original equipment man- reasons why a company with a divi- TO DISAPPEAR.” ufacturers (OEMs) in the industrial, dend which is still growing at 8% would healthcare and technology sectors. In have a yield of more than 4%. Perhaps practice that means its products can Mr Market knows something I don't, The company's track record over the be found controlling power for hospital but I would say this is definitely a low past decade has been impressive. Its equipment, military equipment, train debt, high yield company which is revenues, earnings and dividends have ticket machines, lifts, elevators and worth investigating in more detail.

30 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk THE DIVIDEND HUNTER

PayPoint (PAY): Yield = 4.4%; Growth rate = 8%; “HISTORICALLY PAYPOINT HAS PERFORMED Debt ratio = 0.0 VERY WELL. OVER THE LAST DECADE ITS PayPoint is a payment processing com- AVERAGE GROWTH RATE HAS BEEN ALMOST pany focusing primarily on providing 8% AND ITS AVERAGE RETURN ON CAPITAL payment terminals to small shops and other retailers. These terminals allow EMPLOYED HAS BEEN EXCEPTIONALLY HIGH people to conduct a wide variety of AT MORE THAN 30%. ” transactions in cash, such as paying utility bills, topping up mobile phones or energy meter pre-payment devices As noted in its latest annual results, the next few years as the company and even buying bus tickets. The termi- PayPoint is currently going through expects to return some excess capital nals can also be used to withdraw cash some significant changes. Perhaps the back to shareholders. like an ATM or send cash to someone most significant impending change is else who can then withdraw it from the sale of its online and mobile pay- UK Mail Group (UKM): Yield their local PayPoint terminal. ments business, where management = 5.2%; Growth rate = 3%; hope this will lead to a simpler busi- Debt ratio = 0.3 Historically Paypoint has performed ness which is focused on its network of very well. Over the last decade its av- retail terminals. However, simplifying UK Mail is the UK's largest independ- erage growth rate has been almost 8% a business can still involve a lot of dis- ent postal company, delivering mail and its average return on capital em- ruption and change, neither of which and parcels for businesses and indi- ployed has been exceptionally high at are good in the short term. viduals throughout the UK and across more than 30%. the globe. As you might expect, postal The company is also just starting the delivery is a very steady business and However, virtually all of the company's process of replacing its existing and UK Mail has not disappointed in that growth has been on the profit and div- long-running terminal with a new ter- regard; its revenues, earnings and divi- idend side of things as revenues have minal which has the ability to replace dends barely changed through most of been flat for a number of years. This existing till systems in many of its cli- the last decade. of course means profit margins have ents' stores. Yet more uncertainty been increasing, but with margins now surrounds PayPoint's parcel collection However, that stability came to an end close to 50% it seems unlikely that business, Collect+. This is a 50/50 joint in 2014 as the company optimistically they'll keep going up for much longer. venture with a company called Yodel raised its dividend by more than 13% At some point revenue growth must and the two parties are in discussion on the back of that year's good re- surely return if the company is to avoid over the future structure of this busi- sults, which were partly driven by an stagnation. ness (or whether it has any future at increase in home parcel deliveries as all). a result of the continued shift towards Unlike The Restaurant Group and XP online shopping and home delivery. As Power, there are more obvious rea- So all in all there is a lot of uncertainty part of that optimistic outlook UK Mail sons why this relatively high growth around PayPoint's medium-term fu- also began a major new investment company has a dividend yield of well ture, but on the plus side there could programme to create a new and highly over 4%. be a series of special dividends over automated national sorting hub near

30 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 16 – JULY 2016 | 31 THE DIVIDEND HUNTER

Coventry. This hub, through the use of then partially operational. A degree of Fast forward to the recently announced modern automated sortation technol- disruption was expected as operations 2016 annual results and the dividend ogy, would be designed to significantly were moved from the company's old has been reduced by 25%, which more increase the capacity, efficiency and national hub to the new one, but at than negates the (over) optimistic 13% flexibility of the company's postal op- least the company hadn't saddled it- increase in 2014 and takes the divi- erations. self with lots of debt in order to pay for dend to its lowest level in more than a this major capital investment (it had in- decade. So why has the dividend been By the end of the 2015 financial year stead burned through the vast major- cut? The answer, somewhat predicta- the company had sunk more than ity of its not inconsiderable £27m cash bly, is that new hub. £35m into the new hub, which was by pile). In the real world it is rare for events to go exactly as planned and in my “AT THE TIME OF WRITING UK MAIL’S experience the more critical the event the more likely it is to go wrong. For DIVIDEND YIELD IS 5.2%, LARGELY UK Mail this meant a large number of THANKS TO THE UNCERTAINTY AROUND parcels which the automated sorta- ITS NEW HUB AND THE STIGMA tion equipment couldn't sort, and that, along with other teething problems, ATTACHED TO DIVIDEND CUTTERS.” led to lost customers and higher oper- ating costs.

Longer term though the company still expects the hub to be extremely ben- eficial, and on top of that there is still the continued shift towards everyone buying everything online and then hav- ing it delivered. At the time of writing UK Mail's dividend yield is 5.2%, largely thanks to the uncertainty around its new hub and the stigma attached to dividend cutters. However, if you have the stomach to invest in dividend cut- ters then this one could be worth in- vestigating further.

About John

John Kingham is the managing editor of UK Value Investor, the investment newsletter for defensive value investors which he began publishing in 2011. With a professional background in insurance software analysis, John's ap- proach to high yield, low risk investing is based on the Benjamin Graham tradition of being systematic and fact-based, rather than speculative.

John is also the author of The Defensive Value Investor: A Complete Step-By- Step Guide to Building a High Yield, Low Risk Share Portfolio.

His website can be found at: www.ukvalueinvestor.com.

Master Investor readers can purchase The Defensive Value Investor by John Kingham for 25% off when buying direct through the publisher, Harriman House.

Get the paperback for £18.50 + P&P (RRP: £25) or the ebook for £17 (RRP: £22.99).

Just go to www.harriman-house.com, select the book type and enter MASTERKING in the promo/coupon box at checkout.

32 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk 32 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk BY NICK SUDBURY

funds in focus If You Can't Beat Them, Join Them The Funds That Will Benefit from an Ageing Population

It is estimated that the number of older people in the world – defined as those aged 60 or over – will increase from 901 million to more than 1.4 billion over the fifteen years to 2030. By the end of this period they will be more common than children under 9, while those in the 80 plus bracket will have passed the 200 million mark.

The ageing population will create to make money out of this trend. A terman and his team can come up many challenges, especially for gov- good example is Lombard Odier with. These include the providers ernments who will have to pay for Golden Age, which was launched in of consumer goods and services, as the pension and medical needs of March 2003 and has attracted $638 well as financial stocks, which could the growing number of retirees out million in assets under manage- all benefit from the wealth of older of the taxes generated by a smaller ment. people. Over the last five years the workforce, but there will also be op- sterling hedged share class has risen portunities. Johan Utterman, the fund manager, by 40.6%. has put together a concentrated In many countries older people own portfolio of 48 stocks from around Another option is the £1 billion CPR up to three-quarters of net financial the world with 85% of the exposure Silver Age fund, which was launched wealth, which means that compa- divided between the US and De- in December 2009 and is domiciled nies that can successfully market veloped Europe. His largest sector in France. This is almost entirely in- products and services to them may weighting is the 47% allocation to vested in Europe and the UK, but be able to grow faster than the mar- Healthcare that includes major po- provides exposure to the same sort ket as a whole. Businesses operating sitions in Medtronic, Thermo Fisher of sectors as the Lombard Odier in the healthcare, pensions, insur- Scientific, Allergan – the maker of fund. The largest holdings include ance and leisure industries could all Botox − and Roche. Roche, Sky and Renault, although be major beneficiaries. the performance has been modest The portfolio has been built from with a five-year return of just 9%. One way to take advantage is to in- the bottom up and reflects the best You may need to speak to a financial vest in a fund that specifically aims investment opportunities that Ut- advisor if you want to invest as it is

34 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk FUNDS IN FOCUS

“IN MANY COUNTRIES OLDER PEOPLE OWN UP TO THREE-QUARTERS OF NET FINANCIAL WEALTH, WHICH MEANS THAT COMPANIES THAT CAN SUCCESSFULLY MARKET PRODUCTS AND SERVICES TO THEM MAY BE ABLE TO GROW FASTER THAN THE MARKET AS A WHOLE.”

34 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 16 – JULY 2016 | 35 FUNDS IN FOCUS

not directly available to private inves- to significant positions in companies The idea behind the healthcare theme tors. such as AstraZeneca, GlaxoSmithKline, is that companies that can make treat- Roche and AbbVie. ments more affordable, such as ge- More discretion neric drug manufacturers and distrib- Since it was created in June 2014 the utors, should benefit from the growing Niche mandates can be a bit hit or Woodford Equity Income fund has re- demand from the emerging markets miss, so it might be better to invest in turned 20.95%, which is significantly and from the debt laden governments a fund that has a higher than average better than the 1.26% increase in the in the developed world. exposure to Healthcare stocks so as to benchmark. The performance in the benefit from the general trend while last few months has been fairly lacklus- 'Retiree spending power' is slightly giving the manager more leeway when tre, but nobody can doubt Woodford's different. This targets businesses that looking for opportunities. long-term record. the managers think will benefit from the increasing number of healthier The highest profile example is the The Artemis Global Select fund has and wealthier retirees who have the £8.9bn Woodford Equity Income more of a thematic approach with resources to enjoy holidays and other fund where Neil Woodford has consist- 'rising healthcare costs' and 'retiree leisure activities. ently maintained a large overweight spending power' each accounting for position in the sector. At the end of 11% to 13% of the portfolio. It has a de- Specialist healthcare May, Healthcare stocks accounted for cent long-term track record and is one funds 36.49% of the portfolio, well ahead of of the better performing funds in the their 8.68% weighting in the FTSE All- Global Sector with a three-year return There are also a number of specialist Share benchmark. This was largely due of 32.8%. Healthcare funds. These are not spe- cifically designed to benefit from the ageing population, but the companies they invest in should do well from the “NICHE MANDATES CAN BE A BIT HIT extra demand from older people. OR MISS, SO IT MIGHT BE BETTER The most successful open-ended ex- TO INVEST IN A FUND THAT HAS A amples include Polar Capital Health- HIGHER THAN AVERAGE EXPOSURE TO care Opportunities, AXA Framling- ton Health and Pictet Health, which HEALTHCARE STOCKS SO AS TO BENEFIT are all near the top of the Specialist FROM THE GENERAL TREND WHILE sector with five-year returns of 170.6%, 111.5% and 89.5% respectively. GIVING THE MANAGER MORE LEEWAY WHEN LOOKING FOR OPPORTUNITIES.” The Polar Capital fund is managed by Daniel Mahony and Gareth Powell, who have put together a concentrated global portfolio of 40 to 45 stocks based on the underlying fundamen- tals. These provide exposure to all aspects of the Healthcare sector, in- cluding equipment, services, drugs, pharmaceuticals and biotech.

It was launched in December 2007 and by the end of May 2016 had generated a cumulative return of 148%, which was well ahead of the 70% produced by its MSCI All Country World Index/ Healthcare benchmark. The impres- sive performance has enabled the fund to attract $921 million of assets under management.

AXA Framlington Health has a longer track record having been created in February 1987, but it is only about half the size of the Polar Capital fund. Over the last five years the gain of 108.7% has failed to keep up with the 121.9% return from the MSCI World Health- care index.

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At the end of April it had a 25.7% expo- Worldwide Healthcare Trust has had tractive level of income, with capital sure to biotech stocks. This was much a difficult 12 months, with the shares and income growth, by investing in a larger than the 14.4% weighting in the down around 5% and the discount to diversified portfolio of freehold and Polar Capital fund and is where many net asset value (NAV) widening to 8%, long leasehold care homes and other of the strongest returns have come but this shouldn't detract from its long- healthcare assets in the UK. from with the major holdings including term track record, which has been ex- Amgen, Celgene and Gilead Sciences. cellent since it was created more than At the end of 2015 the fund owned 31 20 years ago. properties valued at £167.2m and it Closed-ended options has since bought a further three. These are typically let out to specialist care There are two specialist healthcare in- home providers and generate a high vestment trusts that provide a general “AGE UK and reliable source of income. THRL exposure to the sector, with the best ESTIMATES THAT has been paying quarterly dividends performer being Worldwide Health- THE NUMBER OF of 1.545 pence per share, which gives care Trust (LON:WWH), which can it a yield of 5.67% and explains why the boast a share price gain of 157.3% PEOPLE THAT ARE shares are trading at an 8.7% premium in the last five years. Polar Capital OVER 85 IN THIS to NAV. It has been a fairly volatile Global Healthcare Growth and In- performer but is up 23.89% in the last come (LON:PCGH) has lagged sig- COUNTRY WILL three years. nificantly behind with a return of just DOUBLE IN THE 74.6%, although this could be partly The other option is the MedicX Fund due to its greater emphasis on income. NEXT 20 YEARS Limited (LON:MXF). This aims to AND TREBLE IN THE achieve rising rental income and capi- WWH is managed by Frostrow Capi- tal growth by investing in a portfolio of tal, which has appointed the specialist NEXT 30.” modern, purpose built primary health- team at OrbiMed Capital to run the care properties. The £327 million fund portfolio. They currently have 62 sepa- owns 148 different buildings of which rate holdings with the top 10 including Healthcare property funds 143 have been let out with the other stocks such as the ONO Pharmaceuti- five under construction. cal Company, Allergan, Bristol-Myers You may also want to consider the two Squibb and AbbVie. specialist property funds that invest in Investors have been receiving quar- this area. Age UK estimates that the terly dividends of 1.4875 pence per The managers expect the Healthcare number of people that are over 85 in share, which based on the latest share sector to benefit from the greater de- this country will double in the next 20 price is equivalent to a yield of 7.21%. mand for medication and treatment years and treble in the next 30. This They have also enjoyed a decent capital from the ageing population, as well as should result in a massive increase in gain with the shares up 27% over three the huge amount of innovation around the demand for care homes and other years and 49% over five years. The areas such as gene therapy. There medical facilities. main problem is that the shares trade should also be a significant level of on a massive 48% premium to NAV be- M&A activity as the large pharmaceuti- The £270 million Target Health- cause of the solid government-backed cal companies expand their drug pipe- care Real-Estate Investment Trust revenue, which could make the share lines by buying smaller rivals. (LON:THRL) aims to provide an at- price extremely vulnerable.

36 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 16 – JULY 2016 | 37 BY RICHARD GILL, CFA

FROM ACORNS TO OAK TREES Special-Dividend Special Earn a Bonus from These Small-Cap Income Kings

Most investors enjoy a dividend payment. Not only do they provide a useful source of income, they can be a sign that a company you have invested in is in good shape, is able to return cash to shareholders, and perhaps more importantly, is willing to give back to its investors. Special dividends, a rarer and often larger form of shareholder distribution, can be even more valuable.

As I see it there are two categories of ative operations, another distribution A special payment may also come fol- special dividend. The first, and most does look likely in the coming years. lowing the receipt of a tax rebate or common, occurs when a company receipt of damages from legal claims. has put in a good performance over a Then there are special dividends which On the tax side, miner Gem Diamonds period of time and as a result has ac- truly are a one off, typically related (LON:GED) announced a special pay- cumulated a large cash reserve. The to special situations. These are usu- ment of 3.5 cents per share earlier this reserves have been built up to such a ally rarer than the type of payments year relating to a cash saving from the level that a proportion is considered to mentioned above and may come af- settlement of a previous tax assess- be surplus to the company's working ter an exceptional company event oc- ment. In these situations there is often capital, capex and investment require- curs, such as the sale of a subsidiary. the opportunity for investors to exploit ments. In other words, the company For example, AIM listed challenger mis-pricings, as the market can heavily has performed so well that it has more bank Secure Trust Bank (LON:STB) discount the probability of such cash cash than it needs to keep running suc- – covered in my blog HERE – recently returns actually occurring, especially cessfully. declared a special dividend of 165p when long legal processes are involved. per share following the sale of its As a result the decision is then made consumer lending business Everyday For example, AIM listed Avesco Group to make a bonus distribution to share- Loans. This payment alone equates to (LON:AVS) famously received a large holders which is usually far and above a yield of 6.9%. award from previously owned subsid- that of the usual annual dividend. iary Celador after US entertainment While these types of special dividends giant Walt Disney was forced to make are usually considered to be a one a payment relating to the US profits off, some companies have built upa from Celador's TV show "Who Wants reputation for regularly making these To Be A Millionaire?" When the jury kinds of payments. One such company first found in favour of Celador in July is AIM listed floorings business James 2010 Avesco's award was estimated at Halstead (LON:JHD), which I covered c.$50 million, which was worth c.£33 in more detail in the April issue of Mas- million at the time. Yet investors could ter Investor Magazine. The firm's latest still pick up Avesco shares at around special payment was in February this the 80p level following the news. This year, so investors might have to wait valued the company at c.£20 million, a a while for the next one. But with a 40% discount to the value of the award strong balance sheet and cash gener- alone.

38 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk FROM ACORNS TO OAK TREES

“THE DISTRIBUTION OF CASH REDUCES THE LIKELIHOOD OF MANAGEMENT TAKING ON UNATTRACTIVE AND VALUE DESTROYING PROJECTS.”

Kent Sievers / Shutterstock.com

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The reason for the large discount is that Disney retained the right to appeal and thus the receipt of the award was uncertain. Appeal they did but Celador won out in the end, resulting in Avesco eventually receiving a net £44.6 million payment in June 2013. Subsequently, a 110p per share special distribution was made to Avesco shareholders, mean- ing that those investors who took the risk back in 2010 made a substantial return.

“SPECIAL DISTRIBUTIONS CAN PROVIDE A WELCOME BOOST There is also the argument that the Firstly, while trading over the past five TO INVESTORS payment of a special dividend, as op- years at Castings has not shown steady WHO ENJOY posed to a share buy-back, indicates growth, it has been relatively consistent, that management of a company be- with the firm constantly posting strong INCOME RETURNS lieves the share price is either fairly profits – pre-tax profits have ranged AND ALSO SIGNAL valued or over-valued. As a counter between £19.2 million and £23.1 mil- argument it could be said that the dis- lion since 2012. More importantly, the A QUALITY tribution of cash reduces the likelihood cash flow from operations has been COMPANY WORTH of management taking on unattractive strong, enabling the company to invest and value destroying projects. in new machinery for its foundries, pay INVESTING IN.” increasingly large dividends and build Regardless of either viewpoint, special up cash reserves on its balance sheet. distributions can provide a welcome Castings is debt free, and with £40.4 At the beginning of this article I said boost to investors who enjoy income million of net cash as at 31st March that "most" investors enjoy dividends. returns and also signal a quality com- 2016 (including £10 million of interest This is because a school of thought ex- pany worth investing in. For those with bearing deposits) was able to make ists which suggests a return of cash in that belief here are a pair of small cap the recent decision to pay a special any form implies that management of companies, one of which is about to dividend. While this distribution will a company has run out of new invest- make a special dividend payment and remove c.£13.1 million from the bal- ment opportunities or ideas. Warren one which might have the potential to ance sheet, if trading continues to be Buffett famously dislikes dividends, do so in the near future. consistent over the coming years there preferring instead that the cash be should be another opportunity for in- used in growing the business. CASTINGS vestors to enjoy a bonus distribution.

One example of this comes in the form Castings (LON:CGS) is a West Mid- of Fully Listed alcoholic drinks business lands based foundry business which Stock Spirits (LON:STK). The troubled manufactures and sells a range of cast Eastern/Central European vodka seller, iron products, mainly for the commer- which has recently seen a shareholder cial vehicle and automotive sectors. Its Secondly, Castings may be one com- revolt topple the CEO, announced operations consist of the foundry busi- pany which will in fact benefit from the a 10p special dividend in late-June. nesses Castings PLC and William Lee effects relating to the United Kingdom's But this only comes because the firm and machining business CNC Speed- exit from the European Union. With ex- hasn't been able to find a "meaningful" well. As a result of a strong financial ports making up 67% of revenues in acquisition in order to expand its oper- performance in the year to March the last financial year (with major mar- ations. The current yield of 9.6% (spe- 2016 it has recently decided to make kets being Sweden, The Netherlands cial + forecast annual dividend of c. 5p) a special dividend payment worth 30p and The Rest of Europe) a weakening may look attractive. But with the firm per share. Unfortunately, the special of sterling against other currencies, as seeing market share in its core Polish dividend is only being paid to share- has been seen post Brexit, could boost market plunge from 38.1% to 30.9% in holders who were on the list as at 24th demand as a result of lower effective 2015, pre-tax profits down by 46%, and June, and they will enjoy a one off yield prices. Reflecting this, the company's with the shares trading higher than of 6.8%. However, I believe that the shares rose by 0.54% on the day follow- most broker targets, Stock Spirits may company is worthy of a further look for ing the referendum result compared to best be avoided. a number of reasons. a 3.8% fall in the wider FTSE All Share.

40 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk FROM ACORNS TO OAK TREES

betting on horseracing, greyhound rac- ing and ball game Jai-Alai via retail, tele- phone, internet and mobile channels. In California the group is developing sports bars, restaurants and betting venues under the brand name "Strid- ers" and in the Netherlands it operates a number of horseracing betting ser- vices under an exclusive licence from the Ministry of Justice. Meanwhile, Sportech Racing and Digital provides software, hardware and services for a range of licensed racing, betting op- erators and casinos around the world. Within the division the acquired busi- ness Bump 50:50 provides in-stadia electronic lotteries to professional sports teams.

The main opportunity here comes from a long running legal saga which has Cast iron certainty? strikingly good balance sheet and qual- been dragging on for seven years. Back ity cash flows. In addition, given the in 2009 Sportech submitted a claim to I have always liked Castings as a busi- recent weakening of sterling, and the HMRC for the repayment of VAT over- ness. It is run by a sensible manage- company's export focus, I believe that paid on a "Spot The Ball" game which ment team and the accounts are al- earnings forecasts for the current year the company ran from 1979 to 1996. ways very easy to read – you'll rarely could well be beaten. The company's case is based on the ar- find confusing exceptional items, gument that Spot The Ball is a game of EBITDA this and adjusted profits that, Overall, investors looking for chance and thus, under UK law, is not in any of the company's reports. steady long-term income growth, subject to VAT payments. In contrast, with the potential for both capital games of skill, which HMRC believes growth and further bonus distribu- Spot The Ball should be classified as, tions, should look no further than are required to pay VAT. “I HAVE ALWAYS Castings. LIKED CASTINGS AS A BUSINESS. IT IS SPORTECH RUN BY A SENSIBLE With my next stock, where the situa- MANAGEMENT tion is a little riskier, I believe there is TEAM AND THE a mis-pricing opportunity to take ad- vantage of, and the potential to enjoy ACCOUNTS ARE a substantial special distribution in the The legal battles since 2009 have been ALWAYS VERY coming months or years. long and complicated but this is a brief summary of the situation: EASY TO READ.” Sportech (LON:SPO) is a Fully Listed business which can trace its history March 2013 – the First-tier Tribunal's back over 100 years. As of today the Tax Chamber finds in Sportech's fa- In terms of the valuation, at the current company is probably best known for vour, with the total claim (including price of 440p, Castings is capitalised at running The Football Pools, a betting simple interest) valued at an estimated £192 million. Remember that the spe- game based upon predicting the out- £80 million+. cial ex-dividend date is now behind us come of football matches. The pools so the valuation reflects this. Investors have declined in popularity in recent June to November 2014 – Sportech buying into the shares now will receive years, mainly due to the introduction receives a payment of £93 million from the final dividend payment of 10.33p, of The National Lottery in the 1990s. HMRC. But following an appeal by the which gives a yield of 2.34%. With a But the game still attracts around taxman the Upper Tribunal reversed full year payment of 14.4p expected 300,000 players a week and is a highly the decision and ruled in HMRC's fa- for the current year the total yield is profitable division for the company. vour. Sportech subsequently appeal a reasonable 3.27%. On forecasts for themselves but are forced to pay back 33p of earnings in the current year Sportech also runs two other divisions. the cash. the shares trade on a multiple of 13.3 Sportech Venues is a US focussed busi- times, which in my opinion looks pretty ness which in the state of Connecticut May 2016 – Now in the Court of Appeal good value for a business which has a has an exclusive licence to operate all three judges are unanimous in award-

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“HMRC IS STARTING TO LOOK INCREASINGLY DESPERATE HERE GIVEN THAT TWO COURTS HAVE VOTED IN FAVOUR OF SPORTECH.”

ing Sportech the overpayments, the value of which, including interest, have now reached £97 million. The Court of Appeal refuses HMRC permission to appeal to the Supreme Court – the final court of appeal in the UK for civil cases.

June 2016 – HMRC applies directly to the Supreme Court for permission to appeal. Sportech files its Notice of Ob- jection and is advised it should hear by Autumn whether the Supreme Court will hear HMRC's case.

What could happen now?

I am no legal expert and of course the final outcome is uncertain but HMRC is starting to look increasingly desperate here given that two courts have voted 10% for legal expenses – so £90 mil- a forecast ex-cash earnings multiple of in favour of Sportech. So it is surprising lion. Assuming the balance sheet has just 8.3 times. to me that the markets look to be pric- remained flat since December that ing in a very low probability of Sportech would leave the company debt free And there could be more value to be eventually receiving the award. This is and with net cash of £32.3 million. realised... reflected in the fact that the £97 million Sportech has run its business success- award (which will increase over time as fully with large amounts of debt for Over the past 12 months Sportech has interest is added) represents almost many years so it looks highly probable been involved in talks with various par- a full year's historic revenues for the there will be some form of special dis- ties over potential corporate activity. company, 82% of the current market tribution. Even if all the debt is paid off In December last year the company cap of £118.1 million and 55% of the I calculate that the distribution could confirmed it had received a number of firm's £175.8 million enterprise value. be as high as 15.66p per share, or a indicative proposals to buy its Football To illustrate the potential here let's yield of 27% at the current share price. Pools business and invited best offers reasonably assume Sportech receives Even if no special payment is made, the to be submitted by mid-January. One £100 million as a final settlement, less shares would thus look very cheap on of these proposals came from AIM listed NetPlay TV (but was terminated), with another reportedly coming from Sportech's former Chief Operating Officer Ian Hogg. Amounts bid for the business mentioned in the media were as high as £100 million.

While Sportech has gone quiet on the matter in recent months it stated in its full year results report in March, "we will continue to investigate any proposals that recognise the value of the inherent potential of these businesses".

So with two potentially value creat- ing events in the pipeline, I believe investors with a high risk appetite should consider a punt in Sportech at current levels.

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42 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk BY VICTOR HILL

Opportunities in Focus Forget "Pharmaceuticals" – Think Immunology and Synthetic Biology

Investors often suppose that biotechnology is all about the development of new wonder drugs which zap bacteria and viruses – pharmacology. But in fact the best investment pros- pects probably reside in other, newer fields of medicine, of which there are several. Today I'm taking a peek into just two of the emerging disciplines which could transform medicine within our lifetimes: immunotherapy and synthetic biology.

Recently I wrote that Big Pharma has more than doubled over the last Indeed, there is much more to mod- has shown itself to be inadequate 150 years, has been driven as much ern medicine than conventional to the challenge of antibiotic resist- by soap as by penicillinii. pharmacology. For a start there is ancei – because the development immunology – the science of em- of new blockbuster drugs no longer powering the body to use its own pays. The economics of pharmacol- remarkable resources to fight infec- ogy have become unfavourable. The “THE TYPICAL tion. And gene therapies also prom- typical cost of bringing a new drug to COST OF BRINGING ise extraordinary advances in medi- market has soared from US$150 mil- cine in years to come. lion to at least US$1 billion in the last A NEW DRUG TO 20 years. And for every successful MARKET HAS Immunology: from Cow- drug brought to market there might pox to Cancer be a dozen which are never com- SOARED FROM mercialised. The pharmaceutical gi- US$150 MILLION Immunology starts with vaccines. ant Pfizer Inc. (NYSE:PFE) is more This branch of medicine has been interested in producing high margin TO AT LEAST US$1 around since 1796 when Edward multivitamins than in developing new BILLION IN THE Jenner inoculated an eight year old blockbusters. But I also reflected re- boy with material from the cowpox cently in another piece that the ex- LAST 20 YEARS.” blisters of a milkmaid. A vaccine (de- tension of human longevity, which rived from the Latin word for cow) is

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“ANALYSTS FORESEE HUGE POTENTIAL GROWTH OF THE VACCINES MARKET IN INDIA (GROWING AT ABOUT 16 PERCENT PER ANNUM) AND CHINA (18 PERCENT) IN THE COMING DECADE.”

imal health. Sanofi-Aventis SA was formed in 2004 when Sanofi-Syn- thélabo (a former subsidiary of the French oil giant Total) acquired Aventis (formerly the organic chemicals divi- sion of Rhône-Poulenc). The company lacks high brand recognition in the English-speaking world but some of its leading products are nonetheless global brands like Gardasil (the cervical cancer vaccine) and Frontline Spot On the world's best-selling anti-parasite treatment for cats and dogs. About 2 billion pipettes of Frontline have been sold.

Sanofi-Pasteur, the fully integrated vaccines business, is a world leader in human vaccine production offering a a biological preparation that improves nearly seven and a half billion people. broad range of first-order and booster immunity to a particular disease. A There cannot be an adult alive in any vaccines: for influenza, paediatric con- vaccine typically contains an agent that developed country who has not had ditions, poliomyelitis, meningitis as resembles a disease-causing microor- a vaccination of some kind. And hap- well as measles, mumps, and rubella ganism, and is often made from weak- pily, the developing world is catching (MMR). Merial, another Sanofi subsid- ened forms of the microorganism or its up fast. Analysts foresee huge poten- iary, is the global market leader in ani- toxins. The agent educates the body's tial growth of the vaccines market in mal health, dedicated to the research, immune system – antibodies – to rec- India (growing at about 16 percent per development, manufacture and deliv- ognize it as foreign, destroy it, and re- annum) and China (18 percent) in the ery of vaccines used by veterinarians, member it. As a result, the human or coming decade. Sales of human vac- farmers and pet owners. Merial's Iver- animal immune system can recognize cines are virtually recession-proof and mectin entered pharmaceutical history and destroy any similar microorgan- can only rise as sophisticated health- a while back as the most successful isms encountered thereafter. care systems are rolled out across the animal health product ever launched. developing world. This family of products has been used This is an example of where human for more than two decades by cattle ingenuity helps Mother Nature to do All the top global pharmaceutical firms ranchers, beef and dairy producers, what she does anyway, only in a more offer vaccines in their product portfo- and veterinarians. timely and precise way. The number of lios, but three firms dominate this in- lives that Jenner has enabled human- creasingly important segment: Sanofi, Not all of Big Pharma wants to be kind to save over eight or so genera- GSK and Merck. in vaccines. In April 2014 Novartis tions is incalculable. (VTX:NOVN) sold its vaccines unit, The French giant Sanofi SA (EPA:SAN) with the exception of flu vaccines, to Vaccines can be prophylactic (preven- was the number four global phar- GlaxoSmithKline (LON:GSK). Central tive) or therapeutic (treating an exist- maceutical company by revenues in to the deal was Bexsero, Novartis' vac- ing condition) and are administered in 2014iii. It is a diversified player active cine for meningitis B – a potentially mind-boggling quantities on a planet of in pharmaceuticals, vaccines and an- fatal disease – which currently has EU

Market Cap Price Earnings Company Revenues 2014 (17/06/2016) (17/06/2016)

Sanofi SA (EPA:SAN) US$36.437 billion US$101.25 billion 20.63 GlaxoSmithKline (LON:GSK) US$29.580 billion US$100.03 billion 113.07 Merck AG (FRA:MRK) US$36.042 billion US$150.373 billion 27.20

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approval and orphan drug designation in the US. Glaxo also inherited 20 or so in-development vaccines to prevent “IMMUNOTHERAPY HAS BEEN hospital infections, tuberculosis, and a wide range of other maladies. Vaccines HAILED AS THE BIGGEST will contribute an estimated 14% of Glaxo's revenues going forward. BREAKTHROUGH IN CANCER TREATMENT FOR DECADES.” Merck AG (FRA:MRK) has distin- guished itself recently by developing an experimental vaccine for the Eb- nicious features of many cancers is the USA as Opdivo) on adults in their ola virus. Ebola, which caused 11,325 that they trick the body's immune sys- twenties and thirties suffering from deathsiv in the West African epidemic tem into thinking that tumour tissue Hodgkin lymphoma (a form of leu- of 2014-15, is particularly tricky as it is benign. The main agent in immu- kaemia). According to a recent report, appears to be able to lurk undetected notherapy is the monoclonal antibody. 66 percent of the 80 participants ex- for a period of about 15 months. Au- Monoclonal antibodies are antibodies perienced tumour shrinkage, while thorities in affected countries have which are specific to one type of cell or ten percent were completely curedvi. succeeded in stopping transmission tissue. They are generated by identical Nivolumab was discovered and devel- of the virus only for fresh outbreaks immune cells that are all clones of a oped by Medarex and brought to mar- to appear seemingly out of nowhere. unique parent cell – in contrast to poly- ket by Bristol-Myers Squibb Corp. Merck says that it will have 300,000 clonal antibodies, which are made from (NYSE:BMS) which acquired Medarex doses of this vaccine to help control several different immune cells. in 2009 for US$2.4 billion. BMS was such flare-upsv. the 15th largest pharmaceutical com- Immunotherapy has been hailed as pany by revenue 2014 with sales of As new virus mutations arise, such as the biggest breakthrough in cancer US$15.88 billion. It should be noted H1N1 ("Bird Flu"), these three will be treatment for decades. The remark- that Medarex licensed Japanese rights at the forefront of preventive immu- able clinical efficiency of monoclonal to Nivolumab to Japan's Ono Pharma- nology. antibodies suggests that immunother- ceutical Co Ltd (TYO:4528) in 2005. apy has the potential to revolutionise From Immunology to Im- modern medicine. Innovation Forum Nivolumab works as a checkpoint inhib- munotherapy Oxford organised a key conference on itor, blocking a signal that would nor- the subject at the John Radcliffe Hospi- mally prevent the activation of T-cells While vaccines boost the ability of the tal, Oxford, on 11 April this year which from attacking a cancerous tumour, immune system to combat specific in- was attended by academics, clinicians, thus allowing the body's immune sys- fections, immunotherapy involves a industrialists and investors. tem to attack the cancer. From April new-generation of oncological drugs this year, Nivolumab has been used for which are designed to re-activate or Oxford University Hospitals Founda- inoperable or metastatic melanoma boost the body's own immune system tion Trust has recently been trialling in combination with a related mono- to fight cancer. One of the most per- Nivolumab (known and marketed in clonal antibody, Ipilimumab (marketed

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as Yervoy). Nivolumab is also used as a second-line treatment for squamous non-small cell lung cancer and for re- nal cell carcinoma.

Nivolumab and Ipilimumab both work by interrupting the chemical signals that cancers use to convince the im- mune system they are healthy tissue. Nivolumab blocks the "off-switch" – a protein on the surface of white blood cells (T-cells) called PD-1. Ipilimumab blocks a similar switch called CTLA-4. However, there are side effects: the combination can cause inflammation in the bowels and liver as the drugs trigger the immune system to attack healthy tissue.

Promising clinical trial results made public back in 2012 caused excitement among industry analysts. Merck devel- oped Pembrolizumab (Keytruda); and Roche (VTX:ROG), via its subsidiary Genentech, comMerialised Atezoli- zumab. Trials were announced by GSK in collaboration with the Maryland bi- otech company Amplimmune; and by Teva Pharmaceuticals (TLV:TEVA) in collaboration with the Israeli biotech company CureTech.

Ono Pharmaceuticals received ap- proval from Japanese regulatory au- boost the immune systems of babies receptor technology, has a pipeline of thorities to use Nivolumab to treat and grown-ups. Its flagship biotech wholly-owned and partnered develop- melanoma in July 2014, which was the product, Synagis, prevents respiratory ment programmes. Partners include first regulatory approval of a PD-1 in- syncytial virus (RSV), a major cause of Genentech, GlaxoSmithKline, MedIm- hibitor anywhere in the world. Merck pneumonia and other respiratory dis- mune, and Eli Lilly and Co. (NYSE:LLY). received its first Food and Drug Admin- ease in infants and children. It has also Founded in 2008 by Oxford University istration approval for the PD-1 inhibi- commercialised FluMist, a nasal spray researchers, Immunocore now has tor, Keytruda, in September 2014. And flu vaccine, and Ethyol which treats more than 230 staff. Immunocore's – while I was writing this – on 17 June the side-effects of chemotherapy. major shareholders include Wood- 2016 the National Institute for Health The company is working on dozens ford Investment Management, Malin and Care Excellence (NICE) announced of investigative therapies, including Corporation, Eli Lilly, RTW Investments that the NHS will be permitted to use monoclonal antibodies, vaccines, and and Fidelity Management & Research Ipilimumab and Nivolumab in combi- small molecule drugs in the areas of Company. nationvii in the UK. These have been infectious disease, cancer, inflamma- shown in recent UK trials to shrink the tion, autoimmune conditions and res- Autolus Ltd was founded by Dr Mar- most aggressive and deadly type of piratory disorders. Durvalumab is now tin Pule in 2014 who remains Chief melanoma (skin cancer) in 69 percent in Phase III clinical trials in a range of Scientific Officer. Dr Pule is the Clinical of patients. Melanoma kills around cancer types. Senior Lecturer in the Department of 2,000 people in the UK every year. Haematology at the University College Immunocore Ltd offers a highly- in London Cancer Institute. His research British Universities Get novative immuno-oncology platform is focused on the genetic engineer- Entrepreneurial technology called ImmTACs. These are ing of T-cells for cancer treatment. a novel class of drugs based on the As well as being a senior Lecturer at A number of niche players active in company's proprietary T-cell receptor UCL, Dr Pule holds the post of honor- different fields of immunology have (TCR) technology, which have the po- ary consultant clinical haematologist emerged out of the research laborato- tential to treat diseases including can- in the UCL Hospital, lymphoma being ries of British universities. cer, viral infections and autoimmune his main clinical interest. Autolus Ltd diseases. Immunocore, commercial- is active in chemotherapy and radi- MedImmune Ltd, a subsidiary of ising the discovery of HLA (human ology as well as in synthetic biology AstraZeneca (LON:AZN), works to leukocyte antigen) targets and T-cell (see below).

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Vaccitech Ltd will be using "viral vec- tors" to make new vaccines against emerging pathogens. This is a research area which has gained prominence since the recent Ebola outbreak in West Africa. Sarah Gilbert, Professor of Vaccinology at the Oxford of University, founded Vaccitech in May 2016 to accel- erate the rapid clinical development of such vaccines. It was announced on 11 May that the start-up had secured £10 million of seed funding from Oxford Sciences Innovation, Invesco, Lans- downe Capital Partners and Woodford Investment Managementviii. Vaccitech is one of nine spinoffs so far this year by Oxford University which has been the world's top medical research uni- versity for the past five years.

Vaccitech will draw on research from Oxford University. It aspires to gener- ate vaccines which boost cancer immu- “CRISPR WAS NAMED BY THE AMERICAN notherapies as well as a "universal" flu ASSOCIATION FOR THE ADVANCEMENT vaccine. The universal flu vaccine theo- retically works against all human, avian OF SCIENCE AS THE MAJOR SCIENTIFIC and swine influenza strains by target- BREAKTHROUGH OF 2015.” ing two proteins inside the virus which do not change. The vaccine is "already showing promise" in Phase II trials.

Other companies in the race to mar- ket a universal flu vaccine include Wisconsin-based start-up FluGen, Israel's Biondvax Pharmaceuticals (TLV:BVXV) and America's Johnson & Johnson (NYSE:JNJ). In the can- cer vaccines field, Vaccitech will be up against the likes of Denmark's Bavarian Nordic A/S (FRA:BV3/ CPH:BAVA), Inovio Pharmaceutical Inc. (NASDAQ:INO) and Aduro Bio- tech Inc. (NASDAQ:ADRO).

Immunotherapy is already being re- ferred to in the medical profession as the fifth pillar of cancer treatment – the first four being surgery, radiotherapy, chemotherapy and conventional phar- macology. Note that radiotherapy itself is undergoing a revolution with the ad- the organism. This technology is called nomes so as to avoid inherited con- vent of proton beam therapy (PBT). CRISPR – which stands for clustered ditions such as Duchenne muscular regularly interspaced short palindromic dystrophy. Most people would think Gene Therapy: the Future repeats. (Now you know!) CRISPR was of that as an incontrovertible advance. is CRISPR named by the American Association But many ethicists and scientists be- for the Advancement of Science as the lieve that this type of therapy may First, biologists set out to crack the major scientific breakthrough of 2015. have legal and social implications. For code of human, animal and vegetable example, some scientists think that de- animal life by sequencing genomes. In the jargon of the new science of syn- pression has a genetic component. But But now they have got a technology thetic biology, first we learned to read would we feel comfortable if scientists by means of which they can edit those the code, but now we are developing then set about altering the human ge- genomes and splice out "faulty" genes the tools to write it. CRISPR is thought nome so as to minimise the risk of a which they know to cause defects in to offer a technique of tweaking ge- disposition towards depression? That

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“THE VALUE OF THE BIO- ECONOMY IN THE UK WAS ESTIMATED AT AROUND £150 BILLION – AND INCREASING RAPIDLY.”

thetic biologyx. The workshop attracted more than 100 scientists and engineers reflecting the UK government's com- smacks of biological and social engi- terials that mimic spider silk – a fibre mitment to the UK's leading position in neering gone too far. And there is the six times tougher than Kevlar. Kevlar the world of synthetic biology, in which Frankenstein factor: the fear of what and Gore-Tex have been around for the UK is second only to the US. The we might unleash if we could generate years and were developed long before April workshop is to be followed by an- entirely new organisms. synthetic biology was even possible; other, bigger event in December 2016 but the new fibres that could be engi- to be held at the IET headquarters in That said, current projects underway in neered using synthetic biology could Savoy Place, London. synthetic biology are practical and rel- have even more astonishing applica- atively uncontroversial. For example: tions. SynbiCITE is headed up by Dr Stephen to cure people of debilitating genetic Chambers. Dr Chambers joined Vertex diseases; to make mosquitoes (which Back in January 2013 David (now Lord) Pharmaceuticals (NASDAQ:VRTX) in spread malaria) sterile; to programme Willets, then Minister for Science, the US at an early stage as a found- microbes to generate biofuels; to in- identified synthetic biology as one of ing scientist. Vertex subsequently had crease the nutritional value of plants; the Eight Great Technologiesix. More re- phenomenal success in commercialis- to create synthetic meat (great news cently, the value of the bio-economy in ing treatments for cystic fibrosis, prin- for vegetarians – and beasts); and to the UK was estimated at around £150 cipally Orkambixi. (It now has a market create new materials with remarkable billion – and increasing rapidly. cap of US$22 billion.) Dr Chambers properties. later became a co-founder of Abpro The Biotech Brit-Pack Inc., a Massachusetts biotech com- The cost of sequencing the genome Leads the Way pany specialising in rapid antibody of an organism has plummeted in re- production, which describes itself as cent years. According to the National On 05 April 2016, the Institution of a complete gene-to-antibody industrial Human Genome Research Institute Engineering and Technology (IET) and biochemistry platform. In an interview (NHGRI) the cost of sequencing a string SynbiCITE, the UK's synthetic biology with the Huffington Post last year, Dr of a billion pieces of DNA has fallen consortium of 56 industrial partners Chambers stated that he came back from $10,000 in 2001 to less than one and 19 academic institutions based to the UK for the same reason that he cent today. This is due to huge ad- at Imperial College London, organised went to the US in the 1980s: to be where vances in DNA sequencing machines a one-day seminar in London on syn- life science start-ups are happeningxii. and in the software that they use. As a result, synthetic biology is not just re- served to Big Pharma. In the USA there are numerous small start-ups and so-called bio-hackers working out of laboratories in their garages and base- ments using cloud computing services to manipulate organisms in order to produce economically viable products.

One such outfit, Lygos, is altering the DNA of yeast and e-coli to produce nylon, polyester, and polypropylene for clothing. Refactored Materials is transforming proteins to create ma-

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Dr Chambers sees SynbiCITE as a foundry for DNA synthesis, assembly and verification. His goal is to help Action would-be scientist-entrepreneurs to translate their ideas and research in The UK is well placed to commer- ent biotech investor, has created synthetic biology into viable products. cialise the medical advances made a new type of biotech index that SynbiCITE's Lean Launchpad is a crash possible by life science technologies focuses exclusively on cancer im- course in entrepreneurship, taking that are coming out of its top uni- munotherapy drugs which he feels scientists out of their laboratories and versities. The leaders of Big Pharma have been overlooked by con- providing them with the skills, knowl- are well positioned to profit from ventional biotech funds. Loncar's edge and understanding to take their huge growth of existing mature fund, launched last autumn, is the science to market. He tells the boffins products such as vaccines in devel- Loncar Cancer Immunotherapy to explain, not the pure science, but oping markets. Sanofi, GSK, Merck ETF (NASDAQ:CNCR). This ETF con- why there is a market for their product. and Bristol Myers Squib should tains companies such as Merck, be core holdings in a large diversi- Bristol-Myers Squibb, Pfizer, Roche/ Nanocage Technologies is one such fied portfolio with a biotech bias. Genentech, Juno Therapeutics company. It has developed a technol- But it is the start-ups in life science (NASDAQ:JUNO), Kite Pharma ogy that allows drugs to be transported that offer the greatest potential (NASDAQ:KITE), Novartis and nu- to specific cells in the body inside tiny for reward. The early bird catches merous others which are making protein "cages". This opens up the pos- the worm. Funds which invest in huge investments in this space. Ad- sibility of delivering cancer therapies cutting-edge life science start-ups mittedly, biotech has not had a great to the precise location where they are include Fidelity Select Biotech- year and the ETF is down about 20 needed thus reducing unpleasant and nology Portfolio (MUTF:FBIOX) percent year to date. But with Bris- often debilitating side effects. though be aware that this is down tol Myers Squibb announcing that by nearly 25% year to date. sales of Nivolumab/Opdivo will hit ETAL, a skincare manufacturer founded US$1 billion this year, now looks like by molecular biologist Gracie Oury, In the US, Brad Loncar, who de- a good time to buy in. A&E doctor Kieran Latham and phar- scribes himself as an independ- maceutical scientist Pitchaya Rungser- eechai, found the challenge was the pressure they were under to come up The products currently being devel- you had to travel to San Francisco to with the right product. After attending oped with synthetic biology in the UK find this kind of innovation. But today Lean Launchpad they have used a spe- are remarkably varied. And this seg- you can just take the tube to SynbiCITE's cific protein to develop a stretch-mark ment is almost entirely driven by dy- offices is in South Kensington. cream for men!xiii namic new start-ups. A few years ago

i Antibiotic Persistence – Or Where Big Pharma Went Wrong, available at: http://masterinvestor.co.uk/ equities/antibiotic-persistence-big-pharma-went-wrong ii Florence Nightingale' Deep Mind, http://masterinvestor.co.uk/equities/florence-nightingales- deep-mind iii See: Top 25 pharma companies by global sales at http://www.pmlive.com/top_pharma_list/global_ revenues iv Figure from Centers for Disease Control and Prevention (CDC). See: https://www.cdc.gov/vhf/ebola/ outbreaks/2014-west-africa v New Scientist, 07 May 2016, page 6. vi Daily Telegraph, 11 June 2016. vii See: http://www.bbc.co.uk/news/health-36549674 viii See: FiercePharma, 11 May 2016 at: http://www.fiercepharma.com/vaccines/oxford-spinoff-vaccitech- nets-ps10m-for-flu-cancer-vaccines ix As well as synthetic biology they are: advanced materials, agri-science, big data, energy storage, regenerative medicine, robotics and satellites. The UK government report on the subject can be downloaded at: http://www.policyexchange.org.uk/images/publications/ eight%20great%20technologies.pdf x See: http://www.synbicite.com/news-events/synbicite-blog/ietsynbicite-joint-workshop-and-confer- ence-enginee xi On 17 June 2016 NICE announced that Orkambi will not be funded for use in the NHS – provoking wide- spread criticism. xii Huffington Post 19/02/2015:http://www.huffingtonpost.com/steve-blank/life-science-startups- ris_b_6713414.html xiii See: http://www.upstartmagazine.co.uk/piece/londons-synthetic-biology-startups

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chart navigator Take Me up the North West Passage

It's 100,000 years since the North Pole was ice free. The ice cap grows or shrinks on a daily basis, depending on the season, and you can watch it unfold if you want to at http://nsidc.org/arcticseaicenews, where they have a daily updated image of the extent of the ice. This year Ocean Physics Professor Peter Wadhams (Cambridge) has predicted that it will be ice free this year by extrapolating data from the National Snow and Ice Data Center. It's sort of snow and ice Technical Analysis. He's short ice. There is a vast amount of data on the site and lots of images like the one here which shows the extent of the sea ice on 21st June '16.

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“THIS WOULD CHANGE THE GLOBAL BALANCE OF POWER ON A LEVEL AKIN TO PHYSICALLY MOVING COUNTRIES AROUND THE WORLD.”

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We'll know in mid-September if he was sovereign state, the 12th largest coun- right, as that's the time when the ice re- try in the world – would presumably cedes the most. And even if he's not this become more habitable. Add to that time around it is surely only a matter Iceland's President Grimsson has in- of time before it is ice free in summer. vited the post-EU UK to participate in a This would change the global balance 'North Atlantic Super Triangle' trading would rise sharply. The Baltic Dry Index of power on a level akin to physically bloc, involving Norway and, critically to shows the change over time in the cost moving countries around the world. this story, Greenland. We could be in of shipping raw materials by sea. The The countries with North facing coasts on the ground floor here index is relatively low at the moment in the Arctic are broadly winners: Den- compared to the last few years as you mark, Norway, Russia, Canada and the The first thing that would happen is can see on this five year chart, which US. With this becoming a reality I won- that some shipping could avoid Pan- The Baltic Exchange has kindly allowed der just how long Denmark will stay ama and Suez and simply flit across us to reproduce. The basic formula in the EU. They'll be as rich as Norway the top of the globe. So goods could is that if the index is rising it means thanks to oil and shipping from Green- be delivered more quickly, and as the global economic conditions are good, land, plus the fact that Greenland, the window of opportunity would be short and vice versa. So with a lot of sudden world's largest island – and, if it were a then demand for vessels in that region demand for shipping across the pole,

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“AS PORTS – AND THE TOWNS AROUND THEM – START TO BE BUILT, THIS COULD REVIVE THE GLOBAL ECONOMY AS INFRASTRUCTURE IS PUT IN PLACE TO HANDLE THE NEW TRADE ROUTES.”

For the measured move I'm saying that the $48 to $58 range is a conges- tion area and so we might expect it to break upwards and match the move into the range – i.e. $48-$26. Let's call it $20, a 30%+ potential upside. It would certainly change the global balance of power in oil if Norway and Denmark suddenly have huge reserves much closer to the developed world.

it's reasonable to assume it would rise. through an ETF could be a SIPP/ISA Contrastingly, a short on Egypt could In the long run Panama and Suez would play. There only seems to be one ETF be a good move too. I wrote about lose out to a fair amount of shipping available and it's dollar-denominated Egypt when I was examining the effect as the polar route would be shorter, (there are a few Nordic alternatives but of the Bataclan attacks in Paris and the albeit only in the summer months. It they won't allow you to isolate the risk beach attacks in Egypt. Since then a would also be a little unpredictable, to Denmark). It's called iShares MSCI plane has disappeared. The shooting at least in the early years. But if the Denmark Capped Investable Market in January was not the first such at- ice isn't thick then some ice breakers Index Fund [NYSE MKT:EDEN]. It's tack on tourists there. The Foreign & could keep shipping lanes open for been doing rather well and we could Commonwealth Office (FCO) advises regular vessels. be seeing a measured move setting against travelling to what looks like up here over the last two years. So every tourist attraction in Egypt from One of the main results would be ac- there is a case to argue that's an entry Sharm el Sheikh to the Valley of the cess to the oil up there. Denmark has point. Of course it could more or less Kings. The only Egypt ETF, again a dol- to be a good bet then as they would go sideways for another two years, but lar-denominated New York listing, is essentially become another Norway: it's certainly been much more resilient VanEck Vectors ETF Trust Egypt In- a hugely rich oil nation with a small than the FTSE 100 over the last couple dex ETF [NYSE MKT:EGPT]. The chart population. A pre-emptive investment of years. is looking weak again with a drop right

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across the cloud and a failure to rally above $40. The military conflicts in the region won't be helping either. I guess everyone's gone to Iceland instead. Egypt relies heavily on tourism and that's been effectively scuppered. Lots of sectors will benefit. Marine insurance, shipping and all raw and manufactured goods that are shipped this way since lead times will perhaps even be halved. Then as ports – and the towns around them – start to be [LSE:MGTL]. There's not a lot to say target whatever sector you wish. Con- built, this could revive the global econ- about this chart and the strategy is a trolling risk into very specific areas is a omy as infrastructure is put in place to very long-term one. But in terms of en- reality nowadays. handle the new trade routes. In fact I'd try a higher low could be an early entry go as far as to say this is the best thing to anticipate a break out above the re- As a long-term framework for invest- that could happen to the world eco- sistance at around £15.50. It really is a ment strategy this is a very broad- nomically speaking. Economic growth very long-term play though and proba- based set of long-term opportunities is never better than the early stages bly one for the SIPP. with a scaffold for shorter-term moves. of building infrastructure. So we could So either the polar ice cap melts in be looking at a generation of growth. Aside from the global index ETF there summer soon or we have another Perhaps the long play is a global index are all manner of global ETFs for world war. Global warming may yet do ETF. This one's listed in London: Lyxor everything from Water to Clean Energy us some good. UCITS ETF DJ Global Titans 50 D-£ and every sector you can imagine, so

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ROBBIE BURNS' TRADING DIARY A Big Ego is a Big Problem There are a lot of reasons people zip-lining into his chair from a heli- was right (and what I was doing was fail to become Master Investors. copter hovering outside the seminar wrong). The usual suspects are fear and room, he did everything possible to greed. But there is something that convey his status as an 'alpha male'. The funny thing was, he was isn't discussed much – ego. convinced he was right on He actually asked a lot of questions everything… but he had lost a lot of If you're one of the (probably) few but it soon became clear he wasn't money. women reading this (most traders listening to much that I was talking are men), then pat yourself on the about. It was no surprise. I talked about back – women suffer a lot less from a company on the day and why I this. A big ego is a major problem for Hunched over an alpha male laptop, thought I might buy it. I discussed traders and it stops them in particu- he was probably 'trading' while I was my research. lar from selling losers. talking. He was, frankly, Mr Ego. Harry piped up to say my research Selling a loser is very bad for the ego was wrong, as were my figures. I and many just can't cut losses. gently pointed out that my figures “SELLING were right, taken directly from the It's all fine and dandy to have an ego company's report. in other aspects of life. After all, most A LOSER IS of the people who get to the top po- VERY BAD FOR He had got his from a website that sitions in their field have big egos. hadn't updated to the latest figures. That drives them to succeed. But it's THE EGO AND That's because he hadn't listened to not much good in trading. That big MANY JUST the bit where I explained where to ego stops you from taking losses. get the figures from. Makes you trade too much. Makes CAN’T CUT you do all sorts of silly things. If you let your ego sabotage your LOSSES.” trading, like Harry did, don't be sur- Here's a trader I met who had been prised when you run into problems. brought low by his ego. (Except for If he can't remove that emotion from his self-esteem, which was still flying Everyone could tell he felt himself his trading he hasn't got a chance of as high.) superior to the rest of the room – succeeding in the stock market. and superior to me – and I was sup- Harry came to a seminar of mine. posed to be the teacher! He was just Our ego is bound with up our pride Short of ripping off his shirt and there to confirm what he was doing and "achieving pride" is one of the

58 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk ROBBIE BURNS' TRADING DIARY

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"intangible motives" that psychologist Daniel Kahneman of Princeton Univer- sity says really drives financial decision making rather than money.

I don't want a desire to feel proud to affect my trading so I try not to brag to anyone when I have made a lot. But I have done it to the wife – and what's funny is I know when I am doing it. It's an alarm bell – every time I have bragged, it was time to bank profits.

If you are to become a Master Inves- tor the ego has to go. If you have got one, it won't be easy. Self-awareness doesn't come readily to someone with an ego.

I know, I know: "Who the hell is this Robbie Burns to tell me I have an ego? Where does he get off suggesting I might be blind to my weaknesses? “TAKE A GOOD HARD LOOK AT I could crush his head in one of my YOURSELF: DO YOU THINK TRADING hands while putting on a successful Fo- rex day-trade with my other and that's RULES ARE FOR OTHER PEOPLE?” not even mentioning where I'd put my knee."

Also, maybe, just maybe, you have an ego.

Seriously, if something or someone is telling you that you might just have an ego… try and consider that possibility. I have an ego. I don't deny it.

But when it comes to trading I ensure that it doesn't surface. I look at cold hard facts and if I get something wrong I admit it right away and cut the posi- tion.

Take a good hard look at yourself: do you think trading rules are for other people?

Or you're simply a cut above others in- tellectually? Other people are a bit dim and you're the shining star? Nothing can go wrong for you?

Cut the ego to make money. How to cut it is the hard bit. Perhaps try to be- come more self-aware. Realise when you made a mistake. Don't worry about cutting a loss: it isn't a mistake. It's a mistake to keep the share that's going down.

Consider sometimes you will get things wrong, you really are only human.

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London Southeast A4 Full Page Advert Final.indd 1 29/03/2016 12:51 BY FILIPE R. COSTA

the macro investor The Death of Bonds

Unlimited Intervention

"The Federal Reserve Bank buys government bonds without one penny…"

- Congressman Wright Patman, Congressional Record, Sept 30, 1941

Over the last few years, investors bonds ahead of the ECB over the last ing bonds at these irrational prices have been trying to front run central few years have certainly experienced is certainly not the best option, but banks by purchasing bonds, in an- massive capital gains, as yields have while bonds are way overvalued, the ticipation of huge price increases as been pushed down by the interven- current price level hardly represents the result of the heavy demand that tion of the central bank. But at a a short selling opportunity. This irra- stems from central banks as they un- point when yields are under water tional exuberance is not going to end fold large-scale asset purchase pro- for maturities up to 10 years, there soon, as inflation is still dormant, grammes to boost inflation levels. is a growing concern that we may and central banks will push harder It all started in the US, where Ben be reaching the lower bound. We for it by increasing their current Bernanke spent trillions of dollars know there is a point at which peo- rescue programmes and using new purchasing government bonds and ple would prefer to keep the money tools. In my view, investors looking mortgage-backed securities in an under the mattress – we don't know for safe havens should skip bonds at attempt to reduce bond yields and exactly where that point lies, but we this point, while those looking for a thereby spur businesses and indi- do know we're approaching it. shorting opportunity should be wary viduals to borrow, invest and spend given the prospects of further inter- more. But as the global economy is Central banks have taken centre est rate cuts and asset purchase pro- more interconnected than ever be- stage over the last eight years and grammes. fore, the same policy was followed have exceeded governments in the world over, which pushed global terms of market intervention. Cur- Three Groups of Bond yields down and bond prices up. rent bond yields are not the result Investors Even Japan, which was already run- of rational, market-driven forces but ning a decades-long expansionary rather the result of central bank in- There are three main groups of policy, decided to become even bol- tervention coupled with a rigid and bond investors: legally-constrained der in its action. prescriptive legal framework that institutional investors, speculators, forces some institutions to purchase and risk-averse investors. The inter- Those who purchased European assets at irrational prices. Purchas- action between them helps explain

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“CURRENT BOND YIELDS ARE NOT THE RESULT OF RATIONAL, MARKET- DRIVEN FORCES BUT RATHER THE RESULT OF CENTRAL BANK INTERVENTION COUPLED WITH A RIGID AND PRESCRIPTIVE LEGAL FRAMEWORK .”

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why yields may remain at irrational lev- tively insensitive to prices (and yields), a greater fool purchasing from them els for a long period of time and iden- as its demand is not driven by market at a later date and at an even higher tify the boundaries for price action. forces. price. Rationally, there is no reason to purchase a bond at a negative yield, As the name suggests, legally-con- But the central bank isn't the only in- because you are paying for the privi- strained institutional investors are stitutional investor demanding bonds lege of lending. By keeping the money large institutions that, one way or an- for legal or statutory reasons. As I under the mattress you get a higher re- other, need to purchase safe assets mentioned above, banks need bonds turn. But because of group one, group due to legal constraints or statutory to pledge as collateral for the loans two may opt to purchase the irration- imposition. In general, these institu- they take from the central bank (and ally priced bonds, as there is a greater tional investors only purchase the safer from the money market). They are also fool that will purchase the bonds from assets, usually government bonds and required by BASEL rules to carry safe them at an even higher price. This highly rated corporate bonds. Central bonds on their balance sheets. Insur- group just attempts to front-run cen- banks, for example, hold government ance companies and pension funds tral banks. bonds as foreign reserves, without any also purchase safe bonds in order to care for yields or prices. The central match their liabilities. No matter how The third group is made up of anx- bank of Saudi Arabia is one of the top irrational the price of a bond is, these ious, risk-averse investors, who tend to purchasers of US Treasury Bonds, as institutions have no other option than purchase only the safest assets. Most it needs these assets to maintain the to purchase the 'safer' assets. government bonds are seen as safe peg of the riyal to the dollar. Because assets in the sense that credit events the main objective is not to make a re- The second group of bond investors are unlikely. People often ignore infla- turn on bond holdings, a central bank is composed of those who purchase tion and taxes and end up demanding is usually insensitive to bond prices bonds because they think there will be assets that seem safe because all cash (or yields). Central banks also keep bonds on their books as the result of their open market operations. The ECB requires banks to pledge collateral to “NO MATTER HOW IRRATIONAL lend them money. This collateral is of- THE PRICE OF A BOND IS, THESE ten composed of government bonds. Additionally, central banks sometimes INSTITUTIONS HAVE NO OTHER OPTION purchase large quantities of govern- THAN TO PURCHASE THE ‘SAFER’ ment and corporate bonds, which they keep on their balance sheets until ma- ASSETS.” turity. Again, the central bank is rela-

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flows are usually paid by the issuer, but which lose purchasing power over time due to the low yields not covering infla- tion and taxes. The existence of group three is one of the reasons why central banks have been failing to deliver on inflation levels.

No matter how low yields are, there will always be a group of investors that only wish to hold cash and gov- ernment bonds. That being true, lower yields just prompt this group to in- crease its savings rate as it desperately attempts to maintain its future level of savings.

Massive Losses on the Horizon

The above reasoning helps us to un- derstand why there is a bubble in the bond market and why it won't burst right now. Long-term investors saving for a pension should keep their money away from this market, but it may not be the best time to short bonds, because central banks won't stop be- fore boosting inflation to at least 2%, meaning that, in the short term, we may see bond yields become more deeply negative. With the US delaying the next hike and revising the path of hikes to be softer than previously an- ticipated, I expect Europe and Japan to further expand their asset purchases and eventually cut interest rates. With so many bazookas trying to hit the tar- get, sooner or later, inflation may just end up rising. If that happens, bond investors would experience significant losses.

Concerned with the decreasing re- turns they're getting from fixed in- come, many investors are turning to longer-maturity bonds. The demand for longer-maturity government bonds is increasing and some governments are now issuing 30-year, 50-year and even 100-year bonds. The longer the cause they will most likely end up los- An investor planning to keep the bond maturity, the higher the yield offered. ing purchasing power over time. until the maturity date (or for a long But investors should realise that the period of time) is willing to accept, at higher yield is a compensation for the Table 1 shows the impact of a rise in the very least, a return that maintains higher risk incurred. The loss that can yields on bond prices. The base case purchasing power over time. If interest derive from a small change in interest considers three bonds, with different rates rise, the investor loses money, no rates increases with distance to matu- maturities, all paying coupons semi-an- matter whether he decides to keep the rity. Longer-dated bonds are exposed nually at the rate of 2% per year. The bonds or to sell them. If opting for the to a significant interest rate risk. At a yields are 0.422%, 1.034% and 1.586% first option, he would keep the yield on point in time when yields are at their for the 10-year, 20-year and 50-year the bond, while the market is offering lowest ever, investors should avoid in- bonds, respectively. These yields are something more. This opportunity cost vesting in these longer-maturity bonds approximately those currently on offer is similar to a loss. If opting for the sec- as a way of recovering the lost yield be- on French government debt. ond, he would have to accept selling

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“THE SHORTER-MATURITY BONDS OFFER RIDICULOUSLY LOW YIELDS BUT THE LONGER-MATURITY BONDS ARE HEAVILY EXPOSED TO INTEREST RATE RISK.”

the bond at a discount. One way or an- other, a loss is incurred.

In the example depicted in Table 1, if after five years the yield rises by 1%, the price of the bond will decrease by 5.9%, 8.6%, or 17.0% depending on the bond maturity being 10-year, 20-year or 50-year respectively. If the increase in yields is 2%, the respective declines in price are 8.2%, 14.7% and 30.3%.

While this situation may appear un- likely, allow me to point out here that the main goal of the ECB (as well as for most central banks around the world) is to keep the inflation rate around 2%. The central bank will do anything ilolab / Shutterstock.com to boost inflation to that level. While it may fail to deliver on its intents over a period of 2-3 years, it is more likely to achieve it over a longer period. The shorter-maturity bonds offer ridicu- lously low yields but the longer-matu- rity bonds are heavily exposed to inter- est rate risk. In the example depicted in Table 1, the 50-year bond suffers a loss of 30% when yields rise by 2% after five years. Even if the increase in yields oc- curs only after 10 years (not reported in the table), the loss would then be equal to 28.5%.

Because of the elevated risk that comes with longer-term bonds, I would avoid them, particularly at a point when central banks are playing in the opposite direction. While austerity has been the main fiscal policy driver for the last seven years, the situation may change in the near future if monetary policy continues to fail at delivering atile, the real risk measure for a long- According to thorough research pre- the expected results. We have already term investor isn't volatility of returns sented by David Dreman in his book heard some central banks mention the but rather the deviation of returns "Contrarian Investment Strategies: The concept of 'helicopter money' as a new from the investor's objectives. Some- Psychological Edge", in the US market tool and we will hear about boosting one saving for a pension is looking to during the period 1946-2010 equities fiscal policy too. In my view, the risks achieve a positive return after inflation have on average significantly outper- of overshooting inflation targets are and taxes are accounted for, after 20, formed bonds and treasury bills over currently higher than the risks of a de- 25 or 30 years. So, when evaluating the almost any time interval. For a one- flationary spiral. best distribution of funds between eq- year interval, for example, equities out- uities and fixed income, what an inves- performed bonds 65% of the time. As There is an additional argument play- tor wants is to maximise the odds of the time interval is enlarged, the odds ing out against bonds. While bonds hitting his target return. In this sense, of equities beating bonds and treasury are usually said to be safer assets than the real risk of investing in bonds is the bills increase. In a 15-year interval or equities because returns are less vol- odds of equities outperforming them. greater, stocks always beat bonds.

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Final Remarks save for a pension would be better off prices, investors should avoid relying investing in equities or real assets. At on the assets that suffer the most with The fixed income market has tradi- least that way they're protected from accelerating inflation. Nevertheless, tionally underperformed equities over any surge in inflation. I don't favour shorting bonds either, almost any time interval. With bond because I believe central banks will cut yields currently at their lowest level Although the world is now preoccu- interest rates further and will continue ever and historical data greatly favour- pied with the deflation threat, average to drive yields down in the short- to ing equities over fixed income, it's hard prices have historically drifted higher medium-term. to find any value from investing in fixed over time. With all major central banks income at this point. Those needing to around the world colluding to boost

66 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 16 – JULY 2016 | 67 BY SAMUEL RAE

FORENSIC FOREX Where next for Sterling? On June 23, the UK voted to leave the EU. After years of campaigning and debates that tran- scended party politics, the UK is setting out alone. What this means for all involved remains to be seen. There are a few short-term implications, however, that we can bring in to play from an operational trading perspective.

Those that have followed the Fo- I use fundamentals to dictate my ag- Let's start with the cable (GBP/USD). rensic Forex column here at Master gression. Specifically, I form a bias For me, as with the rest of the finan- Investor during the last few months (bullish or bearish) for each currency, cial sphere, this one's a no brainer. will be well aware of how I use a translate this to a pair, and enter In currency trading, and also from combination of underlying funda- towards a slightly more aggressive a wider market perspective, the US mentals and naked price action to target if price breaks in line with my dollar is a risk off asset. That is, when go at the markets. For those that bias than I would if it was against my shocks happen, and sentiment shifts haven't, however, here's a quick in- bias. This bias side of things is what I to negative, capital will flow into the troduction. Essentially, I identify key generally look at as part of Forensic dollar as it provides a certain level of levels on the daily charts in the ma- Forex. The referendum has given us security over many other assets. Yes, jor pairs – primarily the Aussie, cable a chance to focus on sterling specifi- its value decays through inflationary and EUR/USD, but sometimes the cally, so here goes. pressure, but near term (as is often USD/JPY and the GBP/JPY. As price the case with macro shocks) this de- approaches these levels, I look for cay is well worth bearing as a cost to a confirmatory signal (generally the offset risk. closing of a candlestick above or be- low the levels in question, or even So we've got a macro shock that better, a pin bar in line with my di- translates to risk off sentiment and a rectional bias. When these signals flight to safe haven assets. That's the arrive, I enter towards a predeter- dollar side of the pair sorted – bull- mined target (also dictated by key ish. Concurrently, we've also got a levels) and set my risk accordingly. genuine concern that the UK will lose I don't touch a trade once it has its competitive edge in global mar- opened; I just let it play out to either kets, and this will lead to an exodus a stop loss or a target hit. of many of the large institutions, fi- nancial and otherwise, that underpin That's the price action side of things. the nation's economy. This concern

68 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk FORENSIC FOREX

“I’M LOOKING TO BE AGGRESSIVE TO THE DOWNSIDE ONCE MORE IN THE CABLE FOR AS LONG AS THIS SENTIMENT HOLDS.”

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has translated to some serious sterling bearishness, and I'm more than happy to hop on the bandwagon. Price broke through a number of key levels post referendum, with entry points at 1.4, 1.38 and 1.36 offering nice quick turn- around positions, and I'm looking to be aggressive to the downside once more in the cable for as long as this senti- ment holds. This doesn't mean I won't enter long (chances are we will see some bounces as speculative shorts unwind) but I will keep my targets tight on these counter trend trades.

“CHANCES ARE WE WILL SEE SOME COUNTER-TREND OPPORTUNITIES ON STANCE UNWINDING, BUT I EXPECT THE MAJORITY OF MY POSITIONS TO BE RIDING OUT STERLING WEAKNESS ACROSS THE NEXT QUARTER.”

to see some growth. The ageing popu- This drifting strength has given me a Moving on, let's look at the GBP/JPY. lation (and in turn, the weight this puts semi-bullish bias in the Yen this year, This one is equally simple, but for on the government's social security with the strength of the correspond- slightly different reasons. The Japanese bill) is still an issue, but pressure is eas- ing currency generally providing an economy has struggled for what seems ing. Over the last six months or so, this underscore for my directional aggres- like an eternity, but Shinzo Abe's poli- has translated to some strength in the sion. In this instance, sterling is the cies are finally bearing fruit; and along- Yen – strength that came despite the corresponding currency, and there's side some pretty aggressive trade Japanese efforts to keep the currency little need to reiterate my stance on stimulus activity, the nation is starting weak (to stimulate export demand). this one. A quick look at the daily chart reveals an almost identical response to the referendum in the GBP/JPY, and I am looking for entry points around 136 and 132 going forward.

All said, general markets are going to be looking in the same direction near term, and this gives us an opportunity to piggy back on sentiment. As men- tioned, chances are we will see some counter-trend opportunities on stance unwinding, but I expect the majority of my positions to be riding out sterling weakness across the next quarter.

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70 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk BY JOHN CORNFORD The Sorry Tale of Stanley Gibbons

Into this Vale of Tears it is Flowers (we are told) that have been sent to soothe our troubled breasts, although we are not so often told that flowers soon wilt and die.

I was reminded of this when glimpsing Only to go immediately wrong the next six years, having once again built a col- another of those share spikes. Thought year and requiring a £7.7 million write- lection of 'gift' and gardening supplies dead, up suddenly in late May flashed down, which proved to be only the around the old Flying Flowers core, Flying Brands (LON:FBDU) to top the start. One splurge had been for gar- seeing its shares rise from its 100p de- leaderboards three days in a row. It is a den centre and theme park Blooms of merger price to 300p in 2006. Until, very small cash shell and only doubled Bressingham, and another for garden again, some sort of curse struck. from a £1 million market cap to £2 mil- tools supplier Clarke & Spiers – both lion. So no big deal – unless the one the having to be sold in 1999 at a £4.6 This time FB had built on what it sup- market hopes for comes along. million loss, followed in 2000 by Bell- posed was expertise in direct mail, cus- bourne Flowers at another £3 million tomer databases, greetings cards, gar- I'm not interested in that, but I remem- loss. On top of which, FF had spent £13 den related activities like plug plants, bered that in the distant past I was million on a call centre and on IT to in- birdseed and – oddly – music and the first analyst to write about Flying tegrate everything. film DVDs. But from then on, despite Flowers (as it then was) when it floated the usual management-speak ("many in 1993. I was enthusiastic because, challenges but exciting plans for in- based in VAT-free Jersey and selling by vestment and development"), all sorts post standardised bunches to those of 'one-off' problems surfaced so that, too time-strapped to select flowers eventually, everything had to be sold for their Mrs and Mums on high and in 2009 to pay off debt incurred to buy holy days, it was a strong generator of But losing and spending £28 million at one particularly disastrous internet cash – so much so that the shares rose a pop didn't deter the management. operation. Thus we have today's cash from their début around 80p, to about Recognising that it 'didn't fit in', Stan- shell, which in 2013 had net assets of 580p in 1998 where its market cap was ley Gibbons (LON:SGI) was de-merged £1.7 million, against £19 million at FB's around £150 million and pre-tax prof- in September 2000 as Communities. 2007 peak. its £5 million. Even the mighty Pru had com (this was still the dot.com boom a stake. – it regained its Stanley Gibbons name So much for Flying Brands. But Stanley in 2002) enabling the continuing and Gibbons had meanwhile flown even But then, when I had moved on to renamed Flying Brands to talk of the higher and for longer, reaching 300p other things, came a profits warning. 'great opportunity' to take advantage of in 2008 against its 22p de-merger price FF had by then splurged out all its cash the changing retail environment and its and, after a sharp retrace to below 90p – and more – into a motley collection "exciting prospects for e-commerce". in January 2009, went on to a brief 350p of businesses, terming itself a 'mul- peak in early 2014 when (unrecognised ti-brand home shopping company', FF shareholders meanwhile had re- of course at the time) real problems with a 'collectables' division compris- ceived one Communities.com (later were taken on board – to emerge only ing the jewel that it thought it had in its Stanley Gibbons) share for every three a year or so later. crown, stamp dealer Stanley Gibbons in Flying Flowers, so off again they each for whom it had paid £13.5 million in flew – quite high for quite a time. Flying Which was a pity, because with its June that year. Brands flapped strongly for the next original stamps business onto which

72 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk THE SORRY TALE OF STANLEY GIBBONS

“WITH ITS ORIGINAL STAMPS BUSINESS ONTO WHICH SG HAD GRAFTED COLLECTABLE COINS AND AUTOGRAPHS AND ON-LINE DEALING AND AUCTIONS, PROFITS AND DIVIDENDS HAD STEADILY INCREASED TO OVER £5 MILLION AND 6.5P RESPECTIVELY PER SHARE IN 2012.” Flavia Morlachetti / Shutterstock.com

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SG had grafted collectable coins and cals so as to migrate our business from autographs and online dealing and dealer to intermediary through a focus auctions, profits and dividends had “THE COSTS OF on auctions – including the necessary steadily increased (except for a brief INTEGRATION AND digital platforms." setback in 2008 when the global crisis DIVERSION OF THE damaged collectors' spending) to over By then SG was operating "an inter- £5 million and 6.5p respectively per MANAGEMENT national sales and auction business share in 2012. TO CHANGE THE focussed on a diversified range of col- GROUP FROM ‘A lectibles with complementary brands If they managed to get out in 2006 in stamp dealing and auctioneering; and 2014 respectively, shareholders BUSINESS BASED in each company would have done ex- ON PHILATELY TO tremely well. A BROADER BASED But the curse kept striking. What curse COLLECTIBLES was that? Was it IT and web develop- GROUP WITH ment? Or was it just 'ambition' and 'op- SIGNIFICANT ON- portunity' exceeding ability to cope? Whatever it was, early in 2012 SG's LINE DISTRIBUTION chairman believed the company was POTENTIAL’ WERE "at the brink of realisation of the ben- PROVING TO BE efits of prior year efforts in building a strong base", so it was hardly surpris- ONEROUS.” ing that in October 2012 £6 million was raised at 195p from shareholders to buy and develop US-based online ing shares in issue by 60%) towards the stamps and collectibles trading plat- £45.3 million (including £24 million form BidStart, to "provide a base from goodwill) acquisition of Noble Group, which to leverage the Stanley Gibbons with its market leading Baldwins rare brand in the low value/high volume coins dealership. Again, the chairman's segment of the collectibles market". rationale (in so many words) was "while continuing to grow the core stamp And a year later followed a much larger dealing and investment business, we £40 million cash raise (at 295p, increas- want to move into new collectible verti-

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coin dealing; antiquarian books and art auctioneering; and dealing in auto- graphs and memorabilia" which could "provide an excellent platform to grow market share across activities; to cross- sell its products into a wider pool of po- tential customers; and de-emphasise the importance of any one asset class."

And so, moving up into more rarefied markets, SG in November 2014, raised a £10 million bank loan towards the £9.5 million purchase of antique dealer and auctioneer Mallett & Co.

Only for it all to go horribly wrong. In November 2015, with the shares still over 100p, SG announced "the trading performance of the Group in the past twelve months has failed to achieve what were, in retrospect, premature and over-optimistic expectations from “EXISTING ORDINARY SHAREHOLDERS the investments of the past two years." NEVER COULD HAVE MAINTAINED THEIR In fact the costs of integration and di- FULL SHARE OF THE COMPANY.” version of the management to change the group from "a business based on philately to a broader based collecti- tion of recent acquisitions has still not £10 million of new equity." Not surpris- bles group with significant online dis- achieved the level of cost savings that ingly, its broker for those acquisitions, tribution potential" were proving to be is required and there has been contin- Peel Hunt, felt it necessary to step onerous. ued investment in the online platform. down in place of a new broker to raise As a result of these factors, the Board the necessary funds. "The Group has continued to experi- now believes that for the year to 31 ence lower revenues throughout the March 2016 the Group will report an But even then the message had still business, with sales of rare collectibles adjusted loss before tax of between not quite sunk in, because the shares to high net worth clients being at a £1.0 million and £2.0 million." stayed above 40p for the next few lower level than expected and trading weeks until, on 11 March, SG had to being particularly difficult in the interi- On top of that it had run up borrowings admit that the raise would be for £13 ors division. Additionally, the integra- of £19.3 million compared with an £8.7 million at 10p per share. And the at- million net cash position two years be- tempt to soothe existing sharehold- fore. ers by promising no dilution if they fully participated proved to be weasel Even then it seems the full scale of the words. To do so they would have to not disaster had still to sink in. In mid Jan- only take up their 8 for 10 entitlement uary when the shares were still above under an open offer but also (this was 60p (having fallen 25% in two weeks) only made clear in the small print) they the Board could still announce that would have to take up another 140% in while considering a fund-raise to re- new placing shares – of which only 26% inforce its working capital and repay could be 'clawed back' to fulfil them. overdrafts, it would not be by way of equity because of the dilution it would So, existing ordinary shareholders cause for shareholders. never could have maintained their full share of the company. And even if they But, unfortunately, needs must when could, for every share for which they the devil drives. They had lost control. had already paid (anything historically On 23 February when the shares were between 40 and 350p) they would have still above 50p the Board, having con- had to stump up another 29p to keep it. sidered the various alternatives, was now "confident that an equity raise Was that worth it? Will SG be able to is the most expedient and efficient get back onto a track to justify that ef- method by which to raise the capital fectively 29p they needed to pay, or is it necessary. Accordingly, the Group is in all really the mess that the current 13p the process of raising approximately is implying?

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The company has been promising coins, stamps, furniture etc. and their So the answer seems to be "not likely". to repair the damage, taking onto its equally obscure high net worth cus- But some lessons might be valuable: Board Clive Whiley of Evolution Capital tomers, would be needed. to conduct a root and branch review 1) Beware the power of 'web inte- and to recommend whatever meas- But who knows? In the depths, the gration' to disintegrate what it ures, disposals, or new funding options curse of Communities.com – SG's orig- touches. might be appropriate. inal dot-com trendy name, in the dot- com year of infamy – might be obscur- 2) Always read the Chairman's re- ing some treasure to restore a bit to views for every (not just the latest) shareholders. After all, the market cap year, and compare with the out- now is only around half the price SG come. paid just over two years ago for Noble Group's mainly coin dealing business 3) Note that 'Caveat Emptor' doesn't (except that 60% was goodwill, which seem a concept familiar to man- might or might not have to be written agement promising the 'synergies off). and growth' that their ambitions have put their way. They might So could there be some sort of happy promise 'growth', but it often turns ending? The management's expansion out to be in their salary and issued and web hubris has done a lot of dam- shares. Much less often is it in the age for the existing long-term share- share price. holders, because on 177.1 million shares now, compared with 25.3 mil- 4) Cross-check the board and man- And SG's old, key institutional share- lion before that first foray into BidStart agement names revolving through holders Henderson and Fidelity have in late 2012, whatever is rescued will these various company doors over been happy to stump up enough to be worth only 14% of the share price it the last 20 years! keep their respective 29.5% and 10% would have merited then. stakes.

So maybe they know better than the rest of us that something worthwhile “SG’S OLD, KEY INSTITUTIONAL will remain. The brands that SG has SHAREHOLDERS HENDERSON AND been getting together even if man- gled must, surely, still be worth a good FIDELITY HAVE BEEN HAPPY TO STUMP deal (a bit like Hornby, and not much UP ENOUGH TO KEEP THEIR RESPECTIVE bigger). But how much damage might have been done – quite apart from the 29.5% AND 10% STAKES.” deterioration in Mallett's and parts of the high value stamp and other collect- ables markets that the company has admitted to?

Unfortunately, because shares in issue now are seven times greater than when last the old core of Stanley Gibbons stamps was making its peak profits in 2012 before the acquisitions splurge, investors can forget completely that 350p share price peak. Then, SG was valued on a near 20x PER and 3x net assets, so that, even back on that old track, with no other disposal losses or costs meanwhile, and on the same rat- ing, the price on the expanded shares would be no more than 50p – which at a more appropriate 1/3 the 2012 rating produces the current share price.

Apart from that guide I don't think any analyst could assess what value there might really be left. Much delving into the obscure and erratic world market for esoteric, collectables, antiques,

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millennials & Money Crowd funding Is It worth the Effort?

78 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk MILLENNIALS & MONEY

“IN 2016, THE CROWDFUNDING INDUSTRY IS ON TRACK TO ACCOUNT FOR MORE FUNDING THAN VENTURE CAPITAL.”

Business is on the move. There's your home office. Now, the power ative obscurity into the mainstream no doubt about it. From hotdesk- of the masses is at your fingertips, when Facebook bought Oculus VR, a ing, to the Social Stock Exchange, where collective ideas, resources successfully crowdfunded tech prod- to increasing social awareness and and strategies can be readily tapped uct, for $2bn, which according to Zuck- accountability, the future of entre- into by the budding entrepreneur. erberg 'is just the start' of a 3D visual preneurial business for Millennials platform revolution. So the success- seemingly lies in business driven by There are, of course, still many chal- fully crowdfunded project can bare communal social initiatives. With lenges and big decisions to consider enormous fruit. According to Forbes, collaboration on the web provid- before starting out, but one of the fast- 2014 saw $16 billion crowdfunded, ing an opportunity for exponential est growing ways for startups to get with that figure estimated to grow to growth, starting a business has a boost is crowdfunding. Everywhere over $34 billion in 2015. In 2016, the never been so exciting. No longer you look, there are exciting crowdfund- crowdfunding industry is on track to does it necessitate a one-man-band ing opportunities for the well informed account for more funding than venture startup hidden behind a laptop with and the forward thinking. Crowdfund- capital. So what exactly is crowfunding, seemingly no way to make it out of ing was recently catapulted from rel- and is it all as it's cracked up to be?

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Crowdfunding is an innovative way ings or outcomes of the process. From to virtually collaborate on a project's Colony88, a creative startup supporter funding or even purchase equity in a in Hong Kong; to Crowdrise, a fund- startup. It has great appeal to those in- raising site for charitable causes; to spired by the ingenuity of the startup Crowdcube, one of the stars of the UK community but frustrated by financial scene: this new wave of funding ranges barriers. Crowdfunding can help early from individuals becoming sharehold- stage companies establish a network ers contributing to the development of investors while securing capital, and growth of the offering, to those whether it's through acting as match- playing a donor role oriented towards maker between startups and investors social projects. via a trading platform, or acting as an online community for peer-to-peer or For Millennials looking to engage in this social lending. Essentially, investors entrepreneurial people power, there are able to discover, fund and support are clearly benefits. Crowdfunding of- businesses that they believe in, and fers businesses the chance to test the strong companies are able to seize an market and see how popular some- opportunity to grow, develop and suc- thing is going to be before a large-scale ceed. operation is set up, and any glitches can be ironed out early on. Given that There are essentially three main types individuals act as agents, selecting of crowdfunding: equity (giving part and promoting the projects in which So crowdfunding undoubtedly pre- of the long-term value of a company), they believe, the process gives a great sents startups with an interesting and reward (incentivising funders with spe- indication of the lie of the land and creative option, but with so much out cial rewards), and debt (donating to the market. There is an organic spon- there, it's clearly also important to be a business or project in exchange for taneity throughout. As the ball gets mindful of a few things. Choose your a financial return and/or interest at a moving, crowdfunding creates hype crowdfunding site carefully and be future date). The idea of crowdfunding as social-media-proficient Millennials sure to check out what fees are in- is not new, with well-known sites such come on board and disseminate infor- volved. It all depends on your product as Kickstarter in the US initially becom- mation about projects they support in or 'offering'. In some cases traditional ing popular by allowing individuals the their online communities, and so share investors may suit your business best. opportunity to promote their project the product even before it's launched. They offer their expertise and advice to in exchange for rewards; but we are The pressures of getting traditional start-ups, who, in some cases, can be certainly in a new phase of this alterna- investors on board can be tough, and young, inexperienced and in need of tive finance movement as the power of this often presents huge stresses and guidance. These investors then have the crowd – something that has great strategic conflicts. Here, you're not tied a vested interest in the company, so if appeal to socially conscious and com- to one investor, or in fact any inves- it loses its way, they can assist and get munally committed Millennials – takes tors in the true sense. Crowdfunding it back on track, as they want to pro- on a new level. After all, it is the input is merely people buying your product tect their investment. Crowdfunding of individuals in the crowd that triggers on various different levels; and those doesn't offer any 'real' investment or the crowdfunding process and influ- who pay more receive more acknowl- risk from others – with many startups ences the ultimate value of the offer- edgment. offering products as low as £5-10 for basic investment.

But cautions aside, it is difficult to ignore the pull of such a powerful communal economy. Large compa-

“CHOOSE YOUR CROWDFUNDING SITE CAREFULLY AND BE SURE TO CHECK OUT WHAT FEES ARE INVOLVED.” Gil C / Shutterstock.com

80 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk MILLENNIALS & MONEY

“WHAT’S APPEALING TO OUR GENERATION IS THAT CROWDFUNDING DOESN’T HAVE TO BE SOLELY ABOUT MAKING MONEY SIMPLY FOR PROFIT’S SAKE. IT CAN ALSO BE RAISED FOR ALTRUISTIC PURPOSES.”

buy shares in order to own part of a offers a list of projects, from new parks property. These 'shareholders' earn to playgrounds, towards which people from both rent and capital gains, and can pledge money. Like Kickstarter it gives them the same opportunities and many others, money is only taken that owning their own home would, once the total funding target has been but on a much smaller scale for those reached. And for all those Millennials who can't afford to buy on their own. with one eye on the future, Project Get In a time when buying a property is be- Old is a programme led by Pfizer, in coming less and less attainable, this is partnership with Indiegogo, based on an opportunity for everyone to get on the idea that age doesn't have to dic- nies (even listed ones) are also using the ladder, albeit by investing in one tate health. Pfizer's goal is to showcase crowdfunding for smaller side pro- piece of the ladder at a time. and garner support for as many pro- jects as a means to test the market. jects as possible that improve quality Marvell's vice president Peter Hoddie What's appealing to our generation of life as we age. raised a $52,000 campaign to attract is that crowdfunding doesn't have to 500 backers to test its new Kimona be solely about making money simply Create software and hardware tool kit. for profit's sake. It can also be raised It speaks volumes if the everyday per- for altruistic purposes. DonorsChoose son is willing to pay $599 to a company has raised $225 million for more than which last year reported profits of $3.4 400,000 classroom projects – from buy- billion. Hoddie believes it to be much ing classroom dictionaries to funding more valuable than a survey or focus field trips. The academic crowdfunding group, and if people are willing to vote site Experiment assists in the much with their feet in such a positive way, needed area of research funding. Here, it must signal accuracy in the product's scientists approve every project before future saleability. they go live on the site, which allows researchers and scientists to propose Perhaps the most exciting aspect of their projects directly to the people crowdfunding, though, is that is has who care about their field. Rather than opened up the world of business and gaining anything physical, campaigns has changed the goal posts in the pro- share progress with donors as thanks So crowdfunding, if maximised, can of- cess. There is an array of exciting al- for their monetary support. RocketHub fer something for everyone. Whether ternatives out there, and many crowd- too gained traction in the sciences with you have a charity project or a busi- funding websites are not targeting its annual SciFund Challenge, an online ness idea, crowdfunding can be used the likes of Marvell, but the individual effort to fund science projects. Ona to help turn your entrepreneurialism start-up – the Millennial. For example, similar level, Unbound provides an al- into reality. Crowdfunding, or collabo- Peerbackers, is consistently recognised ternative to the frustrations of the pub- rative funding via the web, is one of the as one of the top crowdfunding web- lishing industry, where authors pitch standouts for growth in our evolving sites in the industry, focusing on fund- an idea and potential readers pledge collaborative economy. Its potential ing entrepreneurs and innovators; and money to fund its writing. It is both a for exponential growth is exciting, but Endurance Lending Network provides funding platform and a publisher; the so too is the communal power of the a platform that connects small busi- site splits a book's net profit 50:50 with crowd. Crowdfunding provides an op- nesses looking for up to $500,000 of the author. portunity to be part of a great idea, and debt capital. From businesses to the in- as the tag line of crowdfunder.co.uk dividual, there are options. Millennials There are, of course, many out-of-the- highlights, 'Behind every project is a struggling to get a foot in the housing ordinary crowdfunding opportunities great story'. It is this personal touch, market will be especially keen to hear worthy of consideration. With envi- this social awareness, this engage- about Fundrise. It's real estate, but not ronmental factors never far from the ment with the community that drives as we know it. For those who can't af- thoughts of many Millennials, Space- so many new ideas from Millennials. ford a property of their own, Fundrise hive is a funding platform for commu- In crowdfunding, there is the potential offers a company in which anyone can nal projects and public spaces. The site for all this and more.

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Why Iceland is Making a country, heavily criticised for its un- ing with financial crises. Delivering Mockery of the Eurozone orthodox way of dealing with a bank- an excellent performance without rupt banking sector, which seems to being overheated by central bank The financial crisis of 2007-2009 have overcome its crisis in just two intervention, Iceland seems a great should be renamed the financial years and is now flying high. addition to an investment portfo- crisis of 2007-(?) when it comes to lio. The main Iceland equity indexes the Eurozone. Eight years after the While many in the UK and the have been performing well and still peak of the crisis, the region is still Netherlands have good reason to have huge potential for the next few drowning in debt, plagued by de- distrust and complain against Ice- years as this small economy recov- flation, hobbled by a weak banking land due to the Icesave case, the ers at a must faster rate than any sector (headed by a big, fat central truth is that the country is a case other country in Europe. bank), and submerged in weak eco- study from which the Eurozone and nomic growth. While the Eurozone the IMF should learn in order to When central banks from major implodes, there is a small northern avoid future mistakes when deal- economies are unconstrained in the

82 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk BEST OF THE BLOG

“DELIVERING AN EXCELLENT PERFORMANCE WITHOUT BEING OVERHEATED BY CENTRAL BANK INTERVENTION, ICELAND SEEMS A GREAT ADDITION TO AN INVESTMENT PORTFOLIO.”

base money they are able to create, Unlike the rest of the world, when Ice- rope was by then unable to deal with the best solution for smaller econ- land faced a bankrupt banking sys- the huge government imbalances omies is not always to allow a free tem, it decided the best way to deal created by the public bailouts. market to work. After all, quanti- with it would be to allow banks to go tative easing and negative interest bust while jailing their executives. By Filipe R. Costa rates are certainly not the result of In the rest of Europe, policymakers free market interactions, but rather adopted a different approach, as of a planned distortion where cen- they preferred to pay huge benefits tral banks play a major role. When to the rotten bankers to get rid of that happens, money flows tend to them, while nationalising the debts Click here accelerate and increase in scale, in- they created. This of course solved to read the flating smaller economies all over the 2008 banking crisis, but at the full article the world until the point where it expense of creating a bigger 2011 creates a financial crisis. sovereign crisis, as peripheral Eu-

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The Pitfalls of Open-Ended Property funds have delivered strong Property Funds returns in recent years and even over the last 12 months they have produced Click here Investors with long memories may have an average gain of 6.4%, which makes to read the been spooked by the recent activity in it one of the best performing sectors full article the Investment Association's property of the market. The problem is that the sector. A number of fund providers, slowdown in the economy and risk of including Aberdeen, Henderson, M&G Brexit have prompted significant client and Standard Life Investments, have withdrawals. switched from their normal offer price to the lower bid or mid price. This has This wouldn't be an issue for most as- Where Big Pharma Went reduced the value of these holdings by set classes, but funds that invest in ac- Wrong as much as 5% or 6%. tual bricks and mortar are incredibly il- liquid. The managers get round this by What is your favourite apocalypse? The affected funds have all been hit by maintaining significant cash balances Global warming precipitating cata- a wave of client redemptions as inves- of typically 10% to 15% that are suffi- clysmic sea-level rise? Thermonuclear tors look to exit their positions ahead cient for normal market conditions, so war caused by hackers violating the of the EU referendum. A vote in favour the switch in pricing suggests that they Pentagon? Fundamentalists with dirty of the Leave campaign on June 23rd- are getting short and need to raise ad- bombs? A global pandemic of bird flu? could have significant negative conno- ditional liquidity. President Donald? Brexit? Or: what tations for the sector and many people about antibiotic resistance? are uncomfortable leaving themselves Each property fund calculates a daily exposed to the risk. bid and offer price that reflects how I've just listened to a BBC R4 program- much it would receive per share if all me[i] on the subject of the increasing the assets were sold and how much immunity of super-bugs. According to “PROPERTY FUNDS new shares would cost to buy given the the best medical minds, unless we can value of the underlying portfolio. The tackle this threat we are looking into HAVE DELIVERED difference between them – the spread the abyss. We're already at 700,000 STRONG RETURNS IN – is typically 5% or 6%. This is largely preventable deaths per year globally RECENT YEARS AND due to the costs of buying and selling as a result of antibiotic resistance, and the various properties and is much the recent O'Neill Report[ii] suggests EVEN OVER THE LAST higher than for most other funds. that this will rise to 10 million people 12 MONTHS THEY by 2050. That's more people than die HAVE PRODUCED AN Under the normal pricing arrange- of cancer every year right now. Re- AVERAGE GAIN OF ment when client inflows exceed the cently it was announced in the US that outflows, the dealing prices are based a patient was suffering from a form of 6.4%, WHICH MAKES on the higher offer price. This ensures e-coli which was entirely resistant to all IT ONE OF THE BEST that buyers contribute to the transac- available antibiotics. PERFORMING SECTORS tion costs incurred when the fund in- vests their money in new properties. The problem arises because antibiotics OF THE MARKET.” have been used too freely, not least in By Nick Sudbury intensive agribusiness, and the bugs have been allowed to evolve faster than new medicines have become Antibiotic Persistence – Or available.

I don't want to worry you but antibiotic resistance is looming at precisely the time that all of the big pharmaceuti- cal players are in retreat. What I mean by that is that they are scaling back investment in R&D around new block- buster drugs in favour of what used to be called proprietary remedies. And the science and economics behind this has been little reported.

Back in February 2011, the US giant Pfizer (NYSE:PFE and LON:PFZ) an- nounced the closure of its research facility in Sandwich, Kent – the very sta- ble that created the blockbuster Viagra. In the event, total closure was averted.

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“ANTIBIOTIC RESISTANCE IS LOOMING AT PRECISELY THE TIME THAT ALL OF THE BIG PHARMACEUTICAL PLAYERS ARE IN RETREAT.”

now heading down again. There seems no obvious support in sight, particu- larly following the company's last an- nouncement.

The only useful observation, in relation to a year's chart, is that it was profita- ble, from a trading point of view, to pick up the shares after they had underper- formed the market by 30 per cent or more and to sell them again after pe- riods when the shares are shown to have performed in line with the index.

Such a chart 'buy' signal flashed last October, so could it possibly be true now given that the shares have once This was part of a change of strategy. lute and relative share price momen- again underperformed the FTSE 100 The company wanted to trim $3 billion tum. Over the last year, Tesco shares by 30 per cent again? However, that from its US$9 billion research budget have dropped 30 per cent whereas the has happened only once and there is and to expand into non-prescrip- FTSE100 Index has fallen by only 10 per no great supporting evidence yet of it tion medicines such as multivitamins. cent. wishing to do so again, just at the mo- (Funny how our skinny forebears man- ment. The main observed thrust of the aged without multivitamins – or supple- Over a six month perspective, Tesco share price's momentum, still appears ments of any kind, for that matter.) shares did better than the FTSE 100 to be southerly in direction. Something (up 4.8 per cent in contrast to the FTSE for watching, I think! At about the same time, GlaxoSmith- 100's rise of only 2.4 per cent) but in Kline (LON:GSK) announced a re- recent months the weakness of per- By Robert Sutherland-Smith duction in the proportion of sales formance has chipped in again with reinvested in R&D from prescription dear old Tesco, underperforming the medicines. It then closed its depression market – as measured by the FTSE 100 research unit in Harlow, Essex, with the index – by over 7 per cent. Click here loss of 380 jobs, after concluding there to read the was insufficient prospect of producing Tesco was in decline for most of last full article a new blockbuster drug. year and it looked as though it had bro- ken out of that downtrend early this By Victor Hill year. Sadly, that breakout was as short lived as a dragonfly! The share price is

Click here to read the full article

Is It Time to Add Tesco to Your Shopping Basket?

Staring hard at the Tesco share price charts does not make the equity look any more attractive in terms of abso-

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read to succeed The Laws of Wealth Psychology and the secret to investing success by Dr Daniel Crosby

Behavioural finance, in my view, tional theories would analyse a stock whereby negative factors are played is one of the most interesting and rationally and objectively, not letting down. But downplaying the negative thought provoking areas of econom- emotions sway their investment de- aspects could be incredibly damaging ics. Instead of focussing on the ways cisions. But in the real world a whole to wealth. Take HMV in the early 2000s humans, or "Homo economicus", range of biases and feelings can affect for example. Many investors were should behave in relation to their how we look at our investments and focussing on the company's strong decisions, as traditional economic what decisions are made. market position and ignoring the ever theory does, behavioural finance growing rise of internet based music attempts to explain exactly why To give one example, confirmation distribution. And we all know what we as investors decide to make the bias is an affliction whereby investors happened to HMV. If you don't, here is choices we do. Choices which often only focus on factors which meet their a chart. don't seem to make any sense. pre-conceived positive beliefs and

For example, the emotionless, disci- plined investor assumed under tradi-

“IN THE REAL WORLD A WHOLE RANGE OF BIASES AND FEELINGS CAN AFFECT HOW WE LOOK AT OUR INVESTMENTS.”

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No matter how emotionless or reg- flows being their highest at the bottom wanted by investing in ostrich farms" and imented investors may be, these so of the market being one example. So in so on. The problem is that much of the called behavioural biases are still likely a world which often makes little sense, investment world is controlled by mar- to affect their decisions at one time or clear rules must be applied if investors keters (not analysts) who are paid to another – after all, we are all human are to thrive. put you into a state of excitement so and not robots. In fact, an estimated that you will buy their products. After 117 such biases have been identified Don't be silly reading this chapter hopefully you will by proponents of behavioural finance think twice before parting with your as being likely to sway decision making Part One of the book moves onto Cros- cash. In that vein, the author provides for the worse. These range from the by's key Laws of Wealth, ten rules of some useful tips on how to manage well known overconfidence bias to the behavioural self management which emotions, including exercising vigor- more exotic Semmelweis reflex. must be digested and acted upon if ously and limiting intake of alcohol investors want to increase wealth over – two things many of my investment Unfortunately, the discipline as a whole their lives. The first rule, "You Control chums will not be pleased about! has been more concerned with identi- What Matters Most", reflects one of the fying these biases rather than coming main points of Crosby's overall work, Part Two then goes on to introduce up with a practical solution to avoiding being that investors can be their own Crosby's Rules Based Investing ap- them – a bit like a doctor diagnosing a worst enemy. He surmises that bad be- proach, a set of factors which if suc- condition and not offering any treat- haviour, or in other words, emotional cessfully implemented will help to mit- ment. It is in The Laws of Wealth that au- responses to market conditions, can igate risk, exploit mispricing, protect thor Dr Daniel Crosby, attempts to take result in investors underperforming from disaster and increase returns. He the discipline a step further, by analys- the market by up to 4.3% per annum. summarises his approach well with the ing the theory behind investment psy- The next nine rules will help you to following, "Exceptional investing over chology and then suggesting ways to learn good behaviour and to close that a lifetime cannot be predicated on luck. become a better investor. bad behaviour gap. It must be grounded in a systematic ap- proach that is applied in good times and Crosby himself is an asset manager bad and is never abandoned just because and founder of Nocturne Capital, has what is popular in the moment may not a PhD in clinical psychology and is a “EMOTIONS conform to longer-term best practices." leading behavioural finance expert This part will teach you those practices. who uses his expertise in designing fi- ARE THE ENEMY nancial products and in security selec- Conclusion tion. He is also a prolific writer having OF GOOD authored books, newspaper columns INVESTMENT Crosby has two hopes for The Laws of and many blogs. Wealth. Firstly that it will make you bet- DECISIONS.” ter off financially and secondly that it Mad world will leave you with a richer awareness of self. While the first aspect may well Setting the scene, Crosby begins the What follows is some pretty good ad- come in time I have certainly become a book by explaining that humans must vice, including hiring a financial advisor lot more aware of my own behavioural invest in risky assets in order to survive specialising in managing behaviour, biases by reading this book and intend and prosper over the long term. Given buying shares in bear markets and to do something about them by apply- that inflation eats into wealth over diversifying across a range of asset ing the techniques described. time, no one will have a decent pen- classes. All are explained in an enter- sion pot if they only invest in low risk taining manner but also backed up by Overall, this is a highly readable book, government bonds and bank deposits. theory and real life examples. In con- well researched by an expert in his field However, due to the way our brains clusion to each law Crosby provides a and full of practical advice on how you are hard-wired we are ill equipped to useful "What now?" summary section, can improve your long-term finances. invest in risky assets. This is because which covers what to think, ask and do Those who dislike equations and in- the world of investment often operates when faced with each situation. vestment formulas will be pleased to in contrast to everyday life. see that the book is maths light, with My own particular favourite law is num- any numbers presented in easy to For example, in investment, asset re- ber four – "If You're Excited, It's a Bad read tables and charts. Interspersed turns can often be predicted more ac- Idea". In other words, investors should with anecdotes and stories it is also an curately over the long term than in the not let powerful emotions influence entertaining read. The Laws of Wealth short term. In contrast, you are prob- their decision making. While they have will appeal to a broad range of inves- ably more likely to know what you will a huge part to play in life, Crosby sug- tors including private individuals who be doing at this time tomorrow than in gests, "Emotions are the enemy of good are managing their own portfolio, fi- five years. And while in life the consen- investment decisions". We have all seen nancial advisors who want to provide sus view of how good a film is might spurious marketing communications exceptional service to their clients and be accurate, in investing the consensus along the lines of "this stock will soar by fund managers looking for an edge in view is often wrong – investment out- 1,000%" and "live the life you've always the markets.

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the final word Soldiers of Fortune

90 | ISSUE 16 – JULY 2016 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk THE FINAL WORD

I was on an organised walk discovering the trees in my then local park in Ealing a few years back. I mean learning what sort of trees they were, not just locating them. Anyway, the park ranger was telling me that they also do walks with infant-school children and they have to make them wear hi-vis gilets for health and safety. They're in a suburban park! Madness. I thought back to when I was growing up and there were almost no 'traffic calmers' – 'sleeping policemen' we used to call them. Now they're everywhere. It occurred to me what has changed. In those days Darwinian natural selection was allowed to play out. But now we need all nature's losers who would have been run over in the normal course of events to work in Call Centres.

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“WE ARE LIKE SNIPERS, PERHAPS TAKING A LONG TIME TO SET THE SHOT UP AND THEN SOMETIMES NOT EVEN TAKING IT AT ALL IF CONDITIONS CHANGE. THE ANALOGY IS PERFECT.”

Well there is no concept of health and safety in trading. You pays your money and you takes your chance. There is consequently no place for sentimental- ity in trading. We have to literally take advantage of people and take their money off them. You can't really senti- mentalise that as a concept!

Luckily we have lots of things work- ing in our favour as private investors. Firstly we can be agile. What I mean by that is that fund managers, in par- ticular pension fund managers, have their hands tied to a greater extent. They must trade only the markets they are managing funds in, and they must keep largely invested. Even in a SIPP we have the option to move into a cash fund, thus effectively being out of the and emotionless when it comes to have to bend some of their beliefs out market in cash when we want to be. trading. Just like a soldier in fact. We of shape to agree with others. This is As a result, pension funds tend to be have to dehumanise the markets, usually a function of having 'received well behind the curve when it comes which shouldn't be too hard since they opinions', instead of their own. Most to disposing of stock in a downturn. Ef- are only really theoretical in their exist- people are running around with a fectively it means they are keeping the ence. We are soldiers of fortune. It's a motley set of opinions they got from price artificially high while we sell out, daily battle out there to take money off a variety of other people, and about and when they do finally make a deci- other people. Even if you buy so-called which they themselves have given no sion, assuming the price has continued 'ethical' investments based on the serious thought. It's a cop-out – an to fall, they will have underwritten our stock market, it's still someone else's abdication of civic intellectual respon- gains. We're taking money out of peo- money you're gunning for. We are like sibility. Needless to say, their opinions ple's pension funds – another good snipers, perhaps taking a long time to conflict and cannot be defended in an reason to manage your own pension, set the shot up and then sometimes argument. This is a by-product of not incidentally. not even taking it at all if conditions teaching critical thinking as part of the change. The analogy is perfect. standard curriculum. While we're on the subject of pension funds, if you work here in the UK you're You can't rely on governments (and It's amazing how people decry com- obviously subject to the vagaries of the never could) to look after you. It's a pany executives earning big fat bo- UK economy. From a risk perspective jungle out there and you have to look nuses, approved by their board and the very last thing you want to do then after yourself. Society is a sum that shareholders incidentally, whilst hav- is expose yourself to even more of doesn't add up. The world is not a fair ing no problem with footballers and that risk that you've already taken on, place and it's up to you to make sure film actors earning far, far more but living and working here, by investing it's unfair for someone else and not without employing tens of thousands. in the same economy. Arguably your for you. That's the reality in which we They complain about Starbucks not whole portfolio should be in overseas live. Buy things from people who are paying Corporation Tax in the UK investments as a diversification. Cur- desperate to sell for whatever reason, whilst ignoring the fact they have paid rency hedging is so cheap and easy and sell to people who are greedy and billions in the US. Meanwhile, they nowadays that it's really unclipped our have already missed the boat. We have have no problem with the Church pay- wings for global investing. to be in (and out) early, and anticipate ing no tax at all, in spite of the fact that trends. it's a cash business selling a product As with all finite resources and com- that would fail Sales Legislation and modities, if you've got them some- When it comes to tax, the average per- Trading Standards; and if the largest one else hasn't. If you have a job then son has cognitive dissonance. That denominations sold up and gave it all you've robbed someone else of that is to say their beliefs about it directly away they could end global poverty to- opportunity. We have to be detached conflict in a paradoxical sense. They morrow, having stockpiled trillions of

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dollars globally over the centuries. I'm The important thing is to get it right ashamed for not making it and failing not sure what they're waiting for, as I though. I correctly called the Leave win to provide those who depend on one thought that was their gig. Cognitive on 17th June in my blog piece Some- with security. Don't underestimate dissonance indeed. thing for the Weekend – Looks Like a the almost always ridiculous times we Win for Brexit, and the fall in Cable live in, when apparently people don't Tax planning became essential when (GBPUSD), which I started writing even understand a simple referendum Wilson's Labour government in 1974 about in January as a short below $1.40 question and want to re-sit the exam. raised the top rate of tax to 98%. In (Is it time to short cable?) and in a few The world is full of idiots waiting for us certain circumstances it was possible more articles subsequently. In other to relieve them of their money. to attract a further 5% on top, so for words it was going to fall anyway and some there was a marginal tax rate of Brexit just happened – or appeared – I remember teachers that used to say 103%. When people complain about to be the catalyst. Much money is to "it's more important to take part than tax havens: blame Wilson and Labour. be made when going against the pre- to win". What an awful thing to teach But that doesn't affect the man in the vailing school of thought. John Paulson children. We might as well tell them street you might say. No, not exactly. holds the record for the biggest trade X-Factor is a viable career path. But if you've ever bought duty frees win in history when he shorted sub- when you're on holiday, then we have prime. Confident in the face of ridicule, So what's a good opportunity that's established you too don't like paying even many of his own hedge fund in- one you'd not want to tell your your taxes and rely on international vestors cashed out and left the fund friends about, but could be a goody? tax planning solutions, too. Now we're because he was such a maverick. Some Monsanto (NYSE:MON). One of two merely haggling over the amount. people are idiots. But it's a good thing things happens now: either the island There is nothing shameful about le- we can take their money now, too. We created some upward momentum – gally avoiding paying tax. Want to pay should be more like him. and remember, the fall of the candle is more tax? Then earn more money. in tandem with the market move down Making your investments tax efficient It's about being right. It's about winning on Brexit – or it's an island reversal, is going to add a small percentage to and not losing, and there is nothing to which is one of the most reliable of every profit you make. And don't forget be embarrassed about in winning and chart patterns. It's less likely to be a re- Einstein considered compounding the making (lots of) money. There's been versal, I would say, as the US markets Eighth Wonder of the World. Keeping a a 'politically defect' view that money is will be much more attractive now that lid on costs, especially tax, can have a dirty and one should be ashamed for Europe and the UK are home to uncer- massive impact over time. making it. Not at all. One should be tainty. The price is still above the cloud there, and OK, the MACD is a bit toppy It's going to get more dog eat dog than so it might flounder a bit. But what a ever out there over the coming gen- great controversial company to throw eration. Graduates, and in particular “MUCH MONEY IS some cash at if you can find a suitable unskilled workers, will be almost liter- TO BE MADE WHEN entry point. Put another way, to con- ally fighting over jobs as the job pool tinue the theme of the article, get it in shrinks. It'll be much more like the Wild GOING AGAINST your sights, and if the conditions are West, and our job is to do what gov- THE PREVAILING right, and you can, take the shot. And ernment consistently fails to do: safe- if you don't like what Monsanto does, guard our own interests. The reason SCHOOL OF so much the better. Why not use the they don't is that it is inevitably at the profits for activism against them? expense of others, which is why they THOUGHT.” keep changing it to maximise votes. We are soldiers of Fortune.

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