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From the executive editor… We’re always talking about long-term investing here at MoneyWeek. Shorttermism gives us high executive pay packets (shareholders don’t act like long-term owners, and so let managers get away with silly incentive schemes – see page 35); a lack of investment for the future (because that costs money today – for more on the potential consequences of that, see page 14); and a popular view of investment as little more than high-stakes gambling, which does the free-market capitalist system a massive disservice and obscures many of the benefits it has delivered. So while we have been known to express a touch of cynicism as regards ethical investing in the past, we’re a little more keen on its latest incarnation as “sustainable investing” (see page 28). Amid all the irritating buzzwords, meaningless jargon and bandwagonjumping that you’d expect from any other part of the fund-management industry, the core idea of sustainable investing has two major plus points going for it.
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Editor-in-chief: Merryn Somerset Webb Executive editor: John Stepek Managing editor: Cris Sholto Heaton Markets editor: Andrew Van Sickle Senior writer: Matthew Partridge Staff writers: Alice Gråhns, Chris Carter, Sarah Moore Contributors: Emily Hohler, Ruth Jackson, Jane Lewis, Emma Lunn, David Prosser, Alex Rankine, Simon Wilson Art director: Kevin Cook-Fielding Picture editor: Natasha Langan Production editor: Stuart Watkins Chief sub-editor: Joanna Gibbs Website editor: Ben Judge Account director: Chris Watters (020-3890 3972) Executive director: David Weeks (020-3890 3866) Founder and editorial director: Jolyon Connell Chief customer officer: Abi Spooner Publisher: Kerin O’Connor Chief operating and financial officer: Brett Reynolds Chief executive officer: James Tye Editorial queries: Our staff are unable to respond to personal investment queries as MoneyWeek is not authorised to provide individual investment advice. Post: MoneyWeek, 31-32 Alfred Place, London WC1E 7DP Phone: 020-3890 4060 Email:
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Firstly, this is an era in which it makes sense to be seen to be on the side of the angels. The increased scrutiny on the behaviour of institutions of all types (this week it was Oxfam’s turn to be toppled off its pedestal) is only going to continue, and reputational risk is only going to become an ever bigger threat. If sustainable investing can help investors to spot that threat and offset it in advance, then that has value.
“This is an era in which it makes sense to be seen to be on the side of the angels” Secondly, investing sustainably means thinking about companies with sustainable finances, too. So we’re not just talking about “divesting” out of problematic industries such as fossil-fuel providers. We’re talking about looking at what makes a company sustainable in a financial sense – strong brands, healthy end-markets – what we might otherwise refer to as an economic moat. One thing that sustainable companies tend not to have a lot of is debt, and on page 32,
Good week for:
Phil Oakley looks at how the demise of support-services group Carillion shows how companies can – quite legitimately – hide the true extent of their indebtedness using various accounting conventions. Finally, if you’re looking at long-term trends that companies of the future will have to cope with, then one you should most definitely consider is the end of the bond bull market and the return of proper inflation. This week, US inflation figures for January beat market expectations, sending bond yields higher, which probably ensures the recent bout of jitters that saw various volatilitylinked financial instruments blow up (see page 7 and 10) may have a distance to run. As Ben Judge suggests on page 26, it might be a good time to pop something distinctly old-fashioned but perhaps more sustainable than any other financial asset into your portfolio – gold.
Ellen Johnson Sirleaf: the ex-president of Liberia (pictured), who made way for George Weah last month, has won the $5m Ibrahim prize for African Leadership. The award has been bestowed since 2007 on leaders who govern well and leave office voluntarily. She is only the fifth leader to have won the prize. The Pendergasts: Two years after the family from Canada lost their home in a wildfire, they have been able to finish rebuilding their house thanks to a C$1m (£572,000) lottery win. “I have always wanted a Mustang and I will finally have one,” said husband Bill, who bought the ticket on a whim.
Bad week for:
Japanese women: working women in Japan trudged out to buy giri choco (obligation chocolate) for male colleagues on Valentine’s Day this week, when confectionery sales were expected to hit ¥130bn (£872m). In recent years, chocolatiers have added to the burden with tomo choco for friends and honmei choco for men. Belgian maker Godiva Japan has called for the custom to be scrapped. Chinese shoppers: World Duty Free, the commercial partner of Heathrow Airport, sparked a backlash on Chinese social media when it offered shoppers a 20% discount on purchases of at least £250 – except for Chinese customers, who had to spend £1,000 to qualify. The airport said the offer had been “unacceptable”.
John Stepek email:
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Loser of the week Celebrity chef Jamie Oliver’s Italian restaurant chain has racked up £71.5m in debt, The Sun on Sunday revealed. High Court documents seen by the newspaper showed that Jamie’s Italian owed £30.2m to banking group HSBC in overdrafts and loans, and £41.3m to creditors such as the tax office, landlords and suppliers. Restaurant staff are £2.2m out of pocket. Last Friday, creditors voted to cut rent at some branches by up to 30%, while a dozen of 25 outlets are to close with the loss of 450 jobs due to “underinvestment, unsuitable new locations and high costs”. Oliver’s personal assets, thought to be worth £150m, are not under threat.
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news London
Barclays charged over Qatar loans: The Serious Fraud Office (SFO) has charged
Barclays Bank over its £12bn emergency fundraising from Qatar during the 2008 financial crisis. Barclays paid £332m to Qatar Holdings in advisory fees and loaned the company $3bn, a credit line that was only partially disclosed at the time. The SFO believes that the loan was used to finance the purchase of shares in the bank, which constitutes “unlawful financial assistance”. The SFO charged four former executives and Barclays Plc – the group holding company – over the case in June last year. The move to now charge the operating arm puts its banking licence at risk if it is found guilty. Barclays is now under different leadership and has vowed to fight the charges. The bank is betting that “no regulator” would take the “drastic” step of revoking its licence “as a result of a one-off event in the exceptional circumstances of the financial crisis”, says the Lex column in the Financial Times.
San Francisco
Unilever threatens to pull advertisements: Tech giants
Google and Facebook face a growing backlash from advertisers, after consumer-goods giant Unilever said it will pull its advertisements from their services unless they do more to clamp down on divisive and extremist content. Unilever, whose brands include Marmite and Persil, is the world’s secondbiggest advertiser, spending £6.8bn last year on its products. Facebook
and Google together account for 73% of online advertising in the US and 60% in the UK, according to analysts Pivotal. The threat has so far had little effect on the share price of either firm: Google-parent Alphabet’s shares ticked up by 1% following Unilever’s comments. Advertisers have seized on damaging storylines to “boost their leverage” with big tech, says Seth Fiegerman for CNN Tech. Yet for all their talk, “we haven’t seen much action in pulling back spending”, eMarketer analyst Nicole Perrin tells CNN.
Port-au-Prince
Oxfam beset by scandals: The Charity Commission has launched a
statutory inquiry into Oxfam following allegations that the charity covered up an investigation into sexual misconduct by senior aid workers. Oxfam fired four members of staff and let three others resign following claims that they had paid for sex in the wake of Haiti’s 2010 earthquake, but stands accused of failing to “fully and frankly disclose” the matter at the time. Deputy chief executive Penny Lawrence has resigned over her handling of the case, while Haiti’s president, Jovenel Moïse, spoke out against “an extremely serious violation of human dignity”. Further allegations of sexual misconduct and abuse by Oxfam workers both overseas and in the UK have since emerged. In a separate development, the chair of Oxfam International was also arrested this week as part of a corruption investigation in Guatemala. Oxfam receives £32m in annual funding from the UK government. Former aid secretary Priti Patel called the Haiti case “the tip of the iceberg”, speaking of a “culture of denial” in the aid sector (see also page 16).
“Sandwiches at the desk may soon become a distant memory for office workers,” says Andrew Ellson in The Times. “Trendy start-ups” – such as Mr Lee’s Noodles (pictured, left) – reckon that small kitchenettes with just a kettle and a microwave undermine morale. So they offer staff the chance to cook their own meals in bigger kitchens, with a hob, oven and full range of gadgets, such as rice cookers. The aim is to encourage people to bond over a freshly made plate of food and foster a family atmosphere, which should ultimately produce a happier and more productive workforce. Others offices are introducing other “wellbeing amenities”, such as yoga studios, spas, a gym, or even a bar. It all sounds great fun, but what if staff are too busy sitting in the bar to do the washing up – or even work?
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Berlin
Germany forms a government: Angela Merkel’s centre-right Christian Democrats (CDU) have finally agreed to form a grand coalition with the Social Democrats (SPD), the main centre-left party. The deal will bring billions in extra public spending and see the SDP take key ministries. But many SPD members are not happy, and could yet reject the whole agreement in a vote due in early March. SPD leader Martin Schulz resigned this week and renounced his claim to the job of foreign minister. The party is polling at a record low of 16.5%, barely ahead of the far-right Alternative for Germany (AfD). The coalition deal has “prompted something close to a nervous breakdown in the SPD”, says The Economist’s Kaffeeklatsch column. Schulz’s resignation “may reduce the chance of SPD members vetoing a new grand coalition”, which would likely trigger new elections.
Seoul
Lotte chairman jailed:
The chairman of one of South Korea’s biggest conglomerates has been sentenced to two and a half years in prison for bribery. Shin Dong-bin, the chair of Lotte, was found to have given KRW7bn (£4.6m) to Choi Soonsil, a close confidante of impeached former president Park Geun-hye, in exchange for a government licence to operate duty-free stores. Choi was sentenced to a 20-year jail term on the same day; another Park aide was jailed for six years. Lotte is South Korea’s biggest retailer and also has interests in chemicals and hotels. The incarceration of Shin adds to its problems as it struggles to sell its Chinese business, which has been caught up in a political dispute over South Korea’s deployment of a US missile system. “The heavy sentence handed down to Choi Soon-sil bodes ill for Park, who is still on trial and is facing almost exactly the same charges”, says Anna Fifield in The Washington Post.
Hangzhou, China Alibaba-backed Ant raises $5bn: China’s
Pretoria
Time is almost up for Zuma: President Jacob Zuma has defied
an official demand from his party, the African National Congress (ANC), to resign. Zuma has faced mounting pressure to step down since the party elected the business-friendly Cyril Ramaphosa as its new leader in December. Nearly five days of talks between the pair failed to produce a breakthrough, with Zuma reported to be demanding a three to six month period before he quits. The ANC’s National Executive Committee has voted to sack him and will now try to remove Zuma through a no-confidence vote in parliament, installing Ramaphosa in his place. Zuma’s nine years in power have brought repeated scandals and allegations that his cronies have gained control of state resources, and critics allege that Zuma may now be playing for time so that he can destroy any evidence linking him to corruption. The home of the Gupta family, who are close associates of Zuma, was raided by a police anti-corruption unit this week. Both Zuma and the Guptas deny any wrongdoing. moneyweek.com
Ant Financial, the owner of onlinepayments giant Alipay, is looking to raise $5bn ahead of a muchanticipated initial public offering (IPO). E-commerce behemoth Alibaba set up Alipay – China’s answer to PayPal – in 2004, before spinning it off in 2011. Alipay is now China’s main online payments platform, boasting 520 million users. Alibaba kept a hand in the business with a profit-sharing deal and last week announced that it was buying one-third of Ant. Ant was last valued at $60bn in 2016 but the latest fundraising round could move the valuation up to $100bn. Investors should take “a more sceptical view” of “such punchy” valuation estimates, says Jacky Wong in The Wall Street Journal. Ant gets a much lower cut of transactions than PayPal and Tencent-backed Tenpay is eating into its market share. “Investors in any eventual IPO are likely to be asked to accept some heroic assumptions about Ant’s future growth.” 16 February 2018
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markets
A nightmare scenario for the eurozone “The financial markets never got the eurozone quite right,” says Wolfgang Munchau in the Financial Times. They often panicked when there was no need and ignored danger until it was staring them in the face. They may now be too complacent about Italy’s general election on 4 March, which will produce the famously chaotic republic’s 64th government since World War II. Polls point to a hung parliament, with the populist and anti-euro Five Star Movement currently the largest single party. A centre-right, three-party alliance led by former prime minister Silvio Berlusconi’s party (which also contains the Northern League, another antieuro group) is around ten points ahead overall. The centre-left incumbents, the Democrats, are trailing in third place. Everyone expects gridlock and the subsequent reappointment of the current prime minister by the president. But “I would not bet the house on it”.
No big bang for now…
Italy has long been the eurozone’s weakest link. Chronic mismanagement and overspending have dented growth for decades, and the single currency precluded the old methods of giving GDP a boost: cutting interest rates and allowing the currency to fall. After two decades of stagnation, debt has reached an unsustainable 130% of GDP. Faster growth would give investors confidence that the debt can be brought under control, but successive
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Andrew Van Sickle
Five Star’s Beppe Grillo: planning a break for freedom from the chains of the euro governments have been unable to raise the economy’s speed limit through structural reforms such as liberalising overregulated sectors of the economy and reducing red tape. Anti-euro populism is on the rise. If Italy, a founding member of the EU, leaves the euro, European integration would suffer a fatal setback. The “nightmare scenario”, says The Economist, is a hung parliament and then a coalition between the Five Star Movement and the Northern League, which the latter says it won’t attempt but is apparently contemplating in private. However, both parties have toned down their euroscepticism of late. Five Star no longer wants to hold a referendum on euro membership,
while the Northern League, which has previously said that it wants out, now says that the next government should focus on negotiating changes to the single currency.
… just a long, slow decline
“That appears to kick Italy’s departure a long way down the road,” says The Economist. As Capital Economics notes, the anti-euro parties are on less than 50% of the vote, so any coalition would presumably be diluted by another party’s less eurosceptic agenda. The odds are that Italy will remain in the euro but keep drifting slowly but surely towards bankruptcy – and perhaps a messy “Italexit” a decade or so from now.
Sagging dollar could leap yet – and that would flatten Asia
You’d expect the dollar to be performing much better than it has been given America’s “improved growth dynamics, higher market rates, and the prospect of a large repatriation of foreign earnings due to a change in the tax law”, says Joseph Carson on Bloomberg View. Instead, it slumped to a threeyear low in January. Tax cuts combined with higher spending are giving foreign investors pause for thought. Hence the impending “borrowing binge” means that rates “will need to go even higher to attract the needed savings to balance the US accounts”.
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That could have global implications, says Pete Sweeney on Breakingviews. Take Asian markets, for instance. “Low interest rates have encouraged Asian firms to borrow greenbacks instead of their own currencies.” Asian dollar bond issuance leapt 46% last year and the total value of dollar-denominated credit in the region stood at $1.3trn in the third quarter of 2017. A dollar jump would increase the local-currency cost of servicing this debt,
which “would complicate monetary policies and encourage evacuation from local currencies such as the Thai baht and the Chinese yuan”. Tumbling shares are
not too worrying, “but a resurgent dollar could really scramble things”.
moneyweek.com
markets The end of the short Vix trade
Bigger risks lie ahead
Although the markets have since stabilised, the wobbles look like “a potent warning sign of bigger risks that lie ahead”, says Gillian Tett in the Financial Times. The financial system faces three key problems. First, cheap
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Safe havens are at risk of a battering too Christine Lagarde, the manager director of the International Monetary Fund (IMF), had some good news to report when she turned up in Davos three weeks ago, says Larry Elliott in The Guardian. The IMF’s latest forecasts show that growth is stronger than expected almost everywhere. But Lagarde also came with a warning not to get too carried away about the health of the global economy. “There is also significant uncertainty in the year ahead,” she said. “The long period of low interest rates has led to a build up of potentially serious financial-sector vulnerabilities.” “The IMF does not always get it right, but on this occasion Lagarde nailed it,” says Elliott. Last week stockmarkets around the world fell sharply as investors started to fret about the potential consequences if rates begin to rise, with the Dow Jones falling by more than 1,000 points on two separate days.
Christine Lagarde: beware an IMF chief bearing good news money has fuelled a rise in leverage. Second, low rates have fostered financial engineering. Third, regulators are finding it difficult to keep track of the proliferating and fragmenting risks. “These issues will not necessarily spark a full-blown crisis… [but] as rates rise we will almost certainly see more financial shocks.” “What is unsettling is how little it took to puncture this balloon,” says Ambrose Evans-Pritchard in The Daily Telegraph: “a whiff of wage inflation and a 40-point jump in the US-year Treasury bond”. That is a sign of how sensitive the world has become to changes in interest rates, “a dangerous inflexion point now that debt ratios have risen by 51 percentage
“[It] is jarring for European Union leaders to hear Britain ask for special deals when its membership package was the most bespoke of the lot: outside the euro; outside the Schengen border-free zone; treaty opt-outs on social protection and criminal justice; a budget rebate…. A partnership that meets the prime minister’s ambitions of depth and specialness is [still] feasible. But, from the EU point of view, the most that Brexit can do is raise the United Kingdom up to be first among third countries. Prime Minister Theresa May might claim that as a triumph… Or she could tell the truth: there was once a better deal, before Britain voted to leave.” Rafael Behr, The Guardian
n
points since the peak of the last bubble to a record 327% of GDP”. Navigating the turns in the cycle will not be easy in this environment.
No shelter from the storm
To make it worse, “strategies that have protected investors in past sell-offs aren’t doing so now”, says Aaron Back in The Wall Street Journal. Exchange-traded funds with “defensive” strategies and large holdings in sectors such as consumer staples and utilities fell sharply during the sell-offs. These type of stocks usually hold up well during an economic downturn or a market panic – but are now widely held by investors as substitutes for lower-yielding bonds. “If rates keep rising, this defence won’t hold.”
Inflation in OECD countries
Core rate, excluding volatile food and energy prices 16% 14% 12% 10% 8% 6% 4% 2% 0% 1975 1980 1985 1990 1995 2000 2005 2010 2015
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“Until last week the Vix was among the calmest features of the international money markets,” says Phillip Inman in The Observer. “Then suddenly it exploded into life to register the largest one-day rise in its history.” For 18 months, the “fear index” had been virtually moribund. Then last Monday it surged from a low of ten points to above 30 (indicating serious stress in the markets), and then rose to above 50. The move came as US employment data, released on Friday, suggested that wage inflation may finally be picking up, which may in turn push the Federal Reserve to raise interest rates more rapidly than markets had hoped. Investors, unnerved by the prospect of an end to cheap money, fled the market, leaving the S&P 500 to experience its biggest oneday drop since 2011. Markets bounced back, but various exchange-traded products that allowed traders to bet on the Vix index remaining consistently low had almost all of their value wiped out. At first sight the losses look like little more than “a familiar story of greedy but naive retail investors lured by predatory Wall Street into a complex financial product” with the promise of returns that are too good to be true, says Edward Chancellor on Breakingviews. However, the “low volatility environment” has infected “the entire investment world”. The return of volatility could have much further-reaching consequences. (See page 10 for more on the Vix.)
It’s been ages since we had to worry about big price rises, as this chart of underlying inflation in the OECD, a group of developed countries, reminds us. The key reason for disinflation in the past two decades was globalisation, which shifted power from labour to capital, says Andreas Niehaus in Finanz und Wirtschaft. The global workforce almost doubled between 1990 and 2001, while automation and digitalisation also lowered production costs. This halted wage-price spirals even when growth was strong. But inflation may be making a comeback and central banks don’t seem ready to respond.
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Tech fledglings take a leap
Investors in Twitter and Snap have got used to bad news, so the tech laggards’ latest results were encouraging. Alice Gråhns reports “Twitter’s stock rally may be as fleeting as a trending hashtag,” says Amanda Gomez on Breakingviews. Reporting a first-time net profit for the quarter to December triggered a 20% bump in the social-media giant’s market value last week. Naturally, chief executive Jack Dorsey seemed optimistic. However, Twitter’s shift into the black was mainly due to a 28% drop in expenses in the fourth quarter from a year earlier. Revenue rose 2% year-on-year in the last quarter, but contracted more than 3% for the full year. Meanwhile, advertising rose only 1% in the last quarter and dropped 6% over the whole of 2017. Some may see the quarter as the beginning of a turnaround, “but it isn’t much of one in the industry context”: advertising sales at Facebook or Alphabet’s Google grew at double-digit rates. Nevertheless, “Twitter is undoubtedly an improved business”, says Lex in the Financial Times. This is for one key reason: “it has reined in its ambition”. By cutting operating expenses it has acknowledged that “it is a niche service that will not catch up with Facebook and Google”. User numbers bear that out, as its monthly average users have stalled at around 330 million. Instead, “with the austerity approach now mostly played out, Twitter bulls have to believe its allure to marketers can continue to improve”.
A step in the right direction
Meanwhile, Snap, the parent company of social-media app Snapchat, “managed not to fall on its face during a quarterly earnings report for the first time in its history”, says Shira Ovide on Bloomberg Gadfly. Advertising revenue beat expectations, and the rise in user numbers held steady. That’s good news, even if the expectations “are so low that as long as
Twitter CEO Jack Dorsey: optimistic Snapchat didn’t catch on fire people would congratulate it for its good fortune”. Ever since its initial public offering in March last year, it has been a “richly valued internet company with barely positive gross margins”. That’s because it has outsourced the computing power it needs to run its services – costs that are about 70% of Snapchat’s basic expense to operate it – which is one reason why it remains “wildly unprofitable”. In the fourth quarter it made a net loss of $350m and operating cash flow was negative $735m for the year. Still, revenue came in at $286m – an increase of 72% year-on-year, says Dan Gallagher in The Wall Street Journal. For a young firm still trying to prove its power as an advertising platform, the results were “a step in the right direction”. But with its stock at 14 times forward sales, it “still has a lot of growing up to do”.
Strange bedfellows will struggle to marry
“Necessity has made few stranger bedfellows than the Daily Mirror and the Daily Express,” says Lex in the Financial Times. The two UK tabloids will have a common owner after Trinity Mirror buys the Express and the Daily Star from Richard Desmond’s Northern & Shell for £127m in cash and shares, plus £70m in pension payments. About the only thing the papers share is falling circulations. That was reflected in 10.4% year-onyear fall in the left-wing Mirror to 725,000 in January. The right-wing Express, on the other hand, fell 4% to 392,000.
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This is a marriage made in the finance department, says James Moore on The Independent website. Trinity ”thinks it can rip out enough costs to make money from a stable of declining assets”: boss Simon Fox reckons he could save around £20m in costs a year by combining the two papers under one roof. The firm also expects the decline in circulation to slow. Whether this will work is yet to be seen.
Fox “has been at this deal for ages”, says Alistair Osborne in The Times. Talks broke down in 2015, when he switched his attention to the £220m purchase of regional newspaper group Local World. The good news is that there’s no likely threat from competition regulators; the 1.33 million daily readership of the Mirror, Express and Star still lags The Sun’s 1.48 million. At the same time, the extra size will bring more clout with the advertisers. But questions remain – not least, if the “wily Desmond” is selling, can it really be a time to buy?
City talk n “GlaxoSmithKline
(GSK) is doing a useful job in providing tension to the bidding for Pfizer’s consumer healthcare business, fighting it out with Reckitt Benckiser,” says Chris Hughes on Bloomberg Gadfly. Consumer-healthcare assets are attractive, but to win the auction, GSK “needs to outbid a rival that can probably afford to pay more, has fewer constraints and more to lose if it doesn’t win”. Glaxo CEO Emma Walmsley was talking up GSK’s financial firepower in its results last week, yet “both her shareholders and Pfizer’s should cross their fingers that she’s just trying to make Reckitt overpay”.
n If JeanSébastien Jacques “had reached the top of Rio Tinto in January 2016, he’d have hit rock bottom – the biggest bust in commodity prices since the 2008 crisis”, says Alistair Osborne in The Times. Instead, Jacques (pictured) took the helm six months later. Since then, the shares have gained 65%. Now full-year results show cash flow of $13.9bn, and shareholders have got buybacks and dividends of $9.7bn for 2017. How did he do it? “Being in the right place at the right time.” The figures look pretty due to rising commodity prices. How long can that last? n “A profits warning, a...
dividend cut and a £200m equity placing at a tenyear low for the share price: you’d struggle to put a positive gloss on that batch of news, but TalkTalk did its best,” says Nils Pratley in The Guardian. To be fair, chairman Charles Dunstone’s plans for ultrafast broadband connections “sounds more sensible than TalkTalk’s past haphazard efforts with mobile”. Yet the placing structure is “inexcusable”, issuing shares equal to 19.9% of its market value (9.9% is the accepted limit to protect shareholders’ interests). “Dunstone has set a bad precedent.”
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MoneyWeek’s comprehensive guide to this week’s share tips Three to buy Aviva
The Mail on Sunday Dividend payouts at this insurer are increasing at one of the fastest rates in the FTSE 100, backed up by strong sales and profits growth. The stock now yields over 5%. A number of modest acquisitions and a ten-year deal to provide insurance products to HSBC’s customers promise a strong pipeline of new business. The shares have slipped since January – now’s the time to buy in. 486.5p
Cranswick
Shares Heightening market volatility and an equity sell-off are timely reminders of the need for high-quality, cashgenerative growth stocks
in your portfolio. This meat products supplier has “fattened up” its revenues impressively over the past decade, with the latest trading update showing a strong performance over Christmas. The firm is still snapping up market share and boasts an unbroken track record of dividend growth stretching back to 1990. 2,932p Johnson Matthey
The Sunday Times This FTSE 100 maker of
catalysts for car exhausts has not stood idly by as the VW emissions scandal and regulators’ plans to phase out internal combustion engines make its core market “wilt”. It has invested in lithium-ion battery technology. Investors fret that it is being left behind by rivals. Yet the combustion engine will still be with us for decades and winning just 10% of the new battery market would create a subdivision worth £600m. Buy for “a foot in both camps”. 3,110p
Three to sell Connect
The Daily Telegraph The Telegraph had hoped that this specialist distributor would turn things around with a planned sale of its books division and a cost-cutting programme. Unfortunately, the books sale has fallen through and a turnaround at the parcels business is sluggish. Income seekers may want to hold on for the 13.4% prospective dividend yield. But with operating profit set to drop
for the third straight year, dividend cover is getting tighter. 63p Interserve
Investors Chronicle The collapse of Carillion has made investors sceptical about outsourcers. Some might see this as an opportunity to snap up Interserve, given it is trading at just three times forecast earnings, but it is a “dubious bargain”. It could still deliver nasty surprises, and is one of the UK’s
most shorted companies. Others are querying the reliability of the group’s headline profit numbers. 81p Renishaw
The Sunday Telegraph This littleknown engineering firm works in metrology, the
science of measurement, with applications for everything from wind turbines to microscopes, and for brain surgery and dentistry. Its innovations have “won a worldwide audience”. The shares fell in January on news that long-serving CEO David McMurtry is stepping down, yet they still trade at a premium to peers. Avoid until the handover of boardroom power is complete. 4,656p
And the rest The Daily Telegraph
Data-firm Relx has come a long way, but there is more growth to come (1,511.5p). Superb full-year results at BP and a 6%-plus dividend yield make it a buy (481.1p). Market turmoil has created opportunities to buy up RWS, Rentokil, Imperial Brands and Sainsbury’s (386p; 284.25p; 2,732.5p; 237.5p). Investors Chronicle
Urban & Civic has become adept at “driving a horse and
A German view
cart through the planning process” before selling the land (310p). Shares have dipped at communications group Maintel,, but it remains cashgenerative (650p). Last year’s failed Kraft Heinz takeover bid has forced soulsearching at Unilever, which may focus minds on shareholder value (3,977p).
Germany’s PNE, which has been a pioneer in onshore and offshore wind farms for 25 years, is going global. It has hitherto focused on France and Germany. But last month it won a windfarm auction in Turkey, thus bolstering its presence in emerging markets, where the renewable-energy sector is growing more rapidly than in industrialised countries, says WirtschaftsWoche. It recently sold off some of its old windfarms to invest in new ones and to finance its diversification into other renewableenergy businesses, including photovoltaic systems and biogas. This promising green energy play yields 2.4%.
moneyweek.com
Shares
The rise of internet-connected cars and 5G technology create opportunities for electronics specialist Laird (118.75p). (118.75p) Furniture sellers have issued profit warnings, but ScS is a resilient player (212.25p). The Times
Lloyds Banking Group, Land Securities and Fresnillo offer
“portfolio ballast in difficult markets” (67p; 937.5p; 1,285p). The humble cardboard box is a surprise winner in the internet age and packaging manufacturer Smurfit Kappa is raising its dividend (2,444p). The slow demise of the amateur landlord is good news for professional property outfit Grainger (277.25p). Shares in Lloyd’s of London specialist insurer Beazley have jumped after very encouraging results (560.5p).
IPO watch After raising only £30m of the desired £50m, property search portal OnTheMarket had a poor stockmarket debut last week. Its shares were issued on Aim at 165p, but ended their first trading day down 9%. Figures from research group Edison also show the firm is forecast to rack up heavy losses over the next two years before achieving profitability in the financial year to January 2021, says Shares. OnTheMarket was set up in 2015 to challenge the market duopoly of Rightmove and Zoopla as an alternative route to market, offering estate agents access to potential house buyers at a lower cost.
16 February 2018
MoneyWeek
10
investment strategy
Beware of a quick Vix
Guru watch Peter Schiff
The crash of an obscure derivative-based fund demonstrates why you should never invest in anything you don’t understand VelocityShares Daily Inverse VIX ETN (Nasdaq: XIV) Share price in dollars
John Stepek
150
Last week, a small hedge fund made an 8,600% return by betting on 100 the inevitable. It had bet that the VelocityShares Daily Inverse Vix Short-Term exchange-traded note, which was shorting the Vix index, would go to zero. Given that Credit 50 Suisse, the product issuer, warns in bold type in the prospectus (albeit on page 197) that “the long-term expected value of your ETNs is zero”, 0 this would appear to be close to a sure thing. And yet the odds of such an outcome were priced very cheaply, which is how US-based Ibex Investors managed to turn a mere $200,000 into $17.5m when the product (XIV for short) blew up last week as a result of volatility in the markets suddenly spiking hard (see page 7 and the chart on the right). There are some useful reminders here for investors. Firstly, be wary of complexity, and don’t invest in anything you don’t understand – anyone who had actually read the XIV prospectus would surely have thought twice. Secondly, don’t extrapolate the recent past into the distant future – XIV investors were betting on volatility continuing to fall, even though it was already at or near historic lows. Finally, avoid fragile investment strategies that effectively involve picking up pennies in front of a steamroller, as the adage goes – those that put money in your pocket nicely for as long as certain conditions hold true, but then squish you if your luck changes. The XIV made its investors a great deal of money – until the day it lost them everything. But this isn’t just a story about a few obscure derivative-based funds. The end of an
I wish I knew what the Vix index was, but I’m too embarrassed to ask The CBOE Volatility Index (which has the ticker symbol VIX) was launched in 1993, based on ideas in a research paper by finance academics Menachem Brenner and Dan Galai. It aims to measure investor expectations of volatility in the S&P 500. In other words, it is a measure of how violently the stockmarket
MoneyWeek
16 February 2018
2014
2015
2016
2017
2018
era for low volatility could have much broader implications. As Bloomberg notes, “the average volatility rate for 2017 was lower than every single trading day from 22 December 1995 to 20 June 20 2005”. That backdrop of extraordinary calm has, as Edward Chancellor notes on Breakingviews, incentivised the use of many more strategies that are effectively short volatility, even if they are not direct bets on the Vix (see below). The success of trades ranging from buying high-yield debt to share-buyback schemes funded by taking on corporate debt all depend on volatility remaining quiescent and on interest rates being suppressed. With global central banks – and the Federal Reserve in particular – now tightening monetary policy rather than loosening it, this spike in volatility could merely be the first of many. As Jonathan Lavine of Bain Capital tells the Financial Times, the biggest concern about the recent spike was “the ferocity of the move, not triggered by any material news and propelled by a small corner of financial markets. You have to ask yourself what would happen in the event of real bad news.”
is expected to swing around over the following 30 days. The Vix’s value is derived from the price of options bought by investors to protect (hedge) against a fall, or to bet on a rise in the market. The cheaper the options, the lower the Vix. A low Vix (below 20, loosely speaking) indicates that investors expect the market to be calm, while higher readings suggest the opposite, which is why the Vix is sometimes known as Wall Street’s fear gauge.
Yet while in the past it has been cited by some as a potentially contrarian indicator (a high Vix is bullish, a low one bearish), in practice, a higher or lower Vix has shown little predictive value. One problem with the Vix’s growing popularity is that – as both Barron’s and Bloomberg highlighted last year – the proliferation of direct and indirect bets on the index staying low has in itself distorted and suppressed the Vix, creating the potential for a sharp spike, as seen last week.
Peter Schiff, chief executive of Euro Pacific Capital, isn’t surprised by the recent fall in the US stockmarket. Indeed, the perennially bearish gold fan has been expecting it for a long time. “The real time to ask what was going on was when the market was rising.” Compared with the rises of past few years, “what’s happening now makes a lot more sense”. Ironically, President Donald Trump’s tax cuts – which had until now been seen as the great hope for corporate profits and otherwise overvalued equity markets – are largely to blame. These have “thrown a spotlight on the US deficit” (the annual amount of government spending that has to be covered by borrowing, rather than taxes). Schiff thinks the budget talks between Republicans and Democrats are only likely to make things worse as they will “lead to a lot of porkbarrel spending”. Schiff expects the US budget deficit to go over $1trn a year. If you look at the most recent trade figures, then, excluding oil, we’ve just seen “the largest monthly trade deficit in the history of America”. While the government ran large deficits in the aftermath of the financial crisis, it was only able to do this because the Federal Reserve was buying $85bn-worth of government bonds a month. However, not only has the Fed stopped printing, but it is starting to unwind these purchases. “Once you start to end the policy of cheap money then the whole economic bubble that has been created will disappear,” reckons Schiff. This can result in one of two scenarios – either “rates keep rising and markets keep falling”, or the Fed reverses its policy and “intervenes to prop up the stockmarket”. Whatever happens, the outcome is likely to be good for gold, which will benefit from its safe-haven status in the case of a crash, or will do well if the Fed launches another round of loosening.
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12
city view
Why you should be wary of unicorns
people – musicians with listeners, restaurants with customers, drivers with passengers. You can’t charge a huge amount for what is basically just a middle-man fee. A few percent of each transaction may be the best you can do, and even that might be a stretch.
Matthew Lynn
Small firms, big challenges
Take music-streaming service Spotify. In many ways it’s a fantastically successful business. It has reinvented the way people listen to and pay for music and created a powerful global brand. It now has 70 million paying subscribers, more than the population of the UK, and that has doubled in a little over a year. But there is a catch. It doesn’t make any money. Last year its losses doubled to more than €500m even as its revenues doubled. Its marketing costs are huge, and it has to pay out a big percentage of its revenues in royalties. At the same time, it faces ferocious competition from Amazon and Apple, two of the richest, most competitive companies in the world, which makes it virtually impossible to raise prices. Can it ever make money?
A glut of capital for competitors
©Alamy
Spotify is preparing a float. The takeaway food service Deliveroo is also getting its initial public offering ready. Over the next year, there is talk that Airbnb, WeWork and BuzzFeed may well join them. This could be the year when the tech unicorns – that is, unlisted start-ups with a value of $1bn or more – finally go public. That will give the stockmarket a big boost, as well as allow ordinary investors a chance to buy into some very exciting companies. But it will also mean that those firms have to prove they are real businesses. That might be a problem, because when you strip away some of the hype, that is not always clear.
Deliveroo: on the move, or a dead horse? It’s a similar story for Deliveroo. Again, it has carved out a place for itself and created a powerful brand. Takeaway food ordered over the web is a big and growing market, and Deliveroo has one of the strongest positions in the industry. It already operates in 12 countries. But again, it is not making money. Its latest figures showed a loss of £129m, up from £30m a year earlier. It too faces huge challenges. The market is ferociously competitive; the margins slim. There are legal and political pressures to give higher pay and more rights to its delivery workers. Whether it will ever be profitable, we don’t really know. There are often common challenges facing these tech stars. For starters, margins are often wafer-thin. Many of these firms are basically connecting
The markets they operate in are all fiercely competitive. The vast sums investors have poured into tech start-ups in the last year mean that every market is very crowded. As soon as an area gets hot, dozens of companies are launched, and they can all raise a few tens of millions in capital. None of them will be very bothered about racking up big losses for the first few years, and their investors will carry on subsidising them. At the same time, Google, Facebook or Amazon are always ready to launch their own version of a successful product. Such intense competition is bad for profits. It can be done of course. Nobody thought you could make any money from a load of angry rants about Brexit until Twitter came along. But this month, it has turned a profit for the first time. Just because there are question marks over a business model doesn’t mean it can never make money. However, for the moment, many of the unicorns are lossmakers. Pension funds, and general investors, won’t like that: they’re looking for stability, reliability and profitability. Some unicorns will deliver that eventually, but not all of them. And those that do will have to tighten up their businesses, and show they can make money as well as carve out market share. As the unicorns gradually float, we’ll find out which are the real businesses of the future – and which are a dead horse.
Who’s getting what
n Struggling fashion retailer
New Look has scrapped a £12m bonus scheme for its executives and directors after the chain’s fortunes went into reverse. The first tranche was due to be paid to former chief executive Anders Kristiansen this September. The firm is also considering closing up to 60 stores, about 10% of its total. New Look’s woes are yet another problem for owner Christo Weise, who suffered large losses in the Steinhoff scandal (see page 40).
n Penny Lawrence, deputy
chief executive of Oxfam, has resigned following the
MoneyWeek
16 February 2018
charity’s sex scandal, saying she took “full responsibility” for the behaviour of staff in Chad and Haiti. Lawrence, who was paid £99,000 a year, joined the charity in 2006 as programme director before being appointed deputy chief executive in 2016.
n The Professional Footballers’ Association has come under pressure to address boss Gordon Taylor’s “absolutely scandalous” pay package after it emerged he earned almost £2.3m last season (compared with £1.3m the previous year). Taylor is reportedly the world’s best-
paid union boss and his salary caused uproar three years ago when he earned more than £3.3m in one season – £1m more, on average, than the Premier League players he represented.
n The three founders of telecoms firm Lebara, Yoganathan Ratheesan, Baskaran Kandiah and Rasiah Ranjith Leon, made £90m each from the sale of the company, according to The Mail on Sunday. Lebara, best known for selling cheap international airtime, was sold to Swiss investment group Palmarium last September.
Nice work if you can get it GVC’s £4bn takeover of Ladbrokes Coral will hand millions to bosses and advisers, says This is Money. Jim Mullen, Ladbrokes’ chief executive, could make £7.1m, including £6m in bonuses. Andy Hornby, chief operating officer at Ladbrokes Coral, is set to get up to £10m from his stake in the firm. City firms are set to split £111m in fees. GVC will dole out £87.2m to its advisers, £2.8m to its lawyers and £1m to its public relations agency. Ladbrokes’ advisers will pocket £24m.
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14
briefing
The city that ran out of water
South Africa’s second-biggest city might soon have to turn off the taps. What went wrong? And is this a sign of things to come for other cities? Simon Wilson reports What’s going on?
Cape Town, a metropolis of almost four million people – and the second-biggest city in Africa’s richest nation – may become the first major world city to run out of water. The Cape region is in the midst of a three-year drought, described by some researchers as a once-in-amillennium event. Since 1 February, Capetonians have had to restrict daily usage to just 50 litres each – less than a third of average consumption in the UK. Water pressure has been cut; showers are infrequent and short; loos are seldom flushed. But it gets worse. The city’s six reservoirs are at record low levels (less than 25%). Within the next few months they are expected to fall to 13.5%, a critically low level in terms of physically being able to pump the water out. At this point, which the authorities refer to apocalyptically as Day Zero, the piped supply will be deemed to have failed, and engineers will shut off water to about a million households, or 75% of the city. Instead, 200 water-collection points will be established around the city, and citizens will have to queue for an even lower daily ration of just 25 litres. There are fears of a public health crisis, grave damage to the already-suffering tourism and agriculture sectors, and even violence as people compete for the scarce resource. But Day Zero is not inevitable. Last weekend saw welcome rainfall. And since the harsh new restrictions were put in place this month, Capetonians have cut back on consumption.
When is Day Zero expected?
It’s been pushed back from midApril to early May – a welcome sign that the city’s stark warnings are having an effect. But even if Day Zero doesn’t arrive soon, it will be a crisis postponed, not averted. As things stand, the authorities still fully expect to have to implement the emergency plan within months. Helen Zille, the premier of Western Cape Province, regards a shut-off as unavoidable. The real question, she says, is: “When Day Zero arrives, how do we make water accessible and prevent anarchy?”
©Getty Images
What will happen?
“The risks of anarchy are real”: South Africans will soon have to queue for their water infrastructure to support it, has left Cape Town exceptionally vulnerable to drought. Almost all the city’s water comes from six local dams that depend on rainfall. That’s a precarious situation in a dry region, which climatologists warn is only set to get drier, with rains becoming more unpredictable in coming decades, notes Piotr Wolski, a hydrologist at the University of Cape Town. The problem is that the current drought has arrived earlier than policymakers were expecting. Diversifying into new sources of water is part of Cape Town’s longer-term plans, says the deputy mayor, Ian Neilson – indeed, South Africa’s Department of Water Affairs warned the city that it needed to act as far back as 2007, citing fears that climate change would make its reliance on rainwater too risky – “but it was not envisaged that it would be required so soon”.
“Engineers will shut off water to about a million households”
How has this happened?
A massive expansion of the city over the past few decades, without the water
MoneyWeek
16 February 2018
Why has the city failed to prepare?
Paradoxically, Cape Town is known for its strong environmental policies, including its careful water management. In 2014, the reservoirs were full. In 2015, the city was even awarded an “adaptation implementation” prize by the C40 group, a network of global cities
focused on climate change. Although Cape Town’s population had boomed (up 79% since 1995), overall consumption has stayed flat since the early 2000s. In part, that was because many new arrivals settled in poor areas, which consume less water. Second, the city’s water conservation measures – fixing leaks and old pipes, installing meters and adjusting tariffs – had “a powerful impact. Maybe too powerful,” says Norimitsu Onishi in The New York Times. “The city conserved so much water that it postponed looking for new sources.”
What can the world learn from this?
That “the backwater of urban planning has become the front line in the fight against climate change”, reckons the Financial Times. And that investments that would have failed cost-benefit analyses ten years ago – such as costly desalination plants, in Cape Town’s case – now look essential. Part of the global response will require better co-ordination between national and municipal authorities (in Cape Town, animosity between the national ANC government and the Democratic Alliance that runs the province has hindered planning). There must also be a wholesale change of approach, with longer time horizons and an emphasis on resilience in the face of catastrophe. “Environmental change will place huge strains on many societies, and the risks of anarchy are real.” moneyweek.com
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Please quote G MWK 23
16
politics & economics
Should we bin foreign aid?
Betting on politics
The scandal surrounding overseas charity workers is being used as a pretext for demanding cuts to the aid budget. Matthew Partridge reports
We must honour Brexit vote, says Boris Foreign Secretary Boris Johnson has set out his vision for Britain’s departure from the EU, the first of five planned speeches by senior members of the government. He warned that overturning the Brexit vote would “lead to permanent and ineradicable feelings of betrayal”. But he reassured the wary that “Brexit need not be nationalist but can be internationalist; not an economic threat but a
MoneyWeek
16 February 2018
considerable opportunity; not unBritish but a manifestation of this country’s historic national genius”. Yet if Johnson wants to make a success of Brexit, “he needs to engage seriously with what the actual fears of the actual people who voted Remain are”, argues Stephen Bush in the New Statesman. Instead he delivered “45 minutes of flannel about John Stuart Mill”. For example, he failed to acknowledge that the only way to avoid a hard border between Northern Ireland and Ireland “is a significant measure of customs and regulatory
alignment, which Johnson appeared to rule out”. But don’t overlook the fact that “the real audience… were the fellow members of the Brexit inner cabinet”, argues The Spectator’s Tom Dunn. Johnson “made quite clear that the idea of the UK being a rule-taker in large sectors of the economy to minimise friction in trade was unacceptable to him”. While the speech hints there could yet be “room for compromise”, this was a reminder of how hard it will be for Theresa May to get the Brexit inner cabinet to agree on a position.
©Rex Features
“Every year we continue to pile 0.7% of our GDP into aid, no questions asked, so that we can stand up at international conferences and say we’re ‘doing our bit’,” says The Sun. Yet this cash “is ploughed into vanity projects that do little to help the world’s poorest” while “overpaid and underworked consultants” live “the high life at our expense”. The shocking revelations about high-level Oxfam workers using prostitutes (see page 4) is the last straw. It’s time “to bin the spending target”. “Britain’s huge aid budget, much of it spent through charities such as Oxfam, is not exactly popular... at a time of tight spending controls at home,” admits William Hague in The Daily Telegraph. Yet rapid population growth in Africa and the Middle East means we are about to witness “potentially the greatest migration humanity has ever known”. Development aid isn’t the whole answer, but if we want to avert this population explosion and “give young people the opportunities they need in Rees-Mogg: opening up a new front in the culture wars their own countries”, then we need the rest of Europe to spend more on aid, “rather than £32m a year Oxfam currently receives will cut back on what we are doing ourselves”. be wound down”. After all, if this was the “Predatory behaviour” by charity workers corporate sector, it would “lead to a slump in is “peculiarly repellent”, says Zoe Williams the share price, closures and redundancies, in The Guardian. But the Oxfam scandal or even complete corporate collapse”. While has become “a fresh front in a culture war”, this may seem harsh, the charity War on Want with the likes of Priti Patel and Jacob Rees“had to go through a similar process, albeit for Mogg trying to use it to shut down foreign aid very different reasons” in 1991. And it’s not altogether. “Nobody whose serious interest is as though the immediate loss of government in the welfare of the girls and women of Haiti funding would be fatal to Oxfam, argues The and Chad wants to see aid workers shut up Times. Taxpayer funding accounts for about a shop and go home.” tenth of its revenue, which it could recoup by Still, this doesn’t mean there should be cutting back on advertising and photoshoots, no consequences, argues The Independent’s rather than front-line relief. But the task of Sean O’Grady. To prevent wider damage, rebuilding trust in both the charity and in the government should make clear that “the Britain’s aid policy “will take years”.
by Matthew Partridge With Aussie flu rampaging around the UK, it’s only appropriate that our first tip this week should be a political contest Down Under. The Batman byelection is yet another vote prompted by the revelation that many well-known MPs had dual New Zealand citizenship (making them ineligible for parliament). The twist is here that incumbent MP David Feeney has decided not to stand, sceptical that he can retain a seat that he only held onto in 2016 by the skin of his teeth. Instead the Labor party has nominated Ged Kearney, in the hope that she can appeal to voters who have switched to the Green party due to anger over the controversial Adani mining project. Paddy Power isn’t convinced and has her at 3/1 (25%) to win the seat, compared with 2/9 (81.8%) for the Green Party candidate. The Liberal candidate is at 25/1 (3.8%), reflecting the fact that the party got less than 20% of first preferences in 2016. I think the Labor candidate represents value, so I’m suggesting you bet on her. Returning home, Jacob Rees-Mogg now seems to be front-runner to succeed Theresa May as Conservative leader. Smarkets have him at 5.1 to be the next leader (19.6%). The next favourite is Boris Johnson at 8.2 (12.1%), with Amber Rudd at 11.5 (8.6%). I think markets are wildly overestimating Mogg’s chances, given there are plenty of others with leadership ambitions, and polls suggest that his appeal, even with the Conservative membership, is limited. So I’d suggest that you lay Mogg at odds of 5.5, equivalent to betting on him not being leader at odds of 1.22 (82.1%). As previously stated, to lay a candidate on Smarkets, you click on the blue box (not the green box) next to their name and specify the stake that you will accept. In this case you should offer £1.81 per £10 betting unit.
moneyweek.com
politics & economics
17
Trump ditches pledge to cut deficit
President Donald Trump unveiled a $4.4trn budget plan on Monday that proposes “steep cuts” to social security benefits for the poor and middle class, and a big boost for the military, ditching last year’s pledge to balance the federal budget, say Andrew Taylor and Martin Crutsinger in The Washington Post. While all presidential budgets are pretty irrelevant since they stand little chance of being enacted in law, Trump’s plan was “dead before it landed”, coming just three days after lawmakers approved a two-year plan that boosts federal spending by $300bn, increasing funding for domestic programmes by $128bn and the military budget by $160bn. The White House also used Monday’s event to promote Trump’s long-awaited infrastructure plan: to put up $200bn of federal funds over ten years in order to leverage a further $1.3trn from state and local governments and the private sector. This is a “scam”, says Lindsay Koshgarian in Fortune. Just as Mexico won’t pay for Trump’s border wall, private investors won’t pay for his roads and bridges. They want to make money. Where they do provide funding, costs will be passed on to the public in the form of tolls or fees. As for the bipartisan budget deal, it is “a huge evasion of responsibility”, says Robert Samuelson in The Washington Post. “Neither party will make the unpopular choices necessary to pay for an ageing society and essential government.” The independent Committee for a Responsible Federal Budget predicts that the agreement will
©Rex Features
Congress passed a highly profligate budget, but Trump wants more. Emily Hohler reports
Trump unveils his $4.4trn budget see the federal debt grow by around $1.7trn over the next decade. These costs come on top of the estimated $11trn of pre-existing deficits Trump inherited. But for politicians, ignoring “out-ofcontrol deficits” seems to carry “few economic or political costs”. The extra borrowing hasn’t sent interest rates “skyhigh”. Foreigners still seem to regard US Treasuries as safe financial assets. Recent polls, adds William Galston in The Wall Street Journal, signal that voters are increasingly unconcerned too. Deficit spending can work, says The New York Times: for investing in infrastructure, rebuilding after disasters and paying for wars. But to use it to
©Getty Images
Kim’s Olympic-standard propaganda campaign The “gold medal” for propaganda at the Winter Olympics goes to Kim Jongun, says the Financial Times. The North Korean dictator sent an invitation via his sister, Kim Yo-jong, for President Moon Jae-in of South Korea to attend a summit in Pyongyang. Moon was “too smart... to take the bait”, suggesting Pyongyang talk directly with the US instead, says Walter Russell Mead in The Wall Street Journal. Nevertheless, Kim Yo-jong’s meetings with Moon are the “highest level contact between the Koreas in years”. Meanwhile, Mike Pence, the US vice president, told The Washington Post that the Trump administration
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was prepared to hold talks with North Korea, describing its approach as “maximum pressure and engagement at the same time”. Nonetheless, harnessing the Olympicsdriven “feel-good spirit” between the two Koreas to create dialogue over North Korea’s nuclear weapons is “still a long shot”.
fuel the economy when unemployment is about half what it was in 2012 and corporate profits have “soared” is madness. “Many economists believe the tax cuts and spending increases will provide massive fiscal stimulus at precisely the wrong point,” agrees Galston – boosting growth now, but risking inflation and higher interest rates later, which could “choke off growth and lead to the next recession”. When that happens, the government will have few “tools left to fight it”. Voters have said they want more government. Leaders should tell them how much that would cost, or “our fiscal policy will remain on a collision course with reality”.
There is little real doubt that Kim is trying to play South Korea, says Roula Khalaf in the Financial Times. His strategy is to “drive a wedge” between the US and its ally. US military planners seem convinced they have “a ‘bloody nose’ option that would hit some of North Korea’s missile and nuclear weapons without sparking
massive retaliation”. South Korea, which would bear the brunt of any reprisals, understandably prefers to explore any “diplomatic opening”. Meanwhile, Tokyo, Washington and Seoul’s ally in dealing with Pyongyang, made it clear it has “no intention of backing down from its hardline policy”, says Tomohiro Osaki in the Japan Times. In response to Kim’s words about “further livening up the warm climate of reconciliation and dialogue”, chief cabinet secretary Yoshihide Suga said his “gushing words” weren’t “fooling Toyko”. Recent military threats show “the reality of North Korea. We cannot fall for its charm offensive”.
16 February 2018
MoneyWeek
best of the financial columnists
Asia risks being left behind James Crabtree Nikkei Asian Review
Don’t fear billionaires with big ideas Editorial The Economist
Doing good is good business Alexander McCobin and Fred Roeder Handelsblatt Global
Bond glut will be fuel for populism Rana Foroohar Financial Times
MoneyWeek
Asia should feel optimistic, says James Crabtree. The global economy is expanding and developing nations are predicted to grow particularly rapidly. But this is not “the whole story”. The way technology is reshaping global manufacturing now threatens Asia’s development model. India’s chief economic adviser, Arvind Subramanian, recently warned of “late converger stall” in which the likes of India “struggle to mimic the brisk development” of China and South Korea, partly because of rising protectionism, but also because of technology. Previously, Asian workers moved from farms to factories to advanced exporting. But now automation is reducing the need for cheap labour, while the growing sophistication of manufactured goods, increasingly packaged with “complex services, such as after-sale advice”, requires a skilled workforce. Parts of the supply chain are even being “reshored” to rich countries. Late convergers will have to “work twice as hard” to produce the highly skilled workers that the global economy needs. Last week’s Falcon Heavy rocket launch testified to the “outsized vision of Elon Musk”, who wants to colonise Mars and wean the earth off fossil fuels, says The Economist. He isn’t the only “billionaire entrepreneur with grand ambitions”. Mark Zuckerberg wants to “cure, prevent or manage” all diseases by 2100; Bill Gates wants to eradicate polio and malaria and alleviate poverty (with the help of Warren Buffett). Yet their grand schemes provoke “unease”. The big concern is their lack of accountability. There is also a “danger of techno-solutionism”: the idea that the world’s ills can be solved with technology. But these reservations are surely outweighed by their “scope for good”. They are “applying innovative and evidence-based approaches in clinics and classrooms, where elected politicians are often too timid to risk failure”. And for all their wealth, they would “struggle” to force change upon society: that requires the cooperation of governments, industry and citizens. We should salute their ambition. Germany has a long-standing culture of family- and privately owned businesses, the so-called Mittelstand, say Alexander McCobin and Fred Roeder. They “typically try to align commercial goals with the interests of their employees and other stakeholders”, including their local communities, and are critical of the short-term practices of US companies. But they should reconsider this “blanket condemnation”. The real issue is the “misaligned incentives” in public companies, often run by “mercenary executives” rather than their owners. More and more US entrepreneurs are coming round to the idea that longterm success is not just about profit, but “requires taking care of their communities and staff, and defining a ‘social purpose’”. Examples include the Container Store, now one of America’s largest retailers, and Driverselect, a used-car sales firm now beating industry benchmarks. If public companies want to put a stop to the “scandals and ongoing identity crises”, they might follow suit. “It’s simply good business.” A Credit Suisse report confirms the idea that the richest corporations (Apple, Google, etc) have effectively been acting like banks, says Rana Foroohar. The companies have – in a quest for higher returns in our low interest-rate world – been “issuing their own very cheap debt and using it to buy up the higher-yielding corporate debt of other firms”. Economist Zoltan Pozsar has “forensically analysed” the $1trn in corporate offshore savings parked in liquid assets and found that half of this “‘cash’ pile” (the “treasure” driving Republicans’ tax reform) is in fact a “giant bond portfolio”. The implications? Firstly, to repatriate those earnings and invest in “growth-enhancing” projects, those bonds would have to be sold. With the Federal Reserve deleveraging its own balance sheet, that’s a “heck of a lot of bonds on the market”: expect higher interest rates. Secondly, as most of the money would be used for mergers, dividends and share buybacks rather than building factories, little in the real economy is likely to change: fuel for political populism.
16 February 2018
Money talk
©Rex Features
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“I had a long-term game. My objective was always longevity, not fame, not money.” Actor Anna Friel (pictured), quoted in The Times “I wasn’t born with the talent of Lionel Messi, but I made the most of what I have. I work hard because I am scared of failure.” Retired footballer Frank Lampard, quoted in The Observer “I think having a baby might help. When I’m too anxious I lose matches… Knowing I’ve got this beautiful baby to go home to makes me feel like… I don’t need the money or the titles or the prestige. I want them, but I don’t need them. That’s a different feeling for me.” Tennis ace Serena Williams, who last year gave birth to her first child, quoted in Vogue “It’s a big step, playing the lead, a step I’ve been reluctant to make. Guys get more chances to be the lead in a flop. If you’re a woman and it flops, good luck getting another one.” Actor Margot Robbie, Oscar nominated for I, Tonya, quoted in The Guardian “Everything is getting so removed from what it’s about, which is doing your job. Avoid social media; stop all this stupid selfpromoting on Instagram. It’s ugly. All it’s doing is saying, ‘look at me, look at me, look at me’. Keep you in the distance.” Actor Lesley Manville, Oscar nominated for The Phantom Thread, quoted in The Sunday Telegraph
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best of the blogs Don’t fear this market blip… Economist.com/blogs
A recent upward tick Just as often, it in bond yields seemed signifies nothing at all. to signal the arrival of This is not to say a new era, says Ryan that such falls are Avent. When stocks in without risk. They America and Europe signal that investors slumped last week, that are worried, and seemed to confirm it. worry can spread What was the cause of into the economy the crash? And what and dampen spirits. effect will it have? That can lead to The answer to the depressed economies. first is that we don’t Government and know. Perhaps investors central banks can then It’s nothing to worry about – until it is are worried that rising step in to try to cheer wages will crimp profits or trigger a faster us up. But the danger is that they do too little, pace of interest-rate hikes. But perhaps it was too late, before something big happens that a butterfly flapping its wings in Indonesia. We really gets us panicking. That probably won’t just can’t be sure. There is little more certainty happen this time. The economy is as robust about the effects. If history is any guide, then now as it’s been for a decade. This crash is a big move in stock prices can signify some probably nothing. Then again, they always are, big change in the economic fundamentals. except for the times when they aren’t.
… nor the prospect of Brexit doom RogerFarmer.com
The leak of the Treasury forecasts predicting Brexit doom was quite a coup for Remainers, says Roger Farmer. And Brexit may indeed prove to be bad for the economy. But it doesn’t help to overstate the case. The forecast that remaining in the EU would lead to an 8% larger economy 15 years from now than would be the case under a hard Brexit is just that – a forecast. And that forecast has “very large” standard errors attached. Predicting the real world is not like predicting the outcome of rolling a die. Inflation, for example, lay outside the Bank of England’s forecast of the range of likely outcomes for several forecasts in a row following the 2008 crisis. Some of us will probably be worse off under Brexit. Perhaps all of us will be. The truth is, no one knows for sure. All the arguments over Brexit are essentially political, not economic. When the job of a car worker in Northumberland moves to eastern Europe, that person can be forgiven for blaming EU membership. That person certainly understands uncertainty better than the 90% of experts who, we are told, agree that Brexit was the wrong decision. When you have been let down by politicians on both sides of the aisle, the unknown seems a lot less scary.
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Free trade versus trade deals DRodrik.Scholar.Harvard.edu
Ask an economist whether they favour free trade and nearly all will answer yes, says economist Dani Rodrik. Ask whether they support any particular free-trade deal, and their answer will not change. But are the two the same? They used to be. America’s free-trade agreement with Israel in 1985 was less than 8,000 words long, most of which dealt with issues such as tariffs. Its deal with Singapore in 2004 is nearly ten times as long, and covers all kinds of other things: patents, which tend to favour the interests of rich countries, such as large pharmaceutical firms; free capital flows, which even the IMF is now doubtful are always such a good idea; tribunals that allow foreign investors to sue governments; and harmonisation of standards, which can wipe out rules that were made to please consumers and other groups. Perhaps the trade off reached in these deals is something close to optimal. But they may as well be entrenching the power of large, politically wellconnected, rent-seeking firms. We shouldn’t support trade deals just because they have “free trade” on the label.
©Alamy; Rex Features
How to make sense of the numbers FT.com When it comes to finance and statistics, dizzying numbers and impenetrable jargon hinder understanding, But, in each case, common sense does go a surprisingly long way, says Tim Harford. Statistical claims fill our newspapers and social-media feeds, and if we pass on what we have read, by talking about it or sharing or “liking” it on social media, then we are, wittingly or not, contributing to the spread of propaganda. Here are six simple tools to help you evaluate whether a claim is likely to be true. 1. Observe your feelings. The easiest person to fool is yourself, as physicist Richard Feynman observed. If a statistic makes you feel angry or righteous or defensive, then that will get in the way of a
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clear understanding. Be aware of your emotions and do not be led astray by them. 2. Understand the claim. That may seem obvious, but all too often we rush to believe or disbelieve without first pausing to ask whether we have really understood precisely what is being said. 3. Get the backstory. When someone pushes a statistic, they are trying to convince you of something. Beware. The full story may have hidden depths. 4. Put things in perspective. A good question to ask is, is that a big number? Bring any claim down to size by figuring out what it may mean in quantities for which you have an intuitive feel. 5. Embrace imprecision. It’s better to be vaguely right than exactly wrong.
Don’t be blinded by the maths – keep calm and put them in perspective 6. Be curious. It’s bad for cats, but good for stats. If something strikes you as surprising, treat it as a mystery. “Go another click” to
find out what’s really going on. Curiosity is a virtue because it encourages us to work harder to understand and to enjoy the surprises along the way.
16 February 2018
MoneyWeek
20
funds
An easy way on to three bandwagons David Stevenson Thematic funds are the hot new thing in the world of exchange-traded funds (ETFs). The basic premise is to launch a cheap, index-tracking ETF based on a “secular trend” or “big idea”, preferably something accompanied by a wealth of positive news comment. As the battle hots up, provider ETF Securities has launched its “Future Perfect” range. Each of the three ETFs in the range features a total expense ratio of 0.75%; an equal weighting in each stock within the portfolio at launch; and an index managed by German provider Solactive, although the issuer also works with specialist consultants behind the scenes. First, there’s the ETFS Battery ValueChain GO Ucits ETF (LSE: BATG), which, unsurprisingly, invests in energy storage. I had been wondering how long it would take for someone to launch a fund like this – top holdings include lithim producer Orocobre, Tesla (of course), Mitsubishi and electric-motor manufacturer Nidec. Next is the ETFS Ecommerce Logistics GO Ucits ETF (LSE: ECOG), which invests in listed businesses with a strong logistics flavour. These include XPO, Kintetsu World Express and FedEx, as well as the usual suspects Amazon and Ocado. But I’m slightly more curious about the ETFS Pharma Breakthrough GO Ucits ETF (LSE: BIGT). On paper, this sounds like a biotech fund, which is a brave move for anyone in the ETF
industry. Most biotech funds are actively managed, with investment trusts such as the Biotech Growth Trust and BB Biotech fund already wildly popular. To my knowledge, there is only one passive way into biotech at the moment and that’s through the Source Nasdaq Biotech ETF (LSE: SBIO), which has a low total expense ratio of 0.4%. This relatively new fund has already amassed over $500m in assets, demonstrating that the demand for a passive biotech fund certainly exists. However, this ETFS pharma fund goes one step further. It targets “orphan drugs” – these are pharmaceutical products Makers of orphan drugs could be a big hit with investors aimed at curing or treating rare diseases or disorders. These represent a specific segment of considerable sector expertise. The end the pharma market, and benefit from products can be hugely expensive (and lots of government incentives aimed there has been some pushback on this), at encouraging new entrants. For but many orphan drugs indisputably save instance, in the lives, and often the cost savings from new US orphan-drug therapies – when compared with the cost developers have seven of conventional remedies – can be vast. years of marketing Orphan drugs are now big business – exclusivity, with a recent report from market researcher patents extending well EvaluatePharma estimated that sales beyond this term. There are also a lot of are expected almost to double between research and development benefits, with 2016 and 2022, to hit $209bn. The fees for drug applications waived and tax ETF Securities fund has some relatively credits common. well-known names in its top holdings, The reasoning is simple – much of the including Teva Pharma (a giant Israeli mainstream pharma industry is far more outfit) and Novo Nordisk (a Danish focused on blockbuster drugs that can diabetes specialist), but there are also less be used for countless tens of millions of well-known names, such as Bukwang patients. By contrast, orphan drugs have and Spectrum. I think that, with a fair much smaller target markets and require wind, this ETF could be a huge hit.
“Sales of orphan drugs should hit $209bn by 2022”
Activist watch Activist investor Darwin Deacon has asked a court to block the $1.6bn merger between Xerox and Fujifilm, alleging that the deal was “the product of deceit and bad-faith conduct”, says the Financial Times. In a complaint filed to the Supreme Court of New York, the billionaire investor said that the two companies had concealed from shareholders a “crown-jewel lock-up agreement” agreed 17 years ago, which would give the Japanese printing company control of Xerox’s intellectual property rights in Asia in the event of a sale of the US group. Xerox has said the allegations are “without merit”, and suggested that both Deacon and fellow shareholder and activist Carl Icahn knew about the agreement.
MoneyWeek
16 February 2018
Short positions… Reits go way of bendy bananas
n Investors have been locked out of some of the world’s largest real-estate investment trusts (Reits) while fund supermarkets struggle to decide whether they fall foul of new EU rules, says Kate Beioley in the Financial Times. Essentially, brokers can’t agree whether certain Reits will be captured by a new requirement that certain types of fund in Europe produce a “key investor document” that sets out potential investment losses. Because Reits can be set up as commercial
property firms or investment vehicles, there’s confusion over whether they count as “packaged retail insurancebased investment products”, or Priips. For the time being, Interactive Investor and the Share Centre have stopped trading in certain Reits that haven’t produced a key investor document, though AJ Bell and Hargreaves Lansdown continue to trade in them.
n Carlos Hardenberg (left) has resigned from Franklin Templeton Investment Management, leaving the running of the Templeton Emerging Markets Investment Trust to Chetan Sehgal, who oversees its global emerging-markets strategy, says CityWire. The move comes shortly after it was announced that the trust’s former manager Mark Mobius is retiring, after more than 30 years with the firm.
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22
personal finance
The financial upside to getting married
benefit when it comes to individual saving accounts (Isas). Spouses or civil partners can inherit their partner’s Isas when they die, meaning the money retains its Isa status and can continue to grow tax-free. If you aren’t married, then when you die your Isas lose their tax-free status when they pass to your beneficiaries. Given that you could have amassed large sums in Isas, this can make a big difference to your surviving partner.
Ruth Jackson Thanks to Valentine’s Day, this week was one of the busiest of the year in terms of marriage proposals and weddings. With the average wedding now costing almost £30,000, you’d be forgiven for thinking it is a ludicrous waste of money. But before you hand back the ring, it’s worth being aware that marriage can be a lucrative business. Having analysed all the tax breaks available to married couples, broker Hargreaves Lansdown estimates that a couple married for 50 years could be £190,964 better off than those who did not marry – even after you deduct the cost of the wedding.
‘Til death do us part
If you are a basic-rate taxpayer, and your partner doesn’t earn, then make use of the marriage allowance. This allows a non-earning spouse to transfer £1,150 of their £11,500 personal allowance (the amount you can earn each year before you start paying income tax) to their spouse. If your non-earning spouse transfers some of their allowance to you, you could cut your tax bill by up to £230 a year. Yet fewer than one in four eligible married couples use this allowance (many don’t know it exists). But even if you don’t qualify for the marriage allowance, it still pays to do some income-tax planning. If your other half is in a lower income-tax bracket than you, or they don’t earn at all, then transferring income-bearing assets into their name could reduce your overall income-tax bill. Also, split any dividends
©Getty Images
Take advantage of tax breaks
Don’t say “I will” for the tax breaks alone between you in order to make the most of both your dividend allowances. You can each receive up to £5,000 this tax year (falling to £2,000 from 6 April) from dividends before tax is due, so that’s £10,000 between you. When it comes to your assets, consider whether you are likely to sell them, resulting in a capital gain. If you might, then hold the assets jointly so you can benefit from both capital gains tax (CGT) allowances. Everyone can make up to £11,300 a year in capital gains before tax is due – so combine both allowances and you have a hefty £22,600 tax-free each year. Married couples also get an added
On the cheery topic of death, assets can pass between spouses free of inheritance tax (IHT), potentially avoiding a big tax bill. Not only is there no tax to pay on assets passed between a married couple when the first partner dies, but their nil-rate band passes over too. Everyone has a £325,000 IHT allowance, plus homeowners have a residence nil-rate band that will be £175,000 by 2021. That means when the second spouse dies they can leave up to £650,000 tax-free in cash and £350,000 of property (although the property has to be passed to children or grandchildren for the nil-rate band to be valid). By contrast, if you aren’t married and your partner dies (long-term cohabitees beware), you are subject to the same IHT rules as anyone else, meaning estates worth more than £325,000 will be taxed at 40% on the excess. Of course, it might not be the best idea to get married simply for the tax breaks – couples will only benefit from the extra £190,000 if they remain married for life. “Once you introduce a divorce and possibly a remarriage into the proceedings, then you’re looking at a significant financial loss,” says Sarah Coles, personal finance analyst at Hargreaves Lansdown.
Pocket money… hedging risk for the bank of mum and dad
n The “bank of mum and
dad” is the ninth-biggest lender in the UK, handing over £6.5bn-worth of loans, but parents who buy jointly with their children risk being “snared” by the 3% stamp-duty surcharge on second homes, says James Pickford in the Financial Times. Fortunately, there is a way around this: a formerly “niche” product called a joint borrower sole proprietor (JBSP) mortgage, which allows a family member to “back a buyer financially without becoming a coowner”. The other advantages of JBSP mortgages are that
MoneyWeek
16 February 2018
parents won’t be subject to a capital gains charge if the property is sold, and first-time buyers will qualify for the new exemption from stamp duty (introduced last November), provided the property isn’t worth more than £300,000.
n The government is cracking down on unpaid internships, sending out 550 warning letters to firms and “setting up enforcement teams to tackle repeat offenders”, says Sarah Butler in The Guardian. HMRC is expected to target the media, performing-arts, law and accountancy sectors, and will issue guidance to
employers as to when they are legally required to pay interns the minimum wage. According to educational charity the Sutton Trust, around 70,000 internships are offered in the UK each year, and of an estimated 10,000 graduates in internships six months after graduation, 20% still aren’t being paid.
n Collective energy switches
– where customers join forces to negotiate a better deal – are becoming increasingly popular, with around a million households using them each year, says Sam Meadows in The Daily Telegraph.
But how do they work? Sign up to a collective switching scheme run by the likes of the Big Deal or iChoosr, and once enough people have registered, negotiations with energy providers will begin. Once a deal has been agreed, the customer is free to choose whether to accept. On average, people save £250£300 a year, but those with larger houses or properties that are hard to heat have saved as much as £700. However, since these services don’t survey the whole market, it’s worth checking to make sure you can’t get bigger savings elsewhere.
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ADVERTISEMENT PAID CONTENT FEATURE
Three fund recommendations for your 2017/18 ISA Tom Stevenson Investment Director, Fidelity Personal Investing
(Fidelity Special Situations) is run by an expert stock-picker, so it had a good year nonetheless.
On to 2018
I hope you find these ideas useful when you’re making your own ISA decisions, but please remember that, although I recommend them, I’m not saying they’re necessarily right for you.
Nearly nine years into the bull market, I am expecting some volatility this year. The baby will undoubtedly be thrown out with the bathwater if there is a correction, so I’m keeping a little cash in my back pocket to take advantage of any indiscriminate sell-offs. This said, I see good opportunities in regions that haven’t kept up with the US in recent years. I also recognise that the back-end of bull markets can be particularly profitable as sceptics are finally pulled in. For this reason, I’m backing equities over bonds and making three fund recommendations for 2018.
A quick review of last year
Invesco Perpetual European Equity Income Fund
Every year, I poke my head above the parapet to pick my Individual Savings Account (ISA) investments in public. I focus on well-managed funds that could benefit from key trends in the market, as I believe this is the most effective way to aim for long-term growth.
Before I get into this year’s choices, let’s take a quick look back at 2017. It was a year that started out well for investors and just kept going. The result was a benign backdrop that helped the performance of many funds. Focusing on my recommendations, my US fund pick (Old Mutual North American Equity) and a global fund with a US focus (Rathbone Global Opportunities) both benefited from my belief that America would see higher growth. Similarly, my chosen Japanese fund (Schroder Tokyo) took advantage of an improving economy and reasonable valuations. I also expected out-of-favour stocks to do well, although in the end they continued to underperform higher-quality companies. However, my chosen fund for this theme
I like Europe this year. Although it has a positive backdrop, with recovering economic activity and helpful monetary policy, sentiment remains relatively subdued and valuations are undemanding compared with those in the US. The region is also home to many excellent companies that will benefit from the ongoing global pick-up in activity. Stephanie Butcher’s Invesco Perpetual European Equity Income Fund has a value-oriented approach, which didn’t suit 2017 as investors preferred growth stocks. However, if economic recovery picks up, Butcher’s style could have its moment. I also like the idea of an incomefocused fund in an environment of persistently low interest rates.
Fidelity Global Special Situations Fund
Markets could well move sideways in 2018 because we have the type of environment in which active stock-picking has significant potential to outperform. For this reason, I am recommending Jeremy Podger’s Fidelity Global Special Situations Fund. Not only is he an out-and-out stock-picker, but he runs an unconstrained fund that can chase opportunities around the world. With decent exposure to Japan, this fund also fills the gap left by not having a Tokyofocused fund in my picks this year.
Old Mutual Asia Pacific Fund
Finally, I like the Old Mutual Asia Pacific Fund, which invests across the region, including Australia. Ian Heslop has done well over the past couple of years, helped by holdings in Tencent and Alibaba, China’s equivalent of America’s soaraway FANG stocks – Facebook, Amazon, Netflix, and Google parent-company Alphabet. With sentiment set to be more volatile, I like Old Mutual’s focus on this key driver and the manager’s ability to move in an agile way between stocks and sectors as the market mood shifts. To find out more about all of these funds, and watch video interviews with the managers, just visit our website. To open a Fidelity Stocks and Shares ISA today go to fidelity.co.uk or call 0800 368 0219
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Important information Past performance is not a reliable indicator of future returns. The value of investments, and the income from them, can go down as well as up, so you may get back less than you invest. The views expressed may no longer be current and may have already been acted upon. Overseas investments may be affected by changes in exchange rates. Investments in small and emerging markets may be more volatile than those in more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for illustration only. The funds use financial derivative instruments for investment purposes, which may increase the level of risk and cause larger-than-average price fluctuations. The Key Investor Information Document (KIID) for Fidelity and non-Fidelity funds is available in English and can be obtained from fidelity.co.uk/importantinformation or by calling 0800 41 41 61. The Prospectus for Fidelity funds may also be obtained from Fidelity. For non-Fidelity funds, the KIID and the Prospectus are available from the fund provider. Fidelity Personal Investing does not give personal recommendations. If you are unsure of the suitability of a particular investment, you should speak to a financial adviser. Issued by Financial Administration Services Limited, authorised and regulated in the UK by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and the F symbol are trademarks of FIL Limited. UKM0118/21408/SSO/0418
24
pensions
Self-employed must save more
Alternative options for retirement saving
Britain’s boom in self-employment threatens to leave millions of people short of money in retirement, with large numbers currently making little or no provision for later in life. The number of self-employed people in the UK rose to 4.8 million last year, accounting for just over 15% of the labour market, according to data just published by the Office for National Statistics (ONS). But the ONS figures also reveal that nearly half of self-employed workers between the ages of 35 and 54 have no pension savings at all – by contrast, only 16% of employed workers in this age-group are in the same position. And the outlook for older self-employed people doesn’t look much brighter. Some 30% of people over the age of 55 working for themselves have no pension wealth, says the ONS. The data make for depressing reading, particularly given the government’s seeming inability to offer much support. Ministers have just announced their response to the Taylor Review, which concluded last year that workers in the so-called gig economy were being denied many employment rights. The government is now promising to consider extending the auto-enrolment pensions system to these workers, who fall between traditional definitions of employment and selfemployment, but is offering no such help to fully self-employed workers. It’s not all bad news. There is some evidence that self-employed people are more likely to have other types of wealth – possibly because they are uncomfortable with locking up their savings in vehicles that cannot be accessed until aged 55. For example, over-55s in
Tax tip of the week
If you give money as part of a pattern of gifts, and without affecting your own standard of living, then this will not incur inheritance tax. However, if you give money that you received in a cash windfall (for example via an insurance payout) as a lump sum, HMRC will consider this capital, and the gift will not be exempt, notes Tax Tips & Advice. So if you are helping a child with a house deposit, consider giving it as several gifts. If their need is more immediate, you could lend the difference meanwhile.
MoneyWeek
16 February 2018
©Alamy
David Prosser
Working for yourself pays better in Brussels self-employment are twice as likely to have property wealth of more than £500,000 as employed people, potentially opening up options such as equity release for generating income later in life. It’s also worth being aware that the problem is not confined to the UK, with other European countries also now considering how to provide support to growing numbers of workers not in conventional employment. Belgium, for example, has just overhauled its tax system for self-employed workers, including greater support for pension savers. However, as the UK government has merely promised to review its options in the years ahead, self-employed people should not expect reform in the near future.
For self-employed workers with no access to an occupational pension scheme, a personal pension from a private provider such as an insurer or a fund manager is a potential alternative. These plans qualify savers for tax relief on their contributions at their highest marginal rate of income tax – so a £1,000 contribution will cost only £800 and £600 for basic-rate and higher-rate taxpayers respectively. The plans come in different forms, from simple stakeholder pensions to self-invested personal pensions (Sipps), offering greater investment freedom and control. Take professional financial advice on the right plan for your circumstances: returns will vary according to charges and investment performance. One concern for some self-employed workers, who may lack certainty about their future income, is tying up savings on which they may need to fall back. Consider options such as an individual savings account (Isa). For example, the new Lifetime Isa provides government top-ups that are effectively worth the same as tax relief on private pensions, though annual contribution limits are much lower and cannot be opened by those over 39. There is also an early withdrawal penalty of 25%.
Annuity rates look more attractive Annuities have fallen out of favour since the pensions freedom reforms of 2015, with many investors preferring to draw retirement income directly from their savings rather than be locked into a fixed income at a time when insurers’ rates have been close to all-time lows. But with stockmarket volatility unnerving many incomedrawdown investors and annuity rates finally on the rise, the products are starting to look more attractive. Annuity rates tend to move in line with
15-year gilt (government bond) yields, which hit an all-time low of 0.9% in August 2016, when the Bank of England cut interest rates to 0.25%. Since then, however, the mood has shifted in favour of rising interest rates, with the Bank’s first increase in more than a decade coming in November 2017 – and further talk of tighter monetary policy last week. Gilt yields now stand at around 1.8% – that’s double the low, though still miles off the yields of 5% seen prior to the financial crisis. Annuity providers are responding accordingly. Over
2017 as a whole, the average annual income for a standardlevel, without-guarantee annuity for a 65-year-old rose by 1.66% for a £50,000 pension pot, according to Moneyfacts’ data. It was the first year since 2013 in which annuity rates rose, and providers have so far increased rates further in 2018 – Legal & General, for example, raised its rates just last week. However, it remains as important as ever to shop around for the best possible deal. You may also want to take advice on whether to delay annuity purchase in the hope of further increases.
moneyweek.com
LUCK IS WHERE OPPORTUNITY MEETS PREPARATION SENECA
The ISA limit is £20,000.* Make the most of it with the Witan Wisdom ISA. The Witan Wisdom ISA invests in Witan Investment Trust, which aims to provide long-term capital growth and to increase your income ahead of inflation. Witan invests in a diversified portfolio of global equities, employing a multi-manager approach that carefully selects fund managers to run different parts of the portfolio, playing to their individual strengths and avoiding reliance on a single manager. If this makes sense to you, you may be able to help achieve your financial ambitions by investing in Witan through an ISA. Witan Investment Trust plc is an equity investment. The value of an investment and the income from it can fall as well as rise as a result of currency and market fluctuations and you may not get back the amount originally invested.
To find out more visit witan.com
*Adult ISA limits for the 2017–18 tax year, based upon our understanding of HMRC law and practice as at February 2018. Issued and approved by Witan Investment Services Limited, which is registered in England no.5272533 of 14 Queen Anne’s Gate, London SW1H 9AA. Witan Investment Services Limited provides investment products and services and is authorised and regulated by the Financial Conduct Authority.
26
innovative finance
Real money goes virtual Bitcoin’s recent slide has drawn many people’s attention away from “digital gold” to the real thing. But buying gold bullion can be expensive – you pay a premium over the spot price and storage fees on top. And gold is, of course, difficult to spend without converting into cash first (one exception I have looked at before is Glint, which marries allocated gold to a debit card). Enter the blockchain and the “tokenisation” of gold. The theory behind using a crypto-token is that these – and thus the gold they represent – can be freely traded on an exchange: you don’t have to sell your gold first. Australia’s Perth Mint is working on a blockchain solution, and hopes to have something available in the next 12 to 18 months, while the UK’s Royal Mint is working on a similar private blockchain project. It announced its “Royal Mint Gold” (RMG) over a year ago, though it is still not available to private investors. When it is, you will be able to buy RMGs – a type of token – that will be traded on “a dedicated digital asset-trading platform” (so not a freely transferable cryptocurrency). Each RMG will equate to one gramme of gold in the Mint’s vaults, and there are no storage fees. For many goldbugs, the Mint’s involvement might be a concern, given its ties to the government – governments have confiscated gold before (though not in the UK) and could well do so again. The Mint acknowledges this on its website, asking: “What protection
©Getty Images
Ben Judge
Perth Mint gold: a techno solution will allow you to buy goods without converting it into cash against government confiscation does RMG offer?”, although it ducks the issue, as, of course, there is no protection. There are a few alternatives, although clearly there can be no guarantees as to how well these will work. These will be “proper”, freely tradable cryptocurrencies. AurumCoin, for example, is creating a token that “will always be worth one gramme of pure gold”. Yet each coin is backed by just 0.75 grammes – AurumCoin claims that if each were backed by a full gramme, it would be “forced to charge a fee beyond the value of the currency”, which “defeats the idea”. The team behind it is a cagey outfit, saying that “we are obligated to operate legally and therefore we cannot reveal ourselves at this point”. Digix, meanwhile, claims to be “fully allocated bullion”. Its DGX token represents “one gramme of 99.99%
LBMA standard gold secured in Safe House vaults” in Singapore. The source of the bullion is Singaporean pawn shops. Digix will charge a transaction fee of 0.13% and a custody fee equivalent to 0.6% a year. To recast gold into 100g bars will cost 1DGX (one gramme of gold). It is slated for release at the end of the first quarter of 2018. A third option is GoldMint, which operates “goldbacked” crypto assets, which “are 100% backed by physical gold or exchangetraded funds”. GoldMint’s physical reserves consist of gold from pawn shops around the world. Honestly? I wouldn’t buy into any of them. If you are thinking of doing it, do plenty of research first (then do some more, and then some more again). But my view is that so far, if you want exposure to gold, it’s better to stick with the real deal.
News bytes… Russian bomb scientists spot an opportunity
n Other than bitcoin, one of
the cryptocurrency world’s biggest successes has been the game CryptoKitties, in which players breed and collect digital cats that can be traded with other users. It was designed to promote the uptake of the Ethereum smart contracts platform on which it is built, but has proved wildly popular – with some cats selling for up to $80,000, reports The Verge. However,
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16 February 2018
this popularity has put a heavy load on the Ethereum network, slowing it by up to 11%. At one point, reports Fortune, it made up 30% of all transactions on the platform.
n Scientists at a secret
facility in Russia that makes nuclear warheads have been arrested for using the plant’s powerful computers to mine bitcoin. According to Russia’s interfax news agency, someone at the All-Russian Research Institute of Experimental Physics, where the Soviet Union’s
first nuclear bomb was designed, tried to connect the one-petaflop supercomputer – which can carry out a thousand trillion operations a second – to the internet to mine the cryptocurrency. Tatyana Zalesskaya, head of the Institute’s press service, said the activities were ”stopped in time” and the “bungling miners” had been “detained by the competent authorities”.
n RateSetter, the UK’s
second-biggest peer-to-peer consumer-lending platform, has launched its Innovative Finance individual savings account (IF Isa). The IF Isa is
open to “active” investors only – those with money on loan as of 31 December 2017. Once active investors have been invited, invitations will be extended to other RateSetter investors. Once all of RateSetter’s existing customers have been invited, new customers will be allowed to open an account. The product is a flexible Isa, so investors will be able to withdraw funds and reinvest them in the same tax year without affecting their £20,000 Isa allowance. The interest rates on offer will be the same as for RateSetter’s Everyday account (currently between 3.4% and 5.3%).
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28
cover story
Fit for the future: how ethical investing went mainstream
“Millennials are more concerned than previous generations about putting their money into investments that are sustainable“
Late last year, Norway’s sovereign-wealth fund announced that it plans to dispose of all its oil and gas investments, worth more than $35bn. The proposal has yet to be approved by the Norwegian parliament, but if it goes ahead it will be a remarkable switch, given that the fund – which controls more than $1trn in assets – was originally created to look after the surplus revenues of Norway’s oil industry for future generations. Activists who have been pushing pension funds and other investors to divest all holdings in companies that produce fossil fuels are, of course, delighted. But the fund’s plan is not based on ethical considerations – or at least, not officially. Instead, it’s about the long-term risks of holding firms such as these. The fund wants to hedge its bets against a future in which these fuels give way to renewables and oil and gas revenues can no longer be relied upon to keep Norway’s finances in good shape. Norway’s dilemma is a good example of the way in which views on ethical, responsible or sustainable investing are evolving. In the past, these approaches were usually identified with a desire to avoid industries that investors considered especially unethical (for example, an investor might choose to steer clear of tobacco stocks or weapons manufacturers). Investment performance often took second place to being consistent with your principles. However, today, ethical considerations are informed by a broader and more useful trend. Increasing numbers of institutions and individuals are keen to avoid certain sectors because they believe that these face structural problems that make them poor long-term investments. These structural problems may be closely linked to the same issues that see them labelled as unethical – but it is the financial implications rather than simply the ethics that are important for many investors.
Group, a management consultancy. This is equivalent to more than a quarter of total managed assets. In Europe, total assets committed to SRI strategies grew to $12trn in 2016, up by 12% since 2014, according to the 2016 Global Sustainable Investment Review. A heightened awareness of climate change is one significant driver behind the increased interest in SRI investing, as well as growing scrutiny of what we eat and drink, says Stephane Soussan, manager of CPR’s new Food for Generations fund, which will invest in all stages of the food chain, from agriculture and water to food and drink production and distribution, and restaurants. Millennials are also more concerned than previous generations about putting their money into investments that are sustainable and not harmful, argues Terry Smith, founder of asset manager Fundsmith, which has recently launched a sustainable investment fund for institutions. This conclusion is backed up by research from Morgan Stanley, which found that 82% of high-net-worth millennials express an interest in SRI approaches, compared with 45% of all high-net-worth individuals. The rising demand for sustainable assets also reflects a return to long-term investing principles, Amin Rajan, the author of a report into long-term investing in the age of political risk, suggested in the Financial Times recently. This is replacing a period of short-termism brought about by intense volatility immediately after the financial crisis, he reckons. “The result of this shift in attitudes is increased demand from investors for asset managers that are able to spot the... risks associated with poor environmental or governances practices, as illustrated by scandals such as the Deepwater Horizon oil spill or the investigation into Volkswagen’s emissions”.
Behind the SRI boom
Ethics and profits
The big question for investors is whether SRI and Words such as ethical and sustainable are thrown ESG strategies mean accepting lower returns. around quite a lot, without much agreement on Investors have often assumed that they do, since what they mean. The most commonly used terms sectors such as tobacco and weapons have often are sustainable, responsible investing (SRI) and performed strongly over the long term. However, environmental, social and governance (ESG) factors. over the past five years the FTSE4Good UK They often imply the same thing, but some investors index has returned 60.31% (with dividends suggest that the former term refers to exclusionary reinvested) against the FTSE 100’s 50.85%. screening – weeding out “sin” stocks – while the This index measures the performance of companies latter term means inclusionary screening (actively demonstrating strong ESG practices and constituents seeking out companies that reduce fossil-fuel need to show that they are footprints or promote workplace working towards improved equality, for example). However environmental management, you want to define it, it’s clear climate-change mitigation and that this is a booming market. adaptation, countering bribery, In 2016 global assets managed Total assets managed human and labour under some type of SRI mandate under some form of SRI upholding rights, and improving supply-chain hit nearly $23trn, up from $18trn and labour standards. in 2014, says Boston Consulting mandate in 2016
$23trn
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16 February 2018
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©Getty Images
Ethical and sustainable investing is no longer simply about ditching cigarettes or saving trees. Investors are increasingly concerned about better returns and lower risks, says Sarah Moore
Norway could be sailing away from oil – that may make good financial as well as ethical sense Meanwhile, in the US, the KLD400, the main ethical benchmark, returned 109.19% relative to 107.65% for the S&P 500. For inclusion in this index companies must score well in their management of five factors: the environment, community and society, employees and supply chain, customers (in terms of things such as product quality and safety and marketing practices), and governance and ethics. So over the past five years companies with strong ESG practices have fared better in both the UK and the US stockmarkets (although only by a small margin in the latter). In part this may be due to superior financial performance. The question of whether high ESG standards has an impact on how well the company performs is still debated and it’s common for researchers to claim that results are ambiguous, inconclusive or contradictory, note Gunnar Friede, Timo Busch & Alexander Bassen of the University of Hamburg in a paper in the Journal of Sustainable Finance and Investment in 2015. However, when the researchers conducted a meta-analysis based on 2,200 empirical studies released since the 1970s, they concluded that the business case for ESG investing was “empirically well-founded”: of the studies analysed, around 90% suggest a positive relationship between ESG factors and corporate financial performance (CFP). “Investing in ESG pays financially… the positive ESG impact on CFP is stable over time,” the authors conclude. moneyweek.com
“Over the past five years, companies with strong ESG practices have fared better in both the UK and the US stockmarkets“
Research also suggests that – on some level – investors believe companies with better performance on ESG measures merit higher valuations. For example, investors in consumer goods, biopharmaceuticals, oil and gas, banking, and technology rewarded the top performers in specific ESG topics with valuation multiples that were 3%19% higher than those of the median performers in those topics, all else being equal, according to a study by Boston Consulting Group. Most of the ESG topics that were linked to premium valuation multiples were related to minimising risks and other negative impacts, such as health and safety or environmental issues. The study also found a positive relationship between ESG performance and profit margins. Top performers in certain ESG topics had margins that were up to 12.4 percentage points higher, all things being equal, than those of the median performers in those topics.
Higher standards aren’t a cost
The conclusion that financial performance and ethics are not always at odds will surprise some investors who see ethical and environmental considerations as costs – but they don’t have to be, says Audrey Choi, chief sustainability officer at Morgan Stanley. A Harvard Business School study found that if in 1993 you had invested in a select group of public companies that focused narrowly on Continued on next page
16 February 2018
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30
cover story But we shouldn’t assume that the big firms around today financial returns, then after will be so big in the future – 20 years each dollar invested or even still exist. Firms that would have been worth ignore environmental and $14.46. But if you’d invested social problems risk being in a portfolio of firms damaged in the future by that factored in the most large-scale divestment from important environmental and areas such as fossil fuels. But social issues while growing at the same time, firms that their businesses, that dollar are not pragmatic about the would have been worth commercial actions necessary $28.36 after 20 years. These to sustain their business may firms “could earn outsized not be around long enough to gains because they focused make a real difference. on things that aided their This latter point sums businesses, like wasting less up the limitation that most water and energy, giving approaches to sustainable their CEOs incentives to investment still have, focus on the long term and agrees Terry Smith. “If you providing high-quality, examine the factors most diverse workplaces that lead The future for investing is blowing in the wind commonly used to measure to greater employee satisfaction, sustainability, there is no retention and productivity”. mention of items that do not fall into the ESG forms, Ultimately, investors and firms have shared but which are equally vital to real sustainability” interests in responsible investing and long-term – factors such as the level of capital expenditure success that can be achieved through responsible relative to a firm’s own operations and its business practices, says Colin Melvin, founder of competitor; spending on advertising, marketing and consultancy Arkadiko Partners (Melvin drew up the promotion of products; the amount of innovation UN’s Principles for Responsible Investment, which and proportion of revenues derived from new and has more than 1,750 signatories, representing assets improved products; and research and development of $70trn). The solution to the perceived conflict spending. “No matter how compliant a company between financial performance and sustainable may be with desired policies on the environment, actions is to recognise that, over the long term, one human rights and corporate governance, if it is is not possible without the other. not taking the commercial actions necessary to Investors tend to assume the future will look sustain its business, sooner or later there may be no exactly like the present, says Peter Michaelis, head business.” We look at some funds with sustainable of sustainable investing at asset manager Liontrust. principles and strong records in the box below.
“Firms that ignore environmental and social problems risk being damaged in future by large-scale divestment from areas such as fossil fuels“
©iStockphotos
Continued from previous page
Six sustainable funds with very different strategies
When you’re picking a sustainable fund, be aware that the fund manager or index provider may have a very different idea to you of what constitutes ethical investment. For example, Vanguard’s SRI Global Stock Fund excludes stocks that don’t meet its criteria on human rights, labour relations, the environment and anti-corruption – but has oil and gas firms ExxonMobil and Royal Dutch Shell among its top ten holdings. Some ethical investors will be okay with that, but many won’t. If you are, it’s fairly cheap, with an ongoing charge figure (OCF) of 0.35%. Among active funds, the best known UK fund is the Liontrust UK Ethical Fund. This has returned 98.2% over five years, relative to 54.1% for the MSCI United Kingdom index, and 162.6% since its inception in 1999. There’s no oil and gas in this portfolio – financials are the largest holdings at around 30% of the portfolio, including insurers Prudential and Legal & General. The OCF is 0.81%. If you’re looking for funds that focus explicitly on investing in firms that may help to improve the world, rather than doing less harm (known as impact investing), you could consider Impax Environmental Markets (LSE: IEM), a
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16 February 2018
trust that aims to benefit from growth in the markets for cleaner or more efficient delivery of energy, water and waste. Over five years its share price is up 172%, relative to 99% for the MSCI All Country World index. It is trading at a 10% discount to net asset value (NAV) and has an OCF of 1.05%. Others include the WHEB Sustainability Fund, which has returned 107.04% over five years. The fund publishes details of every company it invests in and has launched an impact calculator, which lets investors see what their money has gone towards, in quantifiable terms such as MWh of renewable energy produced and litres of wastewater treated. The OCF is 1.01% You may also want to look at funds that don’t explicitly restrict themselves to sustainable investing, but whose investment approach and holdings are broadly consistent with those principles. For example, Lindsell Train’s funds don’t have a defined ESG investment policy, but follow a buy-and-hold investment strategy focusing on firms that the managers think will continue to make money over several decades. They have avoided sectors such as tobacco and miners, preferring to invest in consumer brands and internet and media
Liontrust UK Ethical Fund Share price in pence
260 240 220 200 180 160 140 2013
2014
2015
2016
2017
companies. The OCF for the Lindsell Train Global Equity Fund is 1.25%. Or for an emerging-markets fund, consider the Scottish Oriental Smaller Companies Trust (LSE: SST), which is run by First State Stewart and invests in smaller companies (up to around $1.5bn market cap) across Asia, excluding Japan and Australasia. The managers invest on the basis that “companies that do not look after their customers, employees, suppliers and the larger community are unlikely...to be rewarding long-term investments”, and aim to engage “extensively” with their portfolio companies on ESG factors. The trust has an OCF of 0.99% and is trading on a discount to NAV of 13%.
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analysis
How investors can spot the next Carillion The debt figure published in an annual report does not tell the full story. Phil Oakley shows you how to dig deeper – and avoid investment disaster The key thing to remember as a shareholder in any company is that you get paid last. Before you get your share of a company’s profits or assets, other creditors have to be paid first. That’s why debt is often viewed as a scary word when it comes to analysing companies. Of course, borrowing isn’t necessarily a bad thing, if the money is put to good use. The problems with debt arise when people or companies have too much of it. How much is “too much” depends on the ability of the company’s income or assets to support its debt levels – which also depends on investors having a complete picture of what constitutes those debts. The recent collapse of support-services group Carillion is a classic example of a company sinking under the weight of its debt pile. However, Carillion also shows how a company can be far more indebted than it looks at first sight. The visible borrowing on a balance sheet is often just the tip of the iceberg. Other debts include things such as pension-fund liabilities, money owed to trade creditors, rental liabilities, etc. When you take these into account, companies can often be a lot more indebted than they appear. The more debt a company has, the more likely it is that interest payments will take up an increasing slice of its trading profits. If profits are growing, that isn’t usually a worry. But when a business hits trouble and trading profits start falling,
“How much debt is too much depends on the company’s income or assets. Investors need a complete picture”
us an estimated value of hidden debt for Carillion in 2016 of £402.5m (see table on page 34). If you do this for a range of FTSE 350 retailers, then you get the results shown below. As you can see, when you account for the rental liabilities, companies are lot more indebted than you think.
FTSE 350 retailers – net borrowings and hidden lease debts Company
Net borrowing Op. lease Hidden lease debt Pension Adjusted cost (op. lease cost x 7) deficit debt
JD Sports Fashion
-£213.6m
£167m
£1.17bn
–
£954m
Marks & Spencer
£1.76bn
£354m
£2.48bn
–
£4.2bn
Next
£899.1m
£225.6m £1.58bn
–
£2.48bn
Sports Direct
£34.1m
£195.6m £1.37bn
£3m
£1.41bn
£201m
£5m
£1.4bn
WH Smith
MoneyWeek
-£4m
16 February 2018
£1.4bn
shareholders will feel the pinch. And if a company declares itself insolvent, shareholders may find it has so much more debt than they thought that there is no money left once all the lenders have been paid off. This is the fate that Carillion shareholders now face. So how can investors spot companies with dangerous levels of debt? The good news is that there’s plenty of information in a company’s annual report that can give the diligent private investor a good sense of what’s actually going on.
Trawling through the accounts
How to adjust debt for rented or leased assets
Credit-rating agencies adjust a company’s debt levels and profits to account for rented assets. To estimate the equivalent amount of debt, they typically multiply the annual rent bill (or operating lease expense) by a number between six and eight. Multiplying by seven gives
Carillion had a huge portfolio of contrac
In an ideal world, investors would not have to trawl accounts to find out exactly how much debt a company really has. And some companies are genuinely free of debt, which can make them very desirable as less risky investments. But for those companies that do have debt, it’s not always clear cut how much there is. Most investors focus on net debt – the total amount of borrowing, less the amount of cash on the balance sheet. The problem with this measure is that a balance sheet is just a snapshot of a company’s financial position on one particular date. It might not be a true picture of what it looks like during the rest of the year. Most companies choose a yearly date when their finances are at their strongest. For example, many retailers have December year-ends. That’s because at that point they have received the cash from selling Christmas gifts, but have not yet paid their suppliers. This flatters their cash balances, while the amount they owe suppliers is classed as a “trade creditor” and not as debt. If you looked at the balance sheet at the end of January instead, the cash balance would probably be a lot lower. So be aware of this when looking at seasonal businesses such as retailers, airlines and tour operators. A much bigger problem is when companies have big liabilities such as pension-fund deficits, or moneyweek.com
analysis
33
A rough-and-ready debt gauge
©Getty Images
Companies with high debt levels
cts – but also a mountain of hidden debt hidden debts. The promise to pay workers a pension based on a proportion of their final salaries can represent a huge liability. Many such schemes are in deficit (the assets of the pension fund are lower than the value of the pensions promised to employees). This is disclosed on the balance sheet. The trustees of the pension fund will insist that any deficit be plugged over time. This is usually done with cash payments to the scheme over a number of years. This is cash that cannot be used to pay dividends to shareholders, which is why a pension deficit should be viewed as being much the same as a bank loan. So you should add any pension-fund deficit to outstanding borrowing to get a clearer picture of a company’s debts – but don’t reduce debts if a fund is in surplus, as this surplus is unlikely to be available to pay off debts. Also, a pension-fund deficit can be expressed in two ways. One is the balance-sheet method described above. The other is the actuarial deficit, where the fund’s assets and liabilities are calculated by a qualified actuary. These deficits can be much bigger than the balance-sheet figure. For example, BT had a balance-sheet deficit of around £9bn in 2017, but recent press reports speculate the actuarial deficit could be as high as £14bn.
Watch out for debt-like liabilities
Debt can also be hidden in joint ventures, deferred payments for buying other companies, and future financial commitments. But one of the most significant hidden debts often results from renting assets rather than buying them outright. This is common with high-street retailers. Buying dozens or hundreds of stores can cost millions or even billions of pounds, which would normally be funded with borrowing. By renting rather than buying, a company can avoid taking on lots of debt – but instead, it may have to sign very long leases. Accountants argue these commitments are effectively debt-like liabilities that are hidden from
moneyweek.com
Company
Market cap
Debt to market cap. (inc. pen.def.)
Vedanta Resources
£1,952m
749.1%
Interserve
£109m
471.8%
AA plc
£728m
447.5%
EnQuest
£360m
443.8%
Premier Oil
£555m
437.7%
Ei Group
£605m
373.7%
Capita
£1,302m
268.1%
Trinity Mirror
£210m
260.2%
Gulf Marine Services £159m
235.8%
A rough-and-ready debt calculation is to add a pension fund deficit to the existing net debt figure and compare it with the company’s market capitalisation. A number over 50% is probably telling you to stay away. More than 100% is a sign of financial distress. The firms on the left breach those levels significantly. Interserve and Capita – similar businesses to Carillion – look unhealthy on this measure.
investors and, from 2019, companies will have to disclose the value of assets they are renting on their balance sheets, as well as future rental liabilities. Until then, we can estimate the value of these hidden debts (see box on page 32 for how to do so). When these are taken into account, the true extent of company debts becomes much clearer. For example, WH Smith’s balance sheet shows it has £4m of net cash. However, if debts are adjusted for its rented shops, then its true level of debt is nearly £1.4bn – and it’s far from being the only one.
An instructive case study
Carillion is a classic example of a company laden with understated and hidden debts. Studying its 2016 annual report makes clear that real debt levels were more than ten times the headline amounts. Professional investors look at a company’s ability to cope with its debts in various ways. Firstly, there’s net debt to Ebitda (earnings before interest, tax, depreciation and amortisation). This measures how quickly a company’s net debts could be paid off based on its gross pre-tax and pre-interest cash flow. Excluding financial, utility and property companies, a number below three is usually seen as relatively safe. Secondly, there’s net debt to operating cash flow. Ebitda ignores significant cash flows such as the timing of money received from customer bills, payment of suppliers, the cost of building up stocks, and pension-fund top-ups. As a result, operating cash flow is usually a better measure of a company’s debt-paying capability – it’s closer to money that a company actually has available to pay its debts. Finally, there’s net debt to equity: this measures debts as a percentage of shareholders’ equity. Excluding companies that normally have high levels of debts (property, financial and utility companies) the lower this number, the better. If net debt is more than 100% of equity, then this could be a danger sign, and needs to be investigated. The headline numbers in Carillion’s 2016 annual report would have suggested there was little to worry about on these measures. Unfortunately this was not true, as the table overleaf shows. For a start, the company disclosed that its average net debt throughout the year was £367.6m higher than the year-end number. It also had a pension-fund deficit
“Studying Carillion’s 2016 annual report makes clear that real debt levels were more than ten times the headline amounts”
Continued on next page
16 February 2018
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34
analysis Carillion’s true debt levels
Headline figures
Balance sheet net debt
Ebitda
Op cash flow
Shareholders' Net debt/ Net debt/op equity Ebitda cash flow
Net debt/ equity
£218.9m
£280.9m
£115.5m
£729.9m
30.0%
£57.5m
£57.5m
£338.4m
£173m
0.8
1.9
Adjustments: Additional average net debt
£367.6m
Pension deficit
£804.8m
Est. hidden lease debts
£402.5m
Joint venture net debt
£370.7m
Deferred consideration
£71m
Promises of funding to PPPs
£63.4m
Effective number
£2.3bn
Continued from page 33
of £804.8m, and hidden debts from rented assets came in at £402.5m (see box on page 32). Carillion’s share of its joint-venture debts was £370.7m. Yet this was not disclosed on the balance sheet – instead its share of net assets of £176m was shown (made up of £1.08bn of assets and £906m of liabilities). Then there was £71m of deferred consideration payments, related to businesses Carillion had bought in the past. And finally, commitments to finance its share of public-private partnerships (PPPs) came in at £63.4m.
£729.9m
6.8
13.3
315%
Taking these into account, Carillion’s true debt level was £2.3bn rather than £218.9m. Looking at its debt ratios on this basis (see table above) reveals the company was a financial basket case. Its level of debt relative to cash flow and shareholder equity was already very dangerous. Some hedge funds knew this and were betting on the share price falling. Yet at the end of March 2017 when the annual report was released, the share price was 219p, giving the company’s equity (its market cap) at £940m. It’s now worth just £60m. Hindsight is a wonderful thing, of course – but any analyst worth their salt could have done this calculation in just 15 minutes.
“Hindsight is a wonderful thing of course – but any analyst worth their salt could have done this calculation in just 15 minutes”
investing in property
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Dark clouds gather over housebuilders Sarah Moore Persimmon, Britain’s largest housebuilder, faced a backlash recently when it was revealed that an ill-considered incentive scheme for its chief executive put him in line for a £100m bonus, the UK’s most generous such payout ever. In total, it will award almost £800m to roughly 140 senior staff. Persimmon is not the only housebuilder handing out huge bonuses, and shareholders may well question whether they’re happy to stick with firms that spend so much of their profits on lining executives’ pockets. But beyond the vexed issue of pay, it’s fair to say that housebuilders have been a good bet for investors. Last year the sector outperformed the FTSE All-Share by about 30%. That was partly because share prices started at low levels due to uncertainty following the vote to leave the EU, but they’ve been a good longterm bet too – anyone who had owned Persimmon for the past five years, and reinvested their dividends, would have made almost 270%, compared with just 41% for the FTSE All-Share. The question now is – can the good times continue? There are “signs the bright picture might be about to darken”, warns Aime Williams in the Financial Times. House-price growth in the UK and in London in particular is slowing, while rising costs are squeezing builders’ margins. Last month, fund manager Mark Swain of Smith & Williamson announced that the firm was “short” (ie, betting on share-price falls) on a number of housebuilders, and long
Housebuilders have done well, but investors should fix the roof while the sun shines and sell only on one – Bellway (which is broker Liberum’s top pick, thanks to its track record of profitable volume growth and an attractive valuation, notes Investors Chronicle). Swain notes that there are several headwinds for investors: no extension of government help-to-buy subsidies, which are set to end in 2021; a potential government investigation into “land banking”, where housebuilders artificially restrict supply by holding on to land rather than starting on new developments where permission to build has been given; a shortage of skilled workers; and high valuations (companies such as Persimmon are expensive – trading on a price/book ratio of 2.8 – “above the previous peak levels seen in early 1990s and 2006”). On the other hand, fund manager Neil Woodford has doubled his firm’s
stake in Crest Nicholson, making it the company’s biggest shareholder. Woodford bought into UK housebuilders last year, viewing them as bargains after the Brexit vote. (Though based on his recent unfortunate record, the purchase isn’t necessarily a ringing endorsement.) For MoneyWeek, the big risk is that housebuilding right now finds itself at the sharp end of both politics and economics. Government support and ultra-low interest rates have helped the sector for many years, driving profit margins to record or near-record highs. But monetary policy is tightening now, while a cavalier attitude to voters’ views on excessive executive pay won’t convince the government (even assuming that Jeremy Corbyn doesn’t get in) to renew its help for the sector. On balance, we’d take any profits now.
Live like a hamster
This house makes such exceptional use of a small space that it has featured on both Grand Designs and George Clarke’s Amazing Spaces. It squeezes four bedrooms into just 1,058 square feet, set over three floors, with a sloping rear roof that allows multiple windows, flooding the house with natural light. Bespoke units throughout maximise storage, and there is a 48ft garden, accessed via glass doors. How much is it? The answer is on the side of this box.
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£1m Savills 020-8877-1222
Guess the price: The Slim House, St John’s Hill, London
Instead of building ever higher tower blocks, the future of housing could be in pipes, says Ellen Scott in Metro. The “OPod Tube Housing System”, created by architect James Law, aims to solve the problems of chronic overcrowding and lack of space in Hong Kong. The houses are created out of repurposed concrete water pipes measuring just over eight feet in diameter and making for roughly 1,000 sq ft of living space, enough for a living room with a bench that converts into a bed, a bathroom and storage space. The tubes could be used to fill gaps between existing buildings or where traditional construction might not be an option. Law suggests the tubes as an option for young people looking for homes, or for city governments to offer as affordable housing.
16 February 2018
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trading
Short American stocks
How my tips fared
Up until now I’ve generally stayed away from betting on indices, with the exception of last year’s trade on the CAC40 around the time of the French presidential election. This is because it’s much easier to make a case for an individual company than the overall market. Still, I suspect that this month’s tumble won’t be the end of the market turbulence, especially in the US. The main problem is that the S&P 500 is hugely overvalued, both compared with other global markets and its own history. Admittedly, if you look at some metrics the US market doesn’t appear to be too expensive. For example, the S&P 500 has a price/earnings (p/e) ratio of around 23.5, compared to 23.2 for the United Kingdom, according to Star Capital. Even France and Germany aren’t significantly cheaper. However, if you use a longer-term measure of valuation, such as the cyclically adjusted p/e ratio (Cape), then the US market is nearly double the price of the FTSE. The US market also has one of the lowest dividend yields in the world, one that is half Britain’s 3.6%. Other metrics, such as price/book-value, paint a similar picture.
Investors are complacent
Investors seem to be being more than a little bit complacent and are assuming that the bull market – which has been going on for nearly nine years – will resume. Yet a strong reason to be bearish is that the Federal Reserve seems intent on raising interest rates. One of the big driving forces behind the bull market has been the perception that as soon as the market starts to decline, the Fed will step in. Yet the Fed seems pretty serious about restoring rates to more normal levels.
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Matthew Partridge
Stocks reaching giddy heights will cause headaches This is good for the long-term health of the economy, but will force investors to reconsider valuations, exerting downward pressure on stocks. So it seems a good time to go short on the US market. There are several options for doing this. For example, IG Index offers investors the choice of shorting the Dow Jones at £0.50 per point, the S&P 500 (which it calls the US 500) at £5 per point, or the Nasdaq (aka the Tech 1000) at £2 per point. The Dow Jones is a tricky index to short because it is made up of only 30 companies. By betting against the Nasdaq you’re betting against some of the fastest-growing tech companies. So I suggest that you bet against the S&P 500 at 2,673 for £5 per point. I’d also suggest that you put in a stop-loss at 2,773, around the level of the 50-day moving average. This gives you a potential downside of £500.
Trading techniques: Bollinger bands Momentum trading relies on buying shares that are doing well and selling those that are doing badly. However, some traders find it more profitable to adopt the opposite strategy – ie, buying during moments of weakness, and selling during moments of strength, in the hope that these fluctuations will be temporary, and that prices will revert to more usual levels. Many of these traders find Bollinger bands a useful tool in deciding whether a share is overbought or oversold – times at which it might make more sense to bet against the trend.
MoneyWeek
16 February 2018
To produce Bollinger bands, take a chart with a simple 20day moving average of a price and then draw two additional lines, each two standard deviations either side of the original line. The idea is that 95% of the time a share should trade in the area between the two lines. If a share’s price approaches, or even breaks, the upper bound, a trader may consider going short. If the price hits the lower bound, they might consider going long. One point to note is that higher price volatility automatically increases the gap between the two bands.
Surveys indicate that Bollinger bands are one of the most popular strategies among short-term traders. A study by Jiali Fang and Yafeng Quinn of Massey University and Ben Jacobsen of TIAS business school found that following these signals helped traders to make money, especially when the technique was first discovered in the 1980s. However, in recent years they have lost most of their predictive power, especially since John Bollinger – who developed the tool – published a popular book on his strategy in 2001.
In issue 800 (26 January) I made some major changes to the open positions that I have previously recommended. These included the decision to close my short positions in Tesla and Facebook, and to raise the stop-loss level on my long positions in IG, Petrobras and Renault. So how have these decisions worked out in light of recent market turmoil? Candidly, the results have not been especially encouraging. The decision to close the shorts in Tesla and Facebook has proved to be particularly unfortunate in terms of timing, since the share prices of both tech firms have since fallen substantially. At the same time, four out of the five long positions have been hit by the dramatic fall in global stockmarkets. While the trade on spread-betting provider IG Group is still making a relatively healthy profit of £449, the position in French carmaker Renault is now making only £168. Worse, property firm Hammerson is underwater to the tune of £204, while the trade in AA is losing a whopping £455. At 115p, shares in this car-repair service are now close to the stop-loss level of 96.5p. The only silver lining is that Brazilian oil firm Petrobras has risen in price, so it is now £592.5 in profit. My suggestion that you short bitcoin has also been vindicated by the fact that the dollar price is now nearly $2,000 lower than it was at the end of January, which means that the short position is now a solid £493 in the black. Overall, my open recommendations are making a total profit of £1,036. Set against a loss of £59 for all my closed positions, this gives a total gain of £977. The only change that I’m going to make is to close my recommendation on AA. Having held the position for six months – and with a substantial dividend cut now looking very likely – it’s time to admit defeat on this particular trade, and move on. However, I’m happy to stick with Hammerson for the time being.
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personal view Small and mid-caps with big potential A professional investor tells us where he’d put his money. This week: Guy Anderson of the Mercantile Investment Trust selects three small and medium-sized firms with promising prospects that the market has missed
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If only you’d invested in… Aveva Group (LSE: AVV) 3,000
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Aveva Group (LSE: AVV) markets and develops IT software and services for engineering companies. In September last year, the Cambridge-based business agreed to merge with French group Schneider Electric in a £3bn move it said would create a global leader in engineering and industrial software with estimated revenues of £657m. In February this year, it announced the appointment of Craig Hayman from US software firm PTC as its new chief executive. Aveva’s current boss, James Kidd, will move to a deputy position and become chief financial officer.
Be glad you didn’t buy… SSE (LSE: SSE) Share price in pence
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SSE (LSE: SSE) supplies phone and broadband as well as boiler cover to UK homes. In November last year, the firm, which is also Britain’s second-largest energy supplier, announced plans to merge and spin off its household energy supply and services businesses to German-owned Npower. However, SSE has suffered as customers move in search of cheaper energy bills. In the third quarter, 40,000 customers left, following a loss of 50,000 in the second quarter.
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Despite the significant political uncertainty – Beazley Breach Response – in 2009. A number of high-profile hacks over the that we saw in the UK over the past year, past 12 to 18 months has moved cybersmall and medium-sized companies protection up the agenda for businesses, based in the country outperformed resulting in growing demand for Beazley’s their larger counterparts. This was not, established and market-leading insurance however, an anomaly. In fact, over the product. This is helping to drive doublepast 60 years, UK small- and mid-caps digit growth in premiums in a sector that have outperformed in roughly two out is largely seen as having limited growth of every three years. What’s more, this opportunities. phenomenon is mirrored in other markets Bodycote (LSE: BOY), a global leader in around the world. thermal processing, has high fixed costs We see small and medium-sized relative to variable costs, an attractive companies as offering a number of quality during a cyclical upturn. With advantages. They have flexible business the current improvement in industrial models that can adapt to change and activity levels, the company can produce enable the firms to innovate and grow higher-than-average margins in the short rapidly. There are greater opportunities for term as demand for its products grows. mergers and acquisitions on both the buy The business has also been investing in and the sell side. And, because they tend to a number of higher-margin specialist be less well researched by analysts, there is technologies that now account for the potential for snapping up significantly roughly 25% of group revenues and are mispriced – that is, cheap – stocks. set to continue to The small- and grow materially mid-cap sector “Because small stocks coming years, in the UK is an tend to be less well researched in enhancing organic incredibly diverse by analysts, there is the growth relative to and dynamic part of peers. While it is not the market, ranging potential for snapping up a cheap stock, at 19 from fledgling companies in exciting significantly mispriced – that is, times 2018 earnings cheap – stocks” per share, we see new industries to significant potential established global for the company to leaders in their grow its bottom line faster than the market specific niches. Within this spectrum of is currently forecasting. companies we search for those that are Hays (LSE: HAS), the global specialist attractively valued, operate in growing recruiter, is traditionally viewed as being end-markets, have sustainable competitive driven by the staffing cycle. With a robust advantages and either are approaching or undergoing a period of positive change. We economic outlook globally, and tight labour markets, the company is well seek to identify opportunities where there placed in this regard. However, changing is a gap between market expectations and cultural perceptions are leading more the likely outcome. skilled candidates to choose flexible or Specialist insurers are continually project-based work, adding complexity innovating to avoid the commoditisation to the hiring process and increased that affects general insurance products. levels of outsourcing. This adds a Beazley (LSE: BEZ) was early to recognise further, unappreciated, dimension to the the potential threat posed by cybercompany’s growth. attacks, launching an insurance product
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16 February 2018
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opinion
Our gilded youth
When I started work in September 1978 as a graduate trainee at what is now KPMG, I was on the princely salary of £3,190. It didn’t seem much at the time, but it included all the tuition necessary for three sets of exams, which, with no retakes, made me a qualified chartered accountant after three years. After a tax-free allowance of £965, income was taxed at the standard rate of 34% (there was a minuscule 25% band of £100). The standard rate fell to 33% before the 1979 election then to 30% following it. In addition, employee’s national insurance (NI) was deducted at the rate of 6.5%. So, after £955 of deductions, I was earning about £186 a month, though I got a 13% pay rise on passing graduate conversion exams in April 1979. Graduate trainees at KPMG in London now get at least £30,450 a year, of which the first £11,500 is tax-free. Thereafter, the standard rate of income tax is just 20%, though the employee NI rate is now 12%. These deductions cost £7,644, but there are also £850 of student-loan payments to deduct at the rate of 9% on earnings over £21,000. The KPMG trainee is left with £1,830 a month. So in the 39 years since I started, gross pay has increased 9.5-fold and net pay 9.8-fold, while the retail price index has multiplied 5.4-fold. In real terms, net earnings have compounded at about 1.5% per annum. Despite student loan charges and the near doubling in the rate of employee NI, total deductions have fallen from 30% to below 28% of gross salary.
The housing-crisis myth
But surely the cost of housing has rocketed since then? No. In the days of rent controls, private-sector rentals were hard to find, while company lets or council flats were out of bounds. Available flats were of the standard later shown in the TV comedy Men Behaving Badly. A flat share in Earl’s Court cost me £90 a month. The tenant below, Stuart Goddard, could have been mistaken for a stockbroker, but soon made a name for himself as Adam Ant (my former neighbour is pictured). Those with money could have bought a small house in the up-and-coming area of Fulham for £40,000 but, for graduate trainees, this was totally unaffordable. Even with tax relief on interest payments up to a loan value of £25,000, payments on a 100% 25-year mortgage would have come out at nearly £300 a month, assuming an interest rate of 10%. Not that 100% mortgages were on offer; they arrived in the 1980s and were initially a bit of a fiction since they were based on a “valuation for mortgage purposes”, which was invariably 10% below the actual price. As now, buying without parental help was all but impossible, unless you worked for a bank that offered cheap mortgages to staff. This explains why smart graduates headed for the financial sector. The rest of us looked enviously at the prices our parents had paid ten or 20 years earlier for houses that had since multiplied in value. A comparable house today might cost £700,000, so a 100% 25-year mortgage with a 3% interest rate would cost £3,350 a month. This is more than 11
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16 February 2018
©Rex Features
Millennials are poorer than their parents were at their age, have worse prospects and will struggle to ever own a house. Is that true? No it isn’t, says Max King
Ridicule is nothing to be scared of: millennials will soon be lamenting the state of youth times the comparable cost in 1978, but nearly half the monthly cost would be loan repayments against just 9% then. We all bought our first property at a much younger age then than nowadays, but this was not because it was any more affordable; rather, it was because we tired of our grotty flats and stretched ourselves to the limit financially.
They’ve never had it so good
“Buying a house without parental help was all but impossible unless you worked for a bank”
What about other costs? Back then, a tube journey from Earl’s Court to Blackfriars cost 70p – now it’s only £2.90. Most non-commuter train fares, the price of cars and the cost of flying have also lagged significantly. So have telephone bills and council tax. On the other hand, gas and electricity prices have risen steeply, partly due to the imposition of VAT at 5% and subsidies to renewable energy. The standard rate of VAT is now 20% against just 8% in 1978, though it rose to 15% in 1979. So millennial graduates are hardly hard done by. What do they spend their extra income on? They eat out a lot more, go on more holidays and buy cappuccinos. They employ builders and decorators and most don’t even know what DIY is. They go to the pub less, cook less, boil the kettle less and drive less. My generation thinks them extravagant, just as our parents thought we were. We wondered how we would ever match our parents’ standard of living but, of course, we did – just as today’s youth will be better off than us and will have to put up with the moaning of the next generation in 25 years’ time. moneyweek.com
letters Your article on trade-credit insurance (MoneyWeek 882) made for interesting reading, but sadly you missed the most salient point as to why it has very little take-up among small and medium-sized enterprises acting as contractors in the construction industry The supply chain in construction consists of many different types of suppliers such as plant hire, materials and contractors. While most of the supply chain will enter into some form of contract for supplying goods and services, generally only contractors enter into a relationship with the principal contractor (eg, Carillion). This relationship binds them to the main contract terms and conditions – in particular payment provision, which can be extremely onerous. As a consequence of this arrangement, and the Construction Act, any matters not resolved over payment provision quickly becomes a dispute. Once in dispute, third parties are locked out by the contractual arrangements of their clients along with the small print in their insurance cover. So paying for something you are unlikely to benefit from makes little sense.
RW
Make executives responsible for deals
I have been reading with interest the development of problems at Carillion, where there appears to have been a complete disconnect between the performance of individual contracts and the remuneration of the responsible executives who signed off on low-ball bids. This is a problem which was encountered and addressed in computer leasing many years ago. In those days in the computer-leasing industry, account executives were paid a modest basic salary. Commission was not paid on leases as they were sold, but only when the leases ran to term or otherwise terminated and the full financial position was understood. As you can imagine, this made for some thin years when you were starting out, but rather better years when you were retiring and in the process of winding down your lease portfolio. If such an approach were applied to executive remuneration in a contractbased industry, such as infrastructure projects and outsourcing projects, any tendency for low-ball bidding would be inhibited because of the high likelihood of a disastrous effect upon the project’s
More lessons from Jack Welch
Bill Bonner’s article describing how Jack Welch’s legacy at General Electric (GE) now rests in tatters (MoneyWeek 881) was very interesting. Bill describes the crazy take-over culture that resulted in GE acquiring businesses it had no idea how to run. While I’ve no doubt that such a pursuit was, in any event, guaranteed to fail, there are perhaps other things to cite for GE and Neutron Jack’s nuclear fallout. If you read Leaders Eat Last by Simon Sinek, he cites the terrible culture Welch created at GE. Welch (pictured) was a new breed of CEO who had no real interest in employees or customers. It was all about shortterm profits in the name of shareholder returns – and, of course, the CEO’s remuneration package. The bottom-performing 10% of managers were dismissed on a regular basis, with lavish bonuses for the best performers. Sinek describes how GE’s was a culture of both greed and fear. In pursuing such a strategy, if it can be called that, Welch
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Why small firms shun insurance
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created a company fit for the 1980s boom times, but totally incapable of coping in a recession. GE devoured itself from the inside out. He goes on to compare the stock-price performance of GE with that of Costco, which was run by James Sinegal. Sinegal was the opposite – his mantra was putting customers and employees first. By taking care of that, the numbers would reflect their efforts. In turn that would look after stakeholders. Put people first and the profits follow. If you look at both firms’ long-term shareprice performance,
it’s clear to see which strategy worked. Even Welch eventually derided the concept of shareholder primacy. Investors would do well to review in detail an organisation’s managers and their interactions with their teams. Does the customer experience reflect the management and marketing messages? Ultimately the numbers are a reflection of the cohesive efforts of people and their relationships. CT We agree that investors overlook corporate culture at their peril. Carillion (see below and on page 32) may be a recent example.
financial performance at contract end. Bonuses would only be paid when projects were successful and the money was there. Public-sector procurement would benefit, as the lowest bid would have been constructed more carefully than appears to be the case at present.
reinvested these also count for tax relief. As the tax year end rapidly approaches, some MoneyWeek readers may well find this an attractive option. They should tread carefully, not because the tax benefits are no better than other Isas (they are), but because of the higher risk that VCTs pose.
How attractive is the VCT Isa?
It’s a minor point, but we’d still disagree that the tax benefits are better than other Isas. The VCT tax relief is independent of the Isa status, so there is no difference between transferring across cash from an existing Isa and investing fresh cash from outside an Isa. There may be a small number of people who find this convenient given their wider financial affairs, but overall it’s hard to see why this product will interest most investors.
MD
Your article on innovative Isas (MoneyWeek 881) is useful, but misses a key feature of the Octopus Titan VCT Isa. Yes, the ongoing tax benefits are the same (tax free) as conventional stocks and shares Isas, but the initial transfer attracts tax relief of 30%. This means an investor can transfer, say £50,000, from an existing Isa and claim back £15,000 in tax. Furthermore, if dividends are
GJ
Writing to MoneyWeek MoneyWeek welcomes letters and emails from readers, but unfortunately we are not able to publish or reply to all of them. We may edit letters prior to publication. All responses are for
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information only and should not be relied upon in making investment decisions. Please note that our staff are unable to respond to personal investment queries, as MoneyWeek is not authorised to
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[email protected], or write to us at Editor, MoneyWeek, Dennis Publishing, 31-32 Alfred Place, London, WC1E 7DP.
16 February 2018
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profile
The boytjie and the missing billions
Markus Jooste built a small South African furniture firm into a global retail empire. Then everything fell apart amid claims of a €6bn black hole in the accounts. Jane Lewis reports “Sorry that I have disappointed all of you. I never meant to cause any of you any harm,” Steinhoff boss Markus Jooste wrote in a letter to colleagues following his abrupt resignation in December. He hasn’t been seen since, says The Sunday Times, and who can blame him for going to ground? Once a hero of South African business, credited with building an international retailing powerhouse spanning five continents, Jooste is now under investigation for his role in what’s been dubbed “South Africa’s Enron”. Steinhoff shares have lost 90% of their value following the shock discovery of “accounting irregularities” late last year. Since then, the company has admitted that some €6bn, perhaps more, “has gone walkabout from its international operations”, which in Britain includes discount store Poundland, the furniture retailer Harveys, and Bensons for Beds. Now the scandal is already “blowing a hole through Wall Street bank earnings”, says Business Insider, as firms such as Goldman Sachs, Bank of America and JPMorgan write down hundreds of millions of dollars of exposure linked to Steinhoff and its shareholders.
Young man in a hurry
Jooste, 56, “wasn’t just a CEO”, says HuffPost South Africa. “He was the face of the conglomerate” and “appeared to have a spotless reputation”. A member of the so-called Stellenbosch mafia, the close-knit group of individuals that dominates business in the Cape, his big passion was racehorses (he owned some 350) and seemed to live a charmed life in
an array of beautiful houses, praised by friends as a regular “boytjie” (talented young man), with no airs and graces. Jooste – the son of a postman who passed on his love of punting on the gee-gees – credits a cash-strapped youth for his later success. Having emerged from university with R100,000 in debt, “I was very hungry”, he told BizNews in 2016. So he put his qualification in chartered accountancy to good use, and was soon appointed financial director of a publicly listed company – furniture firm GommaGomma – while still in his 20s.
Game-changing connections
“My life has always been about relationships,” Jooste told Biz News. “Trust each other and eventually you will do something good together.” He found an early mentor in Claas Daun, a German entrepreneur who invested in GommaGomma. That led to him meeting the other “game changers” in his career: Bruno Steinhoff – who owned a German business that merged with GommaGomma in 1998 – and, later on, retail magnate Christo Wiese. Steinhoff’s purchase of Wiese’s retail
holding company Pepkor for $5.7bn in 2014 was one of those “pillar transactions” that catapulted the company into the international big league, and Weise became the chairman and largest shareholder in Steinhoff. Last year Weise and Jooste tried to merge Steinhoff with supermarket Shoprite. The deal collapsed amid investor opposition and Weise is now selling some of his Shoprite stake to pay off loans secured against Steinhoff shares. Shoprite’s other shareholders now look fortunate not to have been dragged into Jooste’s orbit. “With headlong expansion came apparently ballooning profits,” concludes The Sunday Times. “Only now is the ugly truth starting to emerge: frantic deal-making concealed huge financial fragility.”
The world’s greatest investors: Francisco García Paramés
MoneyWeek
16 February 2018
period expired, he launched his own firm, Cobas Asset Management, in 2017.
What is his strategy?
Paramés follows the valueinvesting principles of stocktrading legends such as Benjamin Graham and Warren Buffett. As with Buffett, Paramés’ style has evolved to favour higherquality firms. “When you’re young you want to achieve a quick, high return and you think you can get it with cheap companies, so you avoid quality companies that are more expensive,” he told CityWire. “Over time you realise these cheap
companies are cheap because they are regular businesses and things can go wrong.”
What was his best trade?
At Bestinver, Paramés’ funds often held a stock for a long period of time, but regularly added to or trimmed the size of each investment depending on which holdings seemed cheapest. This makes it difficult to identify how much specific stocks have contributed to his performance. However, when launching Cobas in 2017 he noted that he had seen (and presumably acted on) an “extraordinary opportunity” in miner Anglo American in
late 2015, when the shares were trading at roughly 270p. By March 2017, they had recovered to 1,400p.
What can investors learn?
In his book Investing for the Long Term (to be published in English this year), Paramés sets out a number of pithy principles, including “the more a company appears in the press, the further you should keep away from it” and “the older a company is, the more possibilities it has of surviving”. He strongly favours family-controlled firms such as BMW, which has been one of his longestheld investments.
moneyweek.com
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Francisco García Paramés studied economics at the Complutense University of Madrid and completed an MBA at the University of Navarra before joining fund manager Bestinver in 1989. There, he became Spain’s mostsuccessful fund manager, delivering annual returns of 16% over 25 years. His record became so important to the firm that its assets under management dropped by 30% when he left in 2014. After a two-year non-compete
money makers What apps miss in the magic of dating
At Gray & Farrar, a dating agency for the rich, matchmaking is still done the old-fashioned way, says Liam Kelly in The Sunday Times. “Sitting opposite somebody and getting to know them, knowing what makes people tick; that’s the magic [and]… what algorithms and apps will never be able to do,” explains founder Virginia Sweetingham (pictured below), 61. Having already set up and sold a dating agency, Cardiff-born Sweetingham launched Gray & Farrar nine years ago to target the lovesick among the ranks of the mega-wealthy. Its 2,000 clients, ranging from the children of dynastic families to corporate executives, all aged 19 to 90, pay a minimum
£15,000 annual fee for at least eight introductions, rising to £100,000 for its bespoke service. Clients are interviewed, and matches are made on Sweetingham’s
instinct. Nonetheless, “the normal rules of courtship still apply”, she says. “We can put the right people in front of you in a discreet way, but then it’s down to you.” Last year, the business, housed in Mayfair, London, turned a £1.1m profit on revenues of £3.7m. Sweetingham now plays an advisory role, having handed over the reins to her daughter Claire, but still owns half the business, with her brother holding the rest.
The man who won’t be iPhoned again
Mike Lazaridis, the cofounder of BlackBerry, has learned his lesson, say Natalie Wong and Jeremy Kahn in Bloomberg Businessweek. “He won’t be iPhoned again.” After years of watching Apple’s iPhone eat away and then entirely overwhelm BlackBerry’s once-dominant share of the smartphone market, Lazaridis stepped down as the company’s co-chief executive in 2012. Having ploughed more than $450m into quantum research projects, Lazaridis now runs the $80m venture company Quantum Valley Investments, based in Ontario, Canada, together with former BlackBerry colleague Doug Fregin. Unlike today’s binary-based computers, which interpret data as being either 0s or 1s, quantum data can be both 0s and 1s at the same time. The result is computing power far
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Chase your demons in a raincoat
Unlike most clothing labels, Stutterheim doesn’t promise to make you happier with its raincoats, says the BBC’s Maddy Savage. As Swedish founder Alexander Stutterheim (right) explains, “melancholy is an essential part of being a human being, and you shouldn’t fight it... And that is the analogy with the raincoat, you should go out and embrace the rain, enjoy it.” It’s a novel approach that has won the brand celebrity fans, including rappers Kanye West and Jay-Z. Stutterheim, a copywriter, found the inspiration for his business in 2010 at the age of 40, when he stumbled upon his grandfather’s old fishing jacket hanging on a nail in an abandoned family barn on the coast near Stockholm. The 1960s coat transported Stutterheim right back to his childhood. “My grandfather was melancholic,” he says, “but when he got back from ‘chasing his demons’ [on his boat] in his raincoat, he was very creative... He wrote poems and... plays.” So Stutterheim updated the coat to be “cooler”, building “a story to embrace the rain”. The coats, which cost around 2,000 kronor (£179), are sold worldwide, mainly through Stutterheim’s website. The company’s annual turnover was 48.5m krona (£4.3m) in 2016, and continues to grow strongly.
in excess of anything available today (quantum computers exist already, but are small and unreliable). Quantum Valley also funds narrower projects that Lazaridis says could be commercialised in the next few years, such as security software to block quantum
hacks. One company, Isara, has sold $1.6m of the software and expects that to double this year. Yet, competition from the US and China is fierce. Canada will need more venture capitalists to ensure Canadian companies bring the technology to market. “We’ve proven that we can do this,” says Lazaridis. “We put our money where our mouth is.”
©Getty Images; Vicki Couchman
High-stakes gambles in the world of cryptocurrencies David (not his real name) is a “quant” – a financier who trades markets with the aid of computer algorithms. He is also between jobs, notes Kadhim Shubber in the Financial Times. While David waits to start at his next job, he trades cryptocurrencies from his home in London. It is a way for David to pass the time as well as keep his skills sharp. On a typical day he trades about £20,000 of exposure across the top 150 cryptocurrencies. Because cryptocurrencies are so volatile, they not only present an “intellectual challenge”, but they also offer higher rewards compared with other, more stable assets. “In a day’s worth of cryptocurrency movement you have a week or a month of equity market
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movement and a decade of country debt,” says David. Besides, “it’s fun”, as one hedge-fund manager tells Shubber, adding that she did not want to suffer from “fomo” (fear of missing out). Yet higher rewards can also translate into bigger losses. That has the banks worried. Last month, Swedish bank Nordea led the way in banning its 31,500 staff from buying bitcoin after 28 February, to prevent the taking of “positions in speculative investments… which might expose them to a risk of financial loss and therefore impact their financial standing”, as the bank’s spokeswoman put it to Bloomberg. Danske Bank has yet to decide
on a ban, but the Danish lender already discourages its employees from trading in bitcoin. Tyler Winklevoss (pictured), one half of the duo of famous twins who made it onto Forbes’ inaugural “cryptocurrency rich list” (their crypto net worth is put at between $900m and $1.1bn), told CNBC last Thursday that he thinks it’s a generational thing. “As you get older your brain loses its plasticity at some point and you get wedded to the frameworks that you have,” he explained. With Warren Buffett having warned on the network that cryptocurrencies “will come to a bad ending”, Winklevoss might be right. Buffett himself has acknowledged that one of his few big regrets was failing to buy Amazon. But the stakes – for those invested, at least – could hardly be higher.
16 February 2018
MoneyWeek
WINE CLUB
We launch our 2018 MoneyWeek Wine Club with a visit to one of the UK’s most quietly influential wine merchants. Haynes Hanson & Clark goes about its business with little fanfare and bluster. This company is expert in many fields, but it’s the authenticity, accuracy and value for money they imbue in all of their discoveries which impresses me most. I first found this merchant a quarter of a century ago when I was in search of Burgundy, Bordeaux and Loire for my own cellar. I have bought countless cases ever since and, from a
punter’s point of view, let alone as a wine writer, they could not be more helpful. With a classical bent, and a fondness for wine built around a core of acidity and freshness, with overt fruit ripeness and overzealous oak thankfully absent from their list of requirements, all wines from HHC show elegance, poise and refinement. I have no doubt that you will embrace these wines with wide-eyed excitement and gustatory pleasure. Cheers!
FREE DELIVERY to UK mainland
Matthew Jukes
How it works: Savings shown are based on purchasing a case of 12 compared to individual bottles and are exclusive to MoneyWeek. NV Crémant d’Alsace, Brut, 2016 Chardonnay, Kellerei Domaine Zinck, France Kurtatsch, Alto Adige, Italy Let’s first talk about something I simply couldn’t leave this which shouldn’t make a stunning wine out of this £16 £13.30 difference: the label on this collection. Coming from high £14.17 £11.67 wine is truly beautiful. Legions altitude vineyards in northern of sparklers have plain, dull Italy, this unoaked beauty rivals script, yet Philippe Zinck, in top Mâcons with its freshness, his wisdom, gives us an image aromatic splendour and length. of the flavour by painting it The mid-palate grows and stays as an alluring sprite. Made in far longer than you’d expect the ‘méthode traditionelle’ (Champagne from any keenly priced white Burgundy style), from Pinot Blanc, Pinot Noir and and it’s easy to see why they are Chardonnay, it is a beautiful wine which championing this elite white wine. This sits above all Prosecco in grandeur, above part of the world is seriously exciting for most Cava in fragrance and well below fans of clean, lean, but succulent whites. Champagne in price. This sophisticated Crémant will amaze you. 2016 Mas Bres, Pinot Noir, Pays des Cévennes, France 2016 Sancerre, Domaine Etienne On paper, this wine doesn’t make much sense - Pinot Noir Daulny, Loire, France £11.10 outside of Burgundy rarely I have followed this wine for £9.50 impresses. But this organicallyover 20 years and it always £14.95 grown, summer berry-soaked, hits the high notes. There is £13.33 refreshingly balanced red is a a growing trend for Loire shockingly good wine. As an Sauvignon Blanc producers to inexpensive Pinot it’s peerless, distance their wines from the but as an elite ‘house red’ it tropical tones found in versions performs at the highest level for every from warmer climes, resulting palate and dish. Most people plump in painfully strict and acidic for hearty Rioja, Malbec or a Sancerre which often requires several Côtes-du-Rhône as their all-purpose years to soften. This incarnation is red, but these styles are often too smooth and cultured, with a benchmark forceful for most dishes. Mas Bres is gooseberry and lawn cuttings nose and perfect in every respect. pliant, silky fruit on the palate.
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SELECT FROM OUR 12 BOTTLE CASES: Original Price NV Crémant d’Alsace, Brut, Domaine Zinck, France £192.10 2016 Sancerre, Domaine Etienne Daulny, Loire, France £179.40 2016 Chardonnay, Kellerei Kurtatsch, Alto Adige, Italy £159.60 2016 Mas Bres, Pinot Noir, Pays des Cévennes, France £133.60 2016 La Madone, Gamay sur Volcan, Gilles Bonnefoy, Côtes du Forez, Loire, France £165.25 2012 Château Couloumey, Millésime Francis, Graves Rouge, Bordeaux, France £229.80 Mixed case – two bottles of each wine
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2012 Château Couloumey, Millésime Francis, Graves Rouge, Bordeaux, France I must finish with a claret: £19.15 one which draws on all of £17.33 the classicism and restraint that this region nearly lost in the 90s and 00s when it became slave to the 100-point system and the prevalence of overoaked and over-alcoholic wines. This Merlot-dominant wine has a tender 12.5% alcohol underpinning its core and nothing is forced and yet it is deeply red fruited and gently oaked. With superb build-quality and a flavour you crave at Sunday lunch this is a delicious Graves.
www.hhandc.co.uk/moneyweek Haynes Hanson & Clark: 020 7584 7927 and quote “MoneyWeek”
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2016 La Madone, Gamay sur Volcan, Gilles Bonnefoy, Côtes du Forez, Loire, France From the furthest southern £13.75 reaches of the Loire wine £12.20 region, benefitting from the influence of the Massif Central, this biodynamic Gamay is a storming wine with so much presence it puts legions of Cru Beaujolais to shame. With a nimble 12% alcohol, but a lionheart of fruit, the volcanic soils are the reason for the depth of plum fruit and thrilling acid line. One of the most arresting wines I’ve seen in a long while.
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Terms & Conditions: Free delivery on all orders of 12 bottles of wine or more to UK mainland; delivery charges outside of these conditions can be found on HHC’s website. Orders will be dispatched within 3 working days of orders being received. Dennis Publishing (Ltd) uses a layered Privacy Notice, giving you brief information about how we would like to use your personal information. For full details, please visit www.dennis.co.uk/privacy or call 01795 592 910.
Exciting wine to start the year, as chosen by Matthew Jukes
Spending it 43 Six pages of holidays, toys and property
P
Three hotels with great views
erched on top of a hill like an old fort, the Renaissance Tuscany Il Ciocco Resort & Spa first opened in 1961 and is situated in a 600-hectare nature park overlooking the Lucca valley in Tuscany, says Phoebe Weston in the Daily Mail. The hotel is spacious, with thick carpets and ornate lighting, antique stone fireplaces and vast sofas. Its spa is “stunning”, the bedrooms “rather eye-catching” and the mountain views spectacular. The nearby small village of Fabbriche di Vallico is home to the region’s two last chestnut mills, where you can learn all about the ancient tradition of making sweet chestnut flour. A tour of a mill can be arranged from the hotel, and you can take the flour back to the hotel to learn how to make pasta with it under the watchful eye of the head chef. It all makes for a perfect holiday for foodies. From €274 per night; see RenaissanceTuscany.com. Sleep in the middle of a glacier
The Sheldon Chalet is perched on an isolated granite peak within a magnificent glacier in the Alaska Range of mountains, says Jim Dobson in Forbes. The hotel is set to open this month and sleeps up to ten guests in five bedrooms, which feature “brilliant panoramas of the Alaska Range from every
Renaissance Tuscany Il Cioc co Resort: perfect for foodies
angle”. Guests are welcomed with Champagne and Alaskan seafood and dinners are prepared by the chalet’s chefs from local ingredients. There is a fireplace to keep the second floor warm, and heaters are provided in each room. The location, initially discovered by pilot Don Sheldon over 60 years ago, has previously only been accessible to experienced mountain climbers, but visitors can now enjoy “true luxury in the middle of an icy paradise retreat”, thanks to helicopter trips. You can
use the chalet as a base for various activities, including helicopter tours, moonlight trekking, mountain biking and skiing, and making igloos. All-inclusive $2,300 per night; see SheldonChalet.com. A bungalow built over water in Belize
Belize has everything you could want for a dream holiday: “picture-perfect beaches, crystal-clear ocean waters, breathtaking landscapes and beautiful resorts”, says Julie Delahaye in the Daily Mirror. However, “there’s one luxury retreat that’s going straight to
the top of our bucket lists: the jaw-dropping Casa Ventanas”. The bungalow is built over the water, 150ft out into the ocean off the private-island resort of Cayo Espanto, and has a glassbottomed floor from which you can watch “the tropical sea life in the turquoise waters below”. The bungalow sits on the island’s main dock, so guests get “unspoiled ocean views, direct access to the water and even a private sailboat if you want to go for a tour of the island”. From £1,134 per night; APrivateIsland.com/villas/ casa-ventanas/
Wine of the week: an elite and indulgent shiraz 2014 Mitolo, Marsican Shiraz, McLarenVale, South Australia. £188, Hedonism Wines, 020-7290 7870, Hedonism.co.uk.
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Matthew Jukes Wine correspondent
In the September of 2016 I received a phone call from Frank Mitolo asking me if we could meet up in Adelaide for a chat. I was about to host my annual Great Australian Red competition with my Aussie wine scribe palTyson Stelzer, so we both went to meet Frank and his winemaking guru Ben Glaetzer.There was a “cleanskin” bottle on the table in the ApothecaryWine Bar when we walked in.This was the first
ever pre-release tasting of Marsican – Mitolo’s secret Shiraz project. The Marsican brown bear (Ursus arctos marsicanus) is an endangered species that lives in the Abruzzo National Park and the surrounding regions in Italy. Frank’s Italian heritage coupled with the size, scale and attitude of this wine mean that its name makes perfect sense. Made from an elite barrel selection of his greatest shirazes of the vintage, and matured in 100% French oak, this is a mighty wine and it is in some ways related to Frank’s Savitar Shiraz, which was until now his top wine of this
grape variety.The main difference is in the detail and the sheer level of complexity. At 14% alcohol it is not a head-banger. It is, however, infinitesimally layered with black fruit, cocoa, liquorice, Partagas Serie D No.4 smoke and black olives, and this makes it a frighteningly indulgent wine. Frank and Ben have set out to make an iconic McLarenVale Shiraz – they have achieved this aim at their first attempt. Matthew Jukes is a winner of the InternationalWine & Spirit Competition’s Communicator of theYear (MatthewJukes.com).
16 February 2018
MoneyWeek
44
property
This week: properties for around £1m – from a Strawberry Hill gothic-revival house in Folkest
Haford Abbey Farm, Llanfynydd, Wrexham. A 16th-century farmstead set in open countryside just over a mile from Llanfynydd. It comes with a fourbed barn conversion, a one-bed cottage and a modern farm building. 5 beds, 3 baths, 3 receps, conservatory, 41.8 acres. £995,000 Strutt & Parker 01244 354880.
Maplehurst, Galashiels, Selkirkshire. This B-listed Arts & Crafts house dates from 1906 and is currently run as a boutique guest house. It has stained-glass windows and retains its original fireplaces and panelled walls. A terrace leads from the dining room into the gardens, which include a summer house. 8 beds, 8 baths, 4 receps, kitchen, workshop, 1.35 acres. £975,000+ Knight Frank 01578-722814.
Old Bailiffe’s House, Beachb orough, Newington, Folkestone, Kent. A Grade II-listed, 1760s Strawberry Hill gothic-revival house overlooking Sugar Loaf Hill and the North Downs. It has leaded-light arched windows, open fireplaces, beamed ceilings and the kitchen retains its original bread oven. 4 beds, 2 baths, 2 receps, 1-bed cottage, garage with workshop, 0.5 acres. £1m Fine & Country 01227-479317. MoneyWeek
16 February 2018
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property 45 one, Kent, to an end-of-terrace cottage with courtyard garden in Barnes, London The Manor House, Lund House Green, Harrogate. A Grade II-listed manor two and a half miles from Harrogate. It has beamed ceilings, feature fireplaces, and a large kitchen with an Aga and an open fireplace. 5 beds, 2 baths, 2 receps, study, gardens. £995,000 Strutt & Parker 01423-561274.
The Old Rectory, Phillack, Hayle, Cornwall. A Grade II-listed, 1740s rectory incorporating an earlier dwelling dating back to 1679. It is set in terraced gardens close t o the dunes and has a country kitchen with flagstone floors and an Aga. 5 beds, 2 baths, 2 receps, 1 acre. £1m Bradleys 01736-756363. An Arts & Crafts-style house in Wood Dalling, Norfolk. The house was built in 2008 and has oak floors, beams and panelling. It is set in large, landscaped gardens overlooking open countryside. 7 beds, 6 baths, 3 receps, study, library, breakfast kitchen, workshop, 3.5 acres. £1m. Fine & Country 01603-221888.
Limes Avenue, Barnes, London SW13. A Victorian end-of-terrace cottage in a quiet cul-de-sac close to Barnes high street and the river. It has a newly fitted kitchen and bathroom and a front garden and courtyard garden. 3 beds, bath, 2 receps. £1.05m Savills 020-8939 6900.
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The Old Rectory, Epperstone, Nottinghamshire. A Grade II-listed former rectory dating from 1583 next to the historic parish church of the Holy Cross. It has a sweeping staircase, period fireplaces and high ceilings, and would benefit from some upgrading. 8 beds, 2 baths, 2 receps, wine cellar, attached coach house/garage. £995,000 Humberts 01159-505444.
16 February 2018
MoneyWeek
46
toys
Seven of the best video games
“If you don’t play video games, you’re not just missing out, you’re wilfully ignoring the most rapidly evolving creative medium in human history,” according to TV critic Charlie Brooker. Here are seven to get you hooked Life is Strange: Before the Storm If sifting through the fallout of a family tragedy doesn’t sound like the usual stuff of video games, that’s because this is no typical game, says Darryn King in 1843 magazine. The purpose is to explore the inner life of the central character, and there are codes to crack and conundrums to puzzle through on the way. This is an exceptional game that doesn’t only “dazzle the senses” but also “ensnares the heat”. (Available for Microsoft Windows, PS4 and Xbox One.)
Shadow of the Colossus The aim is to slay the baddies and win the princess, says Keza MacDonald in The Guardian.Yet as you drive your sword into the ogres and aggressive lizards, this game elicits a feeling not of triumph, but of uneasy self-reflection on the selfish and destructive nature of possessive love. It’s a game of “extraordinary beauty and quiet profundity”. (PlayStation 4.)
Prey This wonderfully atmospheric science-fiction adventure aboard an alien-infested space station will make you feel clever and paranoid, and will excite, intrigue, and, at least once in the story, absolutely terrify you, says Kirk McKeand in The DailyTelegraph.There are some glitches in the game play, but not enough to stop this being one of the most interesting and special video games of the past year. (Microsoft Windows, PS4, Xbox One.)
MoneyWeek
16 February 2018
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toys 47
Super Mario Odyssey Mario has been with many of us since childhood, says Sam Loveridge in GamesRadar.This latest incarnation is a “beautiful homage”, yet with plenty that’s fresh and new. There’s almost too much to explore in Mario’s evolving and intriguing world. This is the “Mario of the future” and the most “glorious” of his adventures to date. (Nintendo Switch.)
The Legend of Zelda: Breath of theWild Zelda is “one of the greatest games of all time”, says Tim Martin in 1843. In its open world you can go anywhere and do anything; you can sink for hours at a time into a kingdom of glorious vistas and undiscovered corners that “enables the most joyfully lateral kind of puzzle solving”. This game reinvigorates the open-world format. (Nintendo Switch.)
Night in theWoods It may look like a cutesy platform game, but this acclaimed indie adventure is a much darker tale than it first appears, says the GameCentral column in Metro. It’s essentially a social-realist version of a communitysimulation game and a “heartfelt exploration of depression and angst in a small-town, working-class community”. It’s also very funny and one of the most impressive games of the past year. (Switch, PS4, Xbox One, PC.)
Okami This new release of an ageing game lacks much that is actually new, but still it remains one of the best games ever made, says Ian Dransfield on Trusted Reviews. Okami is a role-playing game where you run around as the goddess of the sun, taking on quests, exploring and discovering hidden secrets. The world created is “genuinely beautiful and enchanting”, and the game play not po-faced but full of wit, imagination and playfulness. It’s fun for all the family. (MicrosoftWindows, PS4, Xbox One.)
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16 February 2018
MoneyWeek
48
blowing it
The Queen of Bitcoin W
Struggling to turn your bitcoin hoard into cash or superyachts? There’s a person you need to meet…
“Dadiani will act as one-part matchmaker, one-part luxurygoods agent to the digital-currency elite, helping them gatecrash the world of old money assets”
©The Times Magazine / News Licensing
hen it comes to financial technology, Quintus is an unrepentant Luddite. Indeed, part of him longs for the more civilised days when ownership of shares was confirmed by physical certificates and City business was conducted in gentlemen’s clubs, or with one’s stockbroker, over port and cigars. Doubtless such nostalgia seems quaint, or even amusing to today’s generation, but he likes to consider his scepticism at least partly vindicated by the recent turn of events in bitcoin. Even before the recent Eleesa Dadiani: noble ambitions, collapse in the price, those noble connections who had the good sense to cash out at the peak have found out her connections (she is a member of the that using virtual profits to buy physical Georgian nobility), experience and a goods in the real world was not as easy “certain amount of persuasion” to “act as as one might assume. For one thing, the one-part matchmaker, one-part luxuryvast majority of businesses do not accept goods agent” to the digital-currency elite, cryptocurrencies as they are seen as too helping them “gatecrash the world of volatile, as Ben Machell points out in The old money assets”. As perhaps the only Sunday Times. Even trying to turn your person in Europe currently offering such “bitcoin hoard” into pounds or dollars can a service, she’s attracted a lot of attention. be “a complicated, time-consuming and Her biggest success so far was to help an at times a prohibitively costly process”. anonymous Chinese billionaire buy a fleet Banks are often reluctant or simply refuse of four Formula One racing cars using $4m to handle the currencies and have a habit of worth of the digital currency litecoin. treating those who do with suspicion. Ms Dadiani is such a fan of the However, if “you’ve several million currencies that she is launching her own pounds worth of bitcoin burning a hole in version, Dadicoin, later this year, she tells your virtual wallet”, 29-year-old Eleesa the BBC. Her liking for digital currencies Dadiani “can help you turn it into actual is “not a demand-driven decision at all, superyachts or gold bullion”. Dadiani it’s intuitive based on the way things are launched her new service as an offshoot going”, she says. “For me, blockchain [the of an art gallery she owns. She now uses technology underlying bitcoin] is going
to be the biggest thing since the internet.” But she has nobler aims than just flogging trinkets to the super-rich, as Ailis Brennan reports in the Evening Standard. Her art sale in Mayfair, the first in the art world to sell work solely using cryptocurrencies, will run until 20 March, and the work on sale has been created to commemorate the anniversary of the end of World War I. Decentralised digital currencies will undermine the great-power rivalries that led to the war, she thinks, and believes her exhibition looks forward “to a brighter… future in which individuals have greater autonomy and entrenched state power can be overcome”. Let’s hope she is right, but it seems a lot to ask from a digital token.
Tabloid money… a snack for the ladies l Doritos is to develop a new range of crunch-free crisps for women, says CamillaTominey in the Sunday Express. Cue outrage.The #MeToo-ers spat out their Kettle Chips in disgust. Was sexual harassment and gender inequality not enough? Now they have to put up with inferior nibbles, too? Indra Nooyi, CEO of parent company PepsiCo, explains: “Women don’t like to crunch too loudly in public.And they don’t lick their fingers generously and they don’t like to pour the little broken pieces into their mouth.” Clearly, Noori has never been to a Stella & Dot party.
MoneyWeek
16 February 2018
l We need to take back the F-word, says Karren Brady inThe Sun on Sunday. Somehow, feminism has “come to be associated with raging, men-hating, bra-burning women” – particularly among younger women. “But I guess it is easier for young people to take our current freedoms for granted.” When Brady took over Birmingham Football Club in 1993, women were banned from the boardroom. “Now, I am proud to serve as a role model for women in business.” The bottom line is that every man and woman who believes in equality should be proud to call themselves a feminist.
l Plastic surgeons have revealed a 16% rise in men going under the knife, reports Brian Reade in the Daily Mirror. The increase is mainly accounted for by men seeking “brow lifts” to get rid of worry lines. That baffles me. The cost of such procedures start at around £5,000. So, even if the surgery works, fears of how you’re going to make the payments if you lose your job, or if you should wake up with one eyebrow stuck in Roger Moore mode, or of someone saying “I preferred you when you looked like the pre-op Gordon Ramsay”, would surely “turn any man’s worry lines into miniature DeathValleys”.
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crossword Tim Moorey’s Quick Crossword No. 883
Bridge by Andrew Robson
A bottle of Taylor’s Late Bottled Vintage will be given to the sender of the first correct solution opened on 28 February 2018. Answers to MoneyWeek’s Quick Crossword No. 883, 31-32 Alfred Place, London, WC1E 7DP.
A wonderful deal at 4,000 feet
49
Peter Stocken of Yorkshire showed me this wonderful deal from the Briançon Bridge Club, the highest in Europe at over 4,000 feet above sea level. Can you make Six Hearts on the ten of spades lead?
Dealer South
Neither side vulnerable AKJ 843 J986 QJ10
109876 76 AQ7 865
5432 52 32 97432
N W
E S Q AKQJ109 K1054 AK
Enter answers to the first seven clues without their initial letters, which are assumed to have flown upwards out of the grid. Letters thereby released form an appropriate sevenletter word to be written beside the grid. Answers and entries are all real words. DOWN ACROSS 8 Product creating a smell; 1 Creator of an online journal (6) tornado (anagram) (7) 2 Written off initial cost of 9 Spy; type of Orange (5) an asset (8) 10 Understand (3) 3 Let (5) 11 Boredom in France (5) 4 Revealed information (2, 2) 12 Good name for a lady lawyer? (3) 5 Formal speeches (7) 13 Over-hasty complaint? (4) 6 Begins (4) 14 Marijuana (8) 7 Crazy types (6) 18 Behaviour intended to mock (8) 15 100% (3) 19 New Testament book; 16 Subordinate position in a vehicle (4, 4) makes a scene? (4) 17 Tolerates; receives (7) 22 Type of lettuce (3) 18 Loud noise; sports equipment (6) 24 Surplus actor (5) 20 Road (6) 26 Lady’s man (3) 21 Bread roll in a Jewish tradition (5) 27 Precise (5) 23 Fly in the ointment (4) 28 Mean (7) 25 Eye drop; race (4) Tim Moorey is author of How To Crack Cryptic Crosswords, published by HarperCollins, and runs crossword workshops (TimMoorey.info).
Taylor’s, a family firm for 325 years, is dedicated to the production of the highest quality ports. Late Bottled Vintage is matured in wood for four to six years. The ageing process produces a high-quality, immediately drinkable wine with a long, elegant finish; ruby red in colour, with a hint of morello cherries on the nose, and cassis, plums and blackberry to taste. Try it with goat’s cheese or a chocolate fondant.
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Solutions to 881 Across 1 Puff 4 Most 7 Vat 8 Enhanced 9 Tenth 10 Titanic 13 Cowing 14 Safari 17 Nostrum 19 Not on 20 Onlooker 22 May 23 Grit 24 Wisp. Down 2 Up to now 3 Freshener 4 Men 5 Stern 6 White 7 Vatican 11 Train crew 12 Chimney 15 At times 16 Smoke 18 Senor 21 Out.
The bidding South
West
North
East
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pass pass pass end
2 3 4
pass pass pass
* ***
§
* Artificial game-force. ** Negative or waiting. *** Natural slam try – as the first new suit bid after suit agreement. § Ace-showing cue bid. Both black suits are blocked and with no dummy entry after trick one, it may appear you need to lead the knave of diamonds at trick two and hope for a favourable position. That’s what all the declarers did in Briançon. They all went down. Here’s the elegant solution. Win the ace of spades and cash the king-knave, discarding the blocking ace-king of clubs. You can now cash the queen-knave-ten of clubs, discarding three diamonds. You draw trumps and peacefully give up the king of diamonds at the end. Slam made. I hope the East players asked for their money back. For all Andrew’s books and flippers – including his new hardback Tips For Intermediates – see AndrewRobson.co.uk.
Sudoku 883 9
6 7 5 5 8
4 1
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3
2 4
5
5
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The winner of MoneyWeek Quick Crossword No.881 is: Dr Harriet Davidson of London.
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8 4 2
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MoneyWeek is available to visually impaired readers from RNIB National Talking Newspapers and Magazines in audio or etext. For details, call 0303-123 9999, or visit RNIB.org.uk.
To complete MoneyWeek’s Sudoku, fill in the squares in the grid so that every row and column and each of the nine 3x3 squares contain all the digits from one to nine. The answer to last week’s puzzle is below.
5 4 7 6 3 9 1 2 8
2 8 3 7 1 4 6 5 9
1 9 6 8 5 2 7 3 4
9 2 5 4 6 1 3 8 7
7 1 4 3 8 5 2 9 6
16 February 2018
3 6 8 9 2 7 4 1 5
8 5 1 2 4 6 9 7 3
6 3 9 1 7 8 5 4 2
4 7 2 5 9 3 8 6 1
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50
last word
Who would Jesus vote for?
Once you’ve got a dog in the fight, winning is what matters and wiser voices are drowned out
Bill Bonner Last Sunday we went to mass in a little church in a small town in the French countryside. As the priest delivered his sermon on the importance of following in the footsteps of Christ, we noticed two plaques on the wall – similar to those you see all over France. “To Our Heroes” was the inscription on top. Below was a long list of names of the young men killed in the Great War of 1914 to 1918. We were trying to imagine what Christ would have thought of a war to make the world “safe for democracy”… and what he would think of a church that celebrates the men who fought and died in it. Where did they all come from? we wondered. And what must have happened to the village when so many of its young men were dead? How could civilised Europeans get caught up in such a desperately dumb war… and not stop killing each other until 16 million were dead? The question haunts us. We return to it over and over. What is it that makes humans do things that – at least, when viewed from a distance – are obviously self-destructive? Meanwhile, the markets are noisy. Days of wildly gyrating prices left stocks and bonds in retreat. The press shouted
Red or blue? There are more important battles out its outsized fears… and its calming little lies. We still don’t know whether this will turn into the major plunge we have long anticipated. But already, it has delivered a message: watch out! We’re not the only ones who are worried. Bloomberg caught up with billionaire investor Carl Icahn: “Passive investing is the bubble right now, and that’s a great danger”, he said. “When you start using the market as a casino, that’s a huge mistake.” Eventually, he reckons, the bubble will implode and lead to a crisis bigger than in 2009.
Who turned the market into a casino? The Fed. It made fake money too cheap for too long. Readers often accuse us of “criticising” the president, or Congress, or the Fed – while never offering any constructive solutions. But no, we don’t criticise, ever. And no, we don’t offer constructive solutions. If we ever come up with any solutions at all, you can be sure they are completely unworkable and offered in the spirit of mischief. We don’t vote for the same reason we don’t criticise and don’t offer solutions. Once you take sides, you can’t see clearly. You become part of the thing you’re trying to observe. When you have a dog in the fight, you care about the outcome… and you see his teeth drawing blood every time the dust clears. That is the trouble with partisan politics. If you pay attention, you begin to care. You begin to think it is all a matter of one team against another. Red versus blue. Conservative versus Liberal. Them versus Us. You either win… or you lose. So you focus your emotional and intellectual energy on winning. It is like going to war. Reserved and intelligent voices may tell you why the fight is not worth it, why there are more important things at stake, and why war will bankrupt the nation, destroy the government, and kill off its young men. But once the cannons begin to boom, the wise voices fall silent. You think only of victory. Or survival.
The bottom line £985.50 How much it
£500,000 The total that
The savings the EU will reap under plans to end subsidies to countries with a per-capita income above the EU average. The new regime would leave Germany, France, the Netherlands and Sweden out of pocket.
Welsh town of Bangor paid to replace a number of parking signs that previously stated that motorists could park for free for up to “60 minutes”. Motorists can now instead enjoy free parking for up to “1 hour”. billionaire investor George Soros has pledged to donate to campaign group Best for Britain. The group will launch advertising this month to rally public opinion and convince MPs to vote against the final Brexit deal, reports The Daily Telegraph.
MoneyWeek
16 February 2018
cost to deliver a letter to the EU. Theresa May’s missive notifying eurocrats that Britain was heading for the exit was delivered by two civil servants travelling in business class on Eurostar.
€100m
$3.8m The combined
value of a Ferrari 275 GTB
and Shelby Cobra found untouched under a house in North Carolina as the property was about to be demolished. The garage hadn’t been opened for 27 years.
£65m
The discount Richard Caring (pictured), owner of the Ivy Collection and
Le Caprice restaurants, received when he bought Park House in South Kensington. The original price tag was £105m, but Land Registry records show Caring paid £40m.
£100m
The size of the funding gap faced by the UK’s richest county, Surrey, according to the Bureau of Investigative Journalism. The average deficit among the 150 English local authorities whose finances were analysed was £14.7m.
moneyweek.com
©Alamy; Rex Features
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