Monthly Archives: September 2013

Market Report for Week Ending 20/09/2013

In this week’s market report Oliver Phillips talks about Royal Mail…

Market Commentary

In the UK, the FTSE 100 index rose 0.2% to 6,596.4. Having initially lost ground during the first half of last week, the market was boosted by the US Federal Reserve’s surprise decision to maintain its $85 billion-per-month quantitative easing program for the time being.

Stocks in focus: Royal Mail

What does it do?

Royal Mail is the designated universal service provider of mail services in the UK. It has a mandate to provide a fixed price, six days a week letter service to over 29 million addresses and presently delivers approximately 99% of UK letter mail and 36% of parcels (by revenue).

Why is it in the news?

The UK government recently announced its intention to float Royal Mail on the stock exchange.  At least 41% of the shares are expected to be sold and initial estimates value the company at around £3bn, which would make it the largest privatisation since British Rail in 1993.  With letter volumes in decline, Royal Mail’s prospects for growth hinge on its ability to take advantage of the buoyant parcel market, which is being supported by the growth of internet retailing.  A major transformational programme has helped modernise the business and increase both profitability and cash flow, but it remains to be seen whether it can compete effectively with rivals that can cherry pick lucrative urban areas without being obliged to deliver everywhere in the UK.

Points of View: Domestic Bliss? 

Evidence of a UK economic recovery continues to mount for the time being.  As one might expect, this has proved a very positive backdrop for UK consumer oriented stocks and investors in the sector are now left to consider whether this recent outperformance can be maintained.   On the one hand, many retail companies have recently warned of caution, citing that underlying consumer confidence remains weak and that declining real earnings are hindering any improvement in the UK economy from feeding through to the consumer pocket.  On the other hand, optimistic commentators suggest consumer debt reduction is levelling off and that this will release more money to flow back into the consumer economy.


Market Report for Week Ending 13/09/2013

In this week’s market report Oliver Phillips talks about GlaxoSmithKline…

Market Commentary

The FTSE 100 index rose 0.6% to 6583.8 as investor confidence in the UK’s economic recovery was boosted by data revealing a higher-than-expected drop in jobless claims and a fall in the nation’s unemployment rate.

 Stocks in focus: GlaxoSmithKline

What does it do?
GlaxoSmithKline is a global healthcare company that researches and develops a broad range of innovative medicines, vaccines and consumer health brands.

How is it doing?
Following on from the recent investigation into alleged mis-selling practices in China, the group’s risk profile has been increased by news last week that the US Food and Drug Administration (FDA) has issued guidance for generic competition to its $8-billion-a-year asthma treatment Advair, for which GSK’s main US patent expired in 2010. Unique among blockbusters, the drug has thus far remained free of generic competition thanks to the difficulty of copying inhaled drugs and confusion about what regulators would require before approving copies.  The new clarity, though, means generics could potentially hit the market by 2016 or 2017.  This is a concern to investors who are otherwise looking forward to GSK entering an exciting period of new drug launch activity.

Points of View: The Rule of 72

At NWBrown we are strong believers that equity should be the asset class of choice for long term investors.  The stock market is of course volatile in the short term and investors should continue to expect this.  In the long term, though, capitalism has a strong tendency to reward risk-taking equity investors with significantly higher compound growth rates than less risky counterparts such as cash and bonds.  In turn, the power of higher compound growth rates to create long term wealth is illustrated by the “Rule of 72”, which, given an expected compound rate of return, allows one to estimate how long it will take for an investment to double in value. All you do is divide 72 by your expected rate of return.  For example, an equity investment returning an average 12% a year would take six years to double in value whilst a savings account paying 2% a year would take 36 years to do so.

Market Report for Week Ending 06/09/2013

In this week’s market report Oliver Phillips talks about Vodafone…

Market Commentary

In the UK, the FTSE 100 index added 2.1% to 6,547.3, as upbeat readings of the manufacturing, construction and service Purchasing Managers Indices in the UK lifted investors’ sentiment. The FTSE techMARK 100 Index rose 2.5%, to 2,952.8, while the FTSE AIM 100 Index gained 2.2%, to 3,497.

Stocks in focus: Vodafone

What does it do?
Global telecommunications giant Vodafone is the third largest constituent of the FTSE 100 index by market capitalisation.  It provides voice, messaging and data services to around 404 million mobile customers in over 30 countries and owns 45% of America’s largest mobile operator, Verizon Wireless.

How is it doing?
Vodafone stole the headlines this week by announcing that Verizon Communications has agreed to pay $130bn in cash and stock for its 45% stake in Verizon Wireless. To put this in perspective it is set to be the third largest deal in corporate history.  Of its $130bn windfall Vodafone plans to distribute $84bn back to shareholders, comprising $24bn cash plus the entire Verizon shareholding.  Alongside the sale, Vodafone announced a new £6bn organic investment plan aimed at boosting competitive position, networks and customer experience over the next 3 years.

Points of View: UK Interest Rates
In early August the new Bank of England (BoE) Governor Mark Carney set out the framework for his much-awaited ‘forward guidance’.  Under this new policy the BoE’s intent is broadly to resist raising the base rate (currently 0.5%) until unemployment falls from its current level of 7.8% to below 7%, which it does not expect to happen for another three years.  The idea is essentially to encourage confidence that short-term interest rates will remain low for the next 2-3 years, thus promoting growth and liquidity of longer term bank loans at higher rates.  It should be noted that there has been some scepticism in the market about this plan and that the BoE is not contracted to this guidance and could change the policy in due course.  Nevertheless, it does give clues to the shape of the yield curve in the short to medium term and this in turn can guide investment decisions.

The Effect of the Lifetime Allowance on Death in Service Benefits

Whilst Pension Auto-Enrolment is firmly on the radar of most employers it is easy to miss a somewhat hazier blip on the screen.

The reduction of the pension lifetime allowance to £1.25m next April could have adverse tax consequences on death in service benefits. 

The traditional “Death in Service” scheme operated by many employers is registered under pension regulations and any payment made is added to the deceased’s Pension Lifetime Allowance in order to calculate if the Allowance has been breached.  Any such breach gives rise to a tax charge of 55% on the excess over the Lifetime Allowance Limit.

Fortunately a remedy is at hand in the form of unregistered death benefit schemes known variously as Relevant Life Policies (for individuals) or Excepted Group Life Schemes (for groups of employees).

A further advantage of these schemes is that the death benefits may be for a much higher multiple of income, thus providing members with the opportunity to substantially increase the protection available for their families. Company Directors, for example, with pension pots close to the Lifetime Allowance limit might wish to redirect contributions to a Relevant Life Policy using Salary Exchange.

At NW Brown & Company we have a dedicated team of corporate consultants who will offer to look at the “bigger picture” when an employer contacts them regarding their staging date or their Keyman insurance. A full review of your business’s insurancepension and employee benefits provisions may seem a large investment in your time, but an investment worth making.

Focus on BHP

In this weeks market report Oliver Phillips talks about BHP Billiton Plc…

Market Commentary

In the UK, the FTSE 100 index fell 1.2%, to 6,412.9 during the shortened trading week.  Investors fretted over a possibility of US military intervention in Syria, which overshadowed a slew of optimistic economic data and Mark Carney’s first forward guidance on policy measures as the Bank of England Governor.  In stock-specific news, Verizon has agreed to pay Vodafone $130bn in cash and stock for its 45% stake in their joint venture Verizon Wireless, the largest US mobile operator.

Stocks in focus: BHP Billiton Plc

What does it do?

FTSE 100 constituent BHP Billiton is one of the most diversified of the world’s major mining companies with interests in a broad range of major commodities such as aluminium, coal, copper, iron ore, petroleum and potash.  Sales of iron ore are presently the biggest contributor to profits.

How is it doing?

BHP released its full year results on 20th August.  Underlying earnings were slightly worse than expected, but mostly due to a one off tax increase.  Net profit for the year fell 30% to $10.9bn from $15.4bn the year before, held back by the weaker commodity prices prompted by China’s cooling economy.  The results also highlighted a planned $2.6bn investment in the Jansen potash project in Saskatchewan, which confirms BHP’s intentions to remain one of the most diversified of the world’s major mining companies.

Points of View: Mood swings

It is interesting to note a stark switch in sentiment between emerging and developed markets of late. Following a protracted period in which headlines have been keen to exalt the virtues of emerging markets whilst predicting the decline of developed markets, we have noticed a steady increase since the start of the year of headlines highlighting the opposite tack; an improving UK/European economy and bearish pieces on the so-called “BRIC” emerging markets of Brazil, Russia, India and China.  This theme seems set to run for a while yet, although the change in sentiment and resulting underperformance of the newly unloved emerging markets is starting to reveal some interesting investment opportunities worthy of monitoring.

The Impatience of Asset Allocators

A recent survey by Core Data Research confirmed something that a lot of investment professionals have long suspected: that the behaviour of some asset allocators in the financial services industry is undermining the efforts of fund managers to generate above average performance.

The asset allocators in question comprise a large number of fund selectors known collectively as Discretionary Fund Managers, or DFMs. The members of this group have the power to determine whether a particular fund makes it on to their firm’s Buy List.

This is fine but what is not fine is the length of time a fund is likely to remain on that list. The Core Data survey asked DFMs how long they would give an underperforming fund before selling it. The most generous DFMs said they were prepared to tolerate up to 12 months of underperformance  but a more common answer (in around half of cases) was that they would tip the fund out after just 6 months.  The typical holding period for even a good performer may be no more than 2-3 years.

Having won a place on a DFM’s list, the last thing the fund manager (or his marketing department) wants is to see his fund coming off the list in short order. This concern can encourage managers to take the safer route of hugging the fund’s benchmark index, ensuring that performance will not be significantly below par. Unfortunately, this also removes any likelihood that the fund will outperform its peers, despite the client being charged a higher fee for supposed active management.  In a situation where the manager takes this approach the investor would be better off buying a fund that tracks the index –and does so at a considerably lower cost.

Another danger facing the fund manager is that he may have a particular style which lands him at odds with the market. For example, managers pursuing a “value” style (ie buying under-valued assets in the expectation that this gap will be closed) can find themselves in a cold and lonely place if the market goes through a period where it prefers “growth” funds. A strategy that may work well in the longer term may not be given the breathing space it needs to flourish.

All of this seems rather at odds with the mantra of long term investment the industry preaches. Our own approach is to favour funds that are not merely over-priced closet index trackers and give the managers enough time to deliver attractive real returns.