Monthly Archives: October 2013

Market Report for Week Ending 25/10/2013

In this week’s market report Oliver Phillips talks about Standard Life UK Smaller Companies…

Stock in Focus: Standard Life UK Smaller Companies 

Last week I touched on the impressive track record of the Edinburgh Investment Trust under the tenure of its departing manager, Neil Woodford.  This week I thought I would stick with the investment trust theme and shine a light on the Standard Life UK Smaller Companies Trust, which was recently recognised as the best performing UK investment trust over the ten years to 1st October 2013 having generated a total return (capital growth plus dividends) of 588% during this time.

The Trust is managed by highly regarded veteran investor Harry Nimmo, who is modest enough to admit that the ten year comparison was helped by the significant discount to net asset value that existed when he took over.  Even taking this into account, Nimmo’s consistent investment process – looking for companies with proven business models, recurring revenue streams, strong cash flows and pricing power – has enabled him to pull off the near impossible trick of making money in falling markets as well as in rising ones.  Furthermore, Nimmo believes in “running his winners”, even though this has resulted in the portfolio containing stocks that can no longer be described as smaller companies. Indeed, several are now mid-cap and one or two are even larger. Perhaps the best known of these is financial services provider Hargreaves Lansdown, now a FTSE 100 company.  So although the Trust is no longer a pure smaller company play, this has clearly been to the benefit of shareholders to date.

Looking forward, Nimmo expects the portfolio to retain a strong focus on high quality retailers and internet business models.  Thus it is no surprise to see that the likes of ASOS, Paddy Power, Rightmove, Moneysupermarket, Dunelm and Ted Baker dominate the top 10 holdings.


Towards the Holy Roman Empire

The biggest problem the European Union faces is not the Euro, not excessive regulation, not the growth of nationalist parties or the radical right. It is the lack of popular appeal to the people of Europe. The problem is that the concept of a continent without war was, in the 1950’s, really beautiful but today, after nearly 70 years of peace, is just boring. To a generation where almost every European nation had suffered deprivation, death on an unimaginable scale, near starvation and either fascism or communism threatening the existence of civilisation, the dreams of a Europe without boundaries and with a political method of resolving disputes was very seductive. The dreams of Spaak and Monet of a Europe where common regulation would replace regiments of riflemen in determining whose rules would apply have lost their resonance. There is no romance, no unifying symbol, no ceremony to fascinate, nor even, apart from Senor Berlusconi, any interesting scandal to follow which is truly European.

Only in the East where memories of despotism are closest both in time and distance does the European dream still attract popular support. The lack of enthusiasm for common standards of hygiene and food is not perhaps totally surprising – the freedom to expect food without filling in forms is unlikely to fill the streets with placard waving protestors – but it was the removal of the everyday causes of friction and the prevention of small fights which the founders of Europe saw as the secret of freeing us from the horrors of the holocaust, the rivers of blood flowing across Europe from the Somme to Stalingrad.

The boredom, lack of romance and lack of meaning to the man in the Manheim or Manchester street is often put down to a ‘democratic deficit’ – a deficiency in institutions such as the European parliament, the Commission and the Court. The prescription often made is that more power should be given to Parliament as opposed to the Council or the Commission; that the popular mandate for  MEPs would connect European people more closely to their policy makers.

I argue that, although the diagnosis is correct, the cure is much more radical. Boredom and disillusion are there and evident but it is not more politicians who are required, not more plebiscites  or polls but romance which is missing – what Europe needs most is an identifiable institution and we have exactly the right instrument available in the Holy Roman Empire.  We can re-invent or re-establish this memorable relic of our common ancient civilisation with no problem.

The  Emperor or Empress would become the unifying symbol of our common purpose, in his person would be vested with the ornamental and formal representative powers of every member nation – he would be the ceremonial head of the union and every Head of State would swear allegiance to the Emperor or Empress. In his person every European citizen could identify with the real existence of the Empire.

The very existence of an Emperor or Empress would give tangible form to the Union and would allow popular support to focus on something real – a person with a name and a history – an individual who could be seen, cheered and waved at and whose every movement could be commented on by the press, pictured on TV and fill the pages of gossip magazines – of course he would have no real power himself although perhaps rather more than some of his forebears. He would, for instance, have the power to invite every member of the Commission or any head of government of a member state for tea, the duty to attend the opening of the European Parliament etc.,  but the very fact of his existence would be living proof of the European dream.

The Holy Roman Empire is now widely regarded as not very holy and far from its Roman antecedents so it is perhaps possible that a more politically correct term would be appropriate today – indeed a European wide referendum could be held to decide which parts of our common inheritance we should celebrate in the title, although probably the “holy” bit would be acceptable to most and “Roman ” was always a very inclusive and multi-cultural status. Such a referendum might itself be a unifying move.

As for who should be Emperor or Empress, again the elections should be the occasion for public participation, via publicity, betting and TV exposure of the candidates  –  but the electorate should be restricted to heads of state of member nations. To be eligible for election as Emperor one would need to be a head of state or spouse or child of a head of state. The electors would by ballot select ten of their members (or the nominee of one of their members) to enter the final selection by lot. Any head of state could nominate one candidate, either themselves or any eligible person from any member state, in their stead but any nominee would have to be between the age of 40 and 50 when nominated. When elected the European Emperor would rule for life or until he abdicated but when he achieved 70 years of age a successor would be elected.

Imperial power would be restricted to the right to veto any legislation coming from parliament, the right to revoke or amend any act of the Commission and power to veto any appointments to the Court or Commission. These powers would be exercised on behalf of the Emperor by a Senate of 100, all of whom would be elected by the parliaments of member states on the basis of at least one Senator for each state, with the balance being allocated on the basis of population of member states, or groups thereof. A Senator would serve for 20 years, and the Senate would be in continuous session.

The seat of the Emperor would be a matter for his personal choice, and each Emperor could choose the city in which he held court – but once he had chosen he could not ever change. The Senate would sit wherever the Emperor had chosen.

The funding for the imperium would be an imperial purse – this would comprise 1% of all expenses claimed by all Commission, Court and Parliamentary employees and members. It would belong exclusively and wholly to the Emperor and he would not be asked to account to anyone as to how he spent it. In addition he would receive free of tax without any need to account to anyone any payments from any city, country, company or person for any service he wished to provide, including sponsorship, entertaining or personal visits. Any gifts or inducements would belong to him personally to do with as he wished.

Senators would be paid by the states they represented at the same rate as members of their domestic parliaments, and they would be paid at this rate for the rest of their lives.  They would only be able to serve a single term of 20 years and would be expected to resign all other forms of employment or positions of authority whilst serving in the Senate. They would be entitled to the honorific “Senator” for life.

The European Parliament would retain its existing powers but at the end of their term existing MEPs would be replaced by members of individual state parliaments elected by domestic parliaments for a ten year fixed renewable term, on a ‘1 for 2’ basis so as to halve the size of the parliament. It would henceforth only sit in the month of August and when it was not sitting all its powers would be devolved to the Senate. Members would not be paid as they would be receiving a parliamentary salary on appointment. They would not cease to sit as MEPs if they lost their domestic parliamentary seats but if they lost their parliamentary seat there would be no prohibition on their taking outside employment as long as they were available for the month of August.

The benefit to the European project of adopting these reforms would be several.

First, a popular involvement of all the people of Europe in the identification of candidates and with the selection of an Emperor would itself help by providing a unifying symbol.

Second, the removal from the spotlight of the Commission, and the reduction in time and expense of the unpopular parliament would remove sources of unpopularity.

Third, the romance and tradition of the restored imperial throne would provide a continuing source of stories; a focus for the future. Whether it was scandal or the prospects of succession any reporting would of its nature tend to be Europe wide as all would share an interest.

Fourth, an example to the outside world of how Europe can combine forward looking democratic institutions with traditional national institutions and historical continuity would illustrate virtues which could be followed in other areas.

We should cease to bemoan the loss of the glory that was Rome, and act to recreate the best of its long and civilising characteristics in a new Empire. The reality of 70 years of peace is too valuable to risk; securing the inheritance requires imagination from politicians and popular support from their electorates. Re-establishing the greatest Empire the world has known could just be what would inspire both.

Written by Marcus Johnson, Chief Executive, NW Brown Group Ltd

Market Report for Week Ending 18/10/2013

In this week’s market report Oliver Phillips talks about Edinburgh Investment Trust…

Market Commentary

In the UK the FTSE 100 index rose 2.1% to 6,622.6 as positive UK retail sales data and a short term resolution to the US debt ceiling problems lifted investor sentiment.

Stocks in Focus: Edinburgh Investment Trust

The listed UK equity fund Edinburgh Investment Trust has been in the news lately due to its highly-regarded manager, Neil Woodford of Invesco Perpetual, announcing that he will be leaving to set up his own investment company.  This is significant as Mr Woodford has one of the best long term track records of any UK institutional investor thanks to his contrarian, conviction-led approach that saw him avoid the popular rush for dotcom shares in the late 1990s as well as exposure to banks in 2008.  Indeed, so highly regarded is Mr Woodward that the shares in Edinburgh Investment Trust lost 5% on the day of the announcement.   Looking forward, Mark Barnett, the manager entrusted by Invesco to step into Woodford’s shoes should they retain the Edinburgh mandate, seems well qualified to take over thanks to his similar style and similarly impressive track record over last 5 years.

Points of View: US Debt Ceiling Deal

Last week’s article explained the US debt ceiling deadline.  On Thursday 17, the final day of negotiations, the US Senate voted to approve a last-minute compromise to reopen the federal government and raise the debt ceiling in order to avoid a potential US default on its debts.  Markets breathed a sigh of relief but the solution has effectively just kicked the issue down the road.  In a few months both parties will again have to reach agreements regarding the budget that offer more long term resolutions.  In the meantime Barack Obama has suggested that the US needs to “Get out of the habit of governing by crisis”.  This would indeed be sensible but it remains to be seen whether common ground can be reached amicably and in good time given the seemingly entrenched positions of the two sides.

Directors & Officers Insurance – Residents Associations

You may be a flat owner or simply a landlord with a invested interest in the way the estate is run. Your fellow residents may have established a formal Residents Association or Residents Management Company. Depending on the type of lease and the company’s constitution it is likely the company will be able to purchase Directors  & Officers cover to protect its directors and reimburse them in the event of a claim.

The general activities of an estate director will likely consist of general upkeep of their property but can also extend to include fiduciary and legal matters.  In such situations you may be acting in the capacity of a director, trustee, company secretary or non executive director. The law draws no distinction between different categories of director and it makes no difference whether you are paid or unpaid, full or part time.  A director has specific duties and responsibilities and, if they fail to discharge them properly they may incur significant and, indeed, unlimited personal liability.

Residents Association directors give their time and service for free and, consequently we recommend that associations purchase D&O cover to protect them from any personal liability they might incur in performing this function.

NW Brown will arrange Directors & Officers cover to protect the individual’s assets, provide a defence during litigation and include cover for bodily injury and property damage claims.

If you would like to discuss the key features of the policy and organise a quotation then please contact me directly.

Market Report for Week Ending 11/10/2013

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

Market Commentary

In the UK, the FTSE 100 index rose 0.5% to 6,487.2, as the Bank of England refrained from making changes in its interest rate or asset purchase program. The FTSE techMARK 100 Index lost 0.3%, to 2,934.9, and the FTSE AIM 100 Index rose 0.4%, to 3,592.8.

Stocks in Focus: Tesco

Almost two years on from a profit warning, Tesco has retrenched from its overseas operations in the world’s three largest economies, selling up in Japan and the U.S. and taking on a partner in China in order to focus on the UK, where it generates two thirds of sales and profits.  Indeed, the domestic self-improvement programme has continued of late via the re-launch of its premium own-brand finest* range.  This follows on from the rebranding of ‘Tesco Value’ to ‘Everyday Value’ and appears to be aimed at winning back customers from both M&S and Waitrose at the upper end as well as Aldi and Lidl at the lower end of the mid-market.

Points of View: US Debt Ceiling

The US debt ceiling impasse has been causing quite a stir in markets of late, but what is it and why does it cause such panic? The debt ceiling is simply a self-imposed limit on national debt that is set by Congress.  Every now and again budget deficits require the debt ceiling to be raised.  However, this must first be agreed by Congress, which is present at loggerheads.  On the one hand the Republican-led House of Representatives has been demanding concessions on “Obamacare” (President Obama’s flagship healthcare reforms) before they agree to a deal.  On the other hand the Democrat-led Senate has been refusing to give way.  The current limit of $16.699 trillion was actually breached in May, since when the US Treasury has been using what are called “extraordinary measures” to keep paying the bills.  Those measures run out on 17 October, though, and if no deal is agreed by then the US government could suddenly run out of money and default on its obligations; needless to say, this would be disastrous for the global economy.  Accordingly, most believe that some sort of last minute compromise will be reached as neither party can afford to be seen as responsible for allowing a default.

Fund Closures – a badge of honour?

Colin Manktelow looks at recent developments in the Unit Trust industry and how NW Brown meets the challenges that have arisen.

In recent months the unit trust industry has seen a rash of highly successful funds being closed to new investors. So many, in fact, that the need to close a fund may simply be regarded by onlookers as a management group seeking to acquire a badge of honour. What is behind the closures, and what are the consequences for investors? Behind the closures lies a simple calculation as to how much money a manager can run without diluting his or her investment strategy. If the strategy is put under strain it will cease to work, or at least cease to produce the returns that have made it a success. If this happens not only will the fund become of less interest to new investors, but existing investors will start to pull their money out. The consequences are that existing investors will continue to enjoy the benefits of a successful management style, but that new investors have to look elsewhere for their returns.

The reasons why a strategy can come under strain are best illustrated with a practical example from the smaller companies sector. The Fidelity UK Smaller Companies Fund, managed by Alex Wright, achieved such success in a relatively short period of time that investors started to throw increasingly large amounts of money at it. All well and good, but the strategy that drove the fund’s success was based on an exacting criteria that filtered out the majority of smaller companies and left it with a relatively small universe of stocks to invest in. The trouble with smaller companies is that they are small and it is only possible to buy a limited number of shares, any more and supply would dry up and the price rise to a level where the company was no longer attractively valued. This combination of a small universe and practical limits on the amount of shares that can be bought make it increasingly difficult to invest more than a certain amount of money without wrecking the strategy. The only viable solution is to close the fund by levying penal charges on new investors (known as soft closing). This is not, then, so much a badge of honour as a pragmatic means of dealing with the problems of success. Of course, it does no harm to a fund management group to be seen to be in this position!

This imbalance between inflows to successful funds and investable targets has been seen in European, Asian and emerging markets. Funds from Fidelity, Blackrock, First State and Aberdeen have all soft closed in the last few months. At NW Brown we use these funds, but our preference has been to make use of investment trusts where these are available and can be bought on attractive terms. Investment trusts are broadly similar to unit trusts, save that they are companies with limited amounts of share capital at their disposal (additional monies can be raised but the whole process is in the hands of the management group which can control the amount of capital under management). Investors can buy and sell shares in the secondary market so they are not locked in, but the amount of money under management does not change through inflows. This enables the manager to go on applying a successful strategy without being forced to dilute it by the problems of success.

If you would like to know more about the way we invest for our clients, please contact Colin on 01223- 700228 or