Monthly Archives: April 2015

Stocks in Focus: HSBC

HSBC’s Chairman, Douglas Flint, announced last week that the bank is considering moving its headquarters from the UK. This is not entirely surprising given the environment of increasing regulation, fines and bank levy taxes facing banks headquartered in the UK.  Furthermore, a move back to Hong Kong (from where it moved its domicile at the request of the Bank of England when it bought Midland Bank in 1992) could make operational sense given that approximately 78% of the bank’s profits come from Asia.

Thus far, the shares have risen strongly since the announcement.  Indeed, common consensus is that a move would cost approximately £1bn but would save the company roughly £930m each year, much of which would be as a result of a reduced UK bank levy.

So could the bank follow through with its threat? In reality, there are a number of reasons why it would not. First, it is an open question whether the UK regulator would allow the bank to move back to Hong Kong (or anywhere else).  Second, the shareholder base, which is predominantly from the US and UK, would likely baulk at owning a Chinese-listed bank.

In any case, it is no coincidence that HSBC have made this announcement at such a politically important time. The levy on bank balance sheets cost HSBC £750m last year and is set to increase to £1.2bn under George Osbourne’s plans or £1.5bn under Labour. It is unlikely that any government would backtrack on these policies, but HSBC’s warning shot may add caution to any government planning further increases.


Teaching, Performance, and the Battle of Jutland

Marcus Johnson draws parallels between the Battle of Jutland and performance-related tables.

Throughout history and earlier mankind has tried to assess performance. For just as long, we have had the problem that the achievement of intermediate targets is not the same as the achievement of a final goal, and the selection of an intermediate target has countless times unwittingly damaged the chance of achieving the final goal.

On 31 May 1916 nine thousand men lay dead at the bottom of the North Sea and I commend to all readers the book “The Rules of the Game: Jutland and British Naval Command” by Andrew Gordon.

In summary he demonstrates that it was not despite the training and rigorous performance measures with regard to firing speed and ship manoeuvring, but because of them that the Royal Navy lost nearly 6,000 men and 25 ships that day. The Navy had trained its operatives and designed its ships to meet rigorous and demanding standards and its officers had been selected and promoted on the results of competitive exams and annual testing. The ships manoeuvres, signalling skills of officers and the speed of firing guns were all well tested regularly. Unfortunately, on the 31 May the very design and operating methods which led to great performance in Annual Reviews proved fatal.

I have often observed in my own field of investments how performance measurement in the pensions industry has led to a ridiculous focus on short term returns, often at the cost of long term achievement of objectives, and in recent years the major banks have almost all been destroyed by a similar confusion of intermediate targets (todays reported profits) for their ultimate goal (a resilient institution producing a good return for its owners for decades to come). But although not to be dismissed and not without some cost, society will survive the failure of banks, and pensioners will get by with lower pensions. Society will not survive if we fail to educate our children and lose sight of what our goals are in the same way.

Our goal in teaching is not disputed – we want our children to become well-adjusted adults who lead happy productive lives. Teachers are there to help give them the skills and experience they need to do this. Professor Charles Goodhart formulated Goodhart’s Law with respect to indices chosen as measures of economic activity which says any chosen measure will rapidly lose its value.  (More formally: “When a measure becomes a target, it ceases to be a good measure.” ) This is because the intermediate objective is ‘gamed’ – that is because when told that X is a measure of how well we are achieving, humans will tend to maximise X using all means possible. Some of these actions may be detrimental to achieving the actual objective. And so welcome to the education world in 21st century UK. We have built a complex and expensive superstructure and forgotten to look at the results.

We have a civil service and the major political parties all convinced that evidence based policies are the best, but somehow, when it comes to education, they ignore the evidence that the current inspection system is producing perverse results.

If the objective is to achieve happy well-adjusted productive adults, it must surely be the case that those who are role models and in charge of leading our children in the right direction should themselves be happy well-adjusted productive adults? Indeed, I would go further and say a system which leads to high absenteeism, high levels of dissatisfaction as measured by a desire to leave the profession and elevated levels of stress related disease is perverted.

The problem is not caused by multiple re-organisations or by fashion changes in the types of teaching methods adopted – it is not a consequence of poor or insufficient resource allocation. It is an unintended consequence of a well-meaning and well justified attempt to measure value added which has failed because it is simply measuring what can be measured most easily and ignoring wider and more difficult aspects of our schools role. This is not to say that we should abolish exams, ban league tables and stop inspecting schools. It is to say we need to downgrade some of these measures’ importance and seek a wider range of measures as well as, at the same time, making the inspection system less of a punishment regime handing out penalties and more of a support mechanism encouraging the spread of successful sensible socialisation processes.

How do we do this? The first place is to recognise the school is a social organisation and as soon as we do that it becomes obvious that we should look at all the actions and activities – not just the academic. We should emphasise the longer term over the shorter term and explicitly recognise the unreliability of some of the proxies we use. The sort of measures we ignore at our peril are those which measure the outcome of the education process – and the fact that such measures take perhaps 25 years to prove does not make them any less important. It would generally be agreed that a successful school is one where graduates have high employment, low drug usage, low offending rates and can form long term relationships. It is not only that we fail to measure these outputs – it is that our failure to measure them makes it seem as if they do not matter. We should admit they are harder to measure but the fact that they are much more important than whether facts were learned or techniques applied should make us place these measures ahead of all others.

The government recently told banks to spread bonuses over several years because short term rewards for short term behaviour had produced adverse results. How much more important it is that we stop short term behaviour in our education system.

The inspection regime should be renamed a Standards Institute for Education and should be given the specific task of promoting successful education with more emphasis on outcomes, less on pedagogy. To assist in this process it should gather and publish data on the success of schools – and even attempt such attribution analysis as is possible in its publication. Among the measures it uses should be data at age 30 for the pupils from every school as to how successful their social integration has been – including, as they are easiest to obtain, birth, death, employment and marriage rates. But also crucially measures of teacher happiness such as absenteeism, staff turnover and levels of complaints and grievances should be measured and reported as being at least as important as academic value added. The new Standards Institute should have no enforcement powers and all elements of the penal regime there today should be abolished, to be replaced by publicity which allows the possibility of greater parent power but more importantly should empower teachers and heads to spend their time more productively. One of the signal failures of the current regime is that far too many hours of all staff are wasted in demonstrating compliance with standards, one of the standards the new Institute should publish is an index of how much time the school spent on Compliance and the Institute should have a statutory objective of ensuring less than 1% of time available (that is half an hour a week per teacher) is spent on compliance work. The Standards Institute should use surveys to measure satisfaction among parents, teachers and pupils. It should itself be measured on its success in making schools more successful social organisations, and above all in its success in encouraging greater focus on the long term nature of a successful education system.

This article was published in the Cambridge Business Magazine – May 2015 Issue 41 

Stocks in Focus: Shell agrees to buy BG Group

On Wednesday, Royal Dutch Shell announced an agreement to buy BG Group for a consideration of £47bn, a 50% premium to the pre-bid share price.

The rationale for Shell’s offer is that the deal will expand its presence geographically, take advantage of synergies between the businesses, and bolster its ailing 13bn barrels of oil resources by over a quarter.  Shell will develop its exposure to geographies such as Brazil, making it the largest foreign oil company in Brazil, as well as cement its position as the global leader in liquefied natural gas.  By combining the companies, Shell also estimates savings of $2.5bn per year and the group will divest assets worth $30bn between 2016 and 2018.

Speculation that Shell would acquire BG have been circulating for years but it was not until the recent fall in the oil price that BG’s share price was low enough for Shell to make a bid.  However, the large 50% premium Shell has agreed to pay means that the oil price must recover in the medium to long term for the deal to be attractive to its shareholders.

Shell is currently one of the highest yielding companies on the FTSE 350 index and if it can maintain its attractive dividend then the deal offers exciting exposure to world class assets.  However if the price of oil does not recover to at least $70 per barrel over the medium term, investors will be concerned at the large premium of the bid.

New Investment Manager based in Norwich

We are pleased to announce that we have attracted Kevin Boland from the highly regarded Church House Investment Management firm to enhance our Unthank Road operation.

Like all the best investment managers Kevin got his first taste for investments in the stockbroking fraternity, with summer internships at Goodbody Stockbrokers, Ireland’s longest established stockbroking firm during the summers of ‘06 and ‘07.  He studied Business at Union College Kentucky.  After a brief spell with Merrill Lynch, he completed a MSc in Financial Analysis & Fund Management at the University of Exeter and was awarded a Distinction for his dissertation on Value and Growth investing.  He has learned the real skills of managing wealth across a variety of small and national firms including Redmayne Bentley, Charles Stanley and Church House Investment Management.  Kevin is a Fellow of the Chartered Institute for Securities & Investment (FCSI) and was an active member of the Institute’s West Country committee for five years, until his move to Norfolk.

In his personal life he has been for some time an active and enthusiastic Rotarian and is keen to join one of the seven Rotary Clubs in Norwich.  This is one of the reasons he is looking forward to his imminent arrival in the city.  He is also aware of several cycling clubs in the city, one of which he hopes to join.

Kevin says that although he will initially be staying outside the city he hopes to buy a Victorian terrace house close to the Unthank Road offices of NW Brown so he can walk everywhere.  In his role at NW Brown he will be taking responsibility for individual private clients , particularly Norwich residents as the firm believes that local and personal management is very important to many of its clients.

Marcus Johnson, the Chief Executive of the NW Brown Group said ” I hope and believe Kevin has a long future with us. With the arrival of Kevin and a new Administrator in the Norwich office in early April we have achieved our short term hiring objectives but we are always talking to qualified wealth managers with existing business with a view to their moving to a firm with long term commitment to the City.”

Robert Raywood, to whom Kevin will report, said ” I firmly believe that there are many people who want to see their investment portfolio handled by managers they can see and trust , who do not want anonymous distant decision makers making the choices which will determine their future well being.  Norwich is very fortunate to have two locally run firms committed to direct investments in stock markets for their clients.  I expect that both Barratt and Cooke and ourselves will be around for a long time offering high quality individual care and attention to our clients. A single visit to our offices in Pembroke House is enough to show we are a thriving profitable business here for the long term.  The investment world is a competitive place and the expenses of operating rise every day.  It is only our success in implementing electronic reporting and on line access for our clients which has allowed us to maintain our profitability. We continue to be committed to a local presence and we believe we can combine personal relationships with efficient execution, that is the secret of our success.”

Different types of trust to benefit children

Despite reductions in personal taxation over the last two years the tax regime for trusts has remained the same. With an increasing  number of people downsizing to release capital and the new pension reforms allowing total access to pension funds it may well be that the use of trusts to benefit children is something being considered. We are therefore reissuing our original article published in August 2103.

Absolute trust

This type of trust usually exists where someone holds assets as a nominee for someone else. Formally constituted absolute trusts are not recommended.

Interest in possession trust

Usually set up under a Will where someone is given the right to receive the income of the Trust (or part of it) for life, usually the husband or wife of the person who has died.

Unless a trust deed specifically states otherwise, a trust can invest in anything (which they usually do). Trustees no longer have limits on where they can invest as a result of the Trustee Act 2000. Anything that is authorised by the Financial Services Authority is likely to be OK. However you can restrict which type of investment is used in the trust deed.

Accumulation and maintenance trust

Confusingly an accumulation and maintenance trust is sometimes described as discretionary, because the trustees usually have discretion to decide whether the income from the trust is accumulated or spent for the benefit of the beneficiaries or actually paid to them if they are over age 18.

Since 22 March 2006, new accumulation and maintenance trusts and additions to existing trusts have been treated in the same way as discretionary trusts (see below) unless the assets go to the beneficiary absolutely at the age of 18 (or the Trust was amended to achieve this before 6 April 2008) or the Trust is for a disabled person in which case the age of 25 applies instead of 18 and the new rules don’t apply.

For new accumulation trusts or additions to existing ones where gifts exceed the cumulative inheritance tax exemption limit of the donor, there is a tax charge of 20% inheritance tax when funds are given to the Trust. All such trusts will have to pay a 6% charge of their capital value every 10 years on any value of the Trust in excess of the then inheritance tax limit. In practice existing trusts whose value is below the inheritance tax limit will be unaffected by the new inheritance tax charge.

With an accumulation and maintenance trust a settlor, e.g. a grandparent, gives a sum of money, say £100,000, to a trust for at least one named beneficiary. The trust deed should be drafted by a solicitor with experience in drafting such deeds and might cost you up to £500, maybe more. Once the trust is set up, provided the trust says so, anyone else can add money to it (as well as the original settlor) but this should not be a parent, see Trust income below.

The primary beneficiaries of such a trust are the people named in the trust deed. However they need not yet be born. The deed might specify ‘my grandson Joe Bloggs and any other grandchildren’. While Joe is the only grandson he is entitled to 100% of the income of the trust; but if later four brothers and sisters and cousins arrive, he will only be entitled to a fifth of the trust. Alternatively the trust can be for specified people only. Usually such trusts are more specific and refer to named primary beneficiaries; a new trust can be set up for any further grandchildren who arrive.

With an accumulation and maintenance trust, the trustees have no discretion about who gets income and capital. The share of each beneficiary must be according to the original trust deed. The only discretion is whether to pay out income to a beneficiary. If it is paid out to one beneficiary and not to another, then records have to be kept, showing each beneficiary’s share, so that a beneficiary whose share has been accumulated does not get less.

Discretionary trust

With a discretionary trust you don’t need to specify who the beneficiaries are. They can be in rather general terms like ‘any of the descendants of John and Jane Bloggs’. The trustees can choose to whom they pay income to, and when; they can decide whether and to whom to advance any capital; when the trust is finally closed down, they can decide to whom the money is given unless this is already specified in the Trust deed. The settlor can leave informal instructions to the trustees on how they should use their discretion (for instance they could be told not to pay any income to anyone who spends it on gambling or illegal drugs).

Discretionary trusts (and now new accumulation and maintenance trusts) have a few snags, however. There can be inheritance tax when money is given to the trust. It comes into effect once cumulative gifts within the previous seven years exceed the inheritance tax threshold (£325,000 up to 5 April 2016). The rate is half the rate paid on death (currently 20% instead of 40%). Discretionary trusts also have to pay inheritance tax once every 10 years on the capital value of their assets if they are worth more than the inheritance tax threshold at the time. Currently that tax is 6% of the capital value of the Trust in excess of the inheritance tax threshold at the time.

If a discretionary trust is set up below the inheritance tax threshold, there is no inheritance tax when it is set up, provided cumulative gifts within the previous seven years including the amount given to the Trust are in total less than the current inheritance tax limit. There is nothing to stop a husband setting one up for £325,000 and his wife setting up a separate trust with identical provisions for a further £325,000. Both would remain below their respective thresholds and no inheritance tax would be payable. However if after 10 years, the value of assets grew above the then inheritance tax threshold, there could be some inheritance tax in the future on the then capital value in excess over the then threshold.

Trust income

Income from a discretionary trust or an accumulation and maintenance trust is currently taxed at 45% (since 6 April 2013). Income paid by a trustee to a beneficiary is paid with this tax deducted at 45% but the beneficiary (or a beneficiary’s parents in the case of a child beneficiary) can reclaim all (or part) of the tax if he or she is not liable to pay the full amount deducted.

In the case of income received by trustees which comes from UK dividends, the Trustees have to pay 37½% tax to the Inland Revenue on the grossed up amount of the dividend but can set against this the 10% tax credit which is deducted at source and is not reclaimable. This applies where dividend income is accumulated within the trust.

Small trusts with an annual income of £1,000 a year or less since 6 April 2006 pay tax at a rate of 20% for savings income or 10% for dividends. The £1,000 a year applies to all Trusts together of one particular settlor.

Where the beneficiaries are non-taxpayers and income is distributed to them, dividend income from shares or equities, investment trusts and equity unit trusts must be paid after deduction of tax at 35% (not including the 10% tax credit) – and the extra tax has to be paid by the trustee. The beneficiary can then reclaim the full 35%. This makes it less attractive than income from fixed interest stocks or bank and building society deposits if income is to be distributed.

These rules now make a Trust fund which is intended to accumulate money at a date some time in the future less attractive as the income and capital gains will be taxed at the same rate as the donor. The only tax saving will be the avoidance of inheritance tax after 7 years.

But if the Trust is intended to generate an income for a non-tax paying child or young adult, then investment in fixed interest stocks will give a higher income and the whole of the 45% tax deducted by the trust can be reclaimed by the beneficiary or on behalf of the beneficiary. So long as the child only has a modest income from the Trust, then the rise in the trust rate of income has no affect.

Income paid to unmarried children under 18 from a trust set up by a parent usually counts as the parent’s income so no tax rebate is due. It’s not usually worth a parent setting up a such a trust. Such trusts are usually set up by grandparents.

The settlor, the person who gave the money to set up the trust, must not benefit from it; otherwise there are no tax advantages.

The tax repayment claim when the income counts as the child’s is made by the parent on the child’s behalf using Tax Claim Form R232. The trustees must fill in Form R185E giving details of the amount of trust income paid to the parents or spent as well as the tax deducted and give the form to the parent who sends it in with the claim.

If parents are trustees, trust income must be spent on education (e.g. school fees), maintenance (e.g. clothes, food) or benefit (e.g. holidays, presents) to count as having been distributed by the trust and to enable the parent to claim a tax rebate. If the income of the trust is not spent, the 45% tax cannot he reclaimed. But if in a future year the income is spent (in addition to income in that year), the tax can be reclaimed then provided the child (or children) has enough tax allowances in that year.

For more information please contact Graham Clark on 01603 692750 or email

Stocks in Focus: Monks Investment Trust

This week I am focusing on collective funds, which enable investors to gain access to a wide range of financial assets within a single investment. With the plethora of funds available, various factors must be considered when determining which are most attractive to invest in. Among them, two key considerations are the charges involved (keeping these low helps to boost long-term returns) and the portfolio manager’s track record (it is the day-to-day investment decisions that will drive underlying performance).

Given the importance of track record, a fund should clearly be reassessed in the event of a change in manager.  One recent example is Monks Investment Trust, which aims to achieve long-term capital growth from a global equity portfolio. In late March, investment management partnership Baillie Gifford – which is responsible for Monks – announced that manager Gerald Smith and his deputy Tom Walsh were being replaced with immediate effect by its Global Alpha Equity team in an attempt to improve performance.  While the value of Monks’ underlying assets had appreciated under Mr Smith and Mr Walsh, relative performance against peers had been unspectacular of late thanks to a relatively high cash weighting during a strong market.

Looking forward, the new trio of managers (Charles Plowden, Spencer Adair and Malcolm MacColl) appear to have good track records and a close, professional relationship spanning over a decade. Reassuringly the mandates they already run are similar to that of Monks, and focus will now shift to whether they can add value on an absolute and relative basis going forward.

March 2015 Market Review

This edition of the Market Review discusses the recent phenomenon of “sub-zero” bonds and how this is affecting our investment approach.

March 2015 Market Review