Monthly Archives: July 2015

Stocks in Focus: Pearson

UK-listed Pearson, one of the world’s largest education companies, has been the owner of Financial Times newspaper for 58 years.  However, it announced last week that it has agreed the sale of the FT Group for £844m to Nikkei, Japan’s largest media group.  Having rebuffed many suitors over the years, why is Pearson selling now?  In short, CEO John Fallon believes Pearson will now be better placed to focus on its core education offering rather than being distracted by the changing trends in journalism. Equally, he believes that the FT is now better served by being part of a global journalism-led organisation that is focussed on reinventing journalism in a new age of increasing consumption via mobile and social media. Perhaps unsurprisingly, therefore, there has since been speculation that Pearson will sell its other non-educational assets such as its stakes in The Economist Group and the Penguin Random House publishing business.

Pearson has said that the proceeds from the FT deal will in part be used to invest in its global education strategy, which focusses on a significant and exciting long-term opportunity: the sustained and growing global demand for greater access, achievement and affordability in education. In particular, it is involved in school, professional and higher education in North America and is investing so as to capitalise on a shift to digital formats and services.


What Greece Should Learn from Cambridge is Important

But we need to learn from events in Athens too.

Marcus Johnson returns to the Greek theme with some more thoughts.

Cambridge MP’s have a record of sturdy independence for many many years and names such as Eric Geddes , Hamilton Kerr and Robert Rhodes James from the past have their more recent equivalents in Julian Huppert who , whatever you may think of his actions, was not afraid to go against the party line and support Assad when the government wanted to punish him for the use of chemical weapons.

What is also very noticeable is that each of these had supporters from outside their own party, and MP’s such as Ann Campbell clearly had a personal vote which protected them unless their party really messed up. This personal following is hugely important because the essence of representative democracy is that we elect people to represent us who will make important decisions on our behalf and in our name, but we rely on them to look at the data , apply common sense and logic, and decide what is best for the country.

Greece is important because it has lessons to teach us which we will ignore at our peril, but it got into its problems by forgetting or ignoring the most essential part of the process in a representative democracy is the selection of the right representative. Cambridge seems to be really good at this and Daniel Zeichner gives every sign of being the sort of thoughtful experienced deliberative character one would like to occupy the seats of power. This is partly a matter of candidate selection within parties but it is also the duty of the electorate to make judgements based on sound criteria, and electoral law can help in both respects.

Every country is unique and contributes to humanity in some form or other but for the Anglo-Saxon nations of the world Greece is generally thought of as one of the most important contributors to our culture and civilisation. In essence, it was the absorption of Greco Roman culture, as transmitted by the Celtic occupants of Britain to our immigrant forefathers, which forms the basis of the science and politics of our countries today. If most of us were asked what the Greeks contributed to the modern world we would say Democracy (in Greek, ‘Rule of the People’) and Philosophy (in Greek, ‘love of wisdom’ and therefore science). And it is the interplay of these two very Greek themes I believe we should be watching in Greece today in order that we learn from them what we should not do here.

The Romans added a dose of practicality to the Greek theories of democracy – when the legions marched under the banner SPQR please note that the Senate comes before the people – and also that the Senate did not ask the people their views – it asked them to elect tribunes who would represent the views of the people. Greece, in February this year, elected to power the Syriza party under its leader, Alexis Tsipras, who pledged to undo all the reforms to the economy agreed by the previous government as a condition of massive loans from the IMF, the ECB and the EU.  The central problem here illustrated is the gap between democracy and philosophy in the form of economic science.

The reconciliation is meant to be via politics, (a Greek word, of course) which the statesman Otto von Bismark called “the art of the possible” but the problem is that politics easily drifts from the possible to the impossible and the politician becomes a snake oil salesman.

It is clear that the IMF, the ECB and the EU all want the Greek economy back on its feet as soon as possible – they all need a solvent Greek government with lots of tax revenues which can afford to repay debts. It is their job, and the IMF has done this for nearly 100 different countries which have got into similar problems, to diagnose what has gone wrong and prescribe a cure. Normally the problems are much the same – irresponsible governments who have spent too much, employed too many people, embarked on uneconomic projects, subsidised uneconomic firms and failed to raise sufficient taxes to pay for all this. Many of the best economic minds in the world have been employed by the IMF to do this job.

Similarly the Bundesbank, which has the best financial credentials of the world’s central bank, dominates the ECB and has a long and successful record in maintaining the value of the currency under difficult conditions. The representatives of the EU do not have the same credentials but they are clearly well qualifies economists recruited from all EU countries.

In February the Greek people had to decide whether the prescription for curing the undoubted ills of the Greek economy were those offered by the world’s topmost experts in finance and economics or those put up by a fairly random collection of totally inexperienced young left wing Greeks led by K. Tsipras. This is where they forgot about philosophy and went for the snake oil remedies offered by Syriza. In a nutshell, they were promised that the cure for the debts and overspending was quite easy and obvious – indeed all it required was more debt and more spending – higher pensions and more pay for state workers and the economy would boom.

The false solution to this problem is to ban snake oil salesmen, and the long term solution is to educate the population so that they do not believe in snake oil – but pending that perfect solution we need to learn from the Greek crisis and reinforce the mechanisms of representational as opposed to direct democracy.

In most of Europe (Switzerland being an exception where the populations is so well educated that direct democracy works) we elect representatives who we hope will themselves examine all the issues fully and come to a considered decision on our behalf. The Greek problem is that with ease and speed of communication there is an increasing trend across Europe to take the issues directly to the electorate rather than to ask the electors to select representatives to decide.

So when faced with a decision “do you want to do what the IMF says or do you want to go back to yesterday?” the Greek electorate had no problem in choosing the rather more pleasant sounding impossibility. The real choice they were being offered is better described as “Do you want a group of idealistic but totally inexperienced and unqualified exciting young people or a boring experienced group of who have spent a long time thinking about these problems to be responsible for making decisions on the future of the country?” They did not choose representatives who offered experience and promised to look at the options, they bought snake oil which promised a panacea.

The lesson for all of us in this is that we must concentrate much more effort on the “representational” in our representational democracy. Plato proposed that all decision making should be left to men over 65 on the grounds that when their libidinous urges ceased they would start to debate rationally. There are other views on who is best able to make good decisions – academic research suggests that those who have suffered a life threatening illness, personal tragedies or other life changing events are better decision makes than most. Experience and qualifications are necessary to get most jobs. To secure our future as a democratic society we need to shift the debate at elections away from policies and towards personalities. It should never be the case that decisions are made on the basis of promises – that leads to more and more unrealistic promises being made as in Greece in February. The decision for an elector should only be “Do I believe this person will represent me best, and when asked to make decisions about the future will be in a good positon to select what is best for me?”

There are many ways of putting into effect the lessons from Athens but probably the easiest is to extend the ban on inducements which is currently in the Representation of the Peoples Act to include all forms of bribery including making any promises about future actions to be taken. Specifically any promises to raise benefits, pay more or force others to pay more, to spend money on projects of any sort or to favour any groups or areas should be covered by a ban on bribery.

Any person standing for public office should have to declare their experience and qualifications and describe how they would go about making decisions in future. If such mechanisms had been in place in Greece 30 years ago it is unlikely there would have been a Greek crisis – if they had been there 5 years ago it would already have been solved. The Greeks do not need money from the rest of Europe  as much as they need sensible representatives who will stop buying popularity and votes with the rest of Europe’s money. It was the ready availability of credit which allowed veniality and corruption to flourish but it was the inability of the electorate to beware of politicians bearing gifts which started the process, and the credulity given to a random collection of nutty fruitcakes peddling myths which brought it to crisis point.

This article was published in the Cambridge Business Magazine – August 2015 Issue 44

Points of View: China

While all attention has been on Greece recently, China has also been experiencing its fair share of trouble for the past couple of weeks. The Chinese markets have suffered bouts of extreme volatility of late, both on the upside (+150% over a year) and downside (-30% over three weeks). The latter has wiped off $3trillion in value as retail investors look to unwind leveraged positions. To put this in perspective, this is twenty times what most economists expect the Greek government debt write-offs to be, and will be spread across 90 million people in China, mostly small retail investors, rather than a handful of European governments. When stocks started to plummet, officials in Beijing took stringent steps to stop the slide by cutting interest rates, banning large investors from selling, loosening collateral guidelines by boosting the amount investors could borrow, halting new share issues, taking more than 1,000 companies off market listings, and even pushing state-owned brokers to buy equities.

At this point, we should distinguish between the Chinese economy, which is growing, and the Chinese stock markets, which have crashed, as there is little to no correlation between the two. It is also worth mentioning that in contrast to mainland China, the Hong Kong government remained fairly calm and made no plans to intervene. Hong Kong’s financial centre was inevitably affected by the turmoil in mainland China, although on the plus side this has provided it with the opportunity to remind investors of the more open nature of Hong Kong financial markets and its stronger regulatory framework compared to the mainland.

Budget 2015

Viewed through our clients’ eyes, perhaps the most significant aspect of a Budget was George Osborne’s announcement that the Government is to undertake a full review and possible radical overhaul of pensions tax reliefs. Currently, individuals and employers receive tax relief on pension contributions, with the pension assets only re-entering the tax system on retirement, when income tax is due on income drawn. In austere times, this level of tax relief has looked unusually generous for some time and reform is long overdue (see links to Spring Newsletter and 2014 Budget article).

At this stage there are no firm proposals but Mr Osborne made reference to a possible reversal of the current tax process for pensions, so they are treated more like individual savings accounts (ISAs).  “You pay in from taxed income and it’s tax free when you take it out,” said the chancellor.  Other less radical changes outlined in the consultation include altering the lifetime and annual pension saving allowances.

In a continuation of the gradual reduction to pension tax reliefs, the Chancellor announced that from April 2016, the Government will introduce a taper to the annual allowance for those with adjusted annual incomes, and employer’s pension contributions, over £150,000.  If you earn over £150,000 a year, your annual pension allowance will be tapered down from £40,000, to a minimum of £10,000 for those on £210,000 or more.

Dividend taxation is also set to change. An investor will be able to get £5,000 of dividend income tax free, then it is taxed at 7.5%, 32%, and 38.1% (depending on the prevailing income tax rate).  An individual with no other income can currently receive c£38,000 of dividend income tax-free however, from April, that same individual will have a tax liability of £1,700.  The change is mainly aimed at those who pay themselves dividends from a company (as opposed to income), but could also hit investors with portfolios exceeding c£140,000 (depending on dividend income generated).  This emphasises the importance of individuals making use of the annual contributions allowances on ISAs and pensions where appropriate.

One announcement that was well-telegraphed was the change to inheritance tax (IHT).   By 2020-21, if you are married and you live in a house worth at least £350,000, you will have an IHT allowance of £1m.  The Government is adding £175,000 per person to the £325,000 IHT allowance – but only for ‘family homes’.  It is being phased in gradually – it will start at £100,000 from April 2017 and increase from there.

Other Key Announcements


  • Personal allowance will rise from £10,600 to £11,000 from April 2016 and the higher rate threshold will increase to £43,000 from April 2016.
  • Mortgage interest rate relief on buy-to-let property will be restricted to the basic rate of income tax. This will be phased in over 4 years starting in April 2017.
  • The permanent non-domicile tax status will be abolished from April 2017.


  • The corporation tax rate will be cut to 19% in 2017 and 18% in 2020.
  • A National Living Wage for over 25s of £7.20 an hour will be introduced in 2016, rising to over £9 in 2020.
  • The annual investment allowance will be £200,000 from 1 January 2016.
  • Businesses will have their employer National Insurance bill cut by another £1,000 from April 2016, as the Employment Allowance rises from £2,000 to £3,000.
  • An apprenticeship levy will be introduced for large companies to help fund training.
For more information please contact Kevin Boland on 01603 692782 or email 

Investing: Active versus Passive

When investing, there are two main strategies you’ll encounter – Active and Passive


Active funds employ fund managers who make the investment decisions (which companies to invest: when to buy and sell).  They must know their markets and analyse companies before deciding where to invest.

They tactically manage the money, so when markets move up or down, the manager can move the money accordingly.  This comes at an additional cost in fund charges.  They aim to deliver a higher return than the market if the manager makes the right calls. There are more actively managed funds to choose from than there are passive funds.


Or “Trackers”:  where a fund tracks an index or market and doesn’t involve market timing or stock picking.

The funds are essentially computer driven and replicate the assets in the index, to give a return that reflects how that market is performing.  Accordingly, this strategy comes at a lower cost than Active.

The Passive range is gaining momentum with the number of available funds increasing.

Features of both Strategies

  • Picking the right active fund can increase returns compared to tracker
  • Passives track an index so no reliance on judgement calls
  • Skilled managers build reputations of consistent high returns and can justify the higher fees
  • Investment needs might demand higher returns than good active managers aim to deliver
  • Some areas of investment are much better suited to active rather than passive management, such as Property for practical reasons
  • An active manager has a specialism in investment sectors (i.e. technology, healthcare etc) where expert knowledge can seek out added value
  • Not many Active managers consistently outperform their market so Active has to outperform the market (including charges) to deliver value
  • If a manager leaves his fund, do you follow him or remain in the fund?
  • Passives are less expensive than Actives


The choice of Active or Passive is down to personal preference.  At NW Brown we offer both forms of investment within our model portfolio ranges.

Update on the Implementation of New Tax-Free Childcare (TFC)

The government has made an important announcement today about TFC. You may be aware that there has been an on-going legal challenge on HMRC’s decision to work in partnership with NS&I to deliver Tax-Free Childcare accounts. The Supreme Court has today found the government’s proposals for delivering TFC to be lawful.  However the legal challenge has prevented some delivery steps from taking place and, as a result, they now expect TFC to be launched from early 2017.

As part of this announcement the government has confirmed that the Employer-Supported Childcare scheme will remain open to new entrants until TFC is launched.

The following link to their press notice provides more detail:

If you have any queries, please contact us on 01223 720 306.

Stocks in Focus: Hilton Food Group

This week I have had a look at Hilton Foods Group following a site visit to their Huntingdon factory.  Hilton processes beef and lamb for sale in Tesco stores in the UK.  The company also operates across Europe and even in Australia, working with large grocers internationally.

The business model is simple; they purchase butchered meat from abattoirs, then process and package that meat for the supermarket.   It is then delivered to the supermarket ready to be put directly onto the shelves.

Tesco is Hilton’s sole partner in the UK and represents a significant proportion of sales to the group.  Hilton process 70% of Tesco’s red meat requirements so there is not likely to be much growth in UK operations.  One of the main questions for investors in Hilton is the potential overreliance on Tesco given the impact any fall in Tesco meat sales would have on Hilton’s profits.  This was evident in the share price performance during 2014 which was heavily impacted by negative announcements from Tesco, despite the fact that meat sales tend to be resilient and Hilton is taking on more business from Tesco rather than less.

Hilton is a well-run business with a strong management team.  They have a factory which is close to opening in Australia (which is currently doing “dry-runs” with bags of sand) and recently one of its partners in Europe, Ahold, has announced plans to merge with Delhaize in order to compete with the largest grocers such as Walmart in their US operations.  Since Hilton tends to partner with the largest grocer in its areas of activity, consolidating mergers could be a positive for the business.  The factory in Australia is an interesting development, however every geography poses specific challenges.  Expansion in Australia might be limited as transporting products can be a 2-3 day journey as opposed to a matter of hours in the UK.