New appointments and a fresh new look

NW Brown is delighted to announce the appointment of Oliver Phillips as Chief Executive. Oliver, who joined the Group in 2005 as an Investment Manager, takes over from Marcus Johnson, who will continue to serve as Deputy Chairman.

Oliver said of his appointment “I feel extremely honoured to be taking on the mantle of leading what I know to be an outstanding group of people, in a company which in many ways is in the best shape it has ever been”.

Other developments within the Group include the appointment of Paul Fox as Deputy Head of Financial Planning and Director of the Board of NW Brown & Company, and the launch of a new website 

Points of View: Interest Rates

The Bank of England’s (BoE’s) Monetary Policy Committee (MPC) met last Thursday and voted to keep interest rates at the historic low of 0.25%.  However the minutes of the meeting showed that three members (out of eight) voted to increase interest rates. The voting was considerably more hawkish than previously, with only one MPC member voting to increase interest rates at the last round of voting. This would usually be indicative of interest rates rising in the near future.

The MPC members that voted to increase the BoE base rate, cited the recent higher inflation as a reason.  Inflation has picked up to 2.9%, well above the 2% target.  Setting the base rate is one of the BoE’s principle tools for controlling inflation.  Interest rates are generally increased to seek to control higher than targeted inflation.

Inflation has increased following the fall in sterling as imports have become comparatively more expensive.  Many economists argue that inflation is only temporarily higher, with slow economic growth inflation will naturally fall and therefore there is no need to push rates up to control it.  Furthermore any increase in interest rates is likely to put an increased burden on households as two thirds of all mortgages are linked to the base rate.

While we agree with the consensus that interest rates are unlikely to rise in the short term, we will eventually see an increase from these historic lows.  When rates do increase, bond yields will increase and therefore bond prices will fall.  Equities may also see valuations fall but will conversely benefit from higher inflation.  We continue to hold fixed return investments with a low sensitivity to interest rate movements and exercise caution in looking at stock valuations.

Points of View: Election results and implications for long term investors

Last week, we saw the Conservative Party falling eight seats short of achieving a majority in the House of Commons. Brexit negotiations with Brussels are due to begin next week but with the result ending in a hung parliament, EU officials do not yet know if the policy outlook will match that mapped out by Mrs May before the snap election.

The market is continuing to digest the election results and the pound is facing some near-term downside risks. Sterling fell to its lowest level for nearly two months on results day and sank further to a seven-month low against the euro on Monday, signalling that investors are worried about the economic ramifications and political uncertainty that will weaken our position ahead of Brexit negotiations. In contrast, the UK equity market has been quite resilient – not least because the large, international companies that dominate the FTSE100 derive a large proportion (c75%) of their earnings from abroad, and a weak currency means that these overseas earnings will be markedly higher when reported in Sterling. The domestic macroeconomics of the UK has little to do with the collection of international businesses that make up the majority of the UK stock market.

For long term investors, the outcome of the election will matter little in the context of returns from a well-constructed equity portfolio that is diversified by company, sector and country. In particular, the aim of such a portfolio is not to outperform the market in any one short period, but to deliver attractive long term real returns. It is also important to remember that investing is also about taking advantage of uncertainty – and the greater the uncertainty, the more likely that irrational price movements will present attractive opportunities for long-term investors.

Stocks in Focus: Perpetual Income & Growth Investment Trust

This week I am looking at the Perpetual Income & Growth Investment Trust (PLI) following the recent release of its 2017 annual results.

The £1bn investment trust, which is managed by Invesco Perpetual’s Mark Barnett, continues to focus on UK companies that can generate long-term returns irrespective of their position in the economic cycle. Dividends are a key driver of long-term returns for investors and in this respect the trust has a strong track record, having increased its aggregate dividend by 8% on an annualised basis over the last 10 years. The dividend yield currently stands at a relatively attractive 3.3%.

Unusually, PLI’s results were slightly disappointing over the 12 months to 31 March 2017 – its net asset value (NAV) rose 9.6% compared to a 22% rise in its FTSE All Share benchmark. This lacklustre performance was mainly due to the sector split, where PLI’s minimal exposure to recovering mining and banking stocks held the fund back. PLI has for some time been underweight the mining sector, which is very cyclical in nature and thus contradicts its strategy; however the rise in commodity prices and falling pound led to strong outperformance by the sector in the period in question.

Despite this latest set of results, our views on PLI have not changed.  We remain confident in Mark Barnett’s abilities and experience.  This is more than demonstrated by the long term performance of the fund, with the share price increasing 132% over the past 10 years compared to 70% for the FTSE All Share Index.  In addition to this, the fund continues to trade at an attractive 7% discount to NAV.

Stocks in Focus: Tate & Lyle

This week I am looking at Tate & Lyle, the food and beverage ingredients manufacturer, which announced full year results on 25 May.  The results for the last financial year were in line with consensus.  Sales increased by 17% and the company benefitted from the weak pound.

Tate & Lyle’s business is split into two divisions.  Bulk Ingredients (BI) is involved in the production of generic sweeteners such as high fructose corn syrup, whereas the Speciality Food Ingredients (SFI) division produces more technical and often patent protected ingredients.

Over the last two years, under the guidance of CEO, Javed Ahmed, the company has focussed on the higher margin SFI division and moved away from the more commodity related BI division.  However, it was the BI division which produced the strongest results in the last year with an operating profits increase of 32% to £129m. The SFI division still showed steady growth with an operating profits increase of 5% to £181m, which is pleasing to investors convinced by the management’s strategy.

As the SFI division becomes a larger part of the group, the company will transition to a higher quality business with greater barriers to entry.  However, the new US Administration plans to reform the North American Free Trade Agreement, which could prove to be difficult for the BI division as Mexico is a key export market for the corn wet milling industry, particularly for high fructose corn syrup.

Our long term outlook remains positive for Tate & Lyle given the improving quality of the business, their focus on SFI and a confident management. However, the recent share price performance has been strong and investors should continue to be mindful of the price paid for stocks.

Stocks in Focus: Scottish Mortgage investment trust

This week I am looking at the Scottish Mortgage investment trust, which aims to achieve long-term capital growth through investing in global equities, focusing on the speed of technological advancements and how they can disrupt established business practices.

The trust recently published strong results for the 12 months to 31 March 2017, during which it returned an impressive 40.9% vs the FTSE World benchmark return of 33.1%, placing it in the top 10% for Global funds during that period. The main driver of these positive results was a strong US market and, in particular, outperformance of the technology sector.

The lead manager, James Anderson, has been in charge of the trust since 2000 and has seen his successful strategy lead it into the FTSE100 and become the largest investment trust in the UK.  Over this time Mr Anderson has created a concentrated portfolio of around 40-80 holdings, with high weightings in US tech stocks including Amazon and Tesla.  In recent years he has also looked to exploit the emergence of China by holding tech stocks such as Tencent and Alibaba.

This trust has been a consistently strong performer, gaining 219% over 5 years against the FTSE World benchmark return of 116%.  This has gained it much attention from investors and the fund’s size (now at c£5.6bn) has allowed it to lead the way in reducing fees within the investment trust sector.  The trust is clearly an attractive vehicle for investors looking to have diversified exposure to disruptive technologies. The fact that it is trading at a modest premium to the underlying value of its assets makes it less attractive from a value perspective, but reflects the returns generated by the manager.

What is a positive Company Culture and how does it grow?

When I am asked what took me to work at NW Brown I frequently reply that I knew and had done business with most of the firm and liked what I had seen. If pressed to be more specific I have a problem in defining what I liked or why – and I believe that truly what I tried and often failed to define clearly was culture.

Chambers dictionary defines culture as refinement which is the result of civilisation, but I think when we describe a company’s culture I prefer to think of Alexander Fleming’s Petri dish with Penicillin spreading across it and bringing untold benefits to the world.

What the two concepts have in common is that they are the result of cultivation – they do not just happen – they need the right medium to grow and flourish, whether it is the art, literature and science implied in Chambers definition or the nutrient rich medium in Fleming’s Petri dish.

Of the two I think that a Company culture is closer to the Petri dish because Science and literature can be taught but I am not sure a company can deliberately teach culture– it needs to put the right ingredients together, make sure that the temperature is right, the light is good and try to encourage the growth, but formal diktats are certainly not enough and often will be counter productive.

Enron’s motto was “Respect, Integrity, Communication and Excellence.” Its “Vision and Values” mission statement declared, “We treat others as we would like to be treated ourselves….We do not tolerate abusive or disrespectful treatment. Ruthlessness, callousness and arrogance don’t belong here.” Just before the actual values were aired in court the annual report said “ Every employee is educated about the company’s Vision and Values and is expected to conduct business with other employees, partners, contractors, suppliers, vendors and customers keeping in mind respect, integrity, communication and excellence. Everything we do evolves from Enron’s Vision and Values statements.” This from a board which passed a formal motion to exempt its directors from compliance with the rules on investing in partnerships in which they had an interest and where the way in which prices were artificially inflated for electricity consumers was widely publicised as a major coup for the company. Greed, sales at any cost, lie about the numbers if they look bad and if we make enough today we need not worry about tomorrow was the message which came from the behavior of the directors and a 64 page manual exhorting good behavior was irrelevant.

It is perhaps easier to say what does not work than what works and we all know, even from outside, many companies where all the words are right – there is a mission statement of the ‘save the world and be all things to all men’ type as above, but it is clear that the staff hate what they are doing – there is an ‘Equality Policy’ which could come out of ‘Das Kapital’ but the directors hide behind their PA’s and avoid all contact with anyone below heads of department. I remember well a start up insurer a few years ago where all the staff had to pose with their arms round one another and were told it was one happy family and had a strong culture of staff involvement by the boss who flew down from Scotland for the event. I think it lasted three years, but the point is not a single person there believed the words and respected management less for saying them. It is how the directors live their jobs  which  sets the climate and that can either encourage a healthy culture or destroy it.

A healthy culture comes from the top – it permeates through an organisation over the years as people with common values encourage each other, as those who ‘get it’ are promoted and those who do not are frozen out. If the environment encourages good behaviour and rewards success, if management is seen to be open and honest, then the culture flourishes. But the opposite is so easy – wat takes years to build can be destroyed far more rapidly.

The Chambers definition of refinement and civilisation is perhaps more relevant here – because civilisation itself is almost synonymous with a trusting environment – a civilised society (and no insult is intended here to our transatlantic cousins) is one where we do not feel the need to be armed, where we do not need lawyers to regulate our behaviour or police to enforce standards for most of our daily life because we trust those around us to behave towards us as we behave towards them. When a society becomes a police state or rules and regulations replace trust as the basis of everyday life, civilisation rapidly disappears. So it is in a company – and in the same way that within a few years of their coming to power the Nazi party moved from breaking windows to burning books and then gassing millions, when a company begins to lose its way the results can be a rapid deterioration and disaster.

The good new is that a strong culture replicates and thrives and excludes threats. Marks & Spencer was an example of the strength of family values for a hundred years. Many of the Quaker businessmen who flourished in the nineteenth century left behind such a strong culture that their firms survived intact for the whole of the 20th century (Barclays, Cadbury, Rowntrees, Clarks, Lloyds,  Friends Provident come to mind but there were many less well known examples). What they had in common was a climate of absolute trust, of moral integrity and of a belief that by the application of sound business principles they could change the world for the better. The link between owners and managers was close – family, religion, and politics all played a part in this – but the strong belief that capitalism was a force for good coupled with an equally strong belief in the social duty to apply the resulting wealth responsibly allowed their companies to flourish for many decades. Curiously, all this took place without a single policy on ‘Socially Responsible Investment’ or the application of ESG scores (since you ask, an international grading system which gives companies marks for various aspects of their Environmental impact, Social impact and Governance).

In a way, therefore, I would summarise by saying Culture is about substance not about form and the reason business culture today is so poor compared to any previous decade since the start of the 18th century is the triumph of form over substance. Barclays has whole departments dealing with social impact, it has equality statements, it has mission statements, but the words are not only an inadequate substitute for the beliefs of its first century and a half existence, they are corrosive of those values because those who work there know that the behaviour of those at the top is not consonant with the words. Having detailed rules and regulations will always be inconsistent with a climate of trust – it will always encourage behaviour which is calculated to obey the rules instead of those which are right under the circumstances.

So coming full circle back to NW Brown, and why I found it so attractive a decade or so ago, what was the secret? My belief is that the Nigel Brown recipe for success was very simple to say but rather harder to do, as I have learnt. It was to employ people he liked and got on with and then pretty well leave them to get on with the job. He created opportunities but did not impose solutions – encouraged success and quietly removed those who did not fit with the firm. As those he brought in emulated him the firm became a pleasant place to work and the culture became self-replicating. A recent staff survey by an external specialist came up with a score for staff satisfaction which has only been bettered once.

Of course it required luck, but often it needs good judgement and leadership to take advantage of lucky circumstances. Culture may require the leaders of the business to be committed but it is often supported and helped to grow from the bottom and as important is giving freedom to individual business leaders was, I suspect, the welcoming environment into which even the most junior recruit came – an environment where they know their talents would be valued whatever they were. There are mechanisms which perhaps can help a positive culture to grow and I do not dismiss awaydays , picnics  involving families , bonding sessions on cross country treks or cricket matches but I would regard them as symptoms of a healthy culture as often as they are causes. Similarly share ownership and profit sharing are admirable and worthwhile but at most they encourage a healthy culture and maybe reinforce it a bit, they will fail to motivate and retain staff in a company with a poor culture because no-one will believe them. Unless the Board believes that the best way of serving the owners they represent is to be honest and trustworthy in looking after the long term interests of clients and staff and acts in a manner which makes it obvious this is their core belief it will waste any efforts to encourage a positive culture because everyone else in the company will follow their lead.

And having contrasted the reality of a strong culture with the pretence so often illustrated in elaborate mission statements, I do have to admit that even before I joined I knew that Nigel Brown had summarised what the firm was about in the words ‘the client comes first, but it has to be fun’. The difference from the meaningless     “To be the leading facilities-based provider of end-to-end Telecommunications and Internet services to business customers globally”   emblazoned on the office of Worldcom before we discovered $100 billion of alleged assets were an invention is that Nigel’s saying was passed from person to person by employees – because they believed this was the best way of summing up the culture of the firm, and because culture ultimately is what those who work for the firm believe in, they were right.