Tag Archives: Cambridge

Points of View: Market Outlook

Looking forward, the global economy looks set to continue to grow at 3% per annum, but will this growth continue to reward equity investors over the long term?

Our view is that equities will continue to deliver the best long term returns compared to the alternatives of cash and fixed income. There are two main reasons for this. First, starting dividend yields are very attractive on a relative basis. The FTSE All Share, for example, yields approximately 3.6%. In contrast, cash savings rates and gilt yields remain remarkably low. Second, equity dividends should continue to grow from this attractive starting point thanks to underlying economic growth. Whilst there will at some point be another recession or crisis, growth over the long term is remarkably robust.

Having said this, we apply two important caveats. First, we expect equity returns to moderate. Global equities are up nearly 200% since reaching a post Financial Crisis low in 2009, driven by economic recovery, monetary stimulus and a starting point of cheap valuations. However, it seems unlikely that these strong returns will be repeated over the next ten years. This is because the starting point is less attractive. Compared to 2009, debt levels are higher, valuations are higher, and monetary policy has started to tighten. Second, short term risks are elevated thanks to valuation bubbles in certain parts of the market at a time of heightened political risk.

The key to equity ownership is to ensure you are never in the position of being a forced seller when markets are weak – we help manage this risk for our clients via the tools of diversification and asset allocation.



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.

Stocks in Focus: Unilever

This week I am looking at Unilever, following the recent release of its half-yearly results. In addition to an encouraging set of figures, the consumer goods company also announced the $1 billion purchase of Dollar Shave Club, a California-based internet subscription business that delivers cost-effective razors and other personal grooming products. Management have previously identified men’s grooming as a growing market trend and as such it is not surprising that they are increasing their exposure to this category, although their choice of acquisition target is somewhat unexpected.

At first glance, the price paid for Dollar Shave Club appears expensive. The four-year-old start up is barely profitable and revenues are forecast at a mere $200m for this year – so what do Unilever gain from such a high price tag?

Well, what this business does offer is a completely different business model to their competitors, with a modernised approach. The subscription-based service enables direct-to-customer e-commerce capabilities, as opposed to the historical approach of selling products in stores via a third party. This new offering to consumers has already proven a success and despite the short time scale, Dollar Shave Club already holds 5% of the men’s razor blade market and is growing at an extraordinary rate, with sales growth of 30% predicted for this year. In contrast, the personal care group Edgewell, which owns the well-known brand Wilkinson Sword razors expects a modest annual growth of 2-3% over the long term.

As market conditions continue to prove difficult and consumer demand remains fragile we are likely to see an increase in unusual acquisition activity across the sector. Rather than looking at long-standing mature businesses, companies such as Unilever are progressively looking at smaller, younger companies and the passionate entrepreneurs that come with them in order to revive demand.


Reasons for Britain to remain in the EU

Girish Ramrous of NW Brown looks at reasons for Britain to remain in the EU.

The referendum is fast approaching and the debate is heating up. I have done some research on why Britain should remain in the EU.

I was specifically looking at this side of the debate partly for work and partly for my own information. I have put together a couple of interesting points from my findings, which I thought I’d share.  My sources were online articles, blogs, newspapers, magazines and the FT’s EU referendum page.

Has the EU membership been good for the UK economy?

Since Britain joined the European Economic Community (now the EU) in 1973, the nation has become one of Europe’s best-performing large economies.

During that time, domestic product per person has grown faster than Italy, Germany and France, three big economies that the UK had previously lagged behind. In 2013, the country became more prosperous than the average of those economies for the first time since 1965.

Still, most economists agree that the EU effect is at least part of the reason why the UK’s relative economic performance has improved over the past four decades. There is no evidence suggesting that the UK has not benefited economically for joining the EU.

Why does the EU membership help Britain’s economic performance?

Many economists argue that the main contribution the EU has made is to British competitiveness, which increased as the country’s companies fought for markets with rivals across the continent.

Some maintain that greater trade has helped the UK economy all the more because companies that trade internationally have been responsible for most of the country’s increases in productivity. Meanwhile, the UK has become the bloc’s top recipient of foreign direct investment.

What about the EU membership bill?

One should be wary of exaggeration. Although the headline figure for the country’s annual transfer to the EU is £18bn, the net cost of membership is £7bn — after taking into account a rebate secured by Thatcher and EU payments to the UK. This translates to about £150 for each British household, not necessarily a big factor for the economy as whole.

So what would Brexit mean for the economy?

It is much harder to specify how leaving the EU would affect the British economy than it is to examine the impact of four decades of membership. Not only is Brexit a future hypothetical event, it also still largely lacks definition.

If Britain leaves the EU, how would the effects be felt?


  • Taking in around $220 billion of its goods and services each year, the EU remains the U.K.’s single biggest regional partner for trade. The IMF reckons that as part of the club, Britain’s trade with the EU is 55% higher than it would otherwise be.
  • One of the biggest advantages of the EU is free trade between member nations, making it easier and cheaper for British companies to export their goods to Europe. Some business leaders think the boost to income outweighs the billions of pounds in membership fees Britain would save if it left the EU. In case of leaving the EU, these might no longer apply to the UK, which would have to renegotiate them, likely on less favourable terms as a smaller individual trading partner. The UK also risks losing some of its negotiation power internationally by leaving the trading bloc, but it would be free to establish trade agreements with non-EU countries.
  • For British businesses that trade in other European countries, the potential erosion of the UK’s position within Europe may deal a blow to their plans to expand on the continent, as cost and complexity of trade could gradually rise if tariff changes are made against UK goods and services
  • Being part of the EU gives the U.K. significant advantages, helping it avoid tariffs it would otherwise face. The Open Europe think tank estimates some 35% of Britain’s EU-bound goods could be subject to levies of 4% or more upon exit, with makers of cars, chemicals and food among the industries worst affected.
  • Relationships with crucial allies, like the United States, could also be jeopardized by Britain no longer being part of the Brussels machinery at a time when both sides of the Atlantic are negotiating an ambitious free trade deal.
  • If there is a No Vote, the UK will have to negotiate new trade deals with the EU and the rest of the world, as EU trade deals negotiated or nearing completion with China, America, Canada will no longer apply. This will take years to renegotiate, leading to questions over how competitive UK trade agreements will be versus those we currently enjoy as part of the EU.
  • The UK will have to renegotiate or reconfigure deals with more than 50 countries. The UK has not independently concluded such an agreement since the 1970s.
  • Air transport- Britain potentially loses rights under 78 EU-negotiated agreements. New landing and airport access rights must be agreed with the EU and scores of international governments.
  • Enforcement -National bodies replacing EU agencies need funding, manpower and legal clout to replace EU agencies. This covers competition, trade agreement and protection, farming, pharmaceuticals, chemicals and food safety standards.


  • As a whole, entrepreneurs and business owners in Britain broadly remain in favour of remaining a member – and their enthusiasm may be growing. According to the Financial Times a survey of 3,800 businesses last year found 63% believe that leaving the EU would have a negative impact for Britain.. The sentiment seems to be reciprocated: of 2,600 senior executives in 36 countries across Europe in February, nearly two-thirds of those in the eurozone said a British exit from the EU would have a negative impact on the European economy.
  • Lack of import taxes within the EU mean British businesses compete on a level playing field with businesses across the continent. Leaving the EU would create significant uncertainty , which may be enough to cause them to cut back on investment here.
  • The consensus among business leaders appears to be that it is in the best interest of the UK’s economy to remain within the EU. In 2013 the Confederation of British Industry found 8 out of 10 of its members thought this was the case. In the manufacturing sector, 85% of business leaders considered it was best to remain within the EU, and similarly in the financial sector 84% believed it best to stay in the EU.


  • On to the thorny issue of immigration, (as opposed to refugees) having open borders across Europe isn’t some liberal, politically correct, one-nation project; it is an economic necessity. Without freedom of movement to work, the Euro currency zone would collapse and the common market would be less effective.
  • Take the situation in the early 2000’s, where unemployment in Poland and labour shortages in construction in the UK led to many polish workers coming to the UK. The UK construction sector boomed whilst unemployment in Poland fell, setting Poland up for economic recovery and increasing trade with the UK. Add to that, EU immigrants tend to be young, get married and have children and generate 45% more tax for the government over their working lifetimes than UK born peers.
  • There is a strong argument that reforming EU immigration rules should be a high priority, not least as a Brexit would probably not change anything as the UK would probably have to accept EU immigration to retain access to the common market.
  • “Twenty per cent of our top people are from the EU,” says one fund boss. “It would be very awkward if it became more complicated for them to be here than it currently is.”
  • Financial services employers rely heavily on EU workers. “The City attracts the best financial services workers from across the world,” says Chris Cummings, chief executive of The CityUK, a lobby group. “But EU nationals dominate, in large part because of the ease of working across the single market.”
  • Almost 11% of the City’s 360,000 workers come from elsewhere in the EU, according to the latest census. That is by far the biggest contingent after the 78 per cent accounted for by domestic labour. Ireland, France and Italy between them account for nearly half of all the City’s EU migrant labour.


  • Free movement of people across the EU opens up job opportunities for UK workers willing to travel and makes it relatively easy for UK companies to employ workers from other EU countries. Limiting this freedom would deter the “brightest and the best” of the continent from coming to Britain, create complex new immigration controls and reduce the pool of candidates employers can choose from.
  • If the UK looks likely to leave, then Foreign Direct Investment (FDI) in the UK will slow dramatically and cost jobs. Millions of jobs could be lost if global manufacturers, such as car makers, move to lower-cost EU countries
  • The No side also assumes that freedom from EU regulations will make companies more cost effective but what cost new jobs without basic workers’ rights, a limit on the hours worked, relaxed safety rules? Would these be jobs worth having? Would they exacerbate inequality and increase the number of the working poor?

EU Subsidies

  • The loss of EU farming subsidies would be extremely difficult and costly for the agricultural sector in the UK to absorb. British farmers would lose billions in EU subsidies.
  • Taken at face value there is a compelling argument about the UK’s EU membership fees but those already enjoy a significant rebate and that would have to be renegotiated.
  • Norway have to commit funds to EU development and don’t get EU grants in return, nor do they have any MEPs. EU grants can fund as much as 50% of university research and improving R&D is one of the key opportunities for UK economic growth. Also, the EU offers grant support to areas of economic deprivation, so whereas London and the South East get very little back from the EU, Scotland does well. The EU has a role in redistributing the UK’s wealth that we don’t want to lose.


  • One of the greatest reasons for economists fearing a vote to leave is that it would spark huge uncertainty, which stops companies investing and households spending, harming growth.
  • A study by the think-tank Open Europe, which wants to see the EU radically reformed, found that the worst-case “Brexit” scenario is that the UK economy loses 2.2 per cent of its total GDP by 2030. However, it says that GDP could rise by 1.6 per cent if the UK could negotiate a free trade deal with Europe and pursued “very ambitious deregulation”.
  • The Centre for Economic Performance at the London School of Economics predicts the range of Brexit economic scenarios from something akin to the global financial crisis (-10% GDP) to a best case scenario of a – 2.2% annual loss of GDP. Other credible think tanks are more positive but none predict a boom time following a Brexit, so the case for a No vote would appear to be based more on British Nationalism than economic pragmatism.
  • A decision to leave the EU would have a significant adverse impact on economic activity. The immediate aftermath would likely result in substantial uncertainty weighing on investment, while UK households would struggle to maintain spending power amid an anticipated rise in import costs. Quantifying the impact on the economy is uncertain, but GDP may be 2-7 per cent lower than it might otherwise be, with such losses likely front-loaded.

Foreign Exchange and Interest Rates

  • Sterling would likely face a significant drop. A decision to leave would likely trigger further weakness as growth slows, policy is eased, deficits increase, capital inflows fade and questions are asked about the UK’s export capabilities.
  • Brexit would probably trigger weakness in sterling and bring forward interest rate increases. Growth will be weaker as the UK will be seen as a less attractive place to locate a business. Investment and productivity growth would be weaker as a result.


  • The financial services sector — a key contributor to British GDP — would also suffer disruption with investors potentially put off by the uncertainty a vote on EU membership would create, potentially curbing the hefty flows of foreign direct investment the U.K. has enjoyed for years. The UK’s status as one of the world’s biggest financial centres will come under threat if it is no longer a seen as a gateway to the EU for the likes of US banks.
  • Equities would also likely drop. Weaker GDP growth and more difficult export conditions would impact specific sectors, including financial services, exporters, retail and property. This should be somewhat offset by a lower level of the pound and QE. But the net effect is likely to be negative.
  • Gilt market reaction would likely be more neutral, caught between divergent forces. Concerns over UK credit quality may prompt capital flight, particularly in an economy dependent on imported capital. A short-term, sterling-inspired inflation spike would also raise nominal yields. But the prospect of additional QE and weaker potential GDP growth should tend to lower yields overall. We would also expect to see a further widening in sterling credit spreads.

Investment banking

  • Investment banks prospered as London bolstered its role as the world’s largest foreign exchange trading hub. By the same token, their future in the city could be profoundly affected should the UK leave the EU.
  • Today banks takes advantage of the ability to “passport” around the EU from the UK — exporting services without setting up fully-fledged local operations. This is not only efficient but a magnet that brings revenues and jobs to London — one that could be jeopardised by Brexit.


  • The City has always been about far more than banking. London’s pre-eminence in insurance, particularly marine insurance, dates back to the 17th century. Edward Lloyd’s coffee shop — the basis for today’s £30bn Lloyd’s of London market — started out as a venue for insuring ships and their cargoes.
  • Insurers, are careful of overstating the consequences for their industry if the UK left the EU. But many are convinced it would accelerate the shift of business to other global insurance centres, such as Singapore and Japan. The argument applies across different areas of insurance, but the impact on the London-dominated marine market could be the greatest.
  • At present London commands a third of the $18bn global marine insurance market, according to Marsh, the broker. Of that, insurers say about 40 per cent is cross-border EU business.
  • The ability to write business from London passport-free across the EU keeps prices low, says Marcus Baker, who chairs Marsh’s global marine business from the US’s group’s London base. “But if insurers do not have the freedom to write cross-border business as they do now, and have to set up local operations across the EU, there will be potential cost increases,” he says.

Asset management

  • The opening-up of the EU market has made asset management one of the most dynamic areas of cross-border financial services. London has eagerly shared in the spoils.
  • One particular cross-border product, called UCITS — which stands for Undertakings for Collective Investments in Transferable Securities — has grown dramatically, benefiting three jurisdictions in particular. According to Morningstar, the data provider, the UK is neck and neck with Ireland as a domicile for UCITS, only beaten by Luxembourg, which, like Ireland, offers tax advantages.
  • During the past five years net assets held in UCITS in all three locations have doubled, principally because of cross-border sales. For a large chunk of the industry the risk is clear: Brexit would push the UK portion of the business — worth more than €1tn last year — to Luxembourg or Dublin.


  • UKIP leader Nigel Farage believes Britain could follow the lead of Norway, which has access to the single market but is not bound by EU laws on areas such as agriculture, justice and home affairs. But others argue that an “amicable divorce” would not be possible. The Economist says Britain would still be subject to the politics and economics of Europe, but would no longer have a seat at the table to try to influence matters.
  • Britain may lose some of its military influence – many believe that America would consider Britain to be a less useful ally if it was detached from Europe.
  • A likely outcome is that Britain would find itself as a scratchy outsider with somewhat limited access to the single market, almost no influence and few friends. And one certainty: that having once departed, it would be all but impossible to get back in again.
  • Free trade, economic cooperation, free movement of people and goods and the bringing together of independent nations in a war torn Europe in friendship and co-operation has protected Europe’s diminishing place as the world’s political and economic axis swiftly moves East.
  • Scotland would re-emerge, possibly leaving to another referendum on independence — and maybe to a break-up of the UK.


If the U.K. decides it does want to go it alone, figuring out how to do so will be the other significant hurdle to overcome. The country has several options, none of them particularly appealing.

  • UK outside the EU could either choose to follow Norway, which pays into the EU budget and implements the bloc’s regulations or opt for a much more distant relationship, with trade governed by World Trade Organisation rules.
  • It could follow the example of Norway and join the European Economic Area (EEA) but EEA members have to apply all of the EU trade and employment directives in order to access the EU common market. Norwegian Foreign Minister, Børge Brende, said “Norway was one of the fastest to apply EU directives without being ‘around the table’ to have a say in new rules and regulations”.  And that “Britain would be forced to implement every rule from Brussels, even if it leaves the European Union”.
  • What’s more, the U.K. would still have to pay into the EU budget. Norway, for example, contributes 100 euros per person compared with the U.K.’s 180 euros today, according to Open Europe.
  • From here, the issue is whether the UK (or what’s left of it) would follow Norway in taking everything from Brussels (unlikely), or try to negotiate everything (Switzerland model) —considering it has taken years to strike 100 trade deals with individual EU and EFTA states, that hardly seems practical.
  • Perhaps the most simple — if risky — strategy could be to shun all of the above and fall back on Britain’s membership of the World Trade Organisation as a basis for favorable terms. Doing that would see the country automatically forfeit about 50 EU trade deals at a stroke, surrendering large amounts of bargaining power.


Points of View: Inflation

Consumer prices in the United Kingdom increased 0.3 percent year-on-year in May. At this low level, and after years of falling headline numbers, investors may be forgiven for not giving this too much thought. However, despite the historically low inflationary environment, the longer term effects and the power of compounding cannot be ignored – the value of £100 ten years ago, for example, is worth less than £80 today.

Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn’t, pays it.” Inflation can be seen as a compound interest which we are all forced to ‘pay’, and by understanding it we should seek to find assets which consistently protect against it in the long term.

Equities, property, inflation-linked bonds and commodities are often championed as hedges against inflation, but none of these are perfect; property is illiquid and vulnerable to prolonged periods of depressed values; inflation-linked bond prices are influenced by inflation expectations, which are only loosely correlated with changes in actual inflation; and commodities can be volatile and do not provide an income. Equities are also volatile in the short term but are arguably the most reliable source of real returns over the long-term, not least because the underlying companies buy and sell products at prevailing market prices. In any five year holding period over the last 30 years, for example, UK equities produced a real (above inflation) return 80% of the time.

It is this relatively reliable ability to generate attractive real returns over time that leads us to build long term portfolios around a dominant core of equity exposure.


Stocks in Focus: Interserve

This week I am looking at Interserve, the UK-based support services and construction company that operates predominantly in the UK but also has international exposure, including substantial operations in the Middle East. Having begun primarily as a construction and equipment services company, the business has gradually transitioned to focus on support services in recent years and this division now accounts for roughly 64% of operating profit.

Of late, Interserve has fallen out of favour with investors due to concerns over its exposure to the Middle East, where decreasing oil revenues seems likely to put pressure on spending budgets and the construction industry. In addition to this, management credibility has come into question following a £70m exceptional provision made on a mispriced construction contract in the UK.

Despite this setback, management continue to focus on the transition towards what is now the core part of the business – UK support services.  Drivers of this division seem favourable as more customers want to specialise in their core activities and outsource the likes of cleaning and security in order to reduce costs. With contracts lasting multiple years the business also enjoys relatively good earnings visibility. Furthermore, management have announced a strategic review of the equipment services division, which designs, builds, sells and hires specialist scaffolding equipment for major infrastructure projects. This seems likely to result in its sale and would allow management to simultaneously reduce their Middle East exposure whilst raising funds for reinvestment into the UK support services division.

Investors must consider whether the depressed valuation offers a good entry point into a business that is becoming ever more focussed on UK support services. If this transition can be successfully managed then the shares should earn a significant re-rating from their current valuation. However, investors cannot ignore the potential for deterioration in the Middle East and/or the risk of other contracts becoming unprofitable.


Brexit – Put Right the Mistake of 1054

Is there anything positive to say about the EU? Marcus Johnson admits there is a very strong case to remain in the EU but it is nuanced and complex.

When I wrote about Brexit in the April issue of Cambridge Business Magazine my friends, wife and business colleagues all accused me of being wholly negative. It is true that I concentrated on the near term certain costs to the UK and the risks to European and world peace and had nothing good to say about the regulatory mess we label Brussels. That is because, in the short term, I believe we would be poorer and the longer term risks of war are ignored at our peril. A decade of depression might lead to social unrest on a Victorian scale, and Russia would certainly take advantage of a break-up of the EU. So I make no apologies for emphasising the disturbing possible consequences of an ‘out’ vote. Likewise I make no apology for condemning the over detailed counter productive regulatory web we live within, although I have my suspicions that the regulatory burden would stay the same or worsen if we had Whitehall in sole charge.

But what, I was asked, could I say positive about remaining in? I do believe there is a strong positive case to make, but it is nuanced and complex, and involves a belief in human progress and a confidence in the system of parliamentary democracy we have evolved in the UK and now in the EU. I believe that the EU can do two hugely valuable things; one for us in the UK, the other for the world.

The reason that Oxford and Cambridge are in the top ten universities of the world has less to do with the brilliant minds who constitute these intellectual powerhouses and much more to do with the stability of the environment in which they have operated over the centuries. This has allowed academic excellence to flourish without the interruption of invasions, insurrections or dispossession.  It is not unreasonable to believe this relative stability springs from Magna Carta and the representation of all powerful interest groups in parliaments over succeeding generations. Magna Carta recognised that successful government involved an accommodation to the interests of commerce and civil society and that social order was best maintained by self restraint and a common adherence to a written system of laws and justice. This was preserved by a representative system where the most powerful were consulted and a broad consensus preserved. The interests then were Crown, Church, and Land and that has evolved over the years to Commerce, Finance, Industry, Civil Service and Unions but the same idea of putting representatives together and letting them try to create a consensus has with one or two problems along the way proved a success for the best part of a 1,000 years. This settlement is under threat today as never before in all democracies by two powerful forces. The first is an increase in the ease and speed of mass communications; this is leading to a threat to the representative system.  The ability to sample and observe public opinion on individual decisions is tending to replace informed debate by representatives with uninformed short term fashion driven popularity seeking. Referenda are one example but frequently the use of opinion polls and focus groups is replacing “what is the best solution?” by “what is the most acceptable solution?” within both the government and our political parties. The second powerful force is the creation of ever more “entitlements” by politicians seeking votes.  In a system when 300,000 people pay one third of all income tax received by HMRC it is very easy for voters to vote for benefits in the belief that someone else will pay. In a UK which had no treaty commitments to respect private property, and with borders closed to free movement of capital and people, there would be no control on such dictatorship of the majority. So the first great positive contribution the EU can offer in future years is a control over populism and over politicians using bribery to buy votes. The reason the EU offers a control is simple – as long as there is freedom of movement of people, of goods and of capital, those who suffer as a result of uncontrolled populism or electoral bribery can move their business, their capital and their home to a more congenial country and the knowledge that this could happen – or evidence it was starting to happen – would of itself offer a control over extremism of this sort. The Treaty of Rome itself provides protection for individual rights and against seizure of property in the same way which the Constitution does for the USA.

The second major positive influence of keeping the EU (and our departure would set off several others unless the nasty consequences showed themselves very fast so as to deter others from following suit) could be on the rest of Europe. In 1054 the Great Schism was the first act in 1,000 years of bitter dispute between East and West which is still going on today in the Ukraine, was recently in evidence in Bosnia and for most of the last century has regularly surfaced in hostilities between Russian and her neighbours and Turkey and her neighbours. The latter was the cause of the three Balkan wars and then the First World War and the Russia today has soldiers occupying some or all of several of her neighbours. The EU has already shown it can persuade former fascist and communist dictatorships to adopt democratic forms of government and to open their borders to free movement of labour, goods and capital. The extent to which Eastern Europe has changed to adopt our democratic norms is not yet proved, and Poland and Romania are both in different ways profound challenges to the liberal and free society the EU has tried to impose, but to date the model has, broadly speaking, worked both to attract new members and to keep them in line once admitted. The almost unimaginably worthwhile and desirable positive which the EU then holds out is the possibility of integrating Turkey and Russia into our UK and western European model of civil society. The adoption of a secular free social order in these two nations would be the single most positive development we could aspire to in our lifetimes, and it is perhaps achievable if we can show the EU has surmounted its current problems. There are those who might argue that a Brexit followed by depression and disorder in the UK would be a good way of demonstrating first how beneficial the EU can be but this assumes that the EU would survive without us, and as I argued in my previous article we should assume that a success for UKIP here would be rapidly followed by others playing the same nationalist theme elsewhere and the breakdown of the Union as we know it.

So my positive statement about the potential for the future is rather similar to the hopes of those sitting down to sign the Rome Treaty sixty years ago. But whereas their dream was limited to making the next 50 years peaceful in Western Europe my suggestion is that in the next 50 years our aim should be to heal the great divide which opened up in 1054, to bring an end to the instability on the eastern and southern borders of the current EU by making it very obvious that the system of parliamentary democracy we have built can lead to peaceful resolution of disputes and offers a framework within which individual countries can maximise the well-being of their citizens. I believe that the existence of a common agreed framework which sets rules of civilised behaviour will also be likely to help preserve the UK as a united country, and most importantly to help preserve representative democracy and thus the freedom we enjoy today for future generations. If we can extend the current union to bring in Turkey, its first Muslim nation, and Russia, the most aggressively threatening European power, we will have made the world a much safer place for our children and reversed the single most costly policy error of post Roman European governments.

This article was published in the Cambridge Business Magazine – May 2016 Issue 54