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How fragile is Britain’s recovery?How fragile is Britain’s recovery?

13 December 2013 Issue 670 Britain’s best-selling financial magazine

Matthew Lynn: Politicians should get out of the housing market P16

Opinion: Bitcoin may be as big as the internet P22

Profile: The billionaire backing Bob Diamond in Africa P32

HOW TO MAKE IT, HOW TO KEEP IT, HOW TO SPEND IT

13 December 2013 Issue 670 Britain’s best-selling financial magazine

Page 24Page 24

Politicians Opinion: may be as big as the internet

Fuel consumption in l/100 km (mpg): urban 11.8–6.7 (23.9–42.2), extra urban 7.8–5.7 (36.2–49.6), combined 9.2–6.1 (30.7–46.3), CO2 emissions: 216–159 g/km. The mpg and CO2 figures quoted are sourced from official EU-regulated test results, are provided for comparability purposes and may not reflect your actual driving experience.

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www.moneyweek.com 13 December 2013 MoneyWeek 5

Poor Hugh Hendry. The Eclectica hedge fund manager was one of the most vocal proponents of the bear case before the credit crunch, and gained lots of media exposure for his straight-talking put-downs of pompous talking

heads during the eurozone crisis. But now he’s been forced to throw in the towel by the Fed’s endless money-printing. As we note on page 8, it’s not that Hendry has turned bullish – he still thinks everything will end badly. But while the printing presses are running hard, he doesn’t see any benefit to fighting the world’s central banks as governments across the globe compete for growth by devaluing their currencies.

Hendry’s dilemma sums up the problem with bubble spotting. You might be certain that a market is being propped up artificially, and that the fundamentals are firmly against it. But how can you tell when the fundamentals will reassert themselves? You can’t. Sure, there are often psychological cues that suggest a bubble’s days are numbered. The mass scorn that greeted the brave souls who stepped into the market at its low is now aimed at the bears. At the bottom, all you hear are arguments that begin: “Yes, the market looks cheap, but...” At the top, the arguments begin: “Sure, the market looks expensive, but...”

So what do you do? Well, the good news is that, unlike most fund managers, no one pressurises you to be in any particular market

How to spot cheap marketsif you don’t think it is good value. So if you don’t see any opportunities, you can just be patient. Secondly, while the US stockmarket certainly looks expensive, there are still some cheap and hated markets out there that should offer good returns in the long run. A piece in The Wall Street Journal this week sums it up. On the one hand it argues that, while the cyclically adjusted price/earnings (Cape) ratio implies that US “stock returns in the near future will be lower than average... the ratio has gone much higher than its current level during past rallies”. Which sounds a lot like a “the market is expensive, but...” argument to me. On the other hand, in the same piece, various ‘experts’ warn sagely that the Cape isn’t reliable for overseas markets, even though they look cheap.

But the actual data suggest that’s nonsense. According to fund manager Mebane Faber, at the end of 2012 Greece, Ireland, Argentina, Russia and Italy were the cheapest markets in the world, on Cape.

By 4 December all but Russia (down 7.9%) had gained at least 14% – Ireland was up 40%. Meanwhile, the most expensive markets – Peru, Colombia, Indonesia, Mexico and Chile – had all fallen. Mexico was down by just 3%, but the others shed at least 16% (Colombia) and as much as 31% (Peru). As for the year to come, the cheap markets line-up remains the same. Many of you will know I favour Italy, but I’m increasingly tempted by Russia too. As for the most expensive market? It’s the US.

from the editor

13 December 2013 ISSUE 670Editor-in-chief:

Merryn Somerset Webb

Editor: John StepekMarkets editor: Andrew Van Sickle

Senior writers: Phil Oakley, Matthew Partridge

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ISSN: 1472-2062• ABC, Jan - Jun 2013: 52,027

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9 Markets Nelson Mandela took South Africa a long way – but it still has far to go.10 Strategy What are split caps and are they worth investing in?12 Shares in focus This builders’ merchant is still booming.18 Briefing The drive to free up more of our data for the common good.29 Personal finance How to make the

most of your savings.35 Travel A trip to Copenhagen is the perfect way to get in the Christmas spirit.38 Christmas gifts If you’re looking for a truly tasty treat, try one of these hampers.41 Blowing it Is rampant consumerism a sign of a civilisation in decline?46 Last word First the pope, now Barack Obama: who wants to live in North Korea?

In this issue

John Stepekemail: [email protected]

“How can you tell when the

fundamentals will reassert themselves?

You can’t”

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6 MoneyWeek 13 December 2013 www.moneyweek.com13 December 2013 www.moneyweek.com

news

Housing rebound has slowed but not stopped

US economic data have continued to improve. Payrolls grew by 203,000 in November and t he unemployment rate declined to a five-year low of 7%. The University of Michigan’s gauge of consumer sentiment climbed to a five-month high. An index tracking manufacturing activity is at a two-and-a-half-year high. Annualised GDP growth accelerated to 3.6% in the third quarter.

What the commentators said“Never mind” government budget cuts and October’s shutdown, said Economist.com’s Free Exchange blog. The economy is “plugging along at a surprisingly steady clip”. The housing recovery has lost a little momentum of late as mortgage rates have risen, while corporate America still seems to be “hunkering down and curbing capital spending”. But the employment recovery and the decline

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in inflation, boosting real incomes, are underpinning household spending.

Meanwhile, the outlook is encouraging, according to Capital Economics. September and October saw a surge in building permits, suggesting that higher mortgage rates have simply dampened, rather than choked off, the housing rebound. The fiscal drag from Washington is also set to ease over the next 12 months after this year’s cuts. That should outweigh any further increase in long-term interest rates.

That’s because the US Federal Reserve has made it clear that its benchmark interest rate is set to stay at near-zero for another two years, and liquidity-addicted markets have twigged that tapering quantitative easing – reducing the pace of money printing, as the Fed is likely to do soon – is not the same thing as tightening policy. So another sharp jump in long-term interest rates, as occurred when markets confused tapering with tightening earlier this year, is unlikely.Consequently, 2014 “could be the year that the recovery finally shifts into top gear”, concluded Capital Economics.

The recovery gathers pace

Clampdown on Wall Street Four years after it was first proposed, US regulators have approved the Volcker Rule. Named after the former chairman of the US Federal Reserve, this bans banks from making bets with their own money – proprietary (prop) trading – in

order to reduce the likelihood of Wall Street’s big players engaging in overly risky activity and requiring a bailout.

What the commentators saidWhat pointless “crowd-pleasing tokenism”, said Allister Heath in City AM. Property and small business lending “have sunk far more banks than trading ever has”. That certainly applied in the global crisis, when loan losses vastly outweighed trading losses. “Proprietary trading did not cause the recession or the bail-outs.”

Still, as the FT pointed out, implicit state guarantees for big banks and lax regulation of prop trading helped fuel the credit bubble. But turning the Volcker rule into a workable law has proved “fiendishly difficult”. A key issue is deciding what constitutes prop trading and what is market making, whereby a bank buys and sells assets for clients.

For instance, said The Daily Telegraph, the process of making a market, or establishing a price, for a client will often involve the firm holding a certain amount of the product on its own balance sheet. “How do you know whether a certain amount of overstocking might amount to no more than an optimistic view on trading volumes rather than an outright bet on... the product’s price?

Practical difficulties notwithstanding, said David Reilly in The Wall Street Journal, the Volcker rule will be worthwhile if it marks a first step towards stopping banks having their fingers in so many pies that they become

America

£800 The value of the cocaine the former X-factor judge Tulisa Contostavlos (pictured) is charged with supplying. She was arrested in June after being secretly taped in a newspaper sting allegedly boasting that she could get the drug for an undercover reporter.

£11m How much a failing Shropshire construction company claimed an £8,000 ruby was worth in order to inflate its accounts.

$500,000 How much loose change was left at security

checkpoints in American airports in the year to October.

$2.50 The typical wage in Mexico’s manufacturing sector – around a fifth lower than in China. Mexico’s share of North America’s auto jobs has jumped from 12% to 39% since 2000.

52 How many laws the US Congress has

passed in 2013, its least productive year since 1945.

£3.65 What a half litre of vodka will cost in Russia from 1 January. The price will then climb further, to £4.25, in August 2014. The government is trying to clamp down on alcohol addiction, which plays a part in 30% of deaths.

6,000 How many Western tourists have visited North Korea this year, up from 700 in 2004.

£80 What a hand from the Lenin statue destroyed by protesters in Kiev was on sale for on a Ukrainian website this week.

The bottom line ©

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● The way we live nowBritain’s first “social supermarket” has opened its door in Yorkshire. It sells, at hefty discounts, major retailers’ surplus food and household products that would normally be thrown away: excess produce created by forecasting errors, seasonal promotions, or packaging faults. Only people on means-tested benefits can apply to become a member of the discount store. “We are aiming to fill a gap between food banks and mainstream retail,” said Sarah Dunwell of Company Shop, which runs the scheme. “Lots of families are not in an emergency situation but are on the cusp of food poverty.”

Renzi: can he help push through reform?

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Italy crawls out of recessionItaly’s two-year recession is over. According to revised data, GDP was unchanged in the third quarter of 2013 compared to the previous three months. Companies have begun to spend again: industrial production expanded by 0.5% in October. A forward-looking survey of activity in the sector rose to a two-and-a-half-year high. However, the Italian economy is still 7.3% smaller than at its pre-crisis peak and has barely expanded in the past 20 years. Meanwhile, Matteo Renzi, the 38-year-old mayor of Florence, has been chosen as the new leader of the centre-left Democrats.

What the commentators saidThe recession may be over, said Alen Mattich in The Wall Street Journal, but “normal growth is still a long way off”. Exports have ticked up but the domestic economy remains subdued due to a “crippled banking sector”, which continues to withdraw credit from the economy. The International Monetary

Fund expects Italy to grow by 0.7% next year and then by 1% a year – the glacial pace common before the crisis.

Another key reason for that is the long list of urgently needed structural reforms to raise Italy’s long-term growth potential, and thus allay fears that Italy will eventually go bust. The reforms are wearingly familiar, said Hugo Dixon on Breakingviews: privatisations to cut debt; lowering employment taxes and dismantling red tape in the labour market to encourage hiring; exposing a series of cossetted professions to competition; making the business start-up process easier; and reforming the judicial system.

These changes are all the more urgent now because Italy is unique in Southern Europe in having seen no improvement in its competitive position in the past five years, noted Simon Nixon in

EuropeThe Wall Street Journal. The difficulty is confronting the vested interests, notably unions and employers, who have blocked previous reform attempts. The hope is that Prime Minister Letta, possibly galvanised by Renzi, will be able to push through changes now that the influence of his predecessor, Silvio Berlusconi, has waned. Given the evidence of recent years, however, we probably shouldn’t hold our breath.

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% change

FTSE 6,549.13* 0.94%**

Nikkei 15,515.06 0.70%

S&P 500 1,802.62 0.42%

Nasdaq 4,060.49 0.58%

CAC40 4,123.40 -0.12%

Dax 9,148.65 0.39%

$ per e 1.38 2.22%

e per £ 1.19 -1.65%

$ per £ 1.63 -0.61%

Gold ($ per oz) 1,256.36 2.86%

Brent crude oil ($) 108.90 -2.52%

*11 December **since 4 December

Winners % change

Price

Hargreaves Lansdown (HL) 5.77% 1,284p

Smiths Group (SMIN) 5.38% 1,411p

Persimmon (PSN) 4.46% 1,194p

Schroders (SDR) 4.37% 2,486p

TUI Travel (TT) 4.21% 384p

Weir Group (WEIR) 4.08% 2,142p

Sports Direct (SPD) 3.93% 766p

Experian (EXPN) 3.81% 1,118pRoyal Dutch Shell B (RDSB)

3.67% 2,177p

Royal Dutch Shell A (RDSA) 3.52% 2,086p

Losers % change Price

Next (NXT) -1.89% 5,440p

Tullow Oil (TLW) -1.94% 859p

Reckitt Benckiser (RB) -1.95% 4,722p

Imperial Tobacco (IMT) -2.22% 2,249p

Tesco (TSCO) -2.26% 332p

Marks & Spencer (MKS) -2.42% 464p

William Hill (WMH) -2.56% 377p

Aggreko (AGK) -3.00% 1,552pStandard Chartered (STAN)

-4.00% 1,285p

Vedanta Resources (VED) -4.67% 806p

Best and worst-performing shares

Weekly change to FTSE 100 stocks. Prices as of midday 11/12/13

Vital numbers

too big to fail. Why, for instance, are they allowed to run their own fund management arms, when implicit government backing gives them an advantage over stand-alone firms and encourages risk taking? And shouldn’t other companies, rather than banks, handle market making? We must get “banks back to being banks”.

8 MoneyWeek 13 December 2013 www.moneyweek.com

“It is past time to recognise the deflation danger facing Europe,” says French economist Jean Pisani-Ferry. In November, the annual inflation rate in the eurozone had slid to 0.9%. In the autumn of 2012, it was over 2%. Greece, Ireland and Cyprus have already suffered outright deflation (falling prices). On current trends, Spanish and Italian prices will soon be falling. With demand so subdued, inflation is set to keep melting away, says Capital Economics.

The main danger with deflation is that it raises the real value of a fixed sum of debt. So the huge debt burdens already crushing the south will grow. And if the economy is already shrinking, debt as a proportion of GDP will soar. Italy’s public debt, for instance, has risen from 119% of GDP to 133% in just over two years, says Ambrose Evans-Pritchard in The Daily Telegraph. With the south in the grip of deflation, concerns that these countries will default could rapidly return, sending bond yields, or long-term interest rates, upwards and further undermining economies.

Meanwhile, the periphery can’t get its debt written off and can’t inflate its way out. Eurozone countries have no control over interest rates and no longer have

their own currency. With Europe far more export-dependent than other regions, the south desperately needs a weaker euro to fuel a recovery.

Unfortunately, the euro has climbed by 6% against the dollar this year. A strong currency negates any gains in competitiveness stemming from reduced labour costs. According

to France’s industry minister Arnaud Montebourg, every 10% rise in the euro costs France 150,000 jobs. Evans-Pritchard highlights a Deutsche Bank study noting that Germany can cope with a euro-dollar rate of up to $1.79, while the “pain threshold” for France and Italy is a respective $1.24 and $1.17. The rate is currently $1.37. And a high currency reduces inflation further.

With interest rates already at rock-bottom and banks still reluctant to lend, the only way the European Central Bank (ECB) can help the weaker states is by weakening the currency. The trouble is that, having promised to do “whatever it takes” to save the eurozone, the foreign-exchange markets appear to be testing the ECB’s resolve by keeping the euro buoyant. The current state of affairs makes it more likely that the ECB will be forced into quantitative easing – which bodes well for European stocks.

markets

Last bear standing throws in the towelHugh Hendry has been bearish for years. Rattled by the debt build-up before the global crash, the founder of Eclectica Asset Management cashed in on his scepticism as his contrarian strategy gave him a 30% return in 2008.

So this week’s news that the self-styled “last bear standing” has thrown in the towel raised eyebrows. But he hasn’t suddenly decided that everything is fine. “It will all end badly,” he says of the current market rebound, because the fundamentals remain lousy. But he is “tactically bullish” for now because it’s become increasingly clear that the world’s central bankers will keep this party going for as long as possible. That gives equities plenty of scope for further gains. “Stronger growth in one part of the world… will be countered by even looser policy elsewhere.” Overall, then, tighter policy will keep getting postponed.

This macro environment, along with the recent pattern displayed by US stocks, means that “markets look to us much as they did in 1928 or in 1998” – a major spurt away from the top. Japan could be especially promising, Hendry reckons, not because Abenomics will work, but because it won’t. That would imply panic-stricken “money printing without limit”. Hendry is betting on the Nikkei hitting 40,000 by April 2018.

The euro: dangerously buoyant

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Europe’s deflation danger

Dow Jones index adjusted for inflation20,000

500

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15,000

1900 2010 30 40 50 60 70 80 200090 10 20Source: chartoftheday.com

Chart of the week: Dow is treading waterInvestors are only really growing their cash pile if their returns beat inflation. So it’s interesting to note that for all the talk of new all-time highs in US markets in recent months, the Dow Jones index is only just back to its 1999 record if inflation is taken into account. The 1999 peak in real terms was 16,261. So the index has been treading water for 14 years. This period of drift followed the biggest bull market on record, a surge from 2,000 to almost 16,000 over 18 years.


South Africa’s transition to a multi-racial free-market democracy was “a near-miracle for which the whole world must thank” Nelson Mandela, says The Economist. He ditched the Communist economic dogma of the liberation movement the ANC before assuming power. The ANC’s embrace of largely market-friendly policies, buttressed by sound macroeconomic management, notably a clampdown on debt and inflation, ensured that South Africa today boasts sub-Saharan Africa’s “biggest and most sophisticated economy”.

Post-apartheid buoyancyThe economy bounced back from apartheid-era stagnation and since 1994 has tripled. Of the past 73 quarters, only three, during the global crisis, saw national income retreat. In recent years the global commodity boom has provided an additional tailwind. The government has been able to expand access to basic amenities and welfare services. Now 84% of South Africans have access to electricity, up from 58% in 1996.

Nonetheless, this has barely begun to address many of South Africa’s problems. Indeed, 47% of South Africans remain below the national poverty line of $43 a month; in 1994, this was 45.6%. Officially unemployment has risen to 25%; unofficially, it’s around 40%. And the outlook is clouding over. “At best”, says Jim Armitage in The Independent, today’s South Africa is “underperforming... at worst, it’s in a quagmire with little sign of improvement”. Compared to most

emerging markets, its growth rate has been pedestrian in recent years, rarely exceeding 4%-5% – not enough to make a dent in unemployment – and recently falling to 2%. The country’s low economic speed limit is due to several structural problems, notably a poor education system, which affects productivity and employment.

That in turn is undermined by an inflexible labour market, labour conflicts and huge pay rises. Power shortages and infrastructure bottlenecks are also obstacles. And all these issues are looking less likely to be tackled properly now that the ANC has become “a byword for weak leadership and cronyism”, says the FT.

A shot in the footUnder the current president, Jacob Zuma, the ANC has “conflated the interests of

party and state”, says The Economist, attempting to undermine the independence of the courts and the press and “dishing out contracts for public works as rewards for loyalty”. Unions have also used their close ties to the governing party to maintain their power bases and resist significant changes to the labour market.

South Africa has long been dominated by large firms and unions to the exclusion of the informal sector and the unemployed, says the University of Cape Town’s Haroon Bhorat on Nytimes.com. Now the insiders are becoming more powerful, leaving the outsiders – the unemployed and small business people without connections – ever more marginalised. All this hampers growth, in turn repelling potential investors and further reducing South Africa’s potential.

South Africa is shooting itself in the foot just as external headwinds are mounting. China’s growth model is shifting towards consumption and away from investment, which bodes ill for commodity producers such as South Africa. South Africa also has a huge current account deficit, worth 6.8% of GDP. Economies with external deficits need to import foreign capital to cover the gap, and this capital is less likely to come to emerging markets when America is looking likely to tighten monetary policy, as is now the case. If the political environment worsens, it may also be more reluctant to fuel the economy in good times. As such, South Africa’s economy and stockmarket may be in for a bumpy ride over the next few years.

South Africa’s long walk isn’t over yet

markets

Will India’s surge run out of steam?Indian stocks have been on a tear, rising by more than 15% since early September and hitting a new record this week. It’s a marked contrast from this summer, when its currency and equities tanked. One reason investors have returned is that the new central bank governor, Raghuram Rajan, has proved a safe pair of hands, attempting to squeeze out high inflation by raising interest rates twice.

The current-account deficit has fallen, thanks to higher import duties on gold, so India is now less dependent on foreign capital and its assets are thus less vulnerable to global sentiment. Meanwhile, the lacklustre growth of the past few years appears to be bottoming out. In the third quarter, year-on-year GDP growth accelerated to 4.8% from the previous quarter’s 4.4%. And investors were cheered by the victory of the opposition, led by the pro-business Narendra Modi, in three state polls.

Yet the market surge seems unlikely to be sustained, says Capital Economics. For starters, growth may have ticked up, but there is a “bumpy recovery” ahead. The improving global economy and recent slide in the rupee have boosted exports, but the key driver of growth is the domestic economy, and this still looks “shaky” due to the “poor investment environment”, with pervasive red tape hampering a series of major projects.

As the government’s efforts to rectify this have made little progress, it’s no wonder investors are looking forward to the opposition taking over the national government in May. But it will still probably need support from “fickle, regional parties” to govern. High inflation, moreover, continues to constrain household and corporate budgets. India’s long-term prospects may be compelling, but for now, as Capital Economics concludes, markets are getting ahead of themselves.

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Further progress faces headwinds


A few years ago split capital investment trusts were mired in scandal as some investors lost lots of money in risky funds. However, for those looking for higher rates of income and prepared to take on higher risks, they can play a useful role in a portfolio.

What are they?Split capital trusts are investment trusts that issue more than one class of share. This means an investor can decide whether they’d rather have a high rate of income, or a focus on capital growth from the same trust. The trusts tend to have a fixed term (usually five to ten years) with a pre-determined wind-up date. The make-up of a split capital trust can be complicated as it can issue many different types of shares. The most common ones are zero dividend preference shares (zeros) then income and capital shares. The shares are ranked in order of payment priority at the wind-up date. Any borrowings the trust has are paid first, followed by zeros, then income and capital shares.

Zeros don’t pay any income. The interest here is capital gain. When the shares are first issued, they are sold at a discount to a fixed redemption price which is received at the wind-up date. These shares can be useful for higher-rate taxpayers: by selling their shares before the wind-up date, they only have to pay tax on capital gains they make above their annual allowance of £10,900 at 28%, rather than income tax at 40%-45%.

A traditional income share gives you the right to most of the trust’s income, with a redemption price at the wind-up date. This is the safest income option. There are also annuity income shares that can pay a high and rising income. However, there is no capital protection here as capital is depleted and converted into income. These types of shares are best held in a tax-sheltered account, such as an Isa. Ordinary income shares try to provide a high income and a right to a share of the remaining trust assets. These are more risky than zeros, as you could lose your investment if the trust performs badly.

Capital shares have no pre-determined wind-up price, and are entitled to the assets left over at the wind-up date. There is always a risk there may not be any money left, but spectacular gains could

be made if assets rise a lot. These are very risky and only for adventurous investors.

Working out the risks and returnsLook at what the trust is investing in, because this will determine the returns. Is it investing in blue-chip shares or bonds? Or riskier stuff, like smaller firms or technology? One of the biggest risks with a split capital trust is gearing, which comes in two forms. Firstly, it comes from any money borrowed by the trust. This magnifies returns. It’s great if the

trust is performing well, but if it performs badly your investment could be wiped out. Gearing also comes from the trust’s structure. The best way to think about this is to consider who is in front of you when it comes to getting paid. The biggest risk comes from a capital share in a trust with debt, zeros and income shares all in front of it in the payment pecking order.

With zeros and income shares with fixed redemption prices, look at the gross redemption yield (see page 44) of the share. This gives you your total return from paying the current share price and holding it until the wind-up date with the target redemption payment.

Another thing to look for is the share’s hurdle rate. This tells you how much the trust’s assets will have to grow by in order to pay out the full redemption value at the wind-up date. A negative hurdle rate is a good sign as it means that the assets could fall in value by a certain amount and still pay the full redemption value. A similar measure is the wipe-out hurdle rate – how much the assets have to fall by to leave you with nothing.

Asset cover also looks at how many times the trust’s current assets cover the redemption value of the shares. So a cover of two means that there is 200p in assets for every 100p of redemption value – assets can fall by 50% before the redemption value is in danger.

Take a close look at the risk before buying in

Is it time to return to split capital trusts?

investment strategy

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by Phil Oakley

For the safer zero dividend preference shares, Aberforth Geared Income Trust (LSE: AGIZ), with a gross redemption yield of 4.2%, might be worth a look. Aberforth is a value investor specialising in smaller companies. The shares wind up in June 2017 with a target redemption price of 159.7p, which is already covered 2.4 times by the trust’s gross assets. These assets can fall by nearly 20% a year before the redemption value is threatened.

For income shares, you could consider JP Morgan Income & Growth (LSE: JIGI). The trust invests a lot of its money in blue-chip dividend-paying shares with a wind-up date of November 2016. At 92.75p, it trades on a 11.5% discount to

its net asset value and a 4.7% dividend yield. The redemption value is just about covered by assets, but the shares have a gross redemption yield of 8.8%.

Capital shares are few and far between. M&G High Income (LSE: MGHC) is highly geared with zeros and income shares ahead in the pecking order. It winds up in March 2017 and doesn’t yet have enough money to pay anything to shareholders. It needs to grow 6.8% per year just to avoid wiping shareholders out and by 7.7% to get to the current share price. However, if you think the stockmarket will go on a spectacular bull run – and assets go up by more than 8% – the high gearing could see you make several times your money. Not for the nervous.

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Travis Perkins

Travis Perkins: building momentumTravis Perkins traces its roots back over 200 years, but today’s company arose from the merger of Travis & Arnold and Sandell Perkins in 1988. The group has been very successful at growing on its own, as well as buying competitors and entering new markets. It is Britain’s biggest builders’ merchant, with a 15% market share. As well as selling building materials to tradespeople and the construction industry, it has strong positions in the markets for plumbing, heating and interior building materials, such as flooring and drywalls. With the Wickes and Tile Giant chains, it also has significant exposure to the DIY market.

Travis Perkins has been very well run for many years, but its fortunes are inextricably linked to the British economy and construction in particular. This has made it a classic ‘boom-to-almost-bust’ investment over the last decade. At the height of the last boom in 2007, its shares were trading at over £21. Just 18 months later, you could buy them for just over £2, as profits collapsed. In 2009 the dividend was stopped and shareholders were asked for £300m to shore up its finances. But the shares have done very well over the last five years and are up by more than 60% in 2013. Is the good news priced in? Or is there still more to go for?

What does the future hold?UK consumers have yet to rediscover a love of DIY, but the construction trade is roaring away. This is what’s driving sales at Travis Perkins’ merchant business. The construction industry has received a huge shot in the arm from the government’s Help to Buy scheme and is now growing at its fastest rate since 2007. According to economists from Markit, new houses are being built at a rate of 40,000-45,000 per quarter, compared with 28,000 at the end of last year, and 57,000 in the four years to 2007. This means more deliveries of materials to building sites and more money for Travis Perkins.

However, it’s the second phase of Help to Buy that could see a further uplift in sales and profits. The company sells lots of products for repairs, maintenance and improvements. Spending on these areas tends to rise when people move house. So far this year house moves have

increased by nearly 25% and are running at around 95,000 a month. That’s still a long way short of the 155,000 a month seen in the boom years, but the firm is optimistic that the second phase of Help to Buy will push the figure up to around 120,000. However, there is usually a gap between when people buy houses and when they start spending money on them. This means that the company won’t benefit from the uptick in people moving house until 2014 – providing buyers have enough money left over, that is.

Travis Perkins is not just relying on the construction market. It has an ambitious

This builders’ merchant is well placed to profit from Help to Buy, says Phil Oakley

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The numbers

What the analysts sayBuy 7

Hold 12

Sell 5

Target price 1,830p

Directors’ shareholdingsG Cooper (CEO) 81,206

A Buffin (CFO) 33,133

R Walker (chair) 83,003

Key factsStockmarket code LSE: TPK

Share price 1,741p

Market cap £4.27bn

Net assets (June 2013) £2.39bn

Net debt (June 2013) £406m

P/e (prospective) 17.0 times

Yield (prospective) 1.7%

Dividend cover 3.5 times

Interest cover 11.7 times

shares in focus


strategy to grab a bigger share of existing builders’ merchant markets, move into related ones, and become more efficient. As well as growing its merchant depot sites by ten to 15 a year, and adding Toolstation outlets, I wouldn’t be surprised if the company goes out and buys some of the bigger local firms still out there. This would boost its formidable buying power and help profits grow.

There’s also a lot it can do with Wickes. Households are not splashing out on DIY at the moment, so the goal is to make Wickes a serious option for tradesmen by focusing on value for money. It is also likely to increase the number of Wickes stores across Britain. Other areas of expansion include bathroom and interior building supplies. By spending more on where it can get the best bang for its buck, the company reckons it can grow trading profits by more than 10% a year for the next three to five years, and boost its return on capital by 2%-3%. That would be good for shareholders. The company is also feeling confident enough to pay out a bigger slice of its profits each year, which should see a big increase in dividends.

It’s not all plain sailing. Travis Perkins’ lines of business makes it a riskier investment than many. It also has a lot of fixed costs, because it rents rather than owns most of its outlets, making profits very sensitive to changes in sales. Long-term shareholders will know of the pain this can bring, but with business picking

up there’s a good chance that profits in coming years could be higher than many analysts expect. The shares are not cheap on 17 times 2013 earnings, but this falls to 14.7 times next year’s forecast profits.

Travis Perkins looks like it is still building earnings momentum and that’s what could drive the share price higher still.

Verdict: buy

In April last year, I said Drax was a ‘sell’. It looked expensive on 18 times expected earnings, and I thought future profits would be hit by carbon emissions allowances costs, and as it made its power station comply with regulations. A plan to convert from coal to biomass looked to be stuck in the starting gates.

But events have proved me wrong. Although profits in 2013 are set to be lower than in 2012, Drax’s prospects may have been transformed by the government, which last week agreed to let it charge a minimum of £105 per megawatt hour (more than twice the current market price) for the electricity it generates from burning biomass (mainly wood pellets). This runs until 2021, and looks good enough to underpin its £700m investment in turning half of the power station to biomass. UBS reckons it makes Drax

a more attractive takeover target: a bidder could justify paying more than £10 a share, or even £12 if four of the six power units are converted. Barclays Capital reckons Drax could end up paying out up to £1.5bn to shareholders in a few years’ time.

Drax now trades on over 22 times next year’s earnings. But analysts expect profits to almost double over the next three years. With coal-generated electricity a lot more profitable than gas generated, the medium term looks rosy. It may be worth considering how long the price guarantee will last – a future government could change its mind, particularly as it will mean higher electricity bills. But no one seems worried at the moment.

Verdict: hold if you own

Company in the news: Drax (LSE: DRX)

Gamble of the week:Domino’s Pizza (LSE: DOM) 800

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When reviewing Domino’s in July, I thought it was a great business, but way too expensive on 26 times earnings, leaving no room for slip-ups. That proved to be the case. The shares are now down 25% after a tough few months. On the trading front, it seems that replicating the success of its UK business in Germany is not going to happen quickly, if at all. It will take longer than expected for losses to turn into profits. Back in Britain analysts are starting to fret that it won’t be able to open as many new stores as they had expected. When that gets factored into their spreadsheet models, it probably means the business is worth less too.

If that wasn’t bad enough, last week the chief executive said he was leaving. Coming so quickly after the finance director said he was retiring, this did not sit well with investors, who unsurprisingly wondered: ‘what have they seen that outsiders haven’t?’ Investors hate uncertainty, which is why the shares have been hammered.

Analysts are not yet taking a knife to their forecasts. They still expect earnings to grow by 20% in 2014. If Domino’s can deliver on that, the shares trade on a less punchy 17.4 times forward earnings and offer a prospective dividend yield of 3.8%.

The chairman, Stephen Hemsley, who ran Domino’s for a decade, is apparently ready to step in to steady the ship. Time will tell whether Domino’s can keep on growing strongly, but sometimes the market overreacts to news. Domino’s shares could bounce back if some confidence is restored. The shares are a risky, short-term punt.

Verdict: a speculative buy

shares in focus


Murray Income Trust’s (LSE: MUT) objective is three-pronged: to generate a high income, a growing income, and capital growth. The best way to do this is to concentrate on companies with strong market positions and robust balance sheets that have the potential to grow their earnings (and hence their dividends) over the long term. Perhaps surprisingly, over the last 18 months earnings growth for the UK market in aggregate has, so far at least, failed to show signs of improvement. The returns we have seen as the market has moved ahead have been due to a rerating (where investors are willing to pay more for a given level of earnings). Of course, markets can’t perform well forever without earnings making progress, so it’s important to focus on companies that have the potential to deliver strong earnings growth over a long timeframe. I believe the three below fit the bill.

The first is Compass (LSE: CPG), a leading global contract-catering company benefiting from the long-term trend for companies to outsource more of their non-core functions. Around half of its £200bn market is outsourced, with healthcare and education particularly underpenetrated. The company also has scope to gently increase operating margins via cost savings in areas such as labour scheduling and food procurement. Compass is steadily increasing its exposure to emerging markets (by expanding operations in countries such as India and Brazil) while also offering various support services, a market that is growing at around twice the pace of catering. The combination of likely high single-digit earnings growth, a prospective dividend yield close to 3%, and an on-going share buy-back (given its strong cash flow characteristics) provides an attractive total return.

My second choice is Cobham (LSE: COB), a company that has endured a more difficult period over the past couple of years as US defence spending has been reined in. Indeed,

trading is likely to remain difficult in the short term as contract awards are delayed. However, the company has leading market positions in a number of areas such as air-to-air refuelling and antennae that provide the opportunity to expand into new geographical markets. Cobham is also making good progress with its efficiency measures. Through this more challenging period the company has been retuning its operations to focus on its civil aerospace business where growth remains robust. The company has a target to grow its dividend (from a current yield of 3.5%) by 10% a year. It also offers a strong balance sheet that gives it the option to acquire rivals, buy back shares, or perhaps announce a special dividend, and it trades on an attractive valuation of 12.5 times 2013 earnings.

The final company is Inmarsat (LSE: ISAT), the market leader in satellite communications. The company benefits from significant barriers to entry, including the requirement for spectrum rights, orbital slots and sizeable capital requirements. Within the next 18 months Inmarsat will be launching its next-generation service (known as Global Xpress), offering significantly enhanced data speeds and capacity. Further growth will come from the company’s focus on its core area of operations, with machine-to-machine and in-flight connectivity potentially significant markets. The shares offer a dividend yield of more than 4% and, while not cheap on 22 times December 2013 earnings, they offer the prospect of delivering long-term earnings and dividend growth from a unique competitive standpoint.

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personal view

Three strong dividend streams

A professional investor tells MoneyWeek where he’d put his money now. This week:Charles Luke, fund manager, Murray Income Trust

The stocks Charles Luke likes12mth high 12mth low Now

CPG 964.5p 711.5p 920.5pCOB 312.5p 209p 261.5pISAT 749p 579p 727p


Politicians: salesmen with skin in the game

city view

Known for bending the truth? Check. Slick but not very sincere? Check. Everyone hates them? Check. The list of similarities between estate agents and politicians is

already surprisingly long. But now there is another. They are both a largely parasitic class living off a percentage of property sales and with a big stake in keep the market artificially frothy.

Government finances are becoming increasingly dependent on stamp duty. What used to be a relatively insignificant tax has become a major revenue source for the state, with higher rates and more and more transactions being pushed into the top brackets. That is hardly wise. Just like an estate agency, it makes the government dangerously dependent on the property market for its own finances – and gives it an incentive to meddle.

Go back a couple of decades and stamp duty was just a small, irritating charge that got added on when you bought a property. In 1993, there was a single rate of stamp duty of 1%, and it only kicked in when a transaction was worth more than £60,000 – more than the average house price at the time. Most ordinary people didn’t pay it, and when they did it was not a huge sum. It was similar to the solicitor’s bills, and less than buying the furniture or redecorating. Most people paid it without noticing.

But since then, it has kept on rising. After a series of reforms, we now have seven different rates of stamp duty, ranging from 0% for properties worth less than £125,000, to 3% for properties between £250,000 and £500,000, all the way up to 7% for those worth over £2m (and a punitive 15% if you buy through a corporation). The very top end could be dismissed as a tax on the super-rich: £2m houses are not exactly mass-market products, even in London. But £250,000 is hardly a fortune to spend on a family home these days, and for that middle section of the market, stamp duty is

now a major expense. According to the Taxpayers’ Alliance, a lobby group, two in every five homes bought in 2012-13 will be clobbered with the 3% rate, creating a bill of at least £7,500. By 2017 it predicts that 80% of homes will be hit by some form of stamp duty. In London, where prices are highest, many first-time buyers now have to pay the 3% rate, creating a huge bill that already cash-strapped young people struggle to pay.

A combination of rising stamp duty rates and house prices means that the revenue it brings in for the government keeps going up. Accountants Grant Thornton predict receipts will go up from £4.9bn a year now to £13.7bn in a decade. That is roughly the same as the tax raised from tobacco duty, and five times that raised through the bank levy. The Office for Budget Responsibility expects revenue raised from the tax to rise by 73% by 2018, bringing in an extra £6bn a year.

A big slice of government revenues are now a geared play on the housing market. Just like an estate agency, the higher house prices go, and the more turnover in the market, the more money it makes.

That is fine for private-sector companies. But it is hardly wise for the government.

There are two problems here. The minor one is that housing-market revenues are inevitably volatile. All markets go through boom and bust cycles, and the British property market is hardly an exception – indeed, it is usually an extreme example. When prices are rising strongly, as they are now, revenues shoot up. But if the market collapses, the cash raised from the tax will collapse as well. A well-designed tax should aim to bring in a stable, predictable stream of revenue – and stamp duty is far from that.

The major problem is that the government is hardly a disinterested player in the housing market. It controls both supply and demand. Planning laws dictate the supply of new homes, and in the medium term that sets prices for the whole market. As for demand, the government, via the Bank of England, controls interest rates; it influences the availability of mortgage through schemes such as Help to Buy; and it also controls immigration – the major short-term determinant of the number of homes that are needed. Pretty much everything that happens to the property market is influenced by the government.

But it now also has a financial stake in a buoyant market. Whether conscious of it or not, it has a big incentive to manipulate the market. If it wants prices to keep rising, it can achieve that by restricting supply and boosting demand. And the frothier the market gets, the more money flows into its coffers. It may not do it deliberately, but it is hard to believe it will not be influenced by that.

And yet, higher property prices are not necessarily good for the country. Young people find it too hard to get a foot on the ladder. And too much capital gets tied up in one sector that could be better used elsewhere. It might well be better for everyone if prices fell to more reasonable levels. But, through stamp duty, the government has turned itself into a giant estate agent, with a vested interest in rising prices. It shouldn’t be surprised if everyone ends up hating it as much as they do estate agents.

Our government has turned into a massive estate agent

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What is open data?“Open data is data that can be freely used, reused and redistributed by anyone – subject only, at most, to the requirement to attribute and sharealike,” according to the Open Definition, a set of principles created by key players in the open data movement. For data to be open, there are three main elements. “Availability and Access” means that it must be freely available in a convenient and modifiable form. “Reuse and Redistribution” states that it must be provided under terms that allow reuse and mixing with other datasets. “Universal Participation” prohibits discriminatory terms, such as restrictions on the use of the data for commercial purposes.

What sort of data is this?Mostly data collected and held by the government or other state authorities that could potentially be of use to individuals, organisations and businesses. This encompasses everything from crime rates to train timetables; details of government spending to copies of contracts; infection rates in hospitals to water quality analysis to power consumption patterns.

Why should data be open?“Data is the raw material of the 21st century – a resource that gets more plentiful every day,” say Tim Berners-Lee and Nigel Shadbolt, the founders of the Open Data Institute (ODI). So the principle is not just that open data is good in itself, or that it strengthens democratic accountability and transparency – though these are noble aims. The wider belief is that open data can allow businesses and social entrepreneurs to spot opportunities. “When the data has been released, applications have quickly followed,” as Berners-Lee and Shadbolt put it.

What are these applications?One of the most obvious uses is in the plethora of popular websites and smartphone apps that allow travellers to see when their bus is coming, find a parking space, or evade roadworks. Another well-known site is Fixmystreet.com, which allows citizens to log problems with their councils. And one of the ODI’s great success stories has been backing a start-up agency, Mastodon C, which analysed NHS prescribing data (along with Open Health Care UK and Ben Goldacre, the campaigning doctor) and identified £200m of NHS savings after looking at prescribing patterns for statins. For an overview of some of the ways in which open data is currently being used in Britain,

see the article “What did open data ever do for us?” on the homepage of the government’s open data site, Data.gov.uk.

Is open data new?In a sense, no. There are many past examples of “open data” leading to advances in knowledge. Berners-Lee and Shadbolt give the example of Florence Nightingale, who revolutionised nursing in the mid-19th century after using open data to show that most soldiers in the Crimean War died of disease rather from their wounds. John Snow, a London obstetrician, combined data on cholera deaths with the location of water wells and made the connection between contaminated water and outbreaks of the disease. This led to the building of the capital’s sewage system and hugely

improved public health. And in the 1940s the sociologist Robert King Merton

identified the importance of open scientific data, claiming each researcher must contribute their discoveries to the “common pot” in order to allow knowledge to move forward.

So why is open data now a big idea?The idea of “open data” might be rooted in scientific practice developed over centuries, but information technologies, including the internet, have opened radical possibilities for how open data can be analysed, processed and exploited. In recent years many governments have begun to make more information available as open data, a development that open data advocates are trying to capitalise on. The ODI has recently announced the creation of 13 affiliates, or “nodes” in countries from the US to Dubai, aimed at supporting companies, universities and non-governmental organisations in projects that make use of open data.

What’s Britain doing? The UK was one of the earliest countries to set up an official government site for open data and is recognised as one of the global leaders in the field. At the Open Government Partnership,

an international conference held in London this autumn, Britain committed to creating an open database of beneficial ownership of companies, which is expected to help tackle tax evasion and money laundering. This could produce some interesting results. An existing analysis of open data on company directors found that about 350 hold more than 100 directorships each, with a few holding up to 1,000 – a very high number for anyone hoping to fulfil the duties of a director.

Berners-Lee: opening up data for entrepreneurs©

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A quiet revolution in how we access government data is helping us do everything from catch buses to save money for the NHS. Simon Wilson investigates

Governments open their books

Is open data going global?There are a range of initiatives promoting the use of open data worldwide, such as Africa Open Data and OpenData Latinoamérica. Many projects are prompted by concerns about corruption, health, or environmental issues. In Brazil Infoamazonia.org has created a cross-border map of environmental degradation in the Amazon by analysing data from the National Institute for Space Research. In Kenya, the Data Dredger project, funded by USAID, the US development agency, tracks – among other things – the exodus of Kenya-trained doctors to other countries and how counterfeit drugs are hindering the fight against malaria. In Afghanistan and Mexico similar projects are mapping attacks on journalists.

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Money talkPlans to increase MPs’ pay by a massive 11% stem from their “craven unwillingness” in the past to face voters and argue for more money, says Philip Johnston. Instead, they conspired in developing a system of non-salary payments, such as second-home allowances to make up their perceived shortfall, which “appalled” the public when they came to light. Pay peaked around 2002 in real terms and has since fallen off, “a decline that coincided, unsurprisingly, with some of the more exotic expenses claims”. Today, the purchasing power of an MP’s salary of £66,300 is where it was 15 years ago. In 1937 Neville Chamberlain’s salary was worth £500,000 (David Cameron earns £142,500). But MPs’ allowances enable them to employ family members and nearly one in four does, costing £4m. They also have generous pensions. Neither the government nor the opposition should accept such largesse in times of austerity. There is never a good time to increase MPs’ pay, but this surely ranks as “one of the worst”.

“Regular cocaine users don’t look like this.”

Nigella Lawson (pictured) denying she abused

cocaine, quoted in The Daily Telegraph

“We’ve cut back dramatically… we never go out to dinner unless we go to somebody’s house. We never go to restaurants... We invite people here. I

cook. Well, if I’m giving a dinner party I get in help.”

Princess Michael of Kent on her experience of austerity, quoted in

The Times

“Advertising may be described as the science

of arresting human intelligence long enough

to get money from it.”Canadian writer Stephen

Leacock, quoted on Telegraph.co.uk

“In the old days, you could speak to someone in

charge over a sandwich. Now it has to be over

lunch at the Ivy. And you don’t have to keep sending

me flowers.“Comedian Jennifer

Saunders accuses the BBC of wasting money, quoted

in The Sunday Times

“We have the best government that money

can buy.”Mark Twain, quoted in a

PFP Wealth Management newsletter

Do MPs deserve an 11% pay rise?

Philip Johnston

The Daily Telegraph

best of the financial columnists

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Is it fair for the chancellor to offer £1m a year to the Duke of Roxburghe for letting the wind blow? asks Simon Jenkins. Or to promise a reported £1bn to Charles Connell, the Scottish shipbuilding company, over the next 25 years? British energy policy is “chaotic”. News that subsidies for onshore turbines will be cut in favour of offshore ones may be welcome aesthetically, but they are even more expensive and inefficient. The energy required to mine wind turbines’ rare materials and to build and erect them “makes a mockery of their ‘greenness’”. From Offa’s Dyke to the Cambrian Mountains and the open vistas of Scotland, turbines have destroyed (or are set to) some of Britain’s most beautiful landscapes. For what? Turbines rarely produce anywhere near their declared capacity; what they really generate is money – up to £30,000 a year each in subsidy, irrespective of how windy the site. Politicians have showered a tiny elite with public money. Our desecrated landscape is “their memorial”.

Britain’s energy policy is in chaos

Simon Jenkins

The Guardian

We have come to expect the bonus bonanzas, government cash and six-figure salaries of the City, but this also describes today’s charity sector, says Dominic Nutt. Viewers of this week’s Panorama, which “lifts the lid” on how some big charities make money, may be “surprised to learn how far they will go to hit the bottom line”. Between 2007 and 2009 I was head of news at Save the Children. It’s a charity that does excellent work. But it’s part of a problem at the heart of some non-governmental organisations (NGOs) that could “fatally” undermine the sector. NGOs need money, but some have begun to “contradict their founding principles” to boost income. When I was at Save the Children, a press release condemning British Gas for raising prices and forcing poor families to choose between heating or feeding their children was spiked because British Gas was a donor. This is just one example. “Companies want only one thing – good PR”, and that’s why they are “stuffing the mouths of some NGOs with gold”.

Charities – the PR wing of business

Dominic Nutt

The Independent

“Never mind Big Brother, the all-seeing state,” says Douglas Murray, the real menace is the Little Brothers, who “suck up” your personal data and “sell it to the highest bidder”. As you surf the web, thousands of third-party cookies track your browsing habits. Some companies are “scooping up your tweets or Facebook posts”, analysing them and selling on the results. This is “perfectly legal” and lucrative. One major ‘data broker’, Acxiom Corporation, is thought to hold information on 500 million consumers and has annual sales of over $1bn. Targeted advertisements are hardly a “sustained attack” on our freedom. And it’s an exchange. We let people “spy” on us and in return get a free service (Facebook, Google). But this is becoming “one-sided”. Most of us never read the terms and conditions we agree to. Maybe we should. A British firm recently included a clause staking a claim on “your immortal soul”: the “techie joke… harvested 7,000 souls in one day”.

The real menance is Little Brother

Douglas Murray

The Spectator


The potential is vast for Bitcoin start-ups

opinion

Bitcoin is all over the news again. China has banned banks from transacting in the digital currency, just as Bank of America Merrill Lynch has argued that it has a ‘fair value’ of $1,300. But none of these stories grasp the really interesting part – how the underlying Bitcoin platform itself can be used to manage the ownership of real-world assets.

At heart, Bitcoin is simply a huge public ledger, recording who gave what to whom and when: a long list of transactions (27 million at last count), replicated across a network of thousands of computers. To work out how much Bitcoin money you have, you just look down the list of your transactions and add them up. To give someone Bitcoin money, you send a ‘transfer please’ message to the network, which copies the request around the computers and checks all is in order. It is put in a block of transactions, which are added to the ledger (the ‘block chain’). You can read more on the inner workings of the currency and how it’s mined at Moneyweek.com/Bitcoin. But I want to focus on its wider potential.

Coloured coins and ownership rightsWhat’s key is that Bitcoin transactions are not limited to A-to-B transfers. They can contain far more information, such as multiple payers and payees, and rules on the signatures needed for a payee to collect. There are even time locks that dictate how long a transaction is valid. This allows quite sophisticated systems to be built, such as escrow agents for payment dispute resolution, time-limited deposits, and the equivalent of post-dated cheques. This is all part of the Bitcoin system and requires no central authority – so you don’t need a bank or trust lawyer acting as an expensive middle man.

In a way the Bitcoin currency is just the first ‘app’ (software application) to run on the Bitcoin platform. And just as with the launch of the iPhone, the built-in apps will soon be eclipsed by the innovation the system unleashes. For example, the concept of ‘coloured coins’ would enable the Bitcoin system to manage the ownership of real-world assets – anything from shares to cars. A particular Bitcoin would be ‘coloured’ to signify ownership of an asset. Because the block chain is public, anyone can track the ownership

of that Bitcoin (and so the asset itself) through every transaction it has ever been involved in, and see who now owns it. The Bitcoin is purely a token – it’s like writing an IOU for a car on a dollar bill, then storing it in a public ledger.

Each colouring scheme defines its own rules, such as who is allowed to issue the coins, how they are redeemed, and the transactions permitted. One use would be for smart devices to hook up to the Bitcoin network. Let’s say you own a device that streams films from the internet (a smart TV, maybe). To do so, it has to connect to a central server (such as iTunes) to implement digital rights management (DRM) and check that you’ve bought the film, before allowing it to be played. This means the film’s producers can only sell via these services. It also means that if the service shuts down, you could lose access to your film library. In 2008 Microsoft announced it would shut down its MSN Music service (with its ironically named PlaysForSure DRM) and that its US customers would no longer be able to use it to transfer their music to their devices.

Coloured coins would avoid the need for such services. The Bitcoin system itself would hold the entitlements. Your device

could prove to any server storing the film that it was entitled to play it. And because Bitcoin allows for conditions to be attached to each transaction, films could be rented, sold, re-sold, loaned (one area where physical DVDs still beat online films, for example), or even bequeathed, all at the discretion of the owner.

The filmmaker would control the terms on which it offered its films, which, through competition, would result in a balance being struck between the producers and consumers. Just as the internet has cut out layers from the distribution network for books and films, Bitcoin could take it further, allowing producers to sell direct to consumers, without virtual middle-men, such as iTunes or Amazon, being involved.

An investment revolution And it’s not just the world of music and film. So much of today’s finance industry is based on trusted central services for trading, for asset registers and for clearing. But the Bitcoin network provides a public asset register and decentralised trading. A company could issue its own shares in the form of coloured coins. The ownership and trading of these would be done via the Bitcoin system. No need for share registrars. What would existing organisations do? Offer ancillary services (eg, for collecting dividend payments on behalf of a shareholder)? Will nominee services disappear? Will new ‘low-cost’ venues – cutting out a large part of the costly IT infrastructure currently needed – emerge for trading small business shares? Much will depend on the pace of regulatory change in the area – but the potential is vast.

So the best way to invest in Bitcoin is not to buy the currency, or a high-powered mining set-up, but companies that can offer services and products that run on top of the Bitcoin network. Unless you’re a venture capitalist, that means you’ll have to be patient for now – but in the longer run, be prepared for Bitcoin to be as big a gamechanger as the internet.

Ken Tindell is an entrepreneur with experience in various industries, including automotive, embedded internet, and web TV. He currently runs a software development company.

The best way to invest in Bitcoin

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The digital currency will be as big a gamechanger as the internet, says Ken Tindell


Nelson Mandela was regarded by many as a “modern Gandhi”, says Alec Russell in the FT. Yet he “was the first to admit that he was no saint”. He championed the African National Congress’s (ANC) adoption of the ‘armed struggle’ and neglected his family. His friend and fellow Nobel Peace laureate Archbishop Desmond Tutu was one of the first to question the “sanctification of ‘Madiba’” because it risked “blinding people to the colossal problems facing South Africa”. And while Mandela was, of course, a “great humanitarian and moral authority”, he was “first and foremost a brilliant politician”. Reconciliation was not a miracle “emanating from the magnificence of his soul”. He plotted the seduction of the Afrikaners in his cell as a “way to win power”. He knew that South Africa could ill afford a “mass exodus of whites with their skills and capital”, as had happened in neighbouring Mozambique. The failure of most of Africa’s post-independence movements has been caused by the corruption of the leaders and parties in power, but Mandela refused to allow power to “corrupt him either as a politician or a man”, says William Gumede in The Independent. Mandela believed that integrity was crucial and he understood that, because

South Africa had emerged from “such a violent, authoritarian past”, the new democratic political culture would have to be carefully nurtured. He went out of his way to show respect for the principle of political opposition as a key part of democracy, appointing members of the defeated National Party, the party of apartheid, in his first Cabinet.

Sadly, South Africa today is the opposite of what he strived for, epitomised by the “murkiness” of Jacob Zuma, the current ANC and South African President (who was booed at Mandela’s memorial service). His successors have succumbed to “narrow tribalistic tendencies” and risk destroying his “radically inclusive legacy”. The “miserable life of the poor”

remains much the same as under apartheid, adds Slavoj Zizek in The Guardian, and “the rise of political and civil rights is counterbalanced by the growing insecurity, violence and crime. The main change is that the old white ruling class is joined by the new black elite.” Mandela’s role in ending apartheid and South Africa’s largely peaceful transition to democracy is far from his only contribution to history, says Ben Macintyre in The Times. He “carved out a unique place in the world’s conscience”, and he did so, in his own words, with a simple but universal idea: “A

good head and a good heart are always a formidable combination.” He is also the figure who, “more than any other, plotted the highway on which contemporary politicians now march”, says Matthew D’Ancona in The Sunday Telegraph. The division between left and right is less important now than “conflict resolution, the politics of ethnic and religious identity, the opportunities and risks of globalisation”. He saw that the future, not just of South Africa, was pluralist. “He represented the virtues of the long haul, of optimism… of determination leavened by an open mind, of conviction matched by an extraordinary capacity for forgiveness. Such figures come along rarely in a century, let alone a generation.”

How Nelson Mandela changed the world

“Whatever the opposite is of star quality, Ed Balls has it in spades,” says Jenni Russell in The Times. “Faltering, red-faced, shouting to be heard above his hecklers”, he “made a complete hash” of his response to the chancellor’s Autumn Statement. The irony is that his analysis is right. Britain would have been “better served by a Keynesian burst of investment”. Growth is weaker than George Osborne anticipated. But this wasn’t the time to repeat the same old arguments. Faced with an economy that is improving, he needed to adjust his approach and persuade voters that Labour can be trusted to run the country. Yet he has neither shaped a vision for the future “nor accepted his and his party’s responsibility for some of the economic errors of the recent past”. Balls has always had “the dangerous tendency for a politician of wanting to win an argument”, says Aditya Chakrabortty in The Guardian. Events have moved on, and so should he. A “Westminster discussion worth listening to” would acknowledge

that our economy is recovering, but ask why that recovery is serving so few people. However, Labour appears to have got stuck on what to say. Just about any response would have been an improvement on the one Balls gave – “sarcastic, subtle, patronising, teasing, anything”, says Matthew Engel in the FT. Instead, he just “shouted the old news in a cod-angry voice about flatlining and the cost of living and the triple-A credit rating”. Ed Miliband should move Balls, says John Rentoul in The Independent on Sunday. Appoint Chuka Umunna or Stella Creasy; “someone with shock value and star quality, who was not an MP when Labour was in power”. But he won’t. Lulled by his lead in the polls, “Miliband is oblivious to the urgency of Labour’s credibility crisis”. He thinks that he is winning the argument and the public supports his “kinder, gentler capitalism”. He’s wrong – and Balls may understand that himself. “But this is Miliband’s election to lose and he must lose it in his own way.”

by Emily Hohler

“Faltering” Balls makes a credibility crisis for Labour

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“A good head and a good heart are a formidable combination”


Last week was a good one for Chancellor George Osborne. He used

his Autumn Statement as an extended opportunity to rub the opposition’s face in Britain’s economic recovery. There were no big headline-grabbing changes, just a general sense that things were going as he’d planned (and after all, why splash out on any big giveaways when there are still 18 months to go until the election?). His shadow, Ed Balls, was left red in the face and with his position looking increasingly untenable (see page 23).

The reality, of course, is a little different. Yes, the British economy has rallied sharply in the past year – if you drop almost anything from a great enough height, it’ll bounce. Even the Office for Budget Responsibility (OBR) – the independent body charged with trying to give voters the unvarnished truth about a chancellor’s budget shenanigans – points this out. “The improvements are cyclical rather than structural.” The recovery is not “indicating stronger underlying growth potential”.

You can see this in the GDP figures if you look closely. As Richard Jeffrey of Cazenove Capital Management points out, most of the 0.8% growth seen in

the third quarter came from inventory rebuilding (companies replenishing stocks, which cannot sustain growth in the long run) and household spending. Business investment contributed very little, and exports actually fell. And it doesn’t help that GDP may be overstated in any case. The Office for National Statistics has started using a very forgiving ‘GDP deflator’ to measure real (after inflation) GDP. They don’t tell anyone precisely how this is calculated, but while it used to correspond closely to the retail prices index (RPI) measure,

since 2010 the deflator has been far lower – meaning that GDP has been higher than if you’d adjusted it using RPI. (For more on this, see Merryn’s Somerset Webb’s blog at Moneyweek.com/deflator.)

In short, the recovery is “extremely fragile and may not be sustained”, as Liam Halligan notes in The Sunday Telegraph. Meanwhile, “our country remains deep in the fiscal mire”. Britain’s deficit – the gap between what the government takes in and what it spends

– is set to come in at £111bn in this fiscal year. That’s better than the £120bn predicted in March. But back in 2010, it was meant to be down to £60bn. And at 6.8% of GDP, the deficit “remains massive by historic standards”. By 2018, we’ll have added more than £350bn to our national debt pile, and it’s only then that we’re expected to have a surplus – in other words, to start paying some of this off. The reality is that “for all the ‘austerity’ talk, we’re halfway through a process that will see our national debt more than double over eight years”.

It’s not just government debt that remains a problem – far from it. You might be wondering how household spending is contributing to the recovery at a time when real wages have been falling. Well, here’s a clue: personal debt in Britain has just hit a record of £1,400bn – 90% of GDP.

That, as Halligan says, “goes a long way... towards explaining our recent growth surge”. With the government ramping up the housing market via the Help to Buy scheme, boosting property owners’ sense of financial wellbeing, it’s no surprise that consumption is picking up again. Car sales are rocketing too – but a record 74.5% of those sales is funded by borrowing, says the FT.

The British economy has rallied – but, based as it is on debt, low interest rates and printed money, the good times can’t last, says John Stepek

Can Britain stay on its feet as the economy thaws?

“This is a cyclical recovery based on

debt and low rates”

With Help to Buy continuing to prop up the housing market, construction and consumption-related stocks may continue to do well – in the short-term at least. My colleague Phil Oakley takes a look at builders’ merchant Travis Perkins (LSE: TPK) on page 12 as one option to consider.

In the longer run, one side effect of UK interest rates being held down for longer than markets expect is that the pound is likely to weaken, particularly against currencies where monetary policy is going in the opposite direction. The US dollar in particular may well strengthen if the Federal Reserve starts tapering earlier than expected. As well as spurring inflation, this is a good reason to have your portfolio diversified beyond Britain – we like both Japanese and eurozone stocks, which still look good value.

Also, as Ben Lord of M&G notes, in the name of securing a recovery, central bankers “might be prepared to tolerate a period of higher inflation”. Yet index-linked gilts price in “only moderate levels of UK inflation” – roughly 2.7% over the next five years, based on the retail price index (RPI) measure. However, “RPI has averaged around 3.7% over the past three years”. That leaves index-linked gilts looking cheap, he reckons. One way to buy in is via the Vanguard UK Inflation Linked Gilt Index fund, which charges 0.15% a year.

On the ‘glass half-full’ side, if fracking takes off in the UK, one beneficiary could be UK gas explorer iGas Energy (LSE: IGAS), a favourite of Fleet Street Letter editor David Stevenson. It’s high-risk, but it’s one of the purest plays on UK fracking out there.

The investments to buy into now

cover story


So this is a cyclical recovery based on debt. That means it depends on interest rates staying low. Which is why, of course, Bank of England Governor Mark Carney has no intention of raising them this side of the 2015 election, regardless of how ‘good’ things get.

Carney to the rescue?On the evidence so far, Carney is a consummate politician. It’s easy to forget, but the strength of this recovery has clearly surprised him. Within months of taking the reins at the Bank, Carney’s key policy – ‘forward guidance’ – was out of date. He told markets he had no intention of raising interest rates until unemployment had fallen to at least 7%, which he didn’t forsee happening until mid-2016. But he’s rapidly been forced to revise that to late 2014.

Yet he is still smoothly juggling expectations. Carney’s problem is this. The economy looks like it’s recovering. That leads markets to expect higher interest rates. But if rates rise during a recovery that’s based on nothing more than a cyclical, debt-fuelled bounce, the cost of debt will surge and the economy will plunge right back into recession. So he can’t raise rates. But he has to justify that in some way, so as to maintain the Bank’s credibility. And so, even as he insists that rates won’t rise anytime soon, he is equally insistent that he can prevent a property bubble from infl ating via other means. “There is a history of things shifting in the UK and the housing market of moving from stall speed to warp speed and underwriting standards slipping. So we want to avoid that,” Carney said in a recent speech to the Economic Club of New York.

He has already dropped the Funding for Lending Scheme (FLS) for mortgages, which was a clever piece of theatre. On the one hand, FLS will make little difference to mortgage demand, given the existence of Help to Buy. On the other, it frees up a little more money to lend to small businesses. But for all that Carney

is trying to reassure us that he’ll pop any housing bubble if necessary, it’s hard to believe him. Because like it or not, rising house prices are a key part of the recovery plan. Even the Offi ce for Budget Responsibility expects house prices in Britain to rise by 5% in 2014, then 7% in 2015. That’s punchy in a world where infl ation is meant to stay quiescent and commentators talk of a ‘new normal’ where we can only expect annual real returns in the region of 2% from equities.

Meanwhile, as Matthew Lynn points out on page 16, our tax base is becoming ever more dependent on takings from stamp duty, which are expected nearly to triple between now and 2018-2019. A boom and bust economy, dependent on consumer spending and rising house prices, is precisely what got us into trouble in the fi rst place. But for all the talk of rebalancing, it seems to be what we’re stuck with.

The investment puzzleSurely this is all too gloomy? Former BBC economics editor, Stephanie Flanders, now at JP Morgan Asset Management, thinks so. In the Financial Times she writes that the OBR is too gloomy on growth. “Investment – public and private – now accounts for a smaller share of the UK economy than at any time in the past 30 years, and is fi ve percentage points of GDP lower than in the US.” The OBR doesn’t expect that to budge much between now and 2018. But to rectify this, “we just need businesses to have confi dence that the UK is on the road to recovery”. In other words, we all

need to cheer up and look to a brighter future.

Investment is certainly the key to a more sustainable recovery. As Cazenove’s Richard Jeffrey points out, more investment should lead to higher productivity, higher profi ts, and rising wages for those with jobs (although it would probably hit employment growth, as rising productivity means more can be done with the same level of staffi ng). Unfortunately, boosting investment is not a simple matter of everyone clicking into ‘glass-half-full’ mode. Regardless of what people like to believe, economies don’t just nosedive or rocket on the basis of mood swings or media reports. If businesses aren’t investing, there’s a reason for that. And at least part of the blame can be laid at the feet of the low-interest-rate, money-printing policies that we’ve chosen to get us out of this mess.

For one thing, quantitative easing (QE) has arrested the process of ‘creative destruction’. So lots of businesses that should have gone bust, leaving more innovative competitors to make better use of their resources, are still around today. Meanwhile, as Jeremy Warner points out in The Daily Telegraph, small businesses in particular are being starved of cash. With investors desperately hunting for yield, any business that can borrow straight from the markets via corporate bonds has been able to secure rock-bottom rates. But smaller companies, which rely on banks, have

Continued on next page

cover story

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So this is a cyclical recovery based on debt. That means it depends on interest rates staying low. Which is why, of

England Governor Mark Carney has no intention of raising

the 2015 election, regardless of how ‘good’ things get.

easy to forget, but the strength of this

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The puzzle is, can a recovery be built on a flow of new paper?


found life much harder. When you stifle competition like this, it removes much of the impetus for companies to invest. If competition isn’t as fierce, there’s no need to invest and take risks to stay ahead of the competition. “Thus does unconventional monetary policy stifle the new in support of the big and weak.”

Other problems include terribly skewed boardroom pay incentives, which, as economist Andrew Smithers keeps pointing out, encourage executives to take short-term measures to boost metrics such as earnings per share, which dictate their bonuses, rather than focusing on a firm’s long-term welfare.

There’s also the very concrete problem of corporate pension deficits. As Merryn points out on her blog (Moneyweek.com/merryns-blog) this week, more than two-thirds of top executives surveyed by the Confederation for British Industry and Standard Chartered said that fears over pension scheme liabilities were having an “impact on business investment”. The problem is that, as interest rates have plunged, pension-scheme liabilities have surged (the lower the return you can expect on your money, the more you need to save). These deficits need to be plugged – so companies are saving money to pay their future pensioners, rather than investing in growth for today. It’s another example of how low rates have damaged, rather than helped, investment.

It’s not as if Britain needs to be entirely dependent on consumer spending to drive our economy forward. We still have a significant, respected manufacturing sector. Our efforts to build a more significant tech sector are bearing fruit (if slowly) – the ‘Silicon Roundabout’ area of London is home to more than 1,500 digital companies, from less than 200 three years ago, according to the Techworld blog. And if fracking takes off – as the government seems keen to make happen – our energy woes would be far less pressing if we could access cheap shale gas, as America has done.

But if it’s truly the case that low interest rates and QE are a big part of what’s holding back investment, then arguably what Britain really needs for a sustainable recovery is for rates to rise. But the problem is walking that tightrope – higher rates will make life very difficult for an awful lot of people before they shows any sign of making things better.

The government itself is hardly in any position to cope with higher rates – as Liam Halligan points out in The Sunday Telegraph, if gilt rates rose “above a still relatively low 4%, the government would then have to allocate more to interest payment than it spends on education”. This is yet another reason why Carney is likely to do everything in his power to keep rates where they are until after the 2015 election.

But given the poor record that central bankers have of both popping bubbles and defending against inflation, it’s hard to have any faith in his ability to get the timing of any rise just right. M&G’s Ben Lord reckons “there could be significant inflationary impact when banks do begin to increase their lending activities”. And with Carney determined to stay ‘behind the curve’, the risk is that if and when inflation does make a come back, he won’t be able to get ahead of it without driving rates up more rapidly than the economy can handle. If that’s what happens, it’s only a matter of time before our cyclical run hits a wall, and our huge debt burden drags the economy back down. We look at how to profit in the short term and protect yourself in the longer run in the box on page 24.

cover story

Continued from previous page

Carney: a smooth juggler of expectations

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London house prices are still booming. According to figures from Nationwide, they are up 4% in the last quarter alone, and 10% on this time last year. However, just as the recovery in the housing market is showing signs of spreading to the rest of the UK – driven mainly by the government’s Help to Buy scheme – there are signs that the London market might be peaking, especially at the higher end, reports The Sunday Times. According to property agents Knight Frank, annual growth in the price of prime central London property slowed to 6.9% in November – that’s still high, but it’s down from nearly 13% the year before. Knight Frank thinks the slowdown simply means sellers “have to be increasingly realistic, particularly in the £10m and above super-prime bracket, where prices were flat in November”. But a recent report from Fathom Consulting, commissioned by the boss of listed property group Development Securities, suggests that prices could fall hard. Compared to the rest of the country, valuations in London have become “stretched, relative to their fundamental drivers”. For central London – driven largely by foreign buyers – these fundamentals include how cheap sterling is compared to the euro and the dollar, and how much appetite there is for ‘safe haven’ assets.

Based on this model, Fathom reckons prices are already 13% overvalued. One trigger for a correction would be rising interest rates, which would hit property hard, or a drop off in foreign demand caused by confidence being rattled by more aggressive than expected ‘tapering’ of quantitative easing in America.

Other analysts think higher taxes could be an important factor. Trevor Abrahmsohn of Glentree International believes higher stamp duty and the threat of more taxes is already hurting top-end transactions – “the market for houses over £2m is flatlining”. Finally, good old supply and demand might help bring down prices too – as Savills recently put it, “the pipeline for prime schemes across London is entering uncharted territory”.

The coming London house price crash

“It’s only a matter of time before our cyclical

run hits a wall”

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funds

Most exchange-traded funds (ETFs) aim to reproduce an index’s return, less fees. This is referred to as ‘passive’ investing, because trackers do relatively little buying and selling. For a fund tracking a capitalisation-weighted index (such as the FTSE 100), trading is only necessary when stocks enter or exit the underlying index. The index itself selects companies by their market size, and buying and selling occurs when stocks cross above and below the threshold for inclusion. In such an index fund, turnover – purchases plus sales, divided by the fund’s value – can be as low as a few per cent a year. By contrast, many active fund managers buy and sell far more frequently, sometimes pushing turnover levels to above 100%. This incurs high costs: both explicit (such as transaction taxes and stockbrokers’ commissions) and implicit (bid-offer spreads, for example).

But the dividing line between cheap, passive ETFs and high-cost active funds is not as clear as it may seem. For a start, some indices are more active than

others. As soon as you depart from the traditional method capitalisation-weighted method, you start to generate more turnover. You’ll find a growing number of even-weighted, fundamentally weighted, low-volatility and other ‘smart beta’ ETFs on the market. Costs are typically not included in the way their returns are measured and your tracker may well underperform its index by more than the fee. There are also some truly active ETFs that don’t follow an index

at all. These funds’ holdings reflect the views of an individual fund manager.

So do active ETFs make sense? It comes down to the type of market and to costs. Bond funds have so far proved the most successful type of non-indexed ETF. US fund manager Pimco, which operates in Europe via the Source platform, has raised several billion in assets for its active ETFs, because many investors don’t want to select bonds by index. Pimco also offered its American ETF at a fee discount to a comparable mutual fund, helping sales.

Active equity ETFs haven’t taken off to the same extent. But if you’re considering a ‘smart beta’ fund, treat it as being similar to any other actively managed fund. You can end up with the same kind of market exposure (to small caps, say, or value stocks), whichever route you take. Just stick with the cheapest option and you shouldn’t go far wrong – but do include all costs in the comparison.

Paul Amery, formerly a fund manager and trader, is now a freelance journalist.

ETFs: stick with the cheapest options

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by Paul Amery

ETFs may do more active trading than it seems

140%120%100%80%60%40%20%0%

-20%

Witan Investment Trust

Witan Investment Trust Global Growth

2011 20122009 2010 2013

Witan Investment Trust net asset value

New managers should deliver for WitanFund of the week

It’s out with the old and in with the new for the Witan Investment Trust (LSE: WTAN). Since he joined in 2010, Andrew Bell, the trust’s chief executive, has taken a new broom to the trust’s long

list of investment managers.

Unlike other funds, which tend to have just one or two managers, Witan adopts a ‘multi-manager approach’, using between ten and 15 investment managers at any one time. Its rationale is that this will “deliver added value for shareholders while smoothing out the volatility normally associated with a single manager”. Most recently, Bell has brought on board two new managers – replacing Thomas White International and Southeastern Asset Management with Pzena Investment

Management and Tweedy Browne, says Leonora Walters in Investors Chronicle. The new appointments are in line with Bell’s strategy of replacing investment in trackers with active managers. While he prefers not to change managers too often due to the cost, he believes the new managers “had more scope” to deliver investors a better bang for their buck.

Witan aims to deliver capital growth and a growing real income by investing in global stockmarkets. The trust has performed strongly in recent years, delivering a 32% return over one year, 39.9% over three years and 143% over five years. Around 40% of its holdings are in Britain, with just under 24% in US stocks, 14% in Europe and 10% in the Far East. Nearly 23% is held in the financial services sector, with 16% in consumer services and 15% in industrials. Major holdings include publisher Reed Elsevier and tech giant Google. The trust has an ongoing charge of 1.01%, and trades at a discount to its net asset value of around 8%.

Witan Investment Trust top ten holdings

Name of holding % of assets

Reed Elsevier 1.80%Diageo 1.70%Electra Private Equity 1.50%BP 1.40%London Stock Exchange 1.30%Daily Mail & General Trust 1.30%Unilever 1.30%Princess Private Equity 1.20%Pearson 1.20%Google 1.10%


It’s been a miserable few years for savers. But new Bank of England Governor Mark Carney has offered a glimmer of hope by scaling back the Funding for Lending Scheme (FLS). Since its launch in 2012, savings rates have dropped by up to 1.5 percentage points. That’s because banks and building societies have been able to access cheap finance to support mortgage lending, rather than compete for savers’ funds. According to Moneyfacts, the consumer website, best-buy instant-access rates have fallen to 1.6%, well below inflation.

But now analysts reckon competition for deposits could pick up. Cash returns might even “double”, says The Daily Telegraph. Yet this still means a pitiful return. An alternative is to invest – but not everyone wants to risk their capital. So how can savers boost returns?

Let’s assume you’ve used up this year’s Isa allowance and shifted the rest of your cash to the best available instant-access account (if you haven’t used your Isa allowance yet, the top variable-rate cash deal is 1.8% from the Post Office). One option is regular saver accounts. These often offer rates of around 3%. However, higher returns are only available on small

deposits of up to £250 or £500 a month, and often for just one year. The interest typically totals less than £100.

That may not sound worth it. But you can open a range of these with different providers, or even multiple accounts with the same provider. Teachers Building Society (non-teachers welcome) allows savers to open two of its 2.8% Charity Saver accounts and so save £1,000 a month. At the Principality Building Society, savers can have a Christmas Regular Saver Bond (paying 2.5%) and a Regular Saver Bond (2%). Some allow couples to open two joint accounts – with each partner the first-named on a regular saver – plus personal accounts. Some savers have over £50,000 in these accounts, earning hundreds of pounds of extra interest a year.

Opening multiple high-interest current accounts is another option. Some have reportedly opened four current accounts with Nationwide to pocket the 5% it offers for a year on balances of up to £2,500 (although you need to fund each account with £1,000 a month).

If you can’t be bothered with the hassle of multiple accounts, then fixed-rate deposits (in which you can deposit much larger sums) also offer higher rates. These range from 2% on one-year saving bonds to 3%-plus for five years or more. They are only worth considering if you do not need to access your cash – early withdrawals are heavily penalised or not allowed. And the risk is that these guaranteed returns will look far less competitive when interest rates rise.

If you think rates won’t rise for a while, a short-term fix may be worthwhile. The best two-year rate of 2.35% (FirstSave bank) offers a three-quarter point premium to the top easy-access rate of 1.6%. If easy-access returns stayed at

1.6% for the next year and hit 2.35% for the second year, savers would still be about 0.75% better off overall with the fixed rate.

Remember there may be better deals among smaller, less well-known institutions still covered by the Financial Services Compensation Scheme. Credit union My Community Bank has launched market-leading one and three-year fixed deals at 2.15% and 2.75%, compared with bank and building society best-buys of 1.95% and 2.65%, according to Moneyfacts. However, these rates are only available on balances of up to £15,000.

Be ready to move quickly when a better offer comes along. Some deals are so heavily subscribed that they are soon withdrawn.

Savers: where to find the best rates now

By Steve Lodge

The best homes for your cash©

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personal finance

Wherever you put it, be prepared to move quickly

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13) Type Interest

rate (gross)Product Terms

Easy access 1.6%Coventry Building Society Online Saver (Issue 5)

Four penalty-free withdrawals a year

Regular savings

3.05%Cambridge Building Society Regular Savings Bond (Issue 3)

One-year term; maximum deposit £250/month, £3,000 total

Current account

5% Nationwide FlexDirectApplies to balances of up to £2,500 in first year

Fixed rate (one year)

2.15%My Community Bank 1 Year Fixed Term Deposit

£15,000 maximum investment

Fixed rate (two years)

2.35% FirstSaveTwo-year fixed rate bond (16th issue)

Isa (variable rate)

1.80% (tax-free)

Post Office Premier Cash Isa (Issue 5)

Rate includes 0.9% bonus for 18 months; accepts Isa transfers


In the 19th century, not unlike today, there was much concern about poverty in industrial towns. Many felt the problem was a lack of thrift by the poor, which could be solved by getting those on low incomes to save more money. Existing banks and the bond market were aimed at the well-off. So in 1810, a Scottish minister established the first savings bank in Dumfriesshire, which accepted even the smallest deposits, and the idea took off.

Some such banks were run on the trustee model, with directors solely responsible for ensuring savers’ money was invested soundly. But a radical variation came about – the mutual model, where depositors also became the bank’s owners. While the trustee ‘banks’ just pooled deposits and put

them into commercial bank accounts or gilts, mutuals lent money too.

The model quickly crossed the Atlantic, and the Provident Institution for Savings (PIS) was the first to be granted a business charter in 1816. Founded by Boston philanthropists, it allowed people of all incomes to save safely. First investing in government bonds, it soon began lending to selected Boston businesses. Similar banks spread across the US. But while cautious lending helped them survive various crises, including the Great Depression, the lure

of commercialisation proved too strong. By the 1970s deregulation saw many mutuals taken over by commercial rivals or floated (PIS itself went public in 1986).

the big picture

Victorians thought thrift would save them

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Charity moneywasterAmnesty International’s flagship fundraising event, The Secret Policeman’s Ball, lost £750,000, according to BBC’s Panorama. The charity ball, featuring Russell Brand, Coldplay and Desmond Tutu, was expected to raise £211,000. Amnesty is also accused of awarding ex-secretary-general, Irene Khan, twice the severance package she was entitled to.

Bribe of the weekA mother tried to bribe a teacher to cast her daughter as Mary in the school nativity play. The newly qualified teacher told BBC 5 Live she was offered beauty treatments in exchange for giving the infant school pupil the role.

The cost of independenceThe big four supermarkets warned that an independent Scotland would have to pay more for its groceries. Currently the supermarkets absorb the higher distribution costs into UK-wide prices, but would treat an independent Scotland as an international market, according to one executive.

Irony of the weekHybrid buses may cause more air pollution than conventional ones, a study by engineering consultancy Ricardo suggests. They produce far less greenhouse gas, but far more ‘particulate matter’ per mile. Britain’s 1,300 low-carbon subsidised buses cost taxpayers £90,000 each.

Good week for:Stevenage: The town may be the future of space exploration, says Science Minister David Willetts. EADS’ space arm, based there, will provide robotics expertise to the new international mission to Mars.

The Good Life: Richard Briers, who starred in the classic sitcom, left £1m in his will. The bulk went to his family, but he also left £250 to actor Peter Egan for “chardonnay”.

Bad week for:World leaders’ dignity: David Cameron, Barack Obama and Danish prime minister Helle Thorning-Schmidt were spotted gurning for a ‘selfie’ (taken on Thorning-Schmidt’s mobile phone) at Nelson Mandela’s memorial service.

Adam SandlerReturn: £3.40 per £1 of payThe comic actor commands nearly £10m per film, but his most recent offerings, Jack & Jill and That’s My Boy, were turkeys. Jack & Jill cost £50m to make but made just £91m, while That’s My Boy, which cost £42m, returned just £35m.

Reese WitherspoonReturn: £3.90 per £1 of payAfter comedies This Means War and Water For Elephants tanked, Witherspoon is reinventing herself by buying up the film rights to novels with strong female roles and acting in smaller budget movies.

Katherine HeiglReturn: £3.50 per £1 of payFormer Grey’s Anatomy star Heigl quit the drama after success with 27 Dresses and Knocked Up, soon demanding large fees. Unfortunately, more recent films, Killers and One For The Money, were flops.

Hollywood’s most overpaid starsForbes has unveiled its yearly rundown of the Hollywood actors delivering the least value for the biggest fees. Here are the three stars generating the least studio bang for their big bucks

On this day…13 December 1816: first US savings bank opens


Noahpinionblog.blogspot.co.ukWhat should we teach the kids when it comes to economics? Some say we should focus on the big picture – the importance of institutions, regulation, income distribution, why we get recessions and unemployment, and so on – before we get into the study of individuals and markets (microeconomics). They are wrong, says Noah Smith. Why? Because the big picture has a big problem – it doesn’t really work very well. Despite centuries of study, there is still no agreement on such fundamental issues as what causes recessions, or how to prevent them.

That’s not to deny the importance of the study, of course. But we should follow the physicists and teach the stuff that works (Newtonian mechnanics) before we move on to the exotic (string theory). So, what does work? The list is a long one, but it includes game theory (for example, in auctions); the influence of supply and demand on prices; and financial and tax economics – we can, for example, be pretty sure what will happen to bond prices when interest rates go up and what the impact of certain kinds of taxes will be. These things are often simple and unglamorous. But they have led to real improvements in humanity’s ability to control our world. They are scientific successes. We should ground our economics in these before moving on to the tricky stuff.

The economics that works

A Christmas offer you can’t refuseBusiness.time.comNow here’s a Christmas offer you’ll find hard to refuse. Starbucks is offering you the chance to pay $50 for the privilege of spending another $400 at Starbucks, says Brad Tuttle. Act fast!

Almost exactly a year ago, the website Gilt launched this curious sale, offering a special stainless steel gift card to Starbucks for $450. With most gift cards, the amount paid is obviously equal to the amount the holder can spend with the card. But this card was special: it was loaded with just $400. The justification for this was that each card cost more than $50 to make and, more importantly, they were “exclusive”. Only 5,000 went on sale. They reportedly sold out in six minutes. Gilt and Starbucks are now going for a repeat performance. This time, a mere 1,000 cards are available.

What Starbucks is effectively selling is the idea that the holder of this card gets to show off and feel special. “When you’re waiting in line at Starbucks, the next person in line won’t have it,” a Gilt executive said last year. That’s true. But all of the people in line would seem to be able to get coffee, which you might think would be the main purpose of going to Starbucks.

the best blogs

www.bbc.co.uk/news/correspondents/robertpestonThere is a bit of a mystery about Britain’s recovery, says Robert Peston. According to the Office for Budget Responsibility, the recovery has been driven by households spending more than anticipated. This at a time when growth in real disposable income has shrunk and living standards for most British people fallen. So why are we spending more? One answer is we are saving less. Saving is up and at pretty high levels compared with the boom years. But compared with household indebtedness, it’s still inadequate – households are in debt of 140% of available income. The picture is even worse than that makes it sound as the indebtedness is unevenly distributed – some five to nine million households would struggle to keep their heads above water if interest rates were to rise to normal levels. The OBR’s predictions for GDP growth rely on households continuing to reduce their savings and pushing up their debt. Is this sensible when businesses have refused to follow consumers’ lead, and sit on their cash rather than invest? Some might say any recovery will do. But is a credit binge really the road to the recovery we need?

Mainlymacro.blogspot.co.ukWhy has UK productivity growth been so low in recent years – both historically, and in relation to other countries? Part of the answer is probably the dearth of bank lending to small and medium-sized enterprises (SMEs), says Simon Wren-Lewis, professor of economics at Oxford University. SMEs make up about half of the private-sector economy in terms of turnover and employment, and they are dependent on banks for the large majority of external funding. But the banks have squeezed lending as they try to repair their own balance sheets in the wake of the crisis. This means dynamic SMEs are unable to expand, hurting economy-wide productivity. They are also crowded out by ‘zombie’ firms, which banks are reluctant to pull the plug on as this would further hurt their balance sheets, and by mortgages, which the banks are keener to hand out, thanks in part to state subsidies.

But there’s another problem. You might think it would be in a bank’s own interest to foster relationships with growing, dynamic firms. But this “duty of care” that banks once had to their customers has been replaced by “a desire to flog products”. On top of the payment protection insurance scandal, it now seems that interest-rate swaps may have been mis-sold to SMEs as banks thirsted after short-term profits. It’s hard not to be indignant about such scandals. But there is a bigger question at stake. Could the banks be holding back the entire UK economy? The data that might settle the question are not available. But that doesn’t mean the answer isn’t yes.

Have the banks held back Britain?

A curious recovery

We understand this, but not the big picture

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Former Barclays chief Bob Diamond has made a dramatic return from disgrace with an exciting new venture, says The Sunday Times. He is apparently putting “the final touches” to a grand plan to build a banking empire in Africa – having lined up £150m in backing for a cash shell that he plans to list in London before Christmas (see box). Diamond’s choice of Africa speaks volumes for the continent’s rising status as a magnet for foreign investors. But his new partner, Ashish J Thakkar, is just as noteworthy.

Aged just 32, the Uganda-based billionaire – whose conglomerate, Mara Group, has tech, manufacturing, agricultural and property operations in 19 African countries – has had a singular life, says The New York Times. Born in Britain, he emigrated with his parents to Rwanda as a child, survived the genocide, dropped out of school, and was living out of a suitcase selling computers by the age of 15. These days he enjoys something like rock-star status in Africa, where he is celebrated as the continent’s only young hotshot to make Fortune’s influential “40 under 40” list.

Thakkar is clearly the kind of man who’s always up for a new experience, says Forbes. “An astronaut in waiting”,

he recently shelled out $200,000 to “secure his place on Virgin Galactic’s first flight to space”. Still, he doesn’t let it all go to his head. When asked the most important lesson he’s learned in business, he replies: “Always be down to earth and approachable. The day your arrogance or ego kicks in, it’s all over. Always remember, no matter how big you become, you will still always be a drop in the ocean in the grand scheme of things.” Clearly, boardroom wrangles with Bob Diamond are going to be interesting.

When you read Thakkar’s CV, it’s hard to believe he’s only 32 and still qualifies as a World Economic Forum Global Junior Leader. As well as building Mara, he has advised the Presidents of Uganda and Tanzania, taken an advisory position as global entrepreneur-in-residence at Dell and funded a foundation to spread expertise among other African entrepreneurs. He seems particularly proud of the latter, especially a mentorship programme that connects small companies with top business leaders. That’s partly because he could have done with something similar himself when he was starting out. If he’d had access to better advice, he says, “Mara Group would be in another place altogether – five years

ahead, I would say”. The biggest mistake he made, as Mara’s business exploded into sector after sector in his 20s, was forgetting about existing projects in the excitement of a new one. “You must keep your eye on all the balls, no matter how small or big those ventures are,” he told Forbes last year. That’s something to remember if his famously single-minded new banking partner starts getting a little too demanding.

The billionaire with rock star status launching a banking empire in Africa

Bob Diamond has long had an interest in Africa, having set up a charitable foundation that invests in education projects there. But his reinvention as a banker began only a few months ago when he set up Atlas Merchant Capital in New York, says Javier Blas in the FT. He views it as an “old-style merchant bank” that will engage in a series of deals with partners. Atlas Mara – as his venture with Ashish Thakkar is known – is the first of these.

It’s easy to see why Diamond thinks the sub-Saharan banking sector has potential: only a quarter of the region’s one billion population holds a bank account and fewer than 5% of Africans have a credit card. The market is dominated by a few regional groups: Standard Bank, Ecobank and Nigeria’s United Bank for Africa. A source close to the fund-raising suggests that Atlas Mara’s first move will be “to take control of an African bank and grow around it”. Diamond recently met senior officials in Nigeria, fuelling suggestions he may begin his African odyssey there.

Reportedly still “hurt” by his unceremonious ejection from Barclays following the Libor rigging affair, Diamond, 62, has everything to prove with this new venture , says Alex Hawkes in the Mail on Sunday. He is still grappling with the fallout from that. Next year he’ll be called as a witness in a £70m suit brought by Guardian Care Homes, which alleges that Barclays mis-sold it interest-rate hedging products.

So Diamond’s decision to list his new venture in London surprised some, says Simon Goodley in The Guardian. “Even friends admit his reputation is lower in Britain than almost anywhere else in the world”. But the move reflects the fact that the City has better ties with Africa than Wall Street does. Still, the model of buying up assets in emerging markets via a cash shell is controversial. There have been successes, but the spectre of Bumi Plc – the scandal-ridden Indonesian mining firm created from a cash-shell launched by Nat Rothschild – looms large.

Bob Diamond’s African odyssey©

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This week: Ashish Thakkar, Mara Group

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Not every mum and dad is lucky enough to have a baby, to see them grow up and fulfil their dream. A shocking 1 in 4 mums and dads will lose their baby during pregnancy or birth.

MoneyWeek ad.indd 1 29/08/2012 11:14:16

www.moneyweek.com 13 December 2013 MONEYWEEK 35

by Ruth Jackson

If you are looking for a festive holiday, you won’t find anywhere that embraces Christmas quite like Tivoli Gardens in Copenhagen. For the rest of the year this 21-acre park is a pleasure garden with rides and amusements – but in winter it is transformed into one of Europe’s largest Christmas markets. With more than 60 stalls, festive rides, millions of twinkling lights, reindeer and Santa himself in residence, the park has all you could need for a great pre-Christmas city break.

Stay in Nimb, the only hotel in Copenhagen with direct access into Tivoli Gardens. You don’t have to pay the park’s DKK95 (£11) daily entrance fee – the reception give you a wrist band that gets you free access to the rides too, saving another DKK199 (£22).

With its Moorish façade lit up at night by thousands of fairy lights, Nimb looks like a slightly kitsch etching from the world of CS Lewis. But don’t be fooled – inside is a luxurious, intimate boutique hotel. There are just 17 rooms and each

one is different. My room curved around the corner of the building and housed a large four-poster bed, a seating area with log fire and enormous bathrooms and dressing areas. All but one of the bedrooms looks out over Tivoli Gardens – mine was right next to the antique roller-coaster, with the quiet rattling (the windows are well insulated) of the carts whizzing past providing a pleasant reminder of my location.

Beyond Tivoli Gardens, Copenhagen has much to offer. I wouldn’t bother with the shopping – there’s a wide array of international brands on offer, but the

exchange rate means you’ll pay substantially more than if you had simply bought them at home. No, the main attractions in Copenhagen are the restaurants – it’s fast becoming one of the world’s gastronomic hotspots. Noma (Noma.dk), the place to go for Nordic cuisine, was voted San Pellegrino’s Best Restaurant in the World in 2010, 2011 and 2012 and boasts two Michelin stars. Dishes range from mahogany clam to wild duck with pear and kale. There are also 12 more Michelin-starred restaurants in and around

Copenhagen, including Geranium and Kong Hans Kaelder.

Nimb’s dining options are more modest, but still excellent. The brasserie offers good food in a wonderful setting overlooking Tivoli Gardens. The menu consists of French classics, including a particularly delicious haunch of venison with loganberries and cabbage, and the breakfast is easily one of the best I’ve had.

Nimb costs from DKK2,000 (£224) per night for a double (including breakfast). Visit www.nimb.dk, or call 00 45 8870 0000.

Spending it

The best British spasThe Dorchester Spa in London exudes “old-world glamour, but when it comes to treatments, it’s cutting-edge”, says Kate Hilpern in The Independent. It has nine sound-proofed treatment rooms and double suites for couples. Treatments cost from £70 (Dorchestercollection.com).

You can escape the city altogether at Chewton Glen in the New Forest. “One of the UK’s finest country house hotels”, it “boasts a glamorous yet friendly spa with some of the most luxurious treatments around.” Day guests are also welcome. Treatments cost from £25 (Chewtonglen.com).

For a more traditional spa, Champneys

in Hertfordshire is the best option. This “exceptional boot camp” has “nutrition and exercise still at its heart”, but a multimillion-pound revamp means its relaxation facilities are “impressive too”, with “a fabulous Thalassotherapy pool”. Treatments from £15 (Champneys.com).

Ragdale Hall (pictured) in Leicestershire “has been described as the John Lewis of spas because it is of excellent quality, well priced and delivered by friendly, knowledgeable people”. The facilities are “vast and dazzling” and the food is “first-rate”. Treatments start from £18 (Ragdalehall.co.uk).

Celtic Manor in Newport in Wales is perhaps best known for its golfing breaks, but it also offers a “surprisingly tranquil spa, given the size of the hotel”. If you are stuck for what to go for, try their “stand-out treatment” – the Elemis Herbal Steam Temple – “which incorporates an exotic steam cleansing ritual”. Prices start from £44 for a treatment (Celtic-manor.com).

Christmas wonderland in Copenhagen

Tivoli Gardens: one of Europe’s largest Christmas markets


property on the market

Chalet Fountainfield, Kitzbühel, Austria. A chalet with underfloor heating in a renowned ski area. 4 beds, 4 baths, receps, wine cellar, kitchen, lift to all floors, garage for 5 cars, 53 sq m terrace, garden. £4.32m Savills 020-7016 3740.

Chalet Quatre Frères, Verbier, Switzerland. An Alpine chalet with a wraparound terrace, hand-carved woodwork, stone fireplace and an outdoor hot tub. 5 beds, 4 baths, 2 receps, steam room. £4.4m Abercrombie & Kent International Estates 020-3667 7016.

Eco Le Ruitor, Sainte Foy, Espace, France. A development offering one- to three-bed apartments in the Espace Killy ski region. All have fully equipped kitchens and private terraces or balconies. Shared facilities include a swimming pool and sauna. Prices range from about £138,000 to £415,000, available through leaseback with Erna Low Property, 020-7590 1624.

This week: ski chalets – from a £140k one-bed apartment in the Espace Killy region of France to a £7m chalet with one acre of land in Colorado in the United States


property on the market

A lot of three chalets, Vaujany, La Villette, France. Traditional farmhouses that have been converted into three chalets in an Alpine village 200 yards from the ski slope. Chalet Rostaing: 6 beds, 5 baths, vaulted recep/dining area, kitchen. Chalet Dibona: 3 beds, 4 baths, open-plan living/dining area, kitchen. Chalet Lucette: 4 beds, 4 baths, open-plan living area, kitchen. £1.4m Chesterton Humberts 020-3040 8210.

105 Highlands Way, Telluride, Colorado, US. A newly-built house near a ski trail. It has walnut floors, beamed ceilings and fireplaces. 5 beds, bunkroom, 5 full and 2 half baths, 9,406 sq m living area, 1 acre. £7.3m Sotheby’s International Realty +1 970 369 7700.

A traditional chalet near Chemin de Plan Pra, Verbier, Switzerland. A detached chalet in a landscaped garden close to the ski-lifts. It has parquet floors and an open fireplace. 3 beds, 2 baths, dressing room, open-plan recep, kitchen, cellar, balcony, Jacuzzi, parking. £2.87m Chesterton Humberts 020-3040 8210.

Chalet Atka, Verbier, Switzerland. A traditional chalet with easy ski in/ski out access. Each floor has French doors opening onto a terrace. 5 beds, 5 baths, hammam, dressing room, 2 receps, kitchen, cellar, office, staff flat, ski room, garage with lift to chalet, garden. £10.1m Aylesford 020-7349 9772.

This week: ski chalets – from a £140k one-bed apartment in the Espace Killy region of France to a £7m chalet with one acre of land in Colorado in the United States

Chalet Fleur de Neige, Le Grand-Bornand, Haute-Savoie, France. A renovated chalet a short walk from the ski slopes. The main living area has a fireplace, large windows and balcony. 6 beds, 3 baths, 2 receps, kitchen, sauna, laundry, mezzanine, garden. £1m Winkworth 020-7870 7181.

38 MONEYWEEK 13 December 2013 38 MONEYWEEK 13 December 2013

Christmas shopping

A selection of the best food and drink

Belvelly Smoke House (Frankhederman.com, email: [email protected]) supplies smoked salmon to some of Britain’s top restaurants, and its salmon is “widely acknowledged as some of the finest in the British Isles”, says Bill Knott in the FT’s How To Spend It. Unsliced smoked salmon is charged at €55/kilo, with a minimum order of one side plus packaging and shipping.

The Fortum & Mason Imperial Hamper (£5,000, Fortnumandmason.com) is a winter wonderland of extravagant delicacies. From the vintage Krug champagne to the Scottish smoked salmon, it is bursting with festive treats. Finish off your meal with the new Nuts About Christmas Pudding, with its crown of gilded nuts and its melting heart of Somerset Cider brandy butter.

The John Lewis Christmas Extravaganza Leather Trunk

Fresh Hamper (£800, Johnlewis.com) comes in

a faux leather trunk bursting and the contents include Laurent Perrier champagne and a set of luxury Christmas crackers.

13 December 2013 MONEYWEEK 3913 December 2013 MONEYWEEK

“For the truly hands-on gourmet, the ideal present might be one of Brindisa’s Iberico Bellota hams,” says Bill Knott in the FT’s How to Spend It magazine. The Brindisa Iberico Bellota Pequeno Ham Set (£380, Brindisa.com) is one of the great Spanish delicacies – four

years of slow curing produce a wonderful ham with deep, multi-level flavours. It comes from free-range, acorn-fed pigs that have been allowed to roam and forage. This ham from Brindisa, a London-based delicatessen specialising in Spanish food, comes with a stand and knife, and a DVD showing you how to carve like an expert. Minimum size 7kg.

The Ottolenghi Christmas Hamper (£95, Ottolenghi.co.uk) is a hamper from the delicatessen run by the Soho restaurant NOPI. It includes both sweet and savoury snacks, as well as some essentials for the store cupboard. There’s Christmas cake, cranberry relish, dark chocolate, six mince pies, rosemary-spiced nuts, Palestinian za’atar, sumac, panettone classico and Rustichella d’Abruzzo extra virgin olive oil.

The Selfridges British Cheese Hamper (£75, Selfridges.com) proves that British cheesemakers can hold their own against their continental rivals. The hamper

comes with traditional preserves and a Côtes du Rhône.

40 MONEYWEEK 13 December 2013 www.moneyweek.com

Festive tipples

wine

2007 Quinta do Noval, Late Bottled Vintage Port, Portugal (£15.79 75cl bottle, Ocado.com; Peckham & Rye, 0141-445 4555; Cambridge Wines, 01223-568993; Hanslope Wines, 01908-510262; Hailsham Cellars, 01323-846238; The General Wine Co, 01428-727744; www.thedrinkshop.com).

Suave and succulent with masses of depth and charm, this is a very serious LBV. It packs a porty punch and has potpourri notes, orange zest and pure redcurrant nuances to be found in among the brooding power. And because this wine is unfiltered, it has more crunch and seriousness on the finish than others. Made from 100% estate fruit this is the best value port

of the year.

Matthew Jukes tips six bottles for the Christmas table

NV Tanners Brut Extra Réserve Champagne, France (£22.50 a bottle, three or more reduced to £44.95, £49.95 per magnum, Tanners, 01743-234455, Tanners-wines.co.uk).

The eternal quest to find decent, elegant, great value Champagne is a somewhat dull pastime, because these days, what with duty and VAT at all-time highs, most of the well-known Champagne brands are north of £30 and they taste just as dull as ever. I resent paying £30 for lifeless, fishy, lacklustre Champagne, so I either trade up to a great wine (these days £50 is the new £30) or sniper wines like this one. The fruit is delicate, bright and impressive and with a long, tingling finish and fine bubbles it is one of only a handful of Champagnes this year that have officially made the ‘great value without dropping my standards’ grade. Load up with magnums – Christmas is not Christmas without big bottles.

2012 Touraine Les Sauterelles, Domaine de Pierre, Loire, France (£9.95, or £9.25 by the case,

Lea & Sandeman, 020-7244 0522, Leaandsandeman.co.uk).

Your session sauvignon this season – if you want to load up on one wine that will perform every Christmas duty brilliantly, this is it. Smoked salmon blinis on Christmas Day have never tasted as good as they will with this wine in your glass. Emergency white wine, for unexpected gatecrashers, has never been this elegant. Brow-soothing, ice-cold white for the thirsty, irritated chef has never been so calming. This is a Sancerre-annihilating wine with stunning citrus balance, breathtaking poise and unnerving vibrancy.

2011 Bourgogne Blanc, Les Femelottes, Domaine Chavy-Chouet, France (£14.95, Roberson Wine, 020-7371 2121, Robersonwine.com).

This is a thrilling white Burgundy at a wicked price. I wager the Roberson phone will be ringing off its hook by midday on 13 December when MoneyWeek wine fiends reach this page. Made by 22-year-old Romaric Chavy from one parcel of vines just outside of the Puligny-Montrachet boundary, this is a classy chardonnay. Served blind I would have pinned a £30-plus price tag on it. It is drinking now and is a shimmering beauty in the glass. Burgundy fans

look no further.

2011 Châteauneuf-du-Pape, Cuvée Tradition, Vignobles Gonnet, Southern Rhône, France (£26.50, Corney & Barrow 020-7265 2400).

2011 was a pretty weak vintage in Bordeaux, but the Rhône made some attractive wines. This Châteauneuf is very sexy indeed. With a lustrous sheen and a swagger in its step, there is a mass of velvety, spicy, mulberry and plum-scented fruit here. I am mightily impressed with the balance, too. You can and should drink this wine this Christmas, but you can also age it for five years, such is the nobility and energy under the bonnet.

NV El Candado, Pedro Ximénez, Valdespino, Sherry, Spain (£9.99 half, £17.95 75cl bottle, Lea & Sandeman, 020-7244 0522, Leaandsandeman.co.uk; Butlers Wine Cellar, 01273-698724; Halifax Wine Co, 01422-256333; The Wine Chambers, 0191-257 8362; Eton Vintners, 01753-790188; Scarlet, 01736-753696; Solent Cellar, 01590-674852; Wined Up Here, 020-8549 6622; Satchells, 01328-738272; Martinez, 01943-600000; New Forest, 01425-489771; Liquid Treasure, 01773-825754; Henderson, 0131-337 4444).

There is little space for a write up because I wanted to include the details of all of these terrific stockists.

Suffice to say, this is the finest, darkest, sweetest, most intoxicating PX I have ever tasted. Valdespino is one of the ‘100 Most Iconic Wine Estates’ in my book. The padlock on the bottle is in memory of a Valdespino ancestor who once locked up a barrel of this wine because it tasted so good!


Is the desire to acquire material things – to keep up with the Joneses – creating a warped society? The columnist Camilla Cavendish thinks so. She’d vaguely hoped, she says in The Sunday Times, that the recession might have brought about a permanent damping down of materialism, a “reassessment of what really matters”. Instead, we seem to be entering a new era “of the conspicuously pointless gift. Take the Hermès iPad case, in calfskin and silk, retailing at £570, which I stumbled upon last week. Why would anyone buy this? The iPad already comes with a cover.”

You could save 20 people from blindness in India for that, or, if you’re feeling less worthy, take lots of friends out to dinner. And don’t get me started on the £35,000 gold-and-diamond Harrods Savelli smartphone, “a must-have accessory for muggers”, or the lizard Chloé handbag at £2,915, “an item so hideous that I wouldn’t wish it on a reptile”.

A designer friend of Cavendish’s recently came back from a trade fair at which she had gawped at a Sensory Sky shower: while you stand under a huge showerhead it “wafts aromatherapy scents around as lights change colour”. “You know what,” fumed the friend. “Civilisation has gone

far enough.” She’s right, says Cavendish. “When I look at some of these products, I think this is what happens at the end of empires. Societies degenerate. Greed blinds us to what anything is worth.”

The Times’s Carol Midgley feels much the same. Midgley was transfixed by the size of the monthly bills in the Saatchi household, as they emerged in court, and also by the way Michelle Young, the estranged wife of a property tycoon, recently declared her £20m divorce payment to be “disgraceful”. “I spent a good ten minutes staring awestruck at that adjective like a medieval peasant looking at a yo-yo. I appreciate she

felt she deserved far more and believes her husband is depriving her and her children of what’s rightfully theirs, but I can’t help feeling that anyone who is awarded £20m, flicks through their mental thesaurus and selects a word that means ‘shameful or scandalous’ to describe it has somewhat lost her sense of perspective.”

Meanwhile, another lottery-winning couple, the third in a month, have separated. You’d have to have a heart of stone, says Midgley, not to feel a little schadenfreude. Far from delivering happiness, wealth seems as often to deliver the opposite, creating more

problems than it solves. Paul Sykes, the political donor, said after he and his wife separated: “I would sooner have stayed a tyre-fitter, where I started. Money just brings a load of lumber.”

Well, it does and it doesn’t. Not everyone who has a lot of money is miserable, let’s remember, but the trap too many people fall into is believing owning expensive possessions (including houses) makes you happy. Generally this isn’t the case and it’s better to spend money, if you have it, on experiences rather than on things.

blowing it

Can money make you happy?

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Michelle Young: £20m settlement was “disgraceful”

n RBS – 82% owned by the taxpayer – let its customers down big time last week with a computer failure, says Paul Routledge in the Daily Mirror. “Again. The bank has also been fined £323m by the European Commission for rigging interest rates, following a similarly huge fine by US regulators. Yet RBS’s fatcat bosses are set to trouser an estimated £500m bonus bonanza. How can this be? And why does the government permit it? RBS... was bailed out by the taxpayer to the tune of £45bn when bosses took it to the brink of bankruptcy. The least these greedy fatcats can do by way of thanks is to forgo their ill-gotten gains.” n “Multi-millionaire model Lily Cole has been given a taxpayer-funded grant of £200,000 to set up a new website where people make wishes and – hopefully – others fulfil them for free,” says Jane Moore in The Sun. “No doubt Lily – an ardent environmentalist and all-round do-gooder – means well, but a

quick glance at the site proves that not everyone is as altruistic. ‘I wish for someone to take me in a movie,’ says someone called Fashionpixi, who is no doubt being contacted by a porn director as we speak. Someone else asks for an Xbox One for Christmas… Perhaps those of you saving up for a life-prolonging operation the NHS can’t fund because of the ‘savage cuts’ might like to post a message along the lines of: ‘I wish taxpayers’ money was put to better use than this nonsense.’”

n Boris Johnson got caught out on Nick Ferrari’s radio show, says Rod Liddle in The Sun. “Nick asked Boris a couple of intelligence questions and he got them wrong. The first was: ‘If there are three apples and I take two, how many apples do I have?’ The answer, of course, is two. Boris fell into the trap and said ‘one’. He is blonde, I suppose. Just goes to show, you could pay £30,000 a year to put a shrubbery through Eton and Oxford... but it’s still not going to beat you at chess when it comes out.”

Tabloid money: Boris is just expensively educated shrubbery


Tim Moorey is author of How to Master the Times Crossword, published by HarperCollins, and runs crossword workshops (www.timmoorey.info).

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Dealer East North-South vulnerable KQJ53 AQ10 J972 A 108764 A 84 KJ92 1063 8 985 KQJ10732 92 7653 AKQ54 64

Tim Moorey’s Quick Crossword No. 670 Bridge by Andrew Robson A bottle of Taylor’s 10 Year Old Tawny will be given to the sender of the first correct solution opened on Tuesday 24 December 2013. Answers to MoneyWeek’s Quick Crossword No. 670, 8th Floor, Friars Bridge Court, 41-45 Blackfriars Road, London SE1 8NZ.

ACROSS 1 Makes a ringing sound (6) 4 Most of Libya (6) 8 Of enormous effect (7) 10 Forces; sheep (5) 11 Usual capacity for a beer (5) 12 (7) 14 Ono’s ideal Yule (anagram) (3, 3, 4, 2, 1) 17 Break for student employed by a clothing chain? (3, 4) 19 Ponder; source of inspiration for an artist (5) 20 Rod once used for beating (5) 21 Houston’s name (7) 23 Throws aside (6) 24 It has its ups and downs (3-3)

Sudoku 670

MoneyWeek is available to visually impaired readers from National Talking Newspapers and Magazines in audio or etext. For further information,please call 01435-866102, or www.tnauk.org.uk.

Taylor’s, a family firm for over 300 years, is dedicated to the production of the highest quality ports. Every year the Taylor’s

team of winemakers select some of the most elegant and promising wines of each harvest to be aged in small oak barrels for an average of ten years. This ageing produces a highly prized wine of silky, rich fruit with subtle oak nuances and a delicious, nutty finish. Try it chilled.

Solutions to 668Across 1 Regaw (wager) 4 Esrever (reverse) 8 Grow-bag 9 G and T 10 The last straw 12 Up-to-the-minute 15 Brought about 19 Crane 20 Lopping 21 Troppus (support) 22 Nrets (stern).

Down 1 Right out 2 Goose 3 Webcast 4 Eighteen holes 5 Roget 6 Vanuatu 7 Ruth 11 Nest-eggs 13 Tornado 14 In a spin 16 Use up 17 Olive 18 Scot.

The word was BACK, requiring some entries to be reversed.

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The winner of MoneyWeek Quick Crossword No. 668 is: JC Fortescue of Bristol.

DOWN 1 Parties; outdated computer operating system (3) 2 First (7) 3 Full range (5) 5 What BA charges (3, 4) 6 Use a hijab so to speak (5) 7 Pompous type; behind (3) 9 Airline staff (5, 4) 11 Crash involving a car (5) 13 Part of an umbrella; delivered a speech (5) 15 Stuff yourself (7) 16 Large greenish lizards (7) 18 It eats shoots and leaves (5) 19 Cereal that sounds as if it’s a puzzle (5) 20 Compound used in refrigerants, harmful to the environment (abbreviaton) (3) 22 Tree seen in churchyards (3)

One answer in each across row is clued incompletely. To form the entry, consider a 12 across song that is the answer at 14 across (entered slightly cryptically). All answers and entries are normal words.

To complete MoneyWeek’s Sudoku, fill in the squares in the grid so that every row and column and each of the nine 3x3 squares contain all the digits from one to nine.

crossword & bridge

Pony sets a trapThis week’s ‘endplay’ could hardly be called that – occurring as it did as early as trick fi ve.

The biddingSouth West North East 11 pass 2 4pass pass 5 passpass pass

Declarer, Pony Nehmert of the powerful German Ladies Team, won West’s eight of clubs lead with dummy’s ace. She crossed to the queen of trumps, ruffed her second club, then crossed back to her king of trumps, East discarding a club. Though it seems natural for declarer to draw West’s last trump, she realised that she had to lose to East’s ace of spades and did not want to give him an easy club exit [if she drew West’s last trump, she would draw dummy’s last trump, and so enable East to lead a club safely]. Watch what happened when she led the spade at trick fi ve – without cashing the third trump. East beat dummy’s knave with his bare ace but was totally stymied. A heart into dummy’s ace-queen-ten was clearly fatal, so he was forced to lead a third club. This gave declarer a ruff-and-discard. She discarded a heart from hand and ruffed in dummy. She cashed dummy’s king-queen of spades, ruffed a spade then fi nally drew West’s third trump with her ace. She led a heart to dummy’s queen for the overtrick (no good) but 11 tricks were hers by way of two spades, one heart, one club, fi ve trumps in hand, a club ruff in dummy and, crucially, a second club ruff in dummy (care of East). Game made. For all Andrew’s books and flippers – including his new booklet Duplicate Pairs Tactics – see www.arobson.co.uk.


MoneyWeek round-up

Four extracts from our newsletters, free emails and the MoneyWeek website this week

We’ve often written about how useful a land value tax (LVT) might be, says Merryn Somerset Webb. But when we talk about it, like most people, we tend to focus on land that should be hit up for more tax, rather than that which should pay less. It is standard stuff to mention that if you build a bypass around a village the price of houses in the village rises. And if the taxpayer has put up the cash, why should the owners of this tiny group of houses reap a windfall?

But look at it the other way around. What of the people who can now see and hear the bypass, where before they lived in peace? Some will have ended up with a little compensation. Most will have had none. Yet all will have suffered one way or another, so why shouldn’t they be compensated via the tax system – paying less tax on their now-devalued land than those inside the village? Imagine if you were out there nimbying about HS2, or a nasty new wind farm going up in sight of your hill-top cottage, or perhaps the way that fracking was about to ruin your rural idyll. Would you complain so hard if your compensation came in the form of zero council tax forever?

Or if it meant a 70% cut on a new LVT that had mostly replaced income tax? I’m guessing you wouldn’t.

I was interested to see this issue pop up in The Independent last week – albeit without reference to an LVT. The current compensation system for those living around new infrastructure projects, says Anthony Hilton, is “geared to paying out as little as possible”. So people oppose development – there is generally only a downside for them if they don’t.

So why not reward them “properly”? It might be expensive to do so, but if it meant paying out less on legal bills and all other costs of delay, would it cost us much more than under today’s system? Maybe not. It’s interesting then, as Hilton also points out, that tucked away in the Autumn Statement was a decision to “run a pilot project that will share some of the benefits of the development directly with the individual households adversely affected”. There have been several hints since the last election that the Coalition is interested in the LVT. This is another.

l Read Merryn’s blog at Moneyweek.com/blog.

Stuff the nimbys’ mouths with gold

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Would they complain if they shared the spoils?

The bad news a Cape can hide

Osborne’s budget just didn’t matter

Organ transplants without the donors

Cape (the cyclically adjusted price/earnings ratio) is the best measure of market value we have, writes Simon Caufield. However, it does have its limitations. First, just like individual stocks, some markets may be cheap for good reasons. Think of Argentina, where you stand a good chance of having your assets confiscated by the government. Second, most countries’ indices are made up of only 20 to 30 stocks, so they are often highly concentrated. Third, some bullish analysts manipulate Cape to support their own views. Finally, Cape uses ten years’ earnings to smoothe out the effects of temporary distortions, such as the business cycle. But what if there are distortions lasting longer than ten years? So yes, Cape isn’t perfect – but it’s still one of the best measures we’ve got.

Don’t worry about the impact of George Osborne’s mini-budget on your investments, writes Bengt Saelensminde. The themes of this budget were pretty much irrelevant. Yes, the economy is growing. But that’s not worth getting too excited about – after all, in the post-crisis years the markets went up, regardless of what the economy did. Next, Osborne suggested the government will balance the books in three years. This forecast is often made, but rarely met. Again, though, it doesn’t make a lot of difference for investments. The third theme was retirement. Yes, people will be working longer. But that will drive a fresh savings culture, once the reality of longer working lives sinks in. So as far as your investments go, the budget didn’t matter.

Having an organ transplant that doesn’t require a donor and won’t be rejected will soon be a reality, writes Tom Bulford. Worldwide, tens of thousands of people are hoping for new livers, kidneys, hearts and lungs. For these people a donor organ is the only hope. But organs are scarce and recipients must constantly take immunosuppressant drugs to prevent rejection. How much better would it be if we could simply take a replacement off the shelf and plug it in, knowing it would not be rejected? Regenerative medicine is making this possible. It’s already started with replacement windpipes. Beyond that, there is the possibility of using the same process to make other replacement organs. It’s definitely worth watching the companies that make this possible.

True Value and Red Hot Biotech Alert are regulated products issued by Fleet Street Publications Ltd. The Right Side is an unregulated product published by Fleet Street Publications Ltd. Your capital is at risk when

you invest in shares. Never risk more than you can afford to lose. Fleet Street Publications is authorised and regulated by the Financial Conduct Authority (FCA No. 115234).

l Simon writes the True Value newsletter. Contact 020-7633 3780.

True Value

l Tom writes the Red Hot Biotech Alert newsletter. For more information contact 020-7633 3602.

l For more from Bengt, sign up for his The Right Side email, free at www.the-right-side.co.uk.


I wish I knew what the gross redemption yield (GRY) was, but I’m too embarrassed to ask

Gross redemption yield (GRY) is also known as the yield to maturity: it’s what your annual return would be if you held an investment to the end of its life. It can be calculated fairly easily on a spreadsheet, using an ‘internal rate of return’ calculation, and is also often quoted for various assets on investment websites. GRY is best suited to investments such

as bonds where all the required inputs – such as the maturity value (what you get back at the end of the loan period) and the interest payments between now and then – are known with certainty. The GRY on government bonds is one of the most closely followed numbers in the financial markets as lots of investments are priced from it.

the share tipsters at a glance MoneyWeek’s comprehensive guide to the week’s share tips

BUY

* 52-week high/low

Company Reason Price tipped

AG Barr (BAG) Beverages

The failure of AG Barr’s merger with Britvic hasn’t held it back. The firm behind Irn-Bru is growing market share

and sales between August and November rose 8%. Earnings upgrades could be due in the New Year. The Times

544p

588.5p/463p*

Arbuthnot Banking (ARBB) Banks

Arbuthnot’s retail deposit base should hold it in good stead following the withdrawal of the Funding for Lending

scheme for cheap personal loans. A tier one capital ratio of 15.5% is also healthy. Investors Chronicle

1,170p

1,290p/637p

Belvoir Lettings (BLV) Aim

Letting agency Belvoir is well-positioned across the UK, with 153 branches. The firm is on an acquisition spree and

recently added properties in Cheshire and Merseyside. Concern on Funding for Lending is overblown. Shares

187p

195p/104.5p

Brewin Dolphin (BRW) Financial services

Brewin has sold off its broking side and now focuses on wealth management, setting itself tough margin improve-

ment targets. A price/earnings (p/e) ratio of 16 is high, but the shares represent long-term good value. The Times

282p

289p/189p

Cambria Autos (CAMB) General retailers

Car retailers have done well in the last year due to the strong performance of the UK market. This looks likely to

continue into 2014. The sector remains fragmented, so Cambria can grow by acquisition. Investors Chronicle

51p

57p/17p

CareTech Holdings (CTH) Aim

Care-home group CareTech has nearly finished its transition to a less capital-intensive business model. Excluding

refurbishments, like-for-like sales growth was almost 3% and the rating looks undemanding. Investors Chronicle

245p

247p/144p

Consort Medical (CSRT) Healthcare equipment

Half-year revenues at the inhaler maker rose 6.5%, thanks to sales of its Chiesi inhaler. Pre-tax profits rose by 18%

to £8.3m. Meanwhile, approval for its electronic cigarette for British American Tobacco is due next year. The Times

890p

931p/660.5p

DS Smith (SMDS) Support services

The cardboard box maker grew dramatically in size after it bought Swedish rival SCA. Recent results were strong,

sales of boxes are up and profit margins are higher. More acquisitions could be on the cards. The Daily Telegraph

311p

460p/202p

Foxtons (FOXT) Real estate

Concerns about the withdrawal of the Funding for Lending scheme from the mortgage sector is overdone. The

sales and lettings agency has a strong position in the London market and could be set to pay a dividend. Shares

283p

321p/230p

Hunting (HTG) Oil equipment & services

Shares in the oil-services provider have dipped due to a fall in its North American rig count. However, this is a

quality company and activity in shale production in the US and China should drive the shares. Investors Chronicle

804p

947p/724p

Micro Focus (MCRO) Software

After a three-year turnaround, Micro Focus is where it wants to be, with good organic growth and a reputation for

paying special dividends. It returned 60p a share in November and a similar payout is likely next year. The Times

816.5p

859.5p/534p

NMC Health (NMC) Healthcare equipment

New Dubai laws stating that all residents must have health insurance should boost the pharmacy and hospital

operator. Current earnings estimates for 2014 look conservative and earnings quality is good. Shares

405.5p

430p/166.5p

Northgate (NTG) Support services

Having undergone five years of restructuring, the van hire firm is now back in a growth phase. Hiring vans is highly

cyclical and the business could benefit from the UK recovery. A p/e of 12.3 looks fair. The Daily Telegraph

430p

459p/260.75p

Quadrise Fuels (QFI) Aim

Shares in the fuel technology developer are taking off amid interest in its new patented fuel. Trials with Danish

shipping firm Maersk should produce revenues next year and more news flow on its Saudi venture is due. Shares

48p

51.5p/9.5p

NEWTON’S FINEST INCOME PERFORMERS. TOGETHER IN ONE FUND.

The value of investments can fall as well as rise so you may get back less than you originally invested. You should read the Prospectus and Key Investor Information Document (KIID) for each fund in which you want to invest. The Prospectus and KIID can be found at www.bnymellonam.co.uk. This is not intended as investment advice. To help us continually improve our service and in

the interest of security, we may monitor and/or record your telephone calls with us. This document is issued in the UK by BNY Mellon Asset Management International Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Conduct Authority. CP11043-17-12-2013(3M) 22085 10/13

www.bnymellonam.co.uk 0800 614 330

Newton Managed Income Fund

22085 MW Managed Inc DPS Strip 10-13.indd 1 04/10/2013 11:29

www.moneyweek.com 13 December 2013 MONEYWEEK 45

SELL

What’s in the Dax?

Unusually, Germany’s benchmark Dax index is a total return index, taking into account reinvested dividends. The 30-strong index is also one of the world’s most cyclical, and thus most volatile, indices. Firms that are sensitive to the

economic cycle account for just over 80% of it. The main sectors include basic materials (chemicals), and car and car part makers, which account for most of the consumer goods segment. The largest defensive sector, utilities, comprises just 5%.

the share tipsters at a glance MoneyWeek’s comprehensive guide to the week’s share tips

BUY


Parkmead (PMG) Oil & gas

Parkmead’s Tom Cross ran success story Dana Petroleum. Parkmead may be another, with production quadrupling

this year thanks to acquisitions. Drilling results due in 2014 could boost the shares. Investors Chronicle

15p

16p/11p

Pearson (PSON) Media

New CEO John Fallon has refocused Pearson on education, disposing of businesses like Mergermarket. The FT is

now part of its education side. On a rating of 15 and offering a 3.5% yield, it’s a good long-term bet. The Times

1,287p

1,380p/1,090p

Rio Tinto (RIO) Mining

Rio is cashing in on the recovery in commodities prices by hiking production of iron ore at its Pilbara mine in

Australia. Prices are up 16% this year and, despite concerns, Chinese demand looks stable. The Daily Telegraph

3,261p

3,872p/2,579p

Sage (SGE) Software

Shares in the accountancy software provider rose 7% on higher growth prospects, even though profits halved due

to an asset disposal. Cash flow rose by £33m which could boost share buybacks. The Daily Telegraph

373p

391p/304p

Town Centre Secs. (TCSC) Real estate IT

The real-estate investment trust’s shares trade at a 13% discount to its net assets. While its portfolio is mostly in

the north, it has a 98% occupancy rate and offers a 4.5% dividend yield. Good long-term value. The Daily Telegraph

232.5p

247p/178p

WYG (WYG) Aim

The consultant, which works with aid agencies and the military to restore infrastructure to war-torn areas, is

enjoying strong trading. It’s in the running for e300m of new contracts and should return to profit this year. Shares

109p

119.5p/69p


Britvic (BVIC) Beverages

Shares in the firm behind Tango have rebounded to pre-2007 levels. Its new strategy has been well received by the

market but, at these levels, the good news is in the price and any disappointment could hit the rating. Shares

666p

677p/383p

Consort Medical (CSRT) Healthcare equipment

The shares have enjoyed a strong run in anticipation of its electronic cigarette, due for launch next year. But the

regulatory regime is currently unclear and the p/e of 19 looks toppy. Sell. Investors Chronicle

893p

915p/661p

Kingfisher (KGF) General retailers

The DIY retailer’s third-quarter results were disappointing, with trading profit up by only 2%, below brokers’

forecasts. Sales in France were flat and B&Q looks weak. A p/e of 16 is too expensive. Sell. Investors Chronicle

372p

421.5p/267p

Hilton Food Group (HFG) Food producers

Hilton has signed a new deal with Tesco and supplies it with half of its red meat. However, its western European

markets are seeing tough trading, leaving the shares high enough for now on a p/e of 18. The Times

429.75p

450p/257p

Polar Capital (POLR) Aim

Over the past 12 months, shares in the fund manager have performed strongly, thanks to its focus on Japan and

the strength of Abenomics. But this run is unlikely to continue. Long-time investors should take profits. The Times

497p

517p/201p

Tesco (TSCO) Food & drug retailers

Sales are continuing to fall at the ailing supermarket giant. The management seems wedded to its relatively high

profit margins at the expense of market share and the purchase of Giraffe is a distraction. The Daily Telegraph

340p

388p/325p

NEWTON’S FINEST INCOME PERFORMERS. TOGETHER IN ONE FUND.

The value of investments can fall as well as rise so you may get back less than you originally invested. You should read the Prospectus and Key Investor Information Document (KIID) for each fund in which you want to invest. The Prospectus and KIID can be found at www.bnymellonam.co.uk. This is not intended as investment advice. To help us continually improve our service and in

the interest of security, we may monitor and/or record your telephone calls with us. This document is issued in the UK by BNY Mellon Asset Management International Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Conduct Authority. CP11043-17-12-2013(3M) 22085 10/13

www.bnymellonam.co.uk 0800 614 330

Newton Managed Income Fund

22085 MW Managed Inc DPS Strip 10-13.indd 1 04/10/2013 11:29

Industrials

Utilitie

s

Financials

Technology

Consumer goods

Basic m

aterials

Telecoms

23.5

8

21.6

2

17.5

3

8.0

7

14.5

7

4.9

7

4.4

8

The Dax by sector% 25

20

15

10

5

0


last word

It’s the worst economic system, except for all the others

Uh oh. First the Pope. Now the President. Hot on the heels of the pontiff warning us to beware “the tyranny of capitalism”, Barack Obama now thinks that income inequality

will divert the public’s attention from ObamaCare. USA Today has the story:

“President Obama sought to revive the issue of growing income inequality on Wednesday, saying it restricts economic mobility and threatens to shrink the middle class. ‘I believe this is the defining challenge of our time,’ Obama said in a speech at an event hosted by the Centre for American Progress, a pro-Obama think tank. ‘It drives everything I do in this office.’

“The growing gap between rich and poor can be closed by actions ranging from an increase in the minimum wage to better education to following through on his health care plan, Obama said. [He] also again proposed the creation of government-assisted ‘Promise Zones’ in urban and rural areas that are struggling. Obama said the average chief executive now makes 273 times the income of the average worker.”

Where did he get that number? Out of the hat, we suppose, along with the rest of his ideas. In our company, the CEO makes maybe about ten times as much as the average employee. We’d be surprised if it were much different in other small businesses.

Let’s see, the average worker makes about $40,000. So 273 times that is $10,970,000. We’ve met some good CEOs… but never one who was worth $10 million a year. Not even close. Who would pay a CEO that kind of money? Only a public company with cronies on the compensation committee and shareholders who aren’t paying attention!

Is Obama right? Is there something wrong with one person making a lot more than another? Is redistributing wealth from the person who earned it to the person who didn’t the “defining challenge of our time”? If so, can you control the outcome of a free market… and still have a free market?

But then, who cares? The trouble with free markets is that they don’t necessarily deliver the results you want. As far as material success is concerned, nothing can beat the free enterprise system – the freer the better.

No economist has ever put forward a serious proposal for making it more productive. No improvement has ever been forced upon it. No rival system has ever raced ahead of it.

But the improvers talk about ‘fairness’ or ‘the social consequences’ of it... or the ‘political environment’ in which an economy operates. They say there’s a ‘trade-off’ between the ideal of free

markets... and a fair, democratic society. That’s what seems to stick in Obama’s craw... that the trade-off has gotten out of balance. Markets are too free, he believes; they deliver outcomes that voters don’t like.

“It’s either money or control,” says a friend of ours. “You get money by giving up control... and letting markets work.

“But you, personally, don’t necessarily get what you want. And if you try to control an outcome, it’s gonna cost you.”

Rich people want to control things because they want to protect what they have. Poor people want to control things because they want more of what other people have.

Nobody – save a few philosophers and wing-nut economists – is willing to let the chips fall where they may.

“It’s all a matter of envy,” continues our friend. “And greed. Everybody wants what he can’t get honestly. He turns to the government to get it.” And then he changes his tune. Instead of talking about what he wants, he refers to what he says would be “best for the society” or what would “help the economy”.

What we all want is an economy that delivers our own version of ‘fairness’, which almost always involves more for us and less for everybody else. It’s an economy that is so finely controlled that what we do no longer determines what we get. We can step on all the rakes we want; never will the handle come up and hit us in the face. Instead, everything is under control. We get outcomes that are the result neither of choice nor chance, but crony connections and the master plan.

In short, we all want to live in North Korea – until we actually see the place.

To read Bill’s daily thoughts, sign up to the Daily Reckoning free email at www.morefrombill.co.uk.

Pontificating about capitalism

©G

etty

Imag

es

We all want to live there till we see it

“Nobody – save a few philosophers and wing-nut economists – is willing to let the chips fall where they may”

2012

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