Wednesday, 2 July 2014

Don't press that button without thinking . . . getting in early and not getting into the wrong investment for a dumb reason

Email is the most dangerous and effect weapon any executive has in their arsenal of management tools. It makes us lazy and isolated from the realities of the world around us, but simultaneously allows managers to feel directly in control. For years now I've been following the criminal case(s) against various News Corp executives in relation to tapping mobile phones in the UK and the thing that struck me most was the cavalier attitude to email for communicating crucial decisions. Leaving aside the legalities of the case(s) I wondered what course things may have taken without the ability to "point and click" approvals while running between meetings? Acting decicively is not always a function of time, it's a combination of being able to quickly summon the necessary facts within a clear framework of compliance to company goals, policies and legalities.

Email is therefore ripe for some kind of rethink. In the UK and for that matter many other jurisdictions banks are required to keep all electronic communications for 7 years. The decision you make as a mid-level executive can haunt you for quite a long time and as such maybe we need a new model to protect ourselves as much as to protect your company. The easiest thing you can do today is to set a "rule" in your email preferences to delay actually sending emails for (say) 2 minutes from the time you press send. That gives a crucial period in which to reassess what you've written and stop it from leaving your local device and hitting the servers wherever they may be. Just a thought.

This week I'll be attending yet another pre-IPO lunch at local investment bank BBY. The theme remains the same, so it will be another group of tech type business looking to disrupt the old world with some fresh thinking:
  • GoFar - automotive and insurance sector
  • Open Learning - education sector (relevant to the announced 3P IPO)
  • SocietyOne - banks and financials
  • Zed Technologies - healthcare sector
I honestly haven't looked much into these and of course will adopt my usual practice of being early to the meeting in the hope of getting a march on the crowd. One thing I've been noticing is the lack of interest some of the bigger pension funds have in these type of events. I guess it's hard for the big pension funds to run a start-ups sub-fund without incurring costs out of proportion to the size of the investments in stage one of any such business. Instead they probably remain content to go in via various venture capital funds. This seems to me to limit their potential. This sub-contracting of function is dangerous in the e-commerce world we currently live in. I bet the same fund managers whinged about the valuations of Linkedin, Facebook etc., because they had no "touch" with the incredible growth rates of these businesses until they were mustered into a meeting room to be one of the many, rather than one of the few and delivered an ultimatium of either invest or get risk missing out.

When the then Union Bank of Switzerland took over merchant bank Phillips & Drew in 1986 they acquired a very successful funds management business. By the late 90's Chief Investment Officer Tony Dye was a well known figure within the business pages of various financial journals. Mr Dye was referred to as Doctor Doom (one of the many to hold that moniker over the years) because of his famous scepticism in respect of growth stocks and the sub-sector of tech stocks in particular. Essentially Dye believed tech stocks valuations defied logic. In doing so the P&D funds under his control seriously lagged their peer groups and as such shrank from £60bn to less than £35bn over the years before the tech bubble burst in 2000. Unfortunately for Dye he had been removed from his position before seeing himself justified in his stance. My point for investors and investment professionals is that things change very quickly and those organisations who dogmatically hide their heads in the sand and refuse to confront such changes will suffer the consequences. Dye was right in 2000, but a decade on was still wrong and although one can envy the schadenfreude of the moment the case points more to the flaws in P&D's management structure as much as to Dye's single mindedness.

This blog has pointed out more than once the prevailing scepticism that many international investors have in respect of Aussie banks. Maybe there's a moment of Tony Dye schadenfreude out there for the bears that have constantly tried to pick the turning point in the relentless rise of the four Aussie behemoths. Lately there's been a crack in the business model of at least one of the big four. The Commonwealth Bank of Australia (CBA) has lately come under the microscope by behaviour of some its financial advisors who directed certain client funds to higher commission paying CBA products rather than choosing a best in class type solution. The investigations are ongoing, but certainly some investors used to seeing little compliance problems at the Aussie four were quick to jump on the potential for new regulation to eat away at the seemingly endless stream of record profits by the banks. The Murray Review (to be released 15 July) will make recommendations that may weaken the position of the majors and this might cause a rerating in valuations. Investors should remain vigilant, but this blog continues to believe without interest rate rises and a complete change in government policy that the Aussie Banks are perhaps moderately over priced, but no free ride for short sellers. I wonder what Tony Dye thinks?

The Crown Estate (CE) is the GBP 8bn property fund held by the UK government on behalf of the royal family. The profits of the fund get returned to the exchequer and the Queen gets the civil list and fringe benefits for her family. The reason I mention this is is because last week the CE reported a fairly impressive set of figures and in doing so confirmed what this blog has been saying about the London property market for some time. In the UK tax year ending March 2014 the CE recorded a profit of £267m, which was up 5.7% year on year. The total value of its assets increased to £9.9bn. Rents are growing and vacancies are down. As a company and a quasi-sovereign wealth fund there's a lot to like about the way management has been handling things. In particular since 2011 there's been several deals with select outside investors including a sale of a minority stake in Regent Street to the Norwegians and the 2013 partnership with the Ontario Municipal Employees Retirement System on a 270,000 sq ft development in St James’s, worth around GBP320m. The CE isn't allowed to take on debt, so it's hard for them to get the leveraged returns you see elsewhere in the sector. Investors into the UK property market getting in now have missed the easy returns, especially if you are non-GBP based as not only have market cap rates rerated, but so to has Sterling. Watch Spain and southern Europe for better opportunities while they last.

Property can easily get overrated. A great example came to me this week via twitter. Apparently our good friends at KKR are eyeing the yields in the South Korean capital.

This is a great lesson for those investors who apply the simple logic of spread over government bonds. In the case of Seoul the uninitiated looks at this chart and thinks how can prime property trade at such a carry over government debt? The same person then starts doing a similar chart of various Asian and later world cities. Here's the problem . . . In Seoul you're sitting basically an artillery shell's  shot from one of the maddest men on earth. One bad day for the North Korean leader could easily wipe out your whole investment and make you understand why there's a yield pick-up. The same is the case in Japan. Tokyo sits on one of the most active fault lines in the world. One earthquake and those 50bps that you bet your career on are going to look pretty paltry in comparison to your lost capital. Additionally buildings in Tokyo are constantly upgraded or replaced to lessen the impact of "the big one". Thats why I used to get frustrated at conferences and company meetings when the real estate guys from NY, London or Sydney sent over a relative junior who spent most of their time ear-bashing you on the golden opportunities based on the spreads in Seoul or Tokyo narrowing to the same level as NYC. Some investors are best off sticking to what they know and can see from their own office.

We've finally reached that time of year when Europe goes on vacation. It's a time when France's RN7 autoroute will be bumper to bumper and earnings for the toll companies should see a nice bounce. It's also the time of year that we get to see the start of the Tour de France.

The great race begins this year in the UK and I'm tipping it to be the most wide open race in quite a few years. I wish that Wiggins was riding for Sky along with Froome so we could also get a La Monde - Hinault type situation developing, but it should still be pretty good watching Sky try and see off Contador and a raft of others.


I'm tipping Contador because it seems to me that Saxo-Tinkoff finally has a team to support the Spaniard.

As I'm in Australia I'm more concerned about winter riding than the latest in summer cycling clothing being pushed at me through the usual marketing devices. This week I made a effort to get out the winter training wheels as the costal winds have picket up here and I'm getting a bit concerned about the way I've been getting blown sideways as a result of my deeper rimmed Mavics and Campagnolo Boras. My trusty Pinarello Dogma 60.1 has also been dusted off in anticipation of the usual rain and slop that Sydney is likely to se between now and September. When you haven't ridden a bike for a while I highly recommend you give it a full check and even do a wash and re-lube. The Pinarello has been off the road for a few months and given I'd last been on it during the rains earlier in the year here I wasn't surprise to sense something amiss in the headset.

I had a go at taking it apart myself, which is a firs for me with this particular bike as it's always been rock solid and low maintenance. I removed the top cap, spacers etc., but had a lot of trouble getting the fork out. At one stage I used a rubber mallet to try and loosen it, but to no avail. Discretion being the better part of valour I retreated to the safety of the team at Cheeky Monkey and got Joe to do the job. Interestingly the setup on these bikes is very tight and the bearings are of a proprietary specification and can often mean its hard to get things out for a service. Joe tells me the top bearing was the culprit and he replaced it and cleaned things out appropriately. I'm confident of doing the job on the Cannondale and my BMC, but next time will try and do the Pinarello myself . . . mind you for AUD 60 it wasn't the most expensive trip I ever took to the bike shop.



  1. Given that Australian bank equities are effectively being priced as the most junior credit instruments in the capital structure (ie they are treated as income producing assets for many investors) then shouldn't it be such that their relative value should now be assessed against corporate bond spreads and maybe even government bond yields ?

    When the investment community collectively realises that they are effectively the first loss instrument in the capital structure the moves will be most dramatic and violent in my opinion. Without wanting to sound twee, Washington Mutual was reporting earnings growth in 2007 and analysts were almost universally bullish on dividend growth.

    They may not be shorts right now, but I would posit that if credit spreads or asset property values waver, the highly, highly leveraged nature of their dividends will be forgotten quickly

  2. Couldn't agree more with what I think you're saying. Take for instance the replacement tier 1 capital co-contigency preference shares/bonds. These are being priced as a bank deposit replacement instrument, but in an emergency are actually rated equally with the common shares because the regulator can convert these into shares to bolster the bank's capital. The effect of this barrier option (or contingency option to be more correct) is in fact not priced in by the market to my knowledge. In fact during a recent job interview when I mentioned this the executive in question commented that "perhaps you're right, but your average client advisor just doesn't have the skill to properly assess this". Of course in the long run the banks themselves are perfectly legitimate sources of income streams and as I said in the blog remain so until their fundamental model is challenged either by higher borrowing rates or by a radical change in government policy. In the case of the latter I'd suggest neither political parties, nor the public at large has the stomach to break up the structure. Therefore investors have far less to worry about than say someone relying on the ECB, Fed or BoE. Please feel free to contact me directly by Linkedin or other media to discuss more fully.