Investment Management
Quarter 2 2017
Faking It
The number of fake £1 coins currently in circulation in
Britain is estimated to be as high as one in ten. Even
the Royal Mint’s own modest estimates of one in
thirty implies around £50 million of fake coins doing
the rounds. Making counterfeit £1 coins is such good
business that the UK Treasury has commissioned a
new, more secure coin with 12 sides and
counterfeit-proof features to outfox the criminals. The
old coin will be retired in October later this year and
will thereafter be useless except for unlocking
shopping trollies and the like.
New counterfeit notes and coins arrive on the scene almost at the
same time as the real thing. They are typically indistinguishable to
the casual user – when was the last time you closely examined a
£1 coin? Forgery is an age-old business and covers a huge range
of valuables from paintings to jewellery, musical instruments and
books, as well as, inevitably, financial crime.
These days, of course, such fakery also includes news. Not the
originally-sourced material from the likes of the BBC but fake
news generated by idle or mischievous gossip, published and
subsequently distorted on newsfeeds such as Facebook and
Twitter, to lend credibility. Distortion of this kind, blurring fact with
fiction, has been going on for years and certainly long before
electronic information could be sent out to millions of readers
with the click of a button. The infamous (and probably fictional)
message from a British army unit in World War 1 to ‘Send
reinforcements, we’re going to advance’, subsequently reported
as ‘Send Three and Fourpence, we’re going to a dance’, confirms
a long history of misinformation in society, deliberate or
otherwise.
In his critically acclaimed work ‘Sapiens’, a study of human
evolution, Dr Yuval Noah Harari concludes that we rose to the top
of the food chain many thousands of years ago firstly because the
suppleness of our language evolved as a means of
communicating warnings (‘Careful, a lion!’) but subsequently as a
way of gossiping about other people. In other words, using our
imagination to make things up about each other rather than being
technically inventive (although our ancestors were that too).
Although rumours and counter-rumours (i.e. gossip) still play their
part in the movement of global markets, past financial scandals
mean that company announcements are tightly regulated and
intensely scrutinised before being released into the market.
Stock-specific news, therefore, especially for companies quoted
on major exchanges tend to be dry and factual. Black and white.
No gossip at all. And most certainly not fake.
+44 (0) 1624 681250
[email protected]
Whilst analysts and financial journalists can add a little colour to
the facts (they too must be very careful with what they report),
often the real story behind the numbers can best be determined
at the company’s own results presentations when investors can
put questions to the board and hear and see how they respond
at first hand. The insight which we get as professional
investment managers from being present at events of this
nature is intangible yet hugely invaluable.
Body language, therefore, still counts for a lot. It explains why
video-conferencing or webinars have never really replaced
face-to-face meetings and provides solace for those who think
that we are in imminent danger of being replaced entirely by
robots (as I write this, the latest self-driving car has crashed
again, so we’re not there yet, even though it was allegedly the
other - human - driver’s fault).
Despite the inexorable march of robo-advisers, index-tracking
funds and the like, the human element of investment
management is still crucially important. Perhaps less so when
markets are in an upswing and everyone is making money. But
when markets turn sour, when wealth is evaporating and when it
becomes harder to distinguish between real news and fake
news, then the ability to speak to the people who pick the
stocks, manage the portfolio and have seen it all before, has
intangible benefits well beyond the skillset of robots. You may
even get them to gossip a bit too! We’re all human, after all.
Russell Collister
INVESTMENT DIRECTOR - APRIL 2017
www.fimcapital.co.im
FIM Capital Limited. Licensed by the Isle of Man Financial Services Authority and authorised and regulated by the Financial Conduct Authority.
Quarter 2 2017
Going Wild in the Country
“I don’t need no hamburgers, no take-away, no bake
and take, no strawberry milkshake. I wanna picnic.
I’m sick – sick of seeing signs to eat, walking down
these dark lonely streets.”
(“Go Wild in the Country”, Bow Wow Wow, 1982)
Driving along a few weeks ago to the squealing of singer,
Anabella Lwin, as she went decidedly “wild in the
country”, I was transported momentarily back to my
teenage years. Oh, those carefree, slightly awkward
mid-80s when we wanted to save the whales and
pandas, wore lots of mascara (even the blokes) and
stonewashed denim from head to toe. As the nostalgia
cleared, I reflected on the fact that her perfunctory
demands were perhaps representational of what
“Generation X” investment managers (born between
1965 and 1976) and “Baby Boomer II” investment
managers (1955 to 1965, you know who you are)
describe as the “Millennials”, or “Generation Y” (born
between 1977 and 1995).
Reading stock research, one can conclude that the (largely
“Generation X”) authors of such pieces are increasingly
afraid of the Millennials because of the sentiments
expressed by Ms. Lwin. Concentrated in big cities and
towns, there is no urge to pass a driving test or watch TV
(they “stream” instead) and they don’t want “bake and
take” anymore, slurping down a daily detox kale and agave
concoction before jogging or cycling to their “hot-desk” with
a backpack of smart-casuals and a box of quinoa salad,
logging their lives on Snapchat with no time for golf. After
three crises in recent memory (Asia 1998-99, Dot.com
2000-2003 and the Great Financial Crisis of 2008) there is
less desire to follow the path of traditional Capitalism (i.e.
getting a job in The City, investing in “real” stocks and shares
to ensure that capital is correctly allocated). They might
choose instead to develop a trendy app-based platform, or
worse; create algorithms for value-destructive high-frequency
traders, vaping their stress away at a restaurant table booked
via OpenTable, summoning Uber for the journey home.
Reading this, our own “Millennial” investment manager,
Michael Craine, will probably tell me that I am already being
nostalgic and that life has moved on.
Some companies have grasped this concept quicker than
others. The nimble capitalise on trends which rise and fall
quickly while the slowpokes rest on their laurels, relying on
the short attention-span of Homo Sapiens. Why risk their
CEO pay rise? Why risk the reputation of a 100-plus
year-old company, even if it is dying in its own pool of
obsolescence? The truth hurts. Trends lasting generations
become subject to normalcy bias, a mental state adopted
by individuals facing potential disaster or decline, making a
comfy assumption that, as things have not changed during
their lifetime, this is “normality”. In fact, it might just be a
very long-term trend…something a tree would be able to tell
you if it could speak, but this is not Middle-Earth. Falling
into this category are traditional forms of media (TV, books
and magazines), fast and convenience food (desperately
Millennials, please look where you’re going.
seeking reinvention), petrol-driven automobiles (pesky
things that get in the way of bicycles) and dwindling
revenues from North Sea Oil, a trend Nicola Sturgeon
chooses to ignore.
Another generation, categorised (rather condescendingly)
as the “Silent Generation” (born between 1928-1945) is
only “silent” due to a few factors. Firstly, having experienced
post-War austerity, they do not exclaim their every grievance
or “invasion of personal space” on social media. Secondly,
they are quietly seething about the systematic destruction
of wealth via taxation, inflation, financial repression and
social opprobium; grannies being “eased” (a sneaky
euphemism if ever there was one) out of their large town
houses to make room for generations X, Y, Z etc.) More
alarmingly, this generation, along with the second wave of
Baby Boomers (constituting approximately 30% of the UK’s
population) are silent due to “normalcy” bias. They don’t
expect leftist politics to prevail in Europe because there are
too many vested interests in Capitalism, but this view is still
being eroded. They expect bank shares to return to glory,
rather than becoming what journalist Merryn Somerset
Webb once described as “endowment” stocks (facing
eternal decline) as payment and custody systems are
sacrificed in a mad dash to establish contactless payment
synergies with large credit card companies and transaction
platforms like Apple Pay and Google Wallet. With deposit
accounts offering nothing, Millennials are increasingly
funnelling savings into cyber wealth platforms; neither time
nor effort required. In this low-cost “chillaxed” sort of world
where we can all just “go wild in the country”, I hate to be a
spoilsport, but nothing valuable is ever free, gratis or for
nothing. Hard graft, diligence and accountability no longer
have currency in today’s world but my dusty old “Generation
X” instinct tells me that a revaluation is overdue.
Mary Tait
INVESTMENT DIRECTOR
Fitness & Filters
In January, I decided to enter my first Trailquest, a
challenge which is to mountain biking what orienteering is
to fell-running. Despite being allowed plenty of time at the
start to plan the best route to reach the most checkpoints
and achieve the highest score, it didn't prevent my
partner and I from making some pretty amateur mistakes
throughout the event. Deciding to alter our pre-planned
route in favour of a “shortcut” was the first, while the
second was to overestimate our ability, neglecting to
account for the time required to get back to headquarters
before suffering a penalty. The five hours spent riding
awarded us a score which matched what Russell Collister
achieved in just two thirds of the time (fortunately he's a
modest winner).
I'd like to say that this performance was not entirely
indicative of our riding ability, as hindsight has since made
me realise that someone's fitness level and familiarity with
the terrain is irrelevant if they are just going to make things
up as they go along (the “shortcut” I mentioned earlier was
a hill which probably added about thirty minutes to the trek,
gaining us no points).
This is seen quite often in the business world. When
companies are struggling, it isn't always down to the
product on offer, but can instead be due to the
management's lack of experience in the allocation of
sufficient resources to run a lucrative business. Melrose
Industries' business model exploits this trend by acquiring
out-of-favour companies, making them better, and selling
them on for profit, achieved by fine-tuning how the company
in question operates.
Snap Inc.'s recent IPO attracted a lot of media attention
following its decision to offer only non-voting shares, while
additional concerns were focussed on the fact that the
features of its main product offering, Snapchat, can be
replicated quite easily by larger rivals such as Facebook and
Instagram. For those unaware, Snapchat is a free-download
messaging app whose main attraction is its ability to send
photos which are deleted from existence immediately after
viewing, whilst its “Stories” feature offers a way for users to
temporarily share their day-to-day activities with the world in
the form of short videos that exist for just 24 hours (perhaps
President Trump will use this if he ever tires of Twitter!).
While it has thus far been unable to unlock the secret of
turning a profit, Snap Inc. can at least take sole
responsibility for the rise of “selfies”, with virtual dog
features covering the photographer's face, while also
offering another channel through which people can share
pictures of their food with the world (I'm guilty of this last
one, sadly).
A few years ago, I remember being told that if I took the
$300 needed to buy the first iPod in 2001 and instead
spent that money on Apple Inc.’s shares, they would have
been worth more than $20,000 by 2012. From a
consumer's perspective, what made the iPhone so
attractive was the fact that things just worked as they were
supposed to. Unfortunately, it is not something that I could
always say about competing products from brands which
“Michael, this is what a $26bn company can do for you!”
claim to have more advanced technology and better
software. Apple’s user-friendly operating system and
attention-grabbing marketing decisions over the years
meant that its products were able to fly off the shelves.
More recently, however, I find myself getting a little
confused by Apple’s choices and can't help but feel that it
has become a little careless. The notion that you need a
new (and expensive) adapter to connect the newest iPhone
to the newest MacBook Pro is not exactly the kind of
development you'd expect from a company whose designer,
Sir Jonathan Ive, was so influential that he was knighted for
his efforts.
My criticism of Apple is purely from the perspective of a
potential consumer, but with the shares as high as they
have ever been, it does go to show that even the best of us
are able to make silly mistakes. In the same way that our
Trailquest score was not reflective of our ability to ride a
bike, it would be unfair to say that the criticism directed at
Snap Inc. is an accurate reflection of Snapchat's quality.
Nevertheless, without achieving some form of profit, that
quality is wasted. Perhaps management could take
inspiration from my friend and I, who returned for a second
Trailquest with more thorough planning. We completed the
event error-free and successfully claimed gloating rights
from Russell with a much higher score (I'll subtly leave out
.the part where he didn't enter).
Michael Craine
JUNIOR INVESTMENT MANAGER
Quarter 2 2017
Turkey Necks and A Ticking Off
I know when I am late for work when when Mary is already
grabbing a second coffee, but there was one occasion when
it was only partly due to traffic. While shaving, I noticed that
my neck was changing. Age takes its toll and I wondered if I
would develop a turkey neck, or a zebu’s dewlap and which
goes best with baldness. This triggered a thought process
and the subsequent delay. Reflecting on life, I then wondered
if men my age constantly did the wrong thing in their
spouse’s eyes, replacing parents when pointing out the
errors of one’s ways. Perhaps it’s because most of us
eventually rebel (for me, this meant using a serviette instead
of my leg, and, dare I confess, a separate spoon for
marmalade, really showing my age). According to recent
research just 1 in 10 households with children have a jar of
marmalade in the house, as it’s typically eaten by the
over-50s. Evidently, Millennials struggle with “shreds”;
perhaps they hinder ability to use an iPhone while eating
toast?
In terms of scoldings, Henry the clock fixer, rather than my
wife, wins by a good length. Having wound a clock too
aggressively (as I perhaps do to my wife, resulting in
numerous tickings-off), when I visited Henry to collect it,
he told me off for buying rubbish 20 years ago. He
nevertheless pointed me in the direction of a pocket watch
he had restored, which was made on the Isle of Man. In my
attempt to see it working, it broke. My heart stopped,
knowing instantly that Henry would not be pleased when it
was presented for fixing - another ticking off.
Eventually I bought another watch (no doubt the wrong one
in Henry’s eyes; I know what he will say) but driving home,
it dawned on me that in 50 years the only thing likely to
avoid landfill or the scrap heap (including me) was this
watch, as it keeps perfect time, cost less than a year’s
road tax and is over 100 years old. What do I ever buy with
long-term value? This made me appreciate how wasteful I
am. If there are 64 million like-minded people across the
UK, then this presents a problem. We have truly lost sight
of the term “sustainability” but even this classification is
false, typically used to justify consumption. Take one of our
favoured stocks, such as Whitbread, the owner of Costa
Coffee. It serves 600 cups of coffee every minute in the UK
alone and wants to double sales, resulting in 1,200 empty
disposable coffee cups per minute heading for the
dump…but that’s okay, because it supports recycling and
all the coffee comes from sustainable sources. How can
that be good, if where it was grown used to be rainforest
and the farmers growing it now drive around in Ford
pickups, building western-style, consumption driven
communities soon to be riddled with diabetes? Am I
missing something here?
Historically, societies adapted to frequent shortages due to
war, crop failure or bad weather, making ends meet and
not replacing until something was beyond repair. Fashion,
targeted marketing, peer pressure and higher disposable
income mean that we are too quick to dump something
Mary and Michael Tait bring a new meaning to “Trashy TV”
(Beach Buddies IOM, Marine Drive, 2015). One of approximately
20 TVs dumped on this stretch of the Island’s beautiful coastline.
which is unbroken but feel good if it is recycled. There is
often no consideration as to what happens next, how long
it may burden society or whose problem it is now. Ironically
it is us, via environmental taxes and health spending,
which are rising relentlessly to atone for the trail of
destruction we leave in our wake. What happens when the
entire world’s population has a western lifestyle? Already
oceans are awash with plastic while in cities like London,
over 9,500 people die each year from pollution. This really
sinks home when one considers that everything
transported is eventually destined for landfill or the sewer;
only a small proportion recycled. Recycling will never be
anything more than a token gesture, a source of jobs and
revenues, falling short of the volumes required to prevent
marketing and consumerism from destroying all we have.
Society cannot function without economic growth to
generate tax and income, funding welfare and health.
Unfortunately, it will never be enough and we will
eventually be suffocated by the consequences. When
recently asked if I could improve the green credentials of a
portfolio, I sadly admitted that it would be easy to do so
but very difficult to make any money. Attitudes will
eventually change but not until politicians change priorities
and profits or financial wealth are no longer the measure
of success across society. I therefore can’t help but come
back to the same point I made in our last Investment
Briefing; that we all need to be thinking more like
custodians in every aspect of our life, not just our
investments.
Paul Crocker
INVESTMENT DIRECTOR
Investment Management Briefing Editor: Mary Tait, Investment Director
Russell Collister
Investment Director
+44 (0) 1624 604700
[email protected]
Paul Crocker
Investment Director
+44 (0) 1624 604701
[email protected]
Mary Tait
Investment Director
+44 (0) 1624 604702
[email protected]
Michael Craine
Junior Investment Manager
+44 (0) 1624 604704
[email protected]
Barbara Rhodes
Head of Settlements
+44 (0) 1624 604712
[email protected]