Obtaining market access is very straightforward and just involves opened a brokerage account, the procedure for which is roughly analogous to opening a bank account. Without a brokerage account, access to financial markets will only be available via an intermediary. Most intermediaries whether in banks or IFAs, are commission based which in my mind often leads to a conflict of interest. In particular, the sales person is only likely to suggest products for which they receive a sales commission, ignoring all other available options. Hence, listed collective products such as investment trusts and ETFs (Exchange Traded Funds), which typically have lower internal charges than unit trusts, will generally not be suggested by commission based IFAs and bank representatives.

From a very young age, I have always had an interested in finance, and since my student days have invested directly in stock markets. To this day, I have been continually educating myself via books, web sites and private conservations, on the workings of markets. This investment in my education turned out to be the best investment I ever made and I strongly recommend such an investment to others. In particular, if you do not feel comfortable buying financial products directly then why not invest in your own education and investigate further such topics as how brokerage accounts work, the mechanics of the stock market and available listed collective investment products such as ETFs and investment trusts.

After reading up, if you a still wish to use the services of a commission based financial advisor having a basic knowledge of the products available will put you in a much stronger position when judging the suitability of the products suggested to you. Please note that the financial advisory business is rife with conflicts of interest. In the UK, the FSA has tried to address this situation and now requires IFAs to disclose to customers the commissions paid on financial products purchased. They recently took a step back by scrapped the IDD Menu requirement, which required disclosure on commissions of similar products allowing the customer to transparently compare commissions. In the Isle of Man, the situation is much worse in that there is no requirement on intermediaries to disclose the commissions paid on financial products sold. So please take care.

Explanatory Notres on IDD Menu

IDD Menu is short for “initial disclosure documents (IDD) and the Menu of commission and other charges”. The IDD Menu requirement is an attempt by the FSA to implement parts of the Markets in Financial Instruments Directive (MiFID) which is due for implementation in November 2007. MiFID is new European wide legislation for financial products and services, from which it is hoped that a single European wide market for financial products will start to form.tramadol testing drug from
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This month the aptly named “Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund” fell into difficulty after losing 23 per cent of its value in the first four months of the year. A fire sale of assets was adverted when Bear Stearns offered to place its own capital on the line to support the fund. These events illustrated that there is no liquidity for this type of Asset Backed Securities and Collateralized Debt Obligations (CDOs) during market stress. Even with numerous other hedge funds, holding similar assets in this instance there were few buyers at prices close to the assets face value. Lombard Street Research said, “We heard buyers were lobbing bids at just 30% [of face value].” Hence, the liquidity assumptions embedded within the pricing and risk management models of such assets are questionable to say the least.

Collateralized Debt Obligations (CDOs) are similar in structure to split-cap investment trusts where differing ‘tranches’ having different rights over the underlying assets. With CDOs, you typical start with a portfolio of mortgage-backed securities, which roughly speaking are pools of similar mortgages, and other loans. The first tranche of the CDO will typically own 5 percent of the portfolio and absorb the first 5 percent of the default loses. The second tranche will own 10 per cent of the portfolio and absorb the next 10 per cent of loses. The third tranche will own 10 per cent of the portfolio and absorb the next 10 percent of loses, and the fourth tranche will own 75 percent of the portfolio and absorbs the residual default loses. The fourth tranche will usually receive a triple A rating by rating agencies and pay a yield corresponding to similarly rated high-grade bonds or highly covered split-cap investment trust zeros.

In a typical CDO transaction, the bank who arranges the loans will retain the first tranche and a very high proportion of the default risk, and sell on the other tranches transferring only the extreme losses to other market participants. The size and yield of the first tranches is largely driven by the average default probability of the securitized assets. These default probabilities in the Bear Sterns case and across the US mortgage backed securities sector appears to have been greatly underestimated. Re-pricing these assets with respect to higher default probabilities, which now seems inevitable, will lead to a mark down of all similar instruments leading to large paper loses.

Web resource:

Queen’s Walk Investment Limited is a LSE listed closed-end fund which invests within the CDO market. Their web site (http://www.queenswalkinv.com/) contains presentations and reports detailing how the fall out from the mortgage markets during Q1 2007 has affected their portfolio.

The report stated, “World oil consumption rose by just under 650K barrels/day, about half the 10-year average. OECD consumption fell by 400K barrels/day, the biggest decline since 1983. Oil consumption growth was above average in China and oil-exporting countries.”

BP also lowered its estimate of world proven oil reserves, for the first time in more than a decade, with proven reserves equating to 40 years of consumption at present rates. Data reveled that 75 per cent of oil producing fields are more than 20 years old, offering support to the peak oil theory.

US Gulf Coast refining margins averaged 13 USD per barrel during 2006, more than three times to average between 1996 and 2004. Refinery utilization rates where 89 per cent comparable with the average 92 per cent utilization rates, from 1996 to 2005. The persistent high prices of petroleum imply a refinery capacity bottleneck. With is not surprising once you observe that the US has not built a refinery for more than 20 years.

This week I met up with Cato Brahde, Managing Director of Tufton Oceanic who manages from Douglas more that 1.3B USD within hedge funds focusing on the energy, shipping and oil service sectors. With more than 18 year’s experience of deploying capital within the energy sector Cato has developed a comprehensive and consistent framework for analyzing the industries various supply and demand characteristics using public and proprietary data. Cato following the BP report commented that, “The energy universe is still at the beginning of a long upturn; oil demand is increasing as the world industrialises, and if China is to continue on its current trend of development it will reach the kind of per capita oil consumption in 25 years time that South Korean enjoys today. This would lead to a near doubling of the world’s oil consumption by 2030.”

He continued, “Given the lack of cheaply available supplies, this kind of growth is simply not possible today, and it will be a major challenge for the world economy to replace the aging oil fields currently being depleted and at the same time cater for Asian demand growth. The portion of the world’s GDP which will need to be allocated to meet its energy needs to increase dramatically and there is little risk of general investors becoming over allocated in energy in the foreseeable future.”

Web resource:
The BP Statistical Review of World Energy 2007 is available at:

http://www.bp.com/productlanding.do?contentId=7033471

Over the past two weeks global equity and bond markets have been over shadowed by a marked and abrupt shift in the level and shape of the US yield curve. The benchmark ten year US Treasury bond has moved from a yield of 4.6 percent, to over 5.25 per cent. With the yield curve evolving from being ‘flat’ and pricing in a cut in US interest rates in the next year, to being ‘normal’ where further interest rate increases are deemed possible than an imminent cut be been completely discounted. Quantitatively driven relative trading strategies ensured that this shift in the USD curve dragged the Uk Gilt and Euro curve higher resulting in immediate loses for global bond portfolios, with an associated sell-off in global equity markets where the DOW has fallen more than 3 per cent from its recent peak.

Higher interest rates will undoubtedly squeeze the real estate sector, reduce the prices offered in private equity buy-outs and ultimately act as a drag on corporate profitability. Pension fund so called liability matching could also see further selling of bonds, as higher yields equates to less bond holdings needed to ensure a given future cash flow. Market prices reflected these developments with obviously targets such as UK mortgage lenders Bradford and Bingley and HBOS in the UK; and house builders and REITs in the US being hardest hit. Regulated utilities where also marked lower as bonds became a more competitive source of stable cash flows.

However you slice it, higher interest rates are not good for equities. One would prefer such moves to result from stronger than expected growth as opposed to inflation expectations, but I for one are not sure that this in the case.

Web Resources:
GBP/USD Yield Curves: http://www.yieldcurve.com/marketyieldcurve.asp
Dow vs USD Yield Curve: http://stockcharts.com/charts/YieldCurve.html
LIBOR/Swap Rates: http://www.swaprates.co.uk

Dividend investing candidates within the FTSE 100, display some or all of the following characteristics:

1. Dividend yield is at least 150 per cent of the average.
2. PE ratio at least 20 per cent less, than the average.
3. Dividend payout ratio less than 50 per cent of earnings.
4. Investment grade debt, with cash growth on the balance sheet.
5. Stable dividends going forward, backed by a predictable and sustainable business.

By systematically sifting through the FTSE 100 using, the objective criteria (1-3), will provide a manageable list. The more subjective criteria of (4) will require further detailed study of the companies through their annual reports, announcements and investor presentations. Criteria 5 demands research into not only the company but also the business environment.

In spring 2005, such analysis identified BT Group with a PE under 10, and yielding 5 per cent. Though the headline growth figures where not inspiring from 2000 to 2005, the firm had undergone a transformation at the balance sheet, valuation and shop-floor level. In 2000, BT traded on a PE of over 40, had no dividend to speak of and had debts of £30 billion. By 2005, the debt had been reduced to £10 billion, the speculative growth stock valuation requiring many “ifs” to justify had be replaced with a utility like valuation, and the firm took the bold move to turn itself into a ‘platform business’.

In 2002, the firm re-organized itself around the belief that revenue from calls where going to zero and future growth would come from services (media, broadband, corporate data service) offered over its platform. Resulting in BT building its 21st Century Network platform.

Such developments though enhancing BT’s position where not reflected in its share price until they started to feed through to the bottom line. On 26 April 2006, when this feed through was imminent I purchasing BT at 220.62p (including costs/tax), under 10 times historical earnings and 9 times my estimate of future earnings.

This position went against the consensus with City firms Bear Stearns (14 Nov 05), and Goldman Sachs (13 July 05) both subsequently downgrading BT. As Ben Graham would say, “it is the quality of your analysis that makes you right as a stock picker, not whether the market happens to agree with you”. On 8 May 2007, I sold BT at a price of 318.75p, at which point the earnings had moved forward 20 per cent, paid 6 per cent in dividends and the rating had moved forward to 13 times earnings, provided a return over the year of over 50 per cent.

Investing though certainly not implying any of the physical risks of the TT does by its very nature carry financial risk. Actively managing the downside risk against various return expectations is vital. Just as John McGuinness leaves a “safety buffer” when riding in the TT, in the words of Benjamin Graham the founder of value investing, an investor should build in a “margin of safety” when seeking investment opportunities.

A “margin of safety” in the context of value investing refers to the difference between the price a security can be purchased and its intrinsic value. Where the intrinsic value is a value assigned to a security in accordance with your analysis. Value based investors will use a variety of indicators such as the PE ratio, price-to-book, replacement value or dividend yield, in order to ascertain a securities intrinsic value. However, the application of these metrics is only a reliable approach if the metrics you base your model are at worst stable, where ideally the move in your direction.

Dividends offer such a metric and as a source of return are historically much more predictable than capital growth. Capital growth depends on the behavior of other market participants, but dividends depend solely on cash flow and company policy. Executives will generally lean on the side of caution when deciding on the dividend level to ensure that they can be reliably paid and reliably increased. The most likely reason for this is that any dividend cut generally results in senior management being relieved of their posts.

In the main dividends are reliable and consistently increased but even in the most difficult operating environments the exhibit exceptional defensive qualities. For example, in the 2000-2003 bear market when earnings collapsed, the FTSE All-Share index dropped around 50 per cent the aggregate dividend yield only dropped 7 per cent.

For these reasons, the valuation metric of dividend yield and the associated dividend investing strategy where one buys into stocks with a high and sustainable dividend yield is an approach offers a generous “margin of safety”.

Just as John McGuinness’s “safety buffer” does not prevent him from setting lap records, dividend investing with its “margin of safety” does not exclude the possibility of obtaining exceptional returns. Which leads us to next weeks column where I will detail a ‘dividend investment’ I have just exited which provided a return over the one year holding period of almost exactly 50 per cent.

http://news.bbc.co.uk/1/hi/magazine/6670313.stm

Ben Graham’s principle of “margin of safety” is detail within his text ‘The Intelligent Investor’ originally published in the 1950s, and is still in print today. The full text of ‘The Intelligent Investor’ is available online at:

http://www.investinvalue.com/0/value.php#intelligentinvestor

The Wikipedia page:

http://en.wikipedia.org/wiki/Margin_of_safety_%28financial%29

also offers further explanation of the investment principle of “margin of safety” and its application.

China’s inflation in March accelerated to 3.3 percent, above the central bank’s target of 3 percent. With the benchmark one-year deposit rate only providing a negative real return of 2.79 percent, households have rushed into the stock market. This has resulted in the benchmark CSI 300 stock market index jumping 81 percent since the start of the year leaving it trading at the lofty valuation of more than 30 times next years earnings. In short, the combination of high levels of monetary growth with limited out-lets for this money, has created a pressure cooker in financial assets in China.

The tight capital controls have also led to mainland listed A-Shares trading as much as 2.5 times higher than there Hong Kong-listed H-shares with the same nominal value and dividend payout ratios. The Chinese authorities, prompted by the US are now seeking to address such market dislocations and will soon allow Qualified domestic institutional investors to get their first taste of overseas markets. Allowing some steam out from the pressure cooker. But the political pressure is only likely to increase over such dislocations with the leader of this weeks U.S. delegation with China, Treasury Secretary Henry Paulson, said Chinese action on the Yuan — rather than market opening, anti-piracy or other areas — is the benchmark by which he would measure Beijing‘s progress.

As mentioned, the bulk of China’s rapidly growing 1,200+ B USD reserves have been invested in low yielding USD denominated Treasuries. With petro-dollar recycling this has created large pools of cheap financing which has lead to a private equity boom. This week China decided to buy into this boom by buying a 10% stake in Blackstone for 3 B USD, which is around 95% of the imminent proposed IPO price. This represents the first investment outside of fixed income securities and though this investment is not that significant in itself it does illustrate that China wishes to take active steps to increase the level of returns on its huge foreign reserves. In particular, the era of cheap financing via China must be nigh.

The present policies followed by China are encouraging rampant speculation. Only time will tell whether any resulting loses which will occur at some time will be socialized as has been the case in Western market in recent years through the ‘Greenspan put’.

One sure sign of any asset price bubble is when credit rather than fundamentals (e.g. earnings) is the main support for the prevailing price. The dot com boom (1998-2000), which lead to the dot com bust (2000-2003) was one such instance when the money supply via investors was cut-off and the fundamentals (e.g. earnings) did not support the prevailing prices. It was only when the credit was cut-off, that the risks became clear, or as Warren Buffet would say, “it is only when the tide goes out that you learn who is not wearing trunks”.

The headline “FTSE up with private equity driving top risers” sums up market action this year. All the buy-out targets, with Reuters, Hanson and ICI being the latest on a log line of examples, have all seen sharply higher share prices, with cheap credit being the primary driver behind these buy-out offers. In last week’s Sunday Times business section an article entitled “Will the credit bubble burst?” reported the huge amount of debt being taken on in all these takeovers as $4 of debt for every $1 of equity.

In recent years, leveraged lending in Europe has shifted away from banks towards hedge funds and other non-bank credit investment groups. At the turn of the century according to Standard and Poor’s 95% of all leveraged lending, and lending to firms of non-investment grade status was under-taken by banks. In 2005, banks represented 75% of the market, and in March 2007, this was down to 49.8%. This structural shift moves more than half to leverage credit from a tool in managing corporate relationships to a purely investment asset.

Bloomberg reported the UBS hedge fund lost the company about £150 million in the US sub-prime sector, and then just shut up shop. With RealtyTrac reporting, US Mortgage foreclosures rising 62 percent in April and the number of Americans falling behind on home loans climbing this year, such reversals are only likely to continue. Rise in defaults will lead to rise in defaults in Mortgage Backed Securities, which are generally bundled with credit derivatives and sold as AAA rated securities. These bundles are themselves typically used as collateral in further leveraged activity, which could lead to a domino effect if the AAA rated securities go into default.

This is not happen yet, but it is a possibility, which is being under-priced within credit markets, as illustrated by the existence of “negative basis trades”, which is another story for another time.

Next week, I continue the theme of liquidity and consider the example of China.

When the supply on any asset outstrips demand its price will fall, and vice versa. As mentioned last week monetary growth (as measured by M4 in the UK), has lead to the growth of money supply in its various forms outstripping the growth in products and services. This imbalanced has resulted in the real rate at which debt if available falling.

Cheap debt particularly at the longer maturities is alarming. A 30 year UK Gilt pays an annual yield of 4.58%, which is less than the present RPI of 4.9%, and if history is any guide will provide a real return (return over inflation) less than the return which has been available on cash over the past 30 years. Alan Greenspan last year famously referred to this situation as a ‘conundrum’. Here we will not attempt to dissect as to why such a situation has occurred but instead just identify some of its consequences.

The most obvious consequence is that cheap debt results in low hurdle rates for leveraged purchases. If an asset provides a higher earnings yield than the servicing costs of the debt required to purchase the asset, then a debt backed purchase can seemingly offer a risk-less profit. Everyone from buy-to-let investors to private equity firms have employed this strategy over recent years leading to infrastructure and real estate asset prices being marked up with associated earnings yields falling.

PFI Infrastructure in their interim report dated 7th March 2007, detailed this effect as,

“The downward pressure on yields in the secondary market continues, driven by the substantial weight of money in this sector and the low yields on comparable investments such as property.”

Where PFI this week itself received a proposed buy-out offer at a price of more than 35 times earnings (i.e. < 1/35 = 2.86% earnings yield). On the other side, bank and cash flow rich firm have been selling into this theme. In particular, HSBC this month sold and leased back its London headquarters at an annual yield of 4% over 20 years. Goldman Sachs, Merrily Lynch and Barclay’s all recently completed similar deals. ABN Amro upgraded Tesco on 4th May, on the understanding that it would “unlock value from its freehold assets” in a similar fashion.

In short, liquidity has lead to certain transactions taking place at levels significantly higher than would have been the case a few years ago. This I turn has reallocated risks, which will be the topic of next week’s column.

Source Data
Supplementary material for “Recent destinations of liquidity”

Speymill Deutsche Immobilien Company plc
http://www.investegate.co.uk/Index.aspx?company=SDIC

owns and manages more than 13,000 properties in German. The shares presently trade at 117p, and where originally placed at 100p on AIM. The company was established to construct a German retail property portfolio which would generate a 7%+ net yield with the possibility of capital up-lift. The argument behind the expected capital up-lift was that property in Germany could be purchased at below replacement cost, where the managers saw the German property converging to at least their replacement cost over time.

Anyway, this firm provides a good example and the typical holding structure which is set up here on the Isle of Man, with a local manager who will be locally regulated with a remote “investment adviser” who in this case is naturally located in Germany. The registered offices are within a stone throw from my office and their broker is strangle enough called Fairfax PLC (my family name).

The formal measure of the `price of money’ over different time spans is the yield curve, which plots the rate available on UK Government debt (UK Gilts) against differing maturities. A general over view of how the yield curve can be interpreted is available at:

http://www.smartmoney.com/onebond/index.cfm?story=yieldcurve#normal

Download Excel file with UK/US Yield Curve Source data and chart for 7th May 2007.

Yield Curve Conundrum

The “conundrum” as detailed within the speaches of Alan Greenspan reference dates back to at least 2005, see:

http://www.federalreserve.gov/boarddocs/hh/2005/february/testimony.htm

PFI Infrastructure

The interim report of 7th March 2007 is available at:

http://www.investegate.co.uk/Article.aspx?id=200703070700594617S

and other regulatory postings is available at:

http://www.investegate.co.uk/Index.aspx?company=PFI

Property Deals

Goldman Sachs, Merrily Lynch sold and least back their London headquarters and Barclay has recently sold and leased back hundreds of its branches.

For details concerning HSBCs sale of its London Headquarters, see:

http://news.independent.co.uk/business/news/article2499358.ece

Over the past ten year’s the independent Bank of England (BOE) has performed very well at its principle role of keeping inflation in check. However, as recent figures show the risk of an inflationary cycle in the UK economy which could even lead to “stagflation” and a return to a boom-bust scenario of the 1970-80s has increased. “Stagflation” refers to a period of price inflation combined with slow-to-no output growth, rising employment, which eventually leads to recession. The odds of such an outcome occurring definitely shortened last week when the UK consumer price inflation (CPI) came in at 3.1% and the broader RPI measure came in at 4.9%. Against a backdrop of a strengthening pound, moderated energy prices, and constrained wage-price increases.

The CPI number lead the market to re-price UK interest rate expectations with base rates now priced to hit a peak of 5.75% later this year. This in turn has allowed banks to increase rates available with IOM deposit takers offering rates on instant access deposits of over 5.5%, and 1-year term deposits paying over 6%. A peak of 5.75% is the central expectation and I for one would lean towards expecting even higher rates than this, and I am not alone in this belief. For example, Roger Bootle of Capital Economics expects to see a peak of 6-6.5%, where as Professor Tim Congdon of the London Business School thinks interest rates will need to hit 7.5% to control inflation.

The divergence in views originates from differing views on monetary policy and the effectiveness of inflation targeting. The inflation targeting of the BOE unlike the European Central Bank (ECB) gives a low priority to moderating credit and monetary growth. Since the CPI inflation target does not encompass these monetary forces. This how allowed complete freedom over monetary growth (M4) and the BOE has run an excessive monetary growth averaging 13.06% from March 2006 - Feb 2007.

The excessive monetary growth has feed out through financial markets and manifested itself as credit for both private equity buy-outs and the UK consumer. This credit also referred to as liquidity has pushed up the price of everything from quoted securities such as Sainsbury’s, to UK real estate.

This asset price growth will ultimately feed back into inflation though wages and other mechanisms. Hence, the narrow definition of the CPI, which excludes housing and energy costs, results in inflation targeting being a reactive rather than pro-active monetary policy. That is, by the time the inflationary pressures show up in the CPI, the inflation genie is already out of the bag, which is what I believe we are seeing now.

Source Date Used

For source data see Supplement for “Playing defensive on Inflation

Interest rates trade primarily through interest rate swaps and interest rate futures contacts. By backing out the prices of these contracts’ one is able to obtain what is generally referred to as the yield curve. The yield curve is a plot of the maturity (period) against the rate that can be expected over that period. The best publicly available yield curve plot I am aware of is available at:

http://www.yieldcurve.com/marketyieldcurve.asp

UK Debt Statistics:

http://www.creditaction.org.uk/debtstats.htm

Isle of Man Deposit Takers

As an example of “IOM deposit takers offer rates on instant access deposits of over 5.5%, and 1-year term deposits of over 6%”, we provide the Anglo Irish Bank see:

http://www.angloirishbank.co.im/personal-savings/interest-rate-summary.asp

Data of Public and Private Sector Debt

The private sector debt levels:

http://www.creditaction.org.uk/debtstats.htm

And UK GDP:

http://www.statistics.gov.uk/cci/nugget.asp?id=192

The public sector debt level of 37.4% (March 2007) detailed on the ONS site at:

http://www.statistics.gov.uk/cci/nugget.asp?id=206

UK M4 Monetary Growth

http://www.bankofengland.co.uk/statistics/ms/current/index.htm

Since the markets for oil rigs, refinery capacity and personnel are free, present shortages should be brought back into equilibrium through normal market dynamics. However the input materials and in particular crude oil may not obey such economic principles since the markets in which they operate are increasingly being tied up by national oil companies (NOC) such as Saudi Aramco. Such NOCs often lack transparency and are only answerable to their political rather than economic masters, and certainly do not follow the Anglo-Saxon model of free markets.

Estimates based on data from the Energy Information Association (EIA) (2006) suggests that 90% of the world’s crude reserves (at least conventional oil) are under the control of national oil companies, with more than 60% under the control of OPEC cartel members. In contrast the global oil majors Exxon Mobil, Chevron, BP and Royal Dutch Shell in 2005 held about 3% of the world’s oil reserves. Moreover, in the EIA (2006) reference case world oil demand will increase by 46% from 2003 to 2030, and 90% of this new supply will come from national oil companies (primarily in the Middle East). This differs significantly from the past 30 years in which 40% of the production originated from the oil majors.

US oil production peaked in 1971 and has been in continual decline ever since. At present the US imports twice as much oil as it produces. Similarly, the UK’s North Sea peaked in 1999 and has already lost about 1/3 of its rate of production leading to the UK needing to import natural gas. With more of more nations slipping into such a position, power is shifting further into the hands of the national oil companies.

Though the West is crying foul of the major producers (for example, Europe’s friction with Russia over gas supplies), the producers are only aligning their production in accordance with their political masters. For example, Fatih Birol the chief economist at the IEA, estimates that there is a 20% global investment short fall of the $20,000bn investment needed to ensure adequate energy supplies for the next 25 years. Though such under investment does not make any sense from an economic perspective it makes perfect sense politically if oil is treated as a national treasure rather than an economic input.

Note: For source data references please see post: “Oil Supply and Free Market Dynamics” Supplement

• iDealing.com – Only retail DMA provider, covers all Crest settled securities.
• TD Waterhouse – No DMA, good source of liquidity for non-Crest securities, allow up to 20 days to settle trades, international stocks, and good interest rates of cleared funds (presently over 5%)

Which together offer a comprehensive brokerage solution for the UK based investor.

iDealing.com

iDealing.com offers a transparent Direct Market Access brokerage service that includes the possibility to place contingent orders for a fixed fee of 10 GBP per trade for trades up to 10,000 GBP, and 0.1% thereafter. Brokerage fee discounts of up to 25% can be obtained when buying credit in advance. If you trade Crest settled securities (covering almost everything) then iDealing.com in terms of quality of execution, and over-all cost is the clear leader in the UK.

The infrastructure is very functional and as a user I really like the Dealer Dashboard where I can simultaneously view my holdings P&L, my watch list all with streaming bid-offer quotes and cash balances on the same screen. Trades are entered by just clicking on the bid or offer quote and then entering the transaction details.

The disadvantages of iDealing.com service are:

• No support for non-Crest settled securities: For the majority of investors this is irrelevant since such securities are now very rare.
• Not the best Interest Rates: In an ideal world, iDealing’s interest rates could be a little higher (at present they are 2.7% + a bonus of 0.65% for 50K GBP cash holdings).
• No BACS transfers through electronic interface: They could offer an electronic interface to send BACS transfers to a designated UK bank account (rather than needing to complete a form that needs to be faxed or posted).

TD Waterhouse

TD Waterhouse allows trading in non-Crest settled securities, overseas listed securities, has an excellent interest rate (at present, over 5%), and allows 20 days in order to settle trades. For UK residents the TD Waterhouse service is also available (with slightly higher charges and lower interest rates) through a Natwest Stockbrokers branded service. Hence, if you like a familiar brand and the possibility to quiz your local bank manger if anything goes wrong then you could consider taking this route.

A TD Waterhouse account can be closely integrated with any UK bank account through direct debit, which is very convenient particularly for income seeking investors. Also by allowing 20 days to settle purchases means that you can earn interest for 17 more days over the usual 3 days settlement while still participating in the growth in the asset you have purchased.

The only real disadvantage of TD Waterhouse is that it does not provide direct market access (DMA) to the SETS, SETSmm electronic order books.

For Crest settled securities which are not (at present) on an electronic order book then all the major brokers will very much perform similarly with regard to QoE. Most brokers will typically trade within the indicative spread by polling Retail Service Providers (RSP) who offer liquidity off the order book. In terms of particular brokers, I would suggest iDealing.com, TD Waterhouse, SelfTrade.com, and Barclays as offering a good service with pretty much a similar QoE.

For non-crest settled securities (which will never be available on an electronic order book) then I would suggest using TD Waterhouse, which aggregates liquidity from a number of sources including in-house client-client, broker liquidity pools. The trading of such securities is highly illiquid and obtaining liquidity at the indicative market spread will be the key consideration. In fact, because of the additional costs involved in offering non-Crest securities the (electronic) broker’s iDealing.com and SelfTrade.com do not offer trading is such assets.

Key Variables

The key variables (in my mind) in the selection of a brokerage service are:

1. Quality of Execution – The ability of the brokerage to obtain the best volume adjusted price within the relevant markets.
2. Charges – Though the ‘quality of execution’ will generally be by far the largest cost, dealing charges are generally the second highest cost.
3. Interest Rates/Charges – The interest paid of cleared funds and if relevant the charging costs of any gearing.
4. Coverage – Crest/Non-Crest, International coverage, range of instruments (warrants, CFDs).
5. Infrastructure – Trading platform, Settlement (Direct Debit, T+3-25, trading credit), banking services, ease of funding/withdraws, reporting.
6. Support – Online and/or telephone based support, reporting/statements/records.

Researching Providers

Comparison charts and reviews are available at the follow sites:

• BlueSky Ratings
• Motley Fools Broker Comparison

Another good source of information in this topic will be discussion boards such as Motley Fool’s Brokers board at http://boards.fool.co.uk/Messages.asp?bid=50070, where you can discover the experiences of other investors with various brokers.

Testing a Provider

With any financial service provider, I tend to start to asking 20 questions to the front line support staff and seeing if I get 20 reasonable answers back. Remember, if anything goes wrong you will be dependant on these parties fixing the problem before you can get on with your investment activities. If you are happy with the staff then I would proceed with testing the account, by either using a demo account or opening an account depositing a nominal amount of funds and trying out a few trades. Only after a month or two, when the account has behaved well, the reporting has been clear and comprehensive, would I consider moving forward.

Brokers I do and have used

Over the year’s I have used the following brokerage service providers:

iDealing.com, TD Waterhouse, SelfTrade.com, Cater Allen, Barclay’s Stockbrokers

All of which with the exception of Cater Allen (my first broker in the mid-90s) are still in operation today. At present, my primary brokerage providers are iDealing.com and TD Waterhouse, which together offer me, for my needs a comprehensive and cost effective solution.

It now seems that such fall over is taking place in the US economy. Yesterday, General Motors’ Vice-Chairman Bob Lutz reported that “The [car] market as a whole has been a little weakfish. That has come as a result of the housing market problems and the mortgage industry meltdown”. In addition, to such third party effects showing up in the real economy, it is also leading to distress of financial assets. For example, Lehman Brothers used Riverside County mortgages loans as collateral for $1.5 billion of bonds sold in January 2006. Over the past year, Riverside County, California, the foreclosures have almost tripled and the lowest-rated portions of the securities now trade at 63 cents on the dollar, down from more than 100 cents in October, according to data compiled by Merrill Lynch.

With today’s data showing that new house sales plunged 8.4% in March, the biggest drop since Jan. 1989, to 6.12m, against a consensus of 6.45m, with median sales prices falling 0.3% year/year. The third party effects are only likely to become even more pronounced. Moreover, after browsing through property listing sites the rental yields available on property is still generally under 5.25% (short term interest rates) which to me implies that prices are likely to weaken further with respect to inflation. Placing additionally pressure on the underlying market which most likely will lead to further third party effects.

1. The Governor failed to take full responsibility for the fact that the banks interest rate policy decisions and the banks other monetary mechanisms failed to control inflation to the required degree (see Blame me Consultant post).
2. The tone of the letter was much too chummy when the content of the letter was to report of the bank failings. The consequences of inflation when it really takes hold are dire and the treatment (namely rigid control of monetary growth e.g. 1981-1983) is painful, and the tone just failed to reflect this.
3. The letters where clearly designed for external consumption. Though the chancellor and government are by default ‘cheer-leaders’ of the economy and the modus operandi they could at least be a little more subtle.

The open-letter condition within the BOE mandate ensured over-sight and allowed the BOE to reassure the public when the monetary policy path taken failed. However, the letters exchanged yesterday just failed to do either and leaves me with the impression that neither party takes the situation very seriously.

Source: Copies of the BOE letter and its reply are available from:

http://www.bankofengland.co.uk/publications/news/2007/044.htm

For (partial) sales commission refund on Mortgages see:

http://Mortgagegenie.co.uk (Good online tool for comparing total costs of mortgages)
http://Moneybackmortgages.com

For other financial products (loans, credit cards) see:

http://www.greasypalm.co.uk
http://www.quidco.com
http://www.rpoints.com

For more details concerning this topic and numerous other money saving ideas see:

http://www.moneysavingexpert.com/

after all a dollar saved is a dollar earned.

These features offer clear advantages over Pooled Investments such as Unit Trusts and Investments Trusts where the assets will be held by a custodian appointed by the fund manager. Moreover, transparency of investment approach and the costs can be difficult if not impossible to discern from the published materials.

A managed account set-up can be as simple as having a brokerage account where a third party Power of Attorney mandate to empower an Investment manager to operate the account on your behalf has been established. Alternatively you may wish to set up a company or trust structure (onshore or offshore) which holds the assets, in order to allow a family managed account and/or tax planning.

After reviewing the legislation it seems that the Investment Business Order 2004, Statutory Document No. 673/04, specifies the nature of newspaper editorial with regard to “the giving of advice”. I quote from paragraph 19:

======================
Newspapers
19. The giving of advice (in the manner contemplated in paragraph 4) does not apply to advice given in a newspaper, journal, magazine or other periodical publication if the principal purpose of the publication, taken as a whole and including any advertisements contained in it, is not to lead persons to invest in any particular investment.
======================

See:

http://www.fsc.gov.im/lib/docs/fsc/Publications/ibo2004.pdf

Since all newspapers and financial journals treated as a whole do not (in my view) lead the reader to “invest in any particular investment”, I would conclude that any articles I (or a 3rd party) produces for such publications would not constitute advice.

There is also the issue of being deemed to having infringed the “holding out” condition which is detailed within the Telegraph article:

http://www.telegraph.co.uk/global/main.jhtml?xml=/global/2007/02/08/fiphishers.xml

Sources used for Global and US Oil production and consumption estimates

The primary data source was:

Energy Information Administration (EIA)
http://www.eia.doe.gov/
Official energy statistics from the US Government.

and in particular the:

Annual Energy Outlook 2006 with Projections to 2030
http://www.eia.doe.gov/oiaf/aeo/index.html

In addition, the

BP’s Statistical Review of World Energy 2006
http://www.bp.com/productlanding.do?categoryId=6842&contentId=7021390

was also used when evaluating the amount of reserves and which parties control these reserves.

Sources used for UK’s North Sea Oil field estimates

For details concerning the UK Oil Production levels I refer the interested reader to:

UK DTI’s Energy Group page at:
http://www.dti.gov.uk/energy/index.html

The data sources used in the article can be found at:

UK DTI Statistics by Energy Source
http://www.dti.gov.uk/energy/statistics/source/oil/page18470.html

and in particular the Excel spreadsheet:

Production (ET 3.10)
Oil production, refinery receipts, imports and exports
http://www.dtistats.net/energystats/et3_10.xls

Steps involved in Mandate Transform Arbitrage

1. Arbitrage Fund buys large stakes and/or partners with other share holders in order to obtain control.
2. Changes the investment manager of the fund to Arbitrage Fund, changes the fund mandate to the Arbitrage Fund’s preferred investment approach (generally fund arbitrage) and (where possible) increases the management charges. The increase in charges will generally be by the introduction of a performance fee which will be charged in addition to the base management fee.
3. Continue to run the fund, in accordance with the new mandate.

The classical approach will similarly apply the first step and will then often appoint a third party manager which is assigned to wind up the trust in an orderly fashion and return proceeds to shareholder at (or near) NAV. The new approach however seeks to exact value but not only decreasing the discount at which assets trade, but also using such techniques as an asset gathering mechanism for the Arbitrage Fund Managers.

What this means for the future of Closed-end funds
This approach looks very promising because there are potentially two sources of value which can be extracted, namely:

1. Discount Arbitrage: By liquidate the assets with the acquired fund at a lower level of discount.
2. Increase AuM: Increase the Assets under Management (AuM) of the Arbitrage Manager since the capital within the Closed-end fund is fixed.

The nature of the discount uplift is clear and the benefits will be gained by the investors. However, the value created through the increase in the AuM (see * below for further explanation) will only be gained by the Arbitrage Fund, if such fund unit holders also have ownership rights over the Fund Management company.

(*Note, that a fund manager will generally be valued at 5% of AuM where long only type fees are charged (i.e. base fee only), and 10% of AuM where hedge fund type fees are charged (i.e. base fee plus x% of all profits where x% is generally 20%).)

Exactly how the benefits of this approach are assigned between the parties is really a matter for such parties to decide. Saying this, the total value which can be extracted allows such arbitrage of closed-end funds to take place at much lower levels of discount, than the traditional approach which starts to break down when discounts go sub-10%. If is even conceivable to benefits are assigned appropriately that this new approach is viable at just about any level of discount and possibly even when the trust is trading at a slight premium to NAV. Making just about any trust on the LSE a potential target.

One area where I am expecting third party effects to be generated is US sub-prime mortgages. Though these mortgages only represent 15% of the mortgage debt in the US, around a quarter of them are in default. So far these problems have only effected the sub-prime mortgage sector with both smaller mortgage firms imploding (for example, New Century Financial, see Yahoo! Finance Quote) and large multi-nationals such as HSBC taking a $10.6bn hit. Though I anticipated such problems back in September, see US ARM Mortgages, at present it is still unclear whether these problems will cause third party effects.

Within my hypothesis of this dynamic situation I see three key drivers:

• Highest mortgage sales commissions where paid on sub-prime mortgages.
• Recent record low credit spreads within BBB-rated asset based securities (i.e. packaged sub-prime mortgages).
• Ability of Wall Street firms to package BBB-rated asset backed securities and credit derivatives, which are then resold as AAA-rated securities.

The mortgage brokers on 2% front end sales commission, and the PhDs on Wall Street who where taking 9% yielding sub-prime mortgages and selling them on within 5% yielding AAA-rated packages had a clear motivation in entering into such arrangements. However, the un-intended consequence of such a set-up is that individuals where able to take on more mortgage debt than they could afford and institutions chasing yield where not adequately compensated for taking on sub-prime credit risk.

Since the US real estate market has stopped paying people to consume houses and the seeming Alchemy of the PhDs on Wall Street started failing apart went credit spreads on BBB-rated asset backed securities moved from 400bps in February to 800 bps now. There has been a rapid rise in the level of defaults on sub-prime mortgages and institutions have been scaling back there appetite for credit risk. The third party effect of such events (at least in time) will be additional supply of real estate (through repossessions), and the scaling back of mortgage credit availability which will limit the future demand for real estate.

Repossessed houses also tend to have a third party effect on the surrounding housing stock by reducing its value, which may result in effected local residents being less prepared to continue their mortgage repayments, leading to further repossessions. In a similar fashion, financial institutions will often use AAA-rated securities as collateral in order to back other outstanding contracts. If such collateral goes into default then the contract which they are used to back will also go onto default. Though it is rather unclear whether such events will take place in coming months, they are a very real possibility.

For further explanation of the exact workings of the LSE electronic SETS, SETSmm and shortly SETSqx order books, I refer the interested reader to:

• iDealing Explanation of Direct Market Access
• The LSE web pages on the SETS/SETSmm/SETSqx platforms at:
1. SETS Homepage at LSE
2. SETSmm Homepage at LSE
3. SETSqx (mid-07) Homepage at LSE

By taking advantage of these direct access platforms allows the execution of LSE trades at the lowest possible cost. There is also the option to generate an income stream via these platforms by acting essentially as a market maker, and/or pairs trading strategies between products with a high and consistent correlation.

Over view of LSE Electronic Order Books

The SETS platform offers users to place order directly onto the order book for all FTSE 100 constituents the most liquid FTSE 250 securities. The SETSmm service allows order to be place on the order book for:

1. FTSE Mid Cap index securities not traded on SETS
2. FTSE Small Cap index securities
3. Other liquid Main Market equity securities outside the FTSE All share
4. Liquid AIM securities including all of FTSE AIM UK 50 index constituents
5. Liquid dual listed Irish securities
6. Large London secondary listed securities eligible for central counter-party clearing
7. Exchange Traded Funds
8. Exchange Traded Commodities

The SETSqx system is due to become available by mid-2007 in accordance with the MiFID directive. The SETSqx platform will replace the SEATS Plus system and rather than offer an order book/market maker system will offer an uncrossing auction system at the open, close and 2 intra-day auctions at 11am and 3pm.

This period also saw Sterling further weaken against the Euro and the dollar, and this weakening has occurred before clear signs of economic weakness have appeared in the UK. Moreover, the OECD have even recently upgraded the growth prospects in the UK, and the Bank of England latest inflation report suggests further interest rate rise(s) will be necessary to keep inflation I check over the banks two year horizon. Hence the sudden weakness now is something of a surprise.

It is possible that market participants are just reacting to the amount of leverage in the UK housing market which dwarf’s even the levels seen in the US on an equity-to-debt or average earnings-to-debt basis. The idea being that recent events in the US mortgage market must prompt market participants in the UK to reassess their over all credit risk exposure and the amount of compensation they are being paid for taking on such risk. An alternative hypothesis is that the Chinese (and/or other Asia) central banks are switching out of Sterling (3rd largest currency within Foreign exchange holdings) in favor of the Yen. The rationale being that for many Asian central banks the Yen is just about the only currency in the world which is more undervalued against a common basket of currencies than their own currency.

Though the recent movements where something of a surprise the longer term trend is likely to be further weakness of Sterling (and US Dollar) against the Yen. With the OECD estimating on a purchasing parity basis that Sterling is worth $1.62, i.e. more the 15% less than its present value against the US Dollar. And the dollar itself overvalue against the Yen, Sterling has much further the fall against the Yen in particular and a basket of Asia currencies in general.

By purchasing shares with a significant Asian currency cash flow and/or assets located within such domiciles and then waiting for currency movements to take their natural path. The GBP based investor should be able to take advantage of such mis-pricing over the coming years.

Moreover, it is common practice to use the costs incurred by the fund to pay soft commission to third parties for marketing services, capital introductions and investment research. Though these arrangements are usually not formally acknowledged they are very much the norm across the fund management industry. For example, according to Dresdner Kleinwort analysts recently reported that the typical hedge fund manager pay fees of 4-5% of fund under management a year for borrowing stock, leverage and brokerage.

Which begs the question, what are fair and reasonable fees? Which leads one to consider how the fund management activity itself, should be organized to ensure transparency and fairness for all parties. Clearly the structure which ensures the maximum transparency would be a partnership where there are ordinary partners who invest capital in the partnership, and managing partnership who run the day-to-day investment activities of the partnership. Naturally within a pure partnership the managing partners would be paid in accordance with the amount of profit generated for the partnership. Hence a base fee should be discounted and profit sharing only fee used. Moreover a principle of shared risk with shared return amongst the partners should apply, with managing partners also investing monies within the partnership. The level of fee which I would suggest for such a partnership is:

“the managing partners receive a fee of 10% of profits over 1-year LIBOR”

Recall, that 1-year LIBOR is essential the rate available of 1 year term deposits which at present is around 5%. Hence, if the managing partners obtain a performance of 15%, then there management fee is 1%, for 25% performance the fee would be 2%.

Since the fund management is organized around a partnership various conflicts of interest would just not exit since all partners who vote of the material issues affecting the service provider relationships. In such a model the partners will adhere to ensuring the maximum efficiency of the operation ensuring the best over-all outcome for the partners.

Though most investment businesses are not run in accordance which such a model and principles there are some, with the most prominent being Warren Buffet’s Berkshire Hathaway. In addition, I wish to bring your attention to a less well known investment partnership set-up Walter Schloss who just turned 90. Walter ran his investment partnership between 1956-2002, building up an exceptional track record on the way. When asked by Outstanding Investors Digest in 1989, “How would you summarize your approach?”, he replied, “We try to buy stocks cheap”. For more details about Walter, see page 22 of the Berkshire Hathaway’s 2006 Chairman’s Letter available at:

http://www.berkshirehathaway.com/letters/2006ltr.pdf

http://www.gov.im/dti/Energy/

broadly concludes that Wind Power is the only viable resource in the near term using existing technologies. Moreover, analysis of the economics of an offshore resource details that the resulting revenue from such a project would repay the initial set-up and running cost after 13.73 years. Hence, such a project would only provide an internal rate of return of 5.1756% over 13.73 years. With the 10 year Gilt yield being around 4.82%, such a project (in my view) is not financially justifiable since its return over gilts is not enough to justify the inherent risk of such a project.

What about Onshore Wind Farms?

The report unfortunately makes no real attempt to explain why the much more obvious options of an onshore wind farm were not considered. In fact, the option of an onshore wind farm seems to have been discounted from the start, with the rationale given on page 47:

Due to the structure of the Manx planning process, the possibility for commercial scale onshore wind turbines has already been discounted.

Moreover, within the 143 page report the only other reference’s on commercial scale onshore wind farms is on page 18, which reads:

Onshore wind was specifically excluded from this report at the request of the DTI, as previous studies have already looked at the opportunities for this technology.

and on page 15, I found:

In the case of the Isle of Man there are some specific legal protection mechanisms that make onshore development of renewables particularly challenging.

Financial case for Onshore Wind Farms

Though the figures where not worked out for an onshore wind farm, after doing I little digging I found within the article ‘Land- vs. Sea-based Wind Farms’, at:

http://www.pbs.org/newshour/science/wind/landvssea.html

the following guidelines:

Cape Wind itself has an expected energy output of 38 percent of capacity over the course of a year, compared to the mid-to-high 20s or low-30s for onshore wind farms, noted Cape Wind’s communications director Mark Rodgers…

But one of the main challenges to building offshore is cost. The price tag of installing offshore sites can reach 50 percent to twice that of land-based wind technology, Calvert said

Hence, as an estimate I would suggest the drop in power of an onshore vs offshore site would be around 18%, but the reduced cost on an onshore vs offshore farm would be between a 1/3–1/2. Therefore, the cost per KWH would be reduced by 21% - 41% over 13.73 years. Implying an internal rate of return of 6.26%-7.30%, which would provide a return over gilt yield’s in proportion to the level of risk taken by the investor.

http://search.ft.com/search?queryText=webcab&x=0&y=0&aje=true&dse=&dsz=
(login required to read full article)

The only other UK finance journal out of the five picked out was Interactive Investors, which wrote up a review of the article entitled: The best possible time to be alive. Anyway, without further ado here is a quote from the original FT article:

On the hunt for nitty-gritty technical information on the markets? Try WebCab Services Investment Journal (www.webcabcomponents.com/finance/blog). This is an interesting site if you are keen to know more about investment trusts and other closed-end funds. Run by an active private investor with a Phd in mathematics, it offers links to news that might have some influence on the market for closed-end funds. He also offers some astute ideas on investment strategies, strong stocks for income and the mechanics of investing.

For UK residents with UK domicile typically a UK Company will be used since using an offshore Company structure will be subject to various anti-avoidance provisions. However, a UK Company though providing a long term solution for IHT planning does raise some problems. The primary one being Corporation tax where all gains on investments minus costs will be deemed profit. It is possible to mitigate this problem by setting up an Investment Trust (as some ultra HTW individuals have done) which does not pay Corporation Tax on investment gains, but for the majority of HNWs this strategy is just not practical because of the complexity and cost involved.

Isle of Man Solution

There are a number of offshore jurisdictions which can be used to mitigate these problems but the solution I detail below is particular to the Isle of Man. The Isle of Man does not impose any capital, wealth or estate taxes, and hence is an ideal location for those wishing to manage CGT and IHT exposure.

The approach involved first moving offshore to the Isle of Man, which is very simple for UK nationals since they have no residency restrictions, after obtained residency an IOM Company should be establised. Since the IOM Treasury does not levy any capital taxes, the capital gains which the IOM Company makes on its investments will not be taxed however the investment income generated will be taxed at a rate of 18%. Saying this, even the income can be set against some `Allowable Expenses’ as detailed at:

http://www.gov.im/treasury/incometax/technical/practice/PN68-97.xml
http://www.gov.im/treasury/incometax/technical/practice/PN74-99.xml

There may be instances when the structure may involve a trust where the typical structure in such instances is having, a Trust which owns IOM Company which owns UK Assets. Note that when a Trust is introduced into the equation you will nearly always raise more interest with authorities and introduce complexity into the set-up and administration process which will most likely result in additional costs. My personal view is that even if you want Trust like features within the proposed structure then in nearly all instances the easiest approach is to use Company constructs (with special conditions in the articles of association) to mimic the desired effect.

Now the investment decisions of such a IOM (Holding) Company will need to be undertaken by the nominated directors who will typically be the parties who established the holding structure. Though the Company is a distinct legal entity from the directors and hence to director’s are arranging and dealing in investments for a third party, if the arrangement is private (i.e. not marketed) and has a maximum of 50 shareholders then it will typical be deemed an Exempt International Scheme and be exempt from Finance Regulation as detailed at:

http://www.gov.im/fsc/policy/regcollective.xml

in particular,

Exempt International schemes are not subject to the provisions of section 11 of the FSA. They must have less than 50 investors and their relevant constitutional documents should expressly prohibit the making of an invitation to the public to subscribe in any part of the world. Such schemes are regarded as private arrangements and are not subject to regulation. The manager of more than one exempt scheme must be licensed.

One final point I wish to make is that UK assets (such as UK stocks, UK real estate etc) held within an offshore company will not form part of your UK estate with regard to UK IHT. If on the other hand the assets are held for example within a UK stockbrokers nominee account (which will be domiciled in the UK) then the assets will form part of your UK estate and be liable to UK IHT irrespective of your domicile or residence. But by holding the same assets within an IOM Holding Company which has a nominee account at the same UK stockbrokers the underlying assets will not form part of your UK estate, and hence if you are deemed IOM domiciled then these assets will be omitted from your estate for UK IHT purposes.

Though all sides of the political spectrum have played there part over the years in the ever increasing regulatory burden on business. The present UK government in power is due to take it one step further with the proposed “Companies Act”, which is likely to go through parliament this year. For me alarm bells start ringing as soon as I hear that the bill runs to 500 pages and contains 900 clauses. Besides this document ushering in a steady diet of box-ticking activity for UK directors, it also “codifies” UK director’s responsibility to “the impact of the company’s operations on the community and the environment”. Now taken at face value this could mean a director facing legal action over the actions of a company employee who he did not even know about.

As always such policies will be sold in the name of “shareholder protection”, and/or “consumer protection”, but as even it will be the shareholder and customers who will ultimately pay the price. Moreover the end result is likely to be fewer people willing to expose themselves to such regulatory risk, companies more inclined to relocate offshore and the only growth which is likely to result in the UK will be in the governments own bureaucratic empire.

I am not trying to impose my political views from the other side on the English Channel, but as a passive observer I feel that the introduction of some of the dogmatic socialist legislation being proposed by Ms Royal, would lead to further net emigration of Frances best and brightest minds which surely cannot be seen as in the French nation’s best interests. For example, at present there are an estimated 300,000 French nationals working in the City of London who have already voted with their feet. An even more capital repressive system in France would surely only result in this number swelling further. Significantly adding to the UK economy while having an equal and opposite effect of the French economy.

What seems most surprising to me, is that Socialist policies are not only weakening the French economy, but seem at odds with the spirit of the French republic, this is “liberty”. When ever the state gets bigger the freedoms of the individual are reduced. This lack of freedom usually is sold in the name of “worker protection”, or “consumer protection”, but all such `big state’ policies boil down to the following. Some (3rd Party) government bureaucrat forcing both the consumer and producer of a produce or service, to adhere to government legislation. Where as the free market (Anglo-Saxon model) allows each parties to decide for them selves what is and is not in best interest and transact accordingly.

Investment Research Process

• High Level Ideas: Select Top-down Investment Themes with a likely duration of ideally 2-5 years.
• Medium Level Research: Systematic research of all LSE listed assets which allow the expression of the ‘High Level’ Theme, and the selection of the assets (or basket of assets) which allow the most efficient expression of the ‘High Level’ Theme.
• Low Level Quantitative and Trading Techniques: Once the asset(s) have been selected suitable structures and trading approaches will be developed in order to gain exposure to the required assets.

Flux of Investment Complexes

The competitive flux for capital is created when there are more known investment complexes than sufficient capital to cover these complexes. By continuously under-taking fundamental research in order to select ‘High Level’ Investment ideas, construct asset(s) to represent these ideas and investigate the technical and trading aspects of entering such investments. At all times all such discovered investment complexes (invested and un-invested) are in a competitive flux and the fund will switch between investment complexes if and when a un-investment complex is deemed to provide a sufficiently strong argument over an invested complex.

We aim to be fully invested at all times.

Detailed description of the Investment Research Process

The investment process consists of the following three consecutive stages:

1) Generation of High Level Ideas: Macro, stylistic/sector specific or thematic Investment Ideas

The key driver of the out performance of the investment process is the identification of top-down, stylistic/sector specific or thematic investment ideas. The managers are seeking to identify investment ideas which will play themselves out within financial markets over a 2-5 year time frame. The mangers believe that through continuous systematic research and lateral thinking, they will be able to identify on average 2-4, such ‘High Level’ investment ideas per year. The managers also strongly support the view that it is not the number of such ideas which will determine the over-all performance of the fund but the quality of these ideas. For this reason the managers are highly selective in there acceptance of any such ‘High Level’ investment idea and numerous investment conjectures will be considered during any one year. Note that a ‘High Level’ investment idea will generally be formed from multiple underlying investment conjectures.

2) Medium Level Research: Value Oriented Fundamentally based, contrarian Research approach to select particular securities which efficiently express the ‘High Level’ investment ideas.

Once the ‘High level’ investment ideas have been identified by the managers, the managers will systematically undertake a search for securities which first allow these ideas to be expressed, and secondly offer the best risk/reward profile within the context of how the managers believe the high level idea will play out within financial markets. Though the fund managers would broadly agree and apply much of the traditional value investment methodology as detailed within the writings of Benjamin Graham and Warren Buffet, in particular the works:

• The Intelligent Investor, by Benjamin Graham.
• The Essays of Warren Buffett, edited by Lawrence A Cunningham, 2000.

The managers have developed a certain variant of this approach which is compatible with their own mental frameworks which they have applied within the various investment activities and markets in which they operate.

The managers have often found that the most efficient means in which to express a given ‘High Level’ investment ideas is by taking positions within under researched small cap (or even fledging) securities. The managers believe that the rationale for such findings is that these sectors are often the least covered by the research community, and in many cases are just to illiquid to be considered by institutional investors, and as a result the greatest inefficiencies often occur in such sectors. It is anticipated by the managers that investment companies and associated assets (many of which are fledging) will form a significant portion of the investment portfolio. Though such securities themselves are often small-cap the underlying securities which they hold are generally a well diversified collection of blue chip securities, and hence such investment companies do not pose a high level of risk to the investor. It should also be noted that due to the fact that over the past 10 years the managers have often found the greatest opportunities within this sector the managers have build up an expertise within the investment company and associated sectors.

Note: The investment process is not in any way either a small-cap or fund-of-funds approach. Any selection of either small-cap or investment company investments is taken purely because it is believed to be the most efficient means (i.e. best risk/reward profile) in which the express a given ‘High Level’ investment idea.

3) Low Level Techniques: Scalping/market making/technical trading, relative value quantitative techniques and the leveraging of the technology foundation of the fund managers.

This portion of the investment process will generally supplement and run in conjunction within the fundamental research (item 2 detailed above) which is undertaken. The portion of the investment process results from the particular technical skill set which the fund managers bring to the investment process. The technical skills can be divided into two sections: trading (scalping, MM strategies, TA), and quantitative/software. Below we provide further details:

• Trading: Overlay the application of short term trading techniques such as scalping, various market making strategies and acting as a provider of liquidity. In addition, analysis of market internals and trading considerations from a technical analysis stand-point will be considered. The aim of this process is to provide more opportune entry and exit points within our fundamentally selected investment opportunities. In should also be noted that these techniques may also be applied during the period when a given investment idea is being expressed within financial markets. Where we envisage taking a general stance with appropriate holdings over an extended period, however within this period we either switch between associated assets on a relative value or market internals motivated based, and/or scale in/out of the position in order to increase the risk adjusted return profile.
• Quantitative Techniques and Software Platform: Since 1999, we have undertaken firstly the research of quantitative finance, and secondly the development of financial and mathematical software components (see http://www.webcabcomponents.com). These components offer a wealth of financial and mathematical functionality which is leveraged within our internal research systems. In addition, we have developed a proprietary data archive and quantitative financial research platform. This system can apply a variety traditional and state-of-the-art statistical and quantitative finance techniques including regression and time series analysis; pricing and risk (Greeks/global VaR methodology) analysis (for virtually all equity and equity derivative contracts in accordance with a number of price/volatility/interest rate model assumptions).
]]> http://www.foresightiom.com/?feed=rss2&p=118 http://www.foresightiom.com/?p=117 http://www.foresightiom.com/?p=117#comments Fri, 09 Feb 2007 01:25:37 +0000 Ben Fairfax Tax Planning http://www.webcabcomponents.com/finance/blog/?p=117 According to the Adam Smith Institute (see http://www.adamsmith.org), Tax freedom day is now 3rd June, which means that we now spend more days each year working just to pay tax than at any time during the 1970s where income tax level where as high as 80%. In 1997, 2M people where higher rate income tax payers and now the figure is 3.5M, with inheritance tax the situation is even worse….
]]> http://www.foresightiom.com/?feed=rss2&p=117 http://www.foresightiom.com/?p=115 http://www.foresightiom.com/?p=115#comments Fri, 09 Feb 2007 01:06:42 +0000 Ben Fairfax Investment Strategies http://www.webcabcomponents.com/finance/blog/?p=115 Two Yale academics have formally justified what I expected all along. That is, on average real stock pickers who have high conviction (most likely concentrate) index independent portfolios who ideally have smaller sums under management, not only outperform the “cookie cutter” closet index trackers and the sector/theme rotator funds but also the index before and after expenses. The degree of this out performance after expenses is a highly significant 3%, and this out performance is persistent. In particular, the authors show that the funds with the highest Active Share (see below) continue to outperform there indexes (after expenses) by 2.29%-3.69%.

The key introduced notion (known as the Active Share) within the research is to view the level of active management by the level to which the managed portfolio weighting deviates for the underlying indexes stock weightings. Rather than the portfolio’s deviation in term of performance.

For further details, we refer the reader to the following web page of one of the authors:

http://www.som.yale.edu/Faculty/petajisto/research.html

where you will find the main article “How Active Is Your Fund Manager? A New Measure That Predicts Performance”, but also a number of other interesting related articles included some popular summaries of the research.

]]> http://www.foresightiom.com/?feed=rss2&p=115 http://www.foresightiom.com/?p=114 http://www.foresightiom.com/?p=114#comments Tue, 23 Jan 2007 12:15:41 +0000 Ben Fairfax Investment Sites http://www.webcabcomponents.com/finance/blog/?p=114 Gold / Silver Prices and market information:
Kitco
The Bullion Desk

Base metal prices and market information
Metal Prices
London Metals Exchange
Metal Bulletin
NYMEX.com

Uranium price and market information:
Nuclear Industry (mining, reactor, conversion, enrichment)
Uranium Price

General commentary and news on the mining sector:
Mine site
Mining News
Northern Miner

On be continued….

]]> http://www.foresightiom.com/?feed=rss2&p=114 http://www.foresightiom.com/?p=113 http://www.foresightiom.com/?p=113#comments Mon, 15 Jan 2007 21:26:08 +0000 Ben Fairfax Trades Isle of Man http://www.webcabcomponents.com/finance/blog/?p=113 I just finalized my performance figures for the period 1st Jan 2006 – 31st Dec 2006, and my own portfolio which is purely (a higher risk) capital growth portfolio I obtained a performance of 46.3% (in GBP), where as the 3rd party (lower risk) capital growth and income portfolio obtained a performance of 33.6% (in GBP).

Though over all I am reasonable pleased with the performance I did miss a number of opportunities and partially mishandled the markets during the sell-off during April-June. If I had got the April-June period completely right and had been a little more trigger happy (I missed at least two 75%+ opportunities this year due to being to slow to deploy capital), then I would have obtained at least 10-20% higher performance figures. Saying this, my macro positioning was just about right and at no point during the year was I in the red. The performance distribution last year was rather lumpy due to the April-June period, but as always I am happy to sacrifice smooth tranquil performance for over-all end-of-year higher performance.

In terms of my development as an investor which should always to kept central to any investment activity, since performance is mealy a consequence of an investors training, technique and ability. I feel I am moving forward in a number of ways. For example, over the last year I have been developing a more systematic, structured approach; which though does introduce the advantages of having certain structures (reducing the chance of good ideas falling through the cracks) still allows sufficient flexibility to think creatively. On a practical note moving to the Isle of Man last year has provided an environment where one can maintain aplomb, balanced state of mind, and distance oneself sufficiently from the prevailing views, news flow to endorse a dissident mind-set allowing significant out-performance.

]]> http://www.foresightiom.com/?feed=rss2&p=113 http://www.foresightiom.com/?p=111 http://www.foresightiom.com/?p=111#comments Wed, 10 Jan 2007 12:45:29 +0000 Ben Fairfax Stocks for Income http://www.webcabcomponents.com/finance/blog/?p=111 It is good to see many of the themes with regard to the BT Group which I detailed last year becoming a reality within their business and also being more accurately reflected within BTs stock price (up 47.85% year-to-date plus (approx) 5% dividend). For those who wish to catch up on the activities of BT for which voice services now only make up about 15% of the business, I refer to interested reader to an interview of Ben Verwaayen CEO of BT Group made by FT.com:

FT.com Interview (7min 27sec in duration)

Moving forward though BT is not the screaming bargain it was a year ago it still is a good business at a reasonable price. The technology back-drop (i.e. move the VoIP and data centric services) really works in BTs favor since its business is already positioned for this technology shift within the industry. Many of BTs competitors are not as well positioned and hence I can see BT taking market share at least within its core European market. Further the increasing influence of globalization in the provision of business services puts BT in a strong position due to their existing global IP network infrastructure.

]]> http://www.foresightiom.com/?feed=rss2&p=111 http://www.foresightiom.com/?p=110 http://www.foresightiom.com/?p=110#comments Wed, 03 Jan 2007 23:04:24 +0000 Ben Fairfax Macro Themes Investment Sites http://www.webcabcomponents.com/finance/blog/?p=110 The activities of central banks form a vital role in the global economic system in that they determine the supply and price of money. Each central bank has exclusive rights on the supply of money in its currency, and (typically) acts as the lender of last resort in order to ensure the robustness of the local banking system. Central banks also serve a number of other roles in accordance with the objectives set down in there mandate, these may include: monetary policy (setting short term interest rates), foreign exchange intervention, holds and manages the foreign reserves, overviews payment and settlement systems.

Most Important Central Banks for GBP Based Investors

The following links provide a wealth of information concerning the nature, workings and decisions of the respective central bank:

Bank of England of the United Kingdom

Central Bank of the UK (Bank of England) Homepage - Aims to achieve monetary and financial stability. Since its founding more than 300 years ago it has always has to exclusive right to issue Pounds Sterling, however only since 1997 has it been able to independently set interest rates in accordance with an inflation target.

Minutes of Bank Committees, including the Monetary Policy Committee meetings which sets interest rates.

Remark: If you get the chance then I recommend visiting the Bank of England Museum which you will find in Threadneedle Street in the City of London and is open during office hours.

The Federal Reserve of the United States of America

The Federal Reserve Boards Homepage - Has a duel mandate to promoting growth and control inflation, however the Fed does not have an explicit inflation target. US Federal Reserve is the sole institution in the world which sets interest rates for US Dollars and controls of the supply of US Dollars.

Minutes and statements of the US Federal Reserve open market committee

The European Central Bank of the European Union

European Central Bank Homepage - The primary objective of the ECB is to maintain price stability in Euros which it has exclusive right to supply. The ECB where price stability is not effected “shall support the general economic policies” (Treaty article 105.1) which are high level of employment and sustainable and non-inflationary growth.

Monthly Bulletin of the ECBs Governing Council - explains monetary policy decisions and provides analysis of the prevailing economic situation.

Note: The ECB is the only central bank listed which uses details concerning the money supply within its modeling of future inflation expectations. The explicit link between inflation and money supply means that the ECB is in a strong position when defending its own objectives against political interference (namely the over-supply to money to fund government programs).

The Bank of Japan the central bank of Japan

Bank of Japan Homepage - A juridical person established under Law sets the Bank’s objectives “to issue banknotes and to carry out currency and monetary control” and “to ensure smooth settlement of funds among banks and other financial institutions, thereby contributing to the maintenance of an orderly financial system”. Where, “currency and monetary control shall be aimed at, through the pursuit of price stability, contributing to the sound development of the national economy.”

Speeches, Annual Review and Quarterly Bulletin of the Bank of Japan

Other Central Banks

Links to Central Bank websites

]]> http://www.foresightiom.com/?feed=rss2&p=110 http://www.foresightiom.com/?p=109 http://www.foresightiom.com/?p=109#comments Tue, 02 Jan 2007 12:21:28 +0000 Ben Fairfax Uncategorized http://www.webcabcomponents.com/finance/blog/?p=109 Milton Friedman

Free To Choose - TV Series by Milton Friedman the Nobel Prize-winning economist on the interrelationship of personal, political and economic freedom.

An interview with Milton Friedman in 2006

Warren Buffet

Charlie Rose’s 3-part interview:

Part 1: Tha Man
Part 2: The Business
Part 3: The Gift

Central Banking

Money, Banking and the Federal Reserve by Ludwig von Mises Institute: History of central banking from the point of view of ’sound money’.

Collection at the Hoover Institute

Uncommon Knowledge - Contains 300 half hour discussions on a wide range of public policy issues by leading economists. Note that the collection can be searched by topic.

Lectures of Joseph E.Stiglitz (See homepage)

Fair Trade for All: How Trade Can Promote Development, Carnegie Council
The Roaring Nineties by Joseph Stiglitz, World Bank
Joseph Stiglitz and Kenneth Rogoff discuss: Globalization and Its Discontents, World Bank
Information and the Change in the Paradigm in Economics - Nobel lecture, Nobelprize.org
Rewriting history, Kellogg School of Management, Northwestern University
The Future of Globalization: Lessons from Cancun and Recent Financial Crises, Globalization research group, Duke

To be continued…..

]]> http://www.foresightiom.com/?feed=rss2&p=109 http://www.foresightiom.com/?p=108 http://www.foresightiom.com/?p=108#comments Fri, 22 Dec 2006 13:18:59 +0000 Ben Fairfax Investment Mechanics Investment Sites http://www.webcabcomponents.com/finance/blog/?p=108 Sometimes it is best to take a step back and invest some time in developing a deeper understanding of finance, investing, economics, and associated areas such as mathematics and software. Since a young age I have always been interested in these topics and since 1996 I have been an active investor. However, I am still very much on the learning curve and I really see no end in my personal training program.

Below I point out some useful educational resources:

Investing

The Apprentice Investor - “In this special series of articles from RealMoney contributor and market strategist Barry Ritholtz, learn about becoming a better investor — not just a better stock picker”.

Investopedia - Huge resource which is useful for just about any investor. The site also contains (cost effective) guides which can be purchased for those working towards formal professional qualifications (NASD Series, CFA, CFP).

Warren Buffet’s Berkshire Hathaway letters to shareholders (1977-present) - Warren Buffet is not only an exceptional investor but also a very good communicator of investment ideas. His letters to shareholders offer numerous valuable lessons for us all.

Economics

Wikepedia - Homepage on Economics at Wikepedia

Economics Network - Online Texts and Notes list at Economics Network a UK base resource of learning and teaching economics.

Internet Resources for Economists - Good selection of links to blogs, books, journals and more.

Mathematics & Software

FreeTechBooks.com - Online computer science and engineering books (+ lecture notes).

MIT’s OpenCourseWare - MIT’s is a world class university which values the teaching process. Now much of there teaching materials have been made available over the web to self-learners. When I visited MIT in 1998, I discovered that because the education system in the US is basically a product which is sold to fee paying parents the quality of the education is very high.

Paris Tech - Similar idea to the MIT’s OCW but the resources here are provided by the collection of world class universities in Paris, France known as the Grandes Ecoles. Like MIT I also had the good fortune to visit a number of these institutions when I was in academia.

Textbooks in Mathematics links by Alex Stef - An updated collection of links to math’s texts kindly provided by Alex Stef.

To be continued…..

]]> http://www.foresightiom.com/?feed=rss2&p=108 http://www.foresightiom.com/?p=107 http://www.foresightiom.com/?p=107#comments Thu, 21 Dec 2006 17:37:42 +0000 Ben Fairfax Investment Mechanics Investment Sites http://www.webcabcomponents.com/finance/blog/?p=107 Though a certain amount of care should be taken when reading information and discussing ideas on forums they can form a useful source of information and/or an arena to test/exchange/find ideas. Please note I use the term information (rather than tips) and I use the term care because forums are used to propergate “ramping”, “pump & dump” scams, so please take care!

General Investment Forums

Motley Fool - Just about the oldest investment and personal finance forum in the UK which cover a wide range of topics for a wide range of users.
iii Community - User moderated finance forum in which mainly individual stocks are discussed.
Elite Trader - Mainly US focused traders (rather than UK investors) but still very useful to know about.
ADVFN Forum - Forum for LSE focused investors and traders.
Raging Bull - Mainly US focused investors where I recall having a number of detailed discussions on IT hardware.

Quantitative Finance Forums

Wilmott.com - The large and active Quant forum which has many informed and helpful users. Though I am not as active on this forum as I once was you may see me post from time-to-time as DrBen.
Nuclear Phynance - Quantitative finance forum with an orientation towards trading rather than analysis. I post on this forum as MrBen.
CQF.info - Forum and Resource on Maths, Finance & LaTeX; which has a rather academic atmosphere.
Global Derivatives - In there words, “a site aimed at promoting the education and expansion of all things related to financial engineering, derivatives and quantitative finance”.

Directories

Money Science - As the name suggest this site offers links, articles and a forum, seemingly on all topics associated with the application of the scientific method to the domain of finance.

]]> http://www.foresightiom.com/?feed=rss2&p=107 http://www.foresightiom.com/?p=106 http://www.foresightiom.com/?p=106#comments Fri, 08 Dec 2006 21:10:19 +0000 Ben Fairfax Uncategorized http://www.webcabcomponents.com/iom/blog/?p=106 Though this book is worth buying just for the 37 page second chapter written by Anthony Bolton about his investment approach, the book over-all does fall along way short of what it could have been. This chapter gives a good first hand account of the philosophy and process of Mr Bolton, and re-affirms for the reader many age-old rules such as do your own research, do not follow the heard, and be systematic. The real short coming of the book is that this chapter only represents 37 pages of the total 177 pages. The other material contained within the book is either written by Jonathan Davis and is a reproduction of earlier reports and industry analysis, and as far as I can tell is essentially just padding in order to allow the publisher to publish a book rather than a 37 page article.

Anthony Bolton is definitely an outstanding investor and this is precisely why such a book has been produced. Moreover, this is the reason why everyone excluding his immediate friends and family have brought this book. Saying this, a large portion of the book namely chapters 3-4, just endlessly repeats this statement in numerous numerical and linguistic forms without providing almost any insight into the investment process by which this investor works. Unfortunately such material fails in the primary aim of any investment text which surely is to make the reader a better and more informed investor.

Saying this, I did learn one or two new facts such as the interesting fact that Mr Bolton uses sell side analysts, rather than just his (large) in-house analyst team. Also the point concerning how central the use of charting is to Mr Bolton’s over-all approach. But I was also very much left wishing to learn more and hopefully when Mr Bolton leaves Fidelity he will get the chance to write a follow up on chapter 2, with a full 200+ page book detailing not only his investment philosophy but also numerous worked examples detailing particularly investments which illustrate the application of his philosophy.

]]> http://www.foresightiom.com/?feed=rss2&p=106 http://www.foresightiom.com/?p=105 http://www.foresightiom.com/?p=105#comments Thu, 07 Dec 2006 15:36:57 +0000 Ben Fairfax News Editorial Investment Sites http://www.webcabcomponents.com/iom/blog/?p=105 On this page I have collected together a number of links to useful investment blogs which I have come across:

Closed-end Funds - http://closed-endfunds.blogspot.com/
News and news of mainly US listed closed-end funds.

Quant Investor - http://quantinvestor.blogspot.com/
A Quant developers investment activity and views (incl. closed-end fund activity).

Random Roger’s Big Picture - http://randomroger.blogspot.com/
US Portfolio Managers view on portfolio management, foreign stocks (ie non-US), exchange traded funds, options.

The Big Picture - http://bigpicture.typepad.com/
A marco prospective of the investment envoiroment.

ThinkBlog - http://www.thinkequity.com/blog/
NYC equity research teams blog focused on growth opportunities.

Quantitative Trading - http://epchan.blogspot.com/
Quantitative investment and trading ideas, research, and analysis.

Contrary Investor - http://www.contraryinvestor.com/index.html
Monthly research, commentary and perspectives on the financial markets.

The Oil Drum - http://www.theoildrum.com/ Detailing development within the Energy sector.

John Kay (FT Columnist) - http://johnkay.com/ Articles on microeconomics.

To be continued…..

]]> http://www.foresightiom.com/?feed=rss2&p=105 http://www.foresightiom.com/?p=104 http://www.foresightiom.com/?p=104#comments Tue, 05 Dec 2006 23:15:03 +0000 Ben Fairfax Stocks for Income http://www.webcabcomponents.com/iom/blog/?p=104 BT has just opened it first customer lines on its 21st Century Network (21CN) at Wick near Cardiff. The 21CN will eventually be rolled out nationwide and be a complete upgrade of BTs infrastructure. Allowing BT going forward note only to offer more value added digital products and services but also to reduce its fixed ongoing costs associated with maintaining its network. After pouring 10B GBP into this project (over several years) which has had a natural drag on the earnings this long term investment will soon start to pay-off. It will also reduce BTs operational risks since the 16 existing networks will ultimately be reduced by just 1 integrated technology platform which naturally will significantly simplify BTs operational position.

As was widely reported BT also launched its BT Vision service which is a home TV service. The offering is not really news since it has been in the pipeline for at least two years and for those for are interested to learn more I refer the interested parties to either the front page of today’s Companies and Markets section of the FT, or the numerous company reports of the matter which are available from BT’s corporate site at:

http://www.btplc.com/

]]> http://www.foresightiom.com/?feed=rss2&p=104 http://www.foresightiom.com/?p=97 http://www.foresightiom.com/?p=97#comments Tue, 05 Dec 2006 00:15:18 +0000 Ben Fairfax Investment Technique http://www.webcabcomponents.com/iom/blog/?p=97 It seems that the best strategy a manager can take to ensure survival during a risky project is to hire what I refer to as a “blame me” consultant. The “blame me” consultant in theory is hired to provide management with expert advice, but in reality the motivation is that the management will have someone to blame if anything goes wrong with the project. Hence, the term “blame me” consultant. This approach is used to great effect and offers a compelling pay-off to all parties, namely the consultants can pick up large fees and the management never gets blamed for anything.

In the world of investing we also have managers who are involved in a risky project known as investment management. Now in the investment world such managers would also like to adopt a similar strategy however by the very nature of their position they cannot hire a third party to decide investment decisions because that is the essence of their job. In order to get around this problem the investment management community has invented the notion of “Mr Market”. Any under-performance of a fund is often explained with regard to this notional person “Mr Market”. In particular, you will often hear statements like: “Due to market volatility the fund experienced underperformed during Q3”. Hence, in the investment world the usual “blame me” consultant has been replaced by a notional construct where the notional construct serves the same purpose but has the added advantage that he cannot disclose any information and does not require any fee.

This is not meant to be taken completely at face value but I think I am on to something. Moreover, there is a very serious point that any investor should take personal responsibility for their investment decisions and over-all investment performance. The reason for this is that an investors (long term) performance is primarily determined by the ability of the investor rather than the prevailing market conditions. I would even go so far as to say that every day of every year there are opportunities in financial markets. This is just one example of the many psychological pit holes within the investment world and getting into a “Mr Market” blame me Consultant mentality really is a rather dangerous pit-hole since it delegates the responsibility that every investor has to continually strive to make themselves a better investor.

]]> http://www.foresightiom.com/?feed=rss2&p=97 http://www.foresightiom.com/?p=103 http://www.foresightiom.com/?p=103#comments Mon, 04 Dec 2006 23:49:03 +0000 Ben Fairfax News Editorial http://www.webcabcomponents.com/iom/blog/?p=103 According to the Organisation for Ecconomic Co-operation and Development China now has the world’s second largest R&D budget at $136B USD, with Japan now pushed into Third place with a budget of $130B USD, where the US is still the clear leader with a total budget of $330B USD. However the absolute numbers are slightly misleading because of the differing cost basis of differing centers. After all as someone who has run IT operations in differing locations I know from experience that you get very different levels of bang-for-the-buck in differing locations. So to put this into perspective in China there are now 926,000 researchers, where as in the US there are 1.3M, hence China is not as far behind the US as the absolute dollar amount would imply.

Going forward China (at least officially) is committed to developing 100 world-class universities, with a focus on science and engineering. If this aspiration is put in place then China (a generation later) will outstrip any nation state in terms of “intellectual human capital”.

]]> http://www.foresightiom.com/?feed=rss2&p=103 http://www.foresightiom.com/?p=102 http://www.foresightiom.com/?p=102#comments Mon, 04 Dec 2006 23:40:21 +0000 Ben Fairfax Macro Themes http://www.webcabcomponents.com/iom/blog/?p=102 This year has been one of those years in financial markets which has been particularly challenging for investors. Investing is a difficult business however some years are even tougher than others. There has been numerous opportunities this year and some of these I caught (and some of them I missed). But it is the case that the macro backdrop has been getting more challenging and the themes this year have switched several times. In terms of the indexes (which though do not describe or reflect the investment opportunities) are often a good starting point, have performed as follows:

World Index up 16% in dollars, 2% in sterling, and 4% is Euros

Hence for the GBP and EURO dominated investors in particular getting any sort of performance has been very tough for those that stick close to the indexes. Moreover even the USD based investor has only seen nominal index returns since the dollar has devalued by over 10% against its trade weighted basket of foreign currencies.

Though such market conditions are a difficult environment in which to generate decent returns they are an environment in which the relative performance of various managers will become most discernable. Or as Warren Buffet would say, “It is only when the tide goes out that you learn who is not wearing shorts”.

]]> http://www.foresightiom.com/?feed=rss2&p=102 http://www.foresightiom.com/?p=101 http://www.foresightiom.com/?p=101#comments Mon, 04 Dec 2006 23:20:53 +0000 Ben Fairfax Investment Strategies http://www.webcabcomponents.com/iom/blog/?p=101 As I have mentioned a number of times I just feel the Hedge Fund product class offers the typical investor a rather bad deal. With the 2% annual and 20% of return, fee structure it is difficult to see the average investor doing better in hedge funds than putting his money into an index tracking fund. Saying this, if anyone out there has $1B USD (even $50M is OK) and wants to pay me 2/20 fee structure and all I have to do is out-perform the 9.55% YTD hedge fund index (see CS/T Hedge Fund Index) then I will be more than happy to oblige

Now following on from the work of Andrew Low at MIT on the ability of passive computer driven investment strategies to mimic hedge fund returns, Goldman Sachs has produce a product known as Goldman’s Absolute Return Tracker index (ART) which aims to do exactly this. The basic idea is that the computer is feed in the performance of all known hedge funds over the past month and through a variety of models of the trading strategies used works out and aggregate strategy weighting over the entire class. Then the following month it applies algorithms which mimic these strategies. Though the data is provided one month is arrears the tracking error does not seem to be unduly affected, or at least Goldman Sachs is prepared to take this risk on. This product has a fee structure of 1% per annual which means that the product is not only going to beat the hedge fund index but will do so with a product which is still open to new investors (unlike many of the most successful hedge funds) and one that scales in terms of assets under management.

]]> http://www.foresightiom.com/?feed=rss2&p=101 http://www.foresightiom.com/?p=100 http://www.foresightiom.com/?p=100#comments Mon, 04 Dec 2006 22:36:33 +0000 Ben Fairfax Uncategorized http://www.webcabcomponents.com/iom/blog/?p=100

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]]> http://www.foresightiom.com/?feed=rss2&p=100 http://www.foresightiom.com/?p=96 http://www.foresightiom.com/?p=96#comments Wed, 22 Nov 2006 23:16:43 +0000 Ben Fairfax Closed-end Funds http://www.webcabcomponents.com/iom/blog/?p=96 Last week, Matthew Richards who writes for the FT on closed-end funds contacted me with regard to closed-end funds in general and an article he was preparing that week in particular. The article in question was on the activities of hedge funds who apply the strategy of closed-end fund arbitrage. This weekend Matthew’s article appeared in the FT, and for those who have access to the FT the article was entitled “City prey fight back against the big beasts”, published: November 18 2006, within the FTMoney section. As a direct follow up on this article I wish to make the following additional points:

1) The idea that such arbitrage activity only effect’s weak or failing trusts is just not true. There was the case of Edinburgh Investment Trust which obtain good relative performance in the small cap sector, however the sector as a whole fell out of favor and hence the discount widened to 20%. Recently there has been the case of Resource Investment Trust (REI.L) where the trust has not only obtained good performance but also offers essentially a unique product where existing investors in REI.L will find it difficult to find a suitable replacement. Moreover, in this case the fund management team is in the process of taking legal action against the trust for essentially deformation of reputation. The idea being that if you are running a trust which is wound up then it implies you are not any good. I cannot see this legal action succeeding since the contract between the fund and fund management team is very clear with get out clauses on both sides. However, the activities of arbitrage funds is increasing the risk associated with starting an investment trust (particularly outside of the latest hot sector), and this effect is just not in the interest of retail investors.

2) Matthew also mentioned the use of CFDs which arbs use to hide positions. In addition to this strategy there is also the tactic of obtaining huge amounts of loaned stock just before a vote on a special resolution (usually proposed by the arbitrage outfit) in order to push the resolution through. The point here is that the stock will typically only been loaned for 1-day (over the voting period) where the “real” shareholders are just retail investors which hold the stock in nominee accounts which (1) are not able to vote (due to being held in a nominee account) and (2) have no idea there stock is being loaned. Moreover, the special resolution may not even been in the investors long term interests. However this practice continues because the investment bank which is the agent in loaning the stock can obtain up to 10% over LIBOR, on an asset which it does not even own.

3) Essentially in symmetry to (2) above there is also the issue that within some closed-end funds there are differing classes of investors with differing voting rights. This has been a particular problem for equity warrant holders in Investment Trusts since if the trust is wound up the warrant holders get a particularly bad deal since the LSE uses a arcane formulae which greatly under-values the time value of the warrant. In particular, the arcane formula used by the LSE is not equivalent in any way with the widely used and accepted Black-Scholes option pricing model. What this has meant in practice is that an arbitrary outfit can buy a large amount of the ordinary stock, force a wind up (against the wishes of the non-voting warrant holders) and then not only obtain value from the narrowing discount but also get value from being able to give the warrant holders a bad deal. A good example of this was Bearings Emerging Europe Investment Trust which was restructured in 2002, see:

http://www.trustnet.com/general/news/display-story.asp?id=36978&db=it&txtS=y

There are some other points I would like to make but will not due to the risk of annoying the wrong people. However, if you know me in meat world then I am happy to let you know the gory details in confidence and in person.

]]> http://www.foresightiom.com/?feed=rss2&p=96 http://www.foresightiom.com/?p=95 http://www.foresightiom.com/?p=95#comments Wed, 22 Nov 2006 22:46:49 +0000 Ben Fairfax Closed-end Funds http://www.webcabcomponents.com/iom/blog/?p=95 As reported by Trustnet, see:

http://www.trustnet.com/general/news/display-story.asp?db=it&id=82081

the JPMorgan Income & Growth split capital trust is going to be rolled over into another split-cap structure. If you are not familiar with split-caps investment trust structures then there is a brief guide on the BBC site at:

http://news.bbc.co.uk/2/hi/business/1613719.stm

Now the significance of this event is that since the split-cap mis-selling scandal there has been no launches of split-caps. Moreover, all split-cap have a fixed redemption date and until now the funds reaching redemption have only offered investors to options of either cash/loan note or to roll the investment into an investment trust vehicle with a “vanilla” capital structure (i.e. only ordinary shares with possibly some gearing).

Anyway, I am glad to see split-caps of an asset class continue since for the more quantitative investor who makes the effort to do the analysis, opportunities do occur from time to time. For example, after the mis-selling scandal the zeros went to extremely low levels and back in the 90s (i.e. pre-internet days) for those who had the patience to get the annual reports and the time to unwind the various cross holdings and debt structures there was great opportunities.

]]> http://www.foresightiom.com/?feed=rss2&p=95 http://www.foresightiom.com/?p=93 http://www.foresightiom.com/?p=93#comments Fri, 10 Nov 2006 18:58:47 +0000 Ben Fairfax Investment Strategies http://www.webcabcomponents.com/iom/blog/?p=93

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]]> http://www.foresightiom.com/?feed=rss2&p=93 http://www.foresightiom.com/?p=112 http://www.foresightiom.com/?p=112#comments Fri, 10 Nov 2006 16:45:40 +0000 Ben Fairfax Macro Themes Investment Sites http://www.webcabcomponents.com/finance/blog/?p=112 Inflation on the United States of America in US Dollars

Calculator of U.S. Retail Price Inflation (1666-present), Wage Inflation (1914-present), Medical Cost Inflation 1936-present) using Tom’s Inflation Calculator

Links to Inflation Rates in other nation states

UK Inflation in pounds sterling
Japanese Inflation in yen
Euro-zone Inflation in euros
MEASURINGWORTH.COM

To be continued…

]]> http://www.foresightiom.com/?feed=rss2&p=112 http://www.foresightiom.com/?p=92 http://www.foresightiom.com/?p=92#comments Thu, 09 Nov 2006 23:40:59 +0000 Ben Fairfax Investment Technique http://www.webcabcomponents.com/iom/blog/?p=92 Interim dividend was announced at 5.1p this morning which implies a full-year dividend around 14.2p, which raises the divided by 19% putting the shares back onto a 5% yield. However, if you consider for example my original average entry price this year of 220.62p then the yield on this original investment is now running at 6.44%.

The reason I mention this is because the dividend which a stock pays is directly related to the earnings (or more precisely the cash flow), where as the price at which a stock trades is determined by the price market participants are prepared to pay for the present and expected future earnings. In short, the divided is determined by cash in hand, where as the stock price growth is determined by a change in perception which though will be influenced by changes in earnings is not directly related to them. Saying this, typically if the dividend payments of a stock move outside the normal range for that industry (to say 6.44%), and this payout is comfortably covered by the underlying business then one of two things will normally happen: (1) the dividend will eventually be cut because the earnings fall, (2) the share price moves so that the yield becomes more in line with typical market values (say 5%). Hence, if you can eliminate (1) and buy stocks on a high yield for the sector in question then the odds are already leant in your favor.

This is exactly what has happened in the case of BT.A, and provides an illustration why a dividend investing approach can offer tremendous risk/reward investment opportunities. Back in the Spring BT was trading at around 10 times earnings and yielding 5%. In the Spring BT management made it clear that they wished to move towards a divided payout of 2/3 of earnings which lead further support to the dividend and lead investors to believe that management believed a 2/3 payout to be a sustainable level for the underlying business. Now under such a situation and assuming the underlying business is healthy (please see earlier blog posts for this) the odds of a 25%+ return over the next year are very much stacked in the investors favor.

For example with my BT investment this year, there has been some multiple expansion from around 10 to 11, resulting in a 10% capital return before any move in earnings, the earnings have moved forward a healthy 20%, resulting in a total capital return of around 30%, while all the time I have been earning a 5% yield. Resulting in around a 35% return so far this year, even without any multiple expansion a total return of 25% would still have been achieved.

The final point I wish to make with such an approach is that in it important not only to analysis the health of the underlying business (i.e. the growth in earnings) but also have an insight into the way in which stocks multiples vary according to market cycles and themes. Since the large fluctuations in multiples which stocks trade has an outsized effect on performance. For example back in 2000, BT was on a multiply of over 40, and tobacco stocks such as BAT was on a single digit multiple; this year BAT has been on around 16 times earning where as BT has been as low as 9.5. Therefore, the effect of such changes in multiples over this period ignoring the effect of changes in earnings would be for BT to fall over 75%, and for BAT to rally over 60%. Therefore, understanding the dynamics of changes in multiplies is essential to realizing equity like returns (which in my mind our 25%+ annual returns). To be honest, for me the judgment of market themes and associated changes in multiples is more of an art than a science. Coming to a view on market themes does not follow as a deductive process but more of a slow realization, or evolving intuition of the underlying dynamics. However saying this, the development of this intuition is feed from undertaking daily research of the market which is generally undertaking as a formal maybe even scientific activity.

]]> http://www.foresightiom.com/?feed=rss2&p=92 http://www.foresightiom.com/?p=91 http://www.foresightiom.com/?p=91#comments Thu, 09 Nov 2006 23:35:08 +0000 Ben Fairfax Investment Technique http://www.webcabcomponents.com/iom/blog/?p=91 Maybe the market is 90% efficient, maybe even 99%, but personally the exact level of the inefficiency really is of no consequence because as far as I am concerned I only look at the in-efficiencies.
]]> http://www.foresightiom.com/?feed=rss2&p=91 http://www.foresightiom.com/?p=90 http://www.foresightiom.com/?p=90#comments Tue, 07 Nov 2006 12:29:09 +0000 Ben Fairfax Investment Strategies http://www.webcabcomponents.com/iom/blog/?p=90 Yesterday, a conversation prompted me to recall an bit of quantitative research I did in 2001 regarding Correlation Trading of Energy products. This morning I dug this work up and provide it here for who ever may be interested. The idea behind this system is very much based on the fundamentals of the energy market where energy products are continuously shipped between various locations because of arbitration opportunities in the physical market.

Overview

Though by the application of our approach the generation of pure alpha in an absolute sense for trading parties may not be permissible, within the context of a large financial institution with significant customer flow within relevant markets the possibility of the generation of (meaningful) alpha may be possible from the context of absolute returns and over-all cost of capital reductions for the institution as a whole.

With regard to cost-of-capital regulations relating to product correlation we sight the FSA documentation, CM: Section 3: Page 2 of 5, 3.3.1, part 4, Date Issued 30.9.98:

Capital charges for each commodity are to be calculated separately, except under either of the following provisions, where positions may be treated as if they are in the same commodity:

1. positions in different sub-categories of commodities in cases where the sub-categories are
   deliverable against each other; or

2. positions in commodities which are close substitutes for each other and whose price movements
   over a minimum period of one year can be shown to exhibit a stable and reliable correlation of at
   least 0.9.
   1. The correlation referred to in (2) above relates to price movements and not to prices.

With reference to this guideline we investigate to what degree we can conclude that give products exhibit `reliable and stable correlation’. We argue further that any products found to exhibit reliable and stable correlation can be handled in the corresponding manner laid out within FSA regulation with regards to `cost-of-capital’ requirements.

Quantitative Trading and IT

Ideally one would wish to investigate the potential Correlations between as many energy products as possible however in order to do so requires such parties to have a reliable enterprise level IT infrastructure. In short, Excel will just not cope which such a task and I would suggest either using EJB/Java with DBMS (as I did) or SQL Server 2005 with ideally the business logic (i.e. .NET DLL) run from within the database. The reason why Excel will not cope is because with just 20 energy products there are 190 energy product pairs in which the Correlation properties should be investigated, if you have 40 energy products then there are 780 pairs, and for 60 products 1770 pairs. So the point I am trying to make is that in this instance the application of enterprise software platforms with some basic quantitative techniques can lead to a powerful and robust systematic trading technique. In short, IT can give you an edge.

Correlation Report and Basel II

The report from my original investigation can be downloaded from the following link:

Correlation Report (PDF File)

I never really took this approach too seriously from a trading point of view but was interested to see the possibilities in terms of cost-of-capital reductions and internal inter-book (or fund) systematic trading. The system value lies as much in the nature of the FSA regulation procedures as the underlying fundamental rationale for such an approach. Now with Basel II on the horizon, see:

http://www.bis.org/publ/bcbsca.htm

there will be end-less similar opportunities produced by this new regulatory framework. In short, Basel II being a set of guidelines rather than hard rules, will allow the smart and motivated banker to produce quantitative research motivated by the Basel II guidelines, which assuming the research is sufficient robust to get past the regulator will allow the host institution to reduce their cost of capital, feeding directly through to the bottom line.

Our Software

Sorry for the plug but my software firm (WebCab Components) offers all the Correlation functionality discussed above along with general linear/non-linear regression analysis, and ANNOVA type analysis which I imagine would be the functionality particularly relevant to cost of capital related analysis vis-a-vie Basel II. The relevant product would be one of the 4 editions of WebCab Probability and Statistics corresponding to the particular development environment you are using namely: J2SE (plain Java), J2EE, .NET (also contains COM, XML Web service implementations), or Delphi. See WebCab Compoennts home page, or following direct links to product desciption pages: J2SE, J2EE, .NET, Delphi. If you decide to use our software then you can even have the source files of my Correlation Report to re-use for your own reporting purposes.

]]> http://www.foresightiom.com/?feed=rss2&p=90 http://www.foresightiom.com/?p=89 http://www.foresightiom.com/?p=89#comments Mon, 06 Nov 2006 12:11:07 +0000 Ben Fairfax News Editorial http://www.webcabcomponents.com/iom/blog/?p=89 Last week, with the exception of Fridays US jobs report there was a stream of weaker than expected economic data (namely GDP, real estate). Moreover, I would expect the jobs report over the coming months to weaken as the wider US economy slows and the housing sector in particular corrects. Cycles in the housing sector by there very nature (i.e. very illiquid market where it takes 2+ months typically to buy/sell assets) take 1-2 years to fully re-balance. The housing sector in the US like just about every major economy is deeply integrated within the economy and any slowing effect will lead to a slowing in the numerous associated sectors (such as building services, construction). For example, since 2001 there has been around 200,000 real estate agents jobs created in the US, this roughly equals to number of jobs lost at Ford over the same period, with any sustained volume slow-down not only the jobs will be at risk but the revenue creation associated with these jobs will be reduced.

With the US savings rate still around zero, and the US still having its double deficits (trade and federal); all I can see as a way out is inflating the currency leading to a nominal slow-down (i.e. relative to hard assets), or without the inflating just an absolute slow-down (i.e. in USD terms). Either way holding assets exposed to the internal (paper) US economy offers a weakening risk-reward pay-off.

]]> http://www.foresightiom.com/?feed=rss2&p=89 http://www.foresightiom.com/?p=88 http://www.foresightiom.com/?p=88#comments Tue, 24 Oct 2006 11:49:03 +0000 Ben Fairfax Market Themes http://www.webcabcomponents.com/iom/blog/?p=88 Whenever I am asked about property investment I usual suggest that people take a look at the Berlin market. The reason has simply been that I understood it was possible to obtain a 10% rental yield and there was the possibility of a more Anglo-Saxon mortgage market (i.e. prices could get more debt inflated, in addition to the earnings growth inflation). Now firstly it seems you could get a 10% yield but rental yields have been coming down due to investors entering the market and pushing up prices over the past few years, and that now a 6-8% yield is more realistic. What is particularly interesting with this market is that over the past fews years even the smart money, early movers like Morgan Stanley and Blackstone, have found it hard to get a decent return.

Over the past few years there have been a number of trades which have gone through where usually a US Investment Bank or Private Equity Group buys a large block a private residential property in order to reseller it at some point directly within the private market. Now the trade has generally been as follows you buy at the whole sale level (i.e. 300+ flats at once) from Corporations, housing associations etc then resell to owner-occupiers. Apparently the whole sale price at present is around 800 Euro per square meter and the end-user price can be up to 1,000 Euro per square meter. Hence, at least on paper there is something of an arbitrage, at least if you want to get involved in being a real estate agent. However, even with all the investment banking financing tricks people like Morgan Stanley can muster the deals just do not seem to stack up.

Remember JP Morgan is a real business and hence they want 20%+ return on capital, and hence when I say stack up, it means this business does not provide a 20%+ return on capital. Some of the problem’s which such parties have experienced when buying at the wholesale level in order to resell, is that some tenants just do not want to buy, hence you cannot get a clean exit, and you end up having apartment blocks which are partially sold and the ones which are not only provide 6-8% yield. Moreover, if you want to push up the rents in order to try to get the numbers to stack up (or the tenants to leave) then there are municipal rent caps. Hence, you end up being stuck with residential property with a 6-8% rental yield which not really the sort of asset which Morgan Stanley (or people like me) are looking for.

]]> http://www.foresightiom.com/?feed=rss2&p=88 http://www.foresightiom.com/?p=87 http://www.foresightiom.com/?p=87#comments Tue, 24 Oct 2006 11:32:38 +0000 Ben Fairfax Market Themes http://www.webcabcomponents.com/iom/blog/?p=87 You never make friends (or get customers) by telling people what they do not want to hear and hence the sales people (including sales staff in the financial sector) just tell people what they want to hear. Which is probably the reason why I have always been such a miserable salesman since I always just tell people what I think irrespective of the consequences. Now, just to get my position out in the open, I think property at present is a bad investment and the worst market I know of is the UK. If anyone wants to know my personal rule of thumb with property, it is:

“you take the monthly rent multiply to 100 (maybe 120) to give you a target buying price”

That is, I always think property as an investment should offer a 10%+ rental yield. The reason for this is just that in order to have a 6% real (gross) income, with a 2% vacant/management, and 2% cost of up keep, you need 10%+ gross rental income. To me taking less than 6% income with real inflation around 5%, just does not make much sense. Remember when the property developer programs are not on the TV each night and everyone (and there dog) is not pushing property investments (i.e. when the music stops), it is the rental yield (i.e. the earnings) which will count.

Please, before anyone tells me, I really do not care what the market prices are, or what other persons are doing… what I care about with any investment is entering into positions where I expect to obtain a 25%+ compound return per year on my investment. And even an entry price of 100X rent, the numbers only stack up with gearing.

Making such comments is not going to earn me much popularity but since my no.1 source of income over the past 10 years have been investments, I cannot afford to dilute my approach in the name of popularity. Please also note that this is exactly the line I have been telling family members over the past few years, with differing degrees of success.

Since all my family members know I am involved in investment markets I always get people coming up to me at family gatherings and lettering me know about there latest investment activities. And one can guess this discussion recently often centers around property investments. At one end I have people telling me at such gatherings “I am going to just keep on buying and never sell”, and at the other end I have, “I am glad I sold and now rent”. Guess which one of these two camps made the most money over the past 3 years…. Well its the guy who sold his UK house and invested the monies on the stock market. In fact, in the UK over the last one, two and three year periods, the FTSE index has out-performed the housing index.

]]> http://www.foresightiom.com/?feed=rss2&p=87 http://www.foresightiom.com/?p=86 http://www.foresightiom.com/?p=86#comments Fri, 20 Oct 2006 19:25:15 +0000 Ben Fairfax AIM Funds http://www.webcabcomponents.com/iom/blog/?p=86 There have been numerous investment companies launched onto the AIM exchange over the past few years. Since these firm are under researched (in comparison to there Investment Trust counterparts) mis-pricings may appear leading to opportunities for out-performance over time. One area which has particularly interested myself (and an area which other have drawn my attension to) is that of clean energy. As the FT pointed out today, onshore wind farms are getting very close to being viable without state aid and hence this sector may very soon offer an realistic alternatives to hydrocarbon energy sources. Below I list two firms which allow one to gain exposure to clean energy technologies with the assistance of specialist fund management:

Imperial Innovations

Commercialization of Imperial College London Universities IP. The University spends a fortune development intellectual property which general is just published in academic journals, the Imperial Innovations offers an alternative where the University and individual can get a kick back to IP developments which are commercialized. After looking at there site it just looks like is very cost effective means by which the buy up IP assets in the biotechnology and re-newable energy fields.

http://www.imperialinnovations.co.uk
http://www.investegate.co.uk/Index.aspx?searchtype=3&words=IVO&Go=search

Low Carbon Accelerator

Guernsey-domiciled Closed-end private equity AIM fund specializing in green energy sector. Fund run by Mark Shorrock, former CEO and founder of Wind Energy, a UK-based independent wind farm developer.

http://www.lowcarbonaccelerator.com

]]> http://www.foresightiom.com/?feed=rss2&p=86 http://www.foresightiom.com/?p=85 http://www.foresightiom.com/?p=85#comments Thu, 19 Oct 2006 23:03:45 +0000 Ben Fairfax Market Themes http://www.webcabcomponents.com/iom/blog/?p=85 With operations like BNP Paribas Arbitrage SNC today buying stakes in closed-end funds like Aurora Investment Trust plc at a discount of under 7%, you really need to ask yourself whether closed-end fund arbitrage is a strategy worth applying anymore. This is not an isolated event and parties such as ‘The Cayenne Trust Plc’ another fund arb are quite happy to build positions in funds such as Perpetual Income and Growth, Electric & General Investment trust at “discounts in excess of 7%” (see September 06 Factsheet). Such parties would have wanted 15-20% (or higher) discount levels 3-5 years ago, and now they are happy on wafer thin margins which seem to the outside observer that in terms of the expected return the entire activity is hardly worth it. In my judgment I would suggest that at discount level under 10%, would render to closed-end fund arbitrage strategy insufficient to justify. Moreover, if you are paying hedge fund/absolute return like fees then the whole strategy becomes a bit of a disaster (at least for the investors in such funds) when the discounts go sub-10%.

As has been widely reported (for example in the FT), the dilution of potential returns from many hedge fund strategies (such as closed-end fund arbitrage) is being diluted by the simple fact that there is too much money chasing the same opportunities. Closed-end fund arbitrage is a clear example of this where parties are deploying capital in trades with ever lower return expectations. This lowering expectation is also very much born out by the figures where according to Credit Suisse Tremont, the hedge funds as a whole have returned 7.64% over the past year, where as five years ago most strategies offered double digit returns. Saying this, even though the performance each year has been getting weaker and now stands at levels not much higher than a bank account, people are still all to keen to throw money at hedge fund strategies. In particular, according to Hedge Fund Research a record $44.5B has flowed into hedge funds over the last quarter, which is only likely to push returns to even lower levels. ]]> http://www.foresightiom.com/?feed=rss2&p=85 http://www.foresightiom.com/?p=84 http://www.foresightiom.com/?p=84#comments Wed, 18 Oct 2006 12:57:02 +0000 Ben Fairfax Macro Themes http://www.webcabcomponents.com/iom/blog/?p=84 Back in 98′ I clearly recall the day when Russia defaulted on its national debt. I also recall reasonably clearly the collapse of pyramid “investment” schemes in Central Europe, and the collapse of numerous retail banks which resulted from the mis-management and out-right fraud associated with the banks lending activities. These events happened just 10 to 15 years ago. The consequence of such events at the time in terms of banking services was that the populous just did not trust the system. This resulted in large amounts of capital just flowing out the country into foreign bank accounts and in many cases people just keeping the cash (in a hard currency) and literally stuffing it under the mattress.

Though global financial service firms have exquisitely complex accounts the basic business model really boils down the something very simple. Namely, they take deposits and make loans, and the interest they pay on the deposits is less than the interest they charge on the loans and their profit is the difference. For example, RBS.L has an interest rate differential of around 2.6% (i.e. loans on average are charged at 2.6% higher interest rate than is paid on average on deposits), there are approximately 400B GBP of loans and 400B GBP of deposits, hence the profit each year is 400B GBP * 2.6% = 10B GBP. In short, a bank’s profits result from two driving factors loan/deposit volume and interest rate differential.

Returning to our example, after 50 years of communism one would expect any nation state’s economy will take years to transform the infrastructure and mentality of the population to become more in line with established capitalist societies. However, what has surprised me is the speed at which this transformation has taken place. Just recently Sberbank (Russia’s no.1 bank) has been running trials of credit cards to retail customers, according to Sberbank they expect to start issuing credit cards by Christmas. Yesterday a much smaller Russian bank MDM Bank managed to securitised $430M of car loans. That is, the bank sold car loans to private individuals and then resold these loans on within financial markets. The pricing of the notes where as follows:

$270.9M, Baa1/A-minus note, priced at 100 basis points over one-month dollar Libor
$77.4M, Baa2/BBB note, priced at 160bp over one-month Libor
$54.8M, Ba2/BB note, priced at 330bp over one-month Libor

now though my Russia is almost non-existent it would seem from:

http://www.mdmbank.ru/private/loans/car/conditions/ontime/

that the car loan run with a 9.99% interest rate, and hence the above prices provide descent margins and moreover the bank does not even hold the default risk. The point is banking is Russia and Central/Eastern Europe really has come a very long way since the dark days of the 1990s.

Now getting back to the issue at hand the point I am trying to make is that the US banking sector has traveled a similar path from banking panics and collapses to the mass adoption of credit and other financial services. However, in the case of the US this evolution has taken about a hundred years going back to the formation of the FED in accordance with the Federal Reserve Act of 1913 (see http://www.ny.frb.org/aboutthefed/history_article.html), the breaking up of the Breton Woods agreement in the 1970s, to the recent post Thatcher-Regan monetarism which had its ultimate expression in the “Greenspan put”. The result of these developments has resulted in the credit and banking services being ever more widely available. However, as you can see from the time span detailed above this transformation has taken about 100 years, where as in Russia and Central/Eastern Europe which are well on the way to making the same transformation in just a 10 year period.

]]> http://www.foresightiom.com/?feed=rss2&p=84 http://www.foresightiom.com/?p=83 http://www.foresightiom.com/?p=83#comments Fri, 13 Oct 2006 17:44:46 +0000 Ben Fairfax Tax Planning http://www.webcabcomponents.com/iom/blog/?p=83 The Isle of Man (Manx) trust law is very similar to the trust law within England, and the taxation of trusts can be rather complex. Saying this, in order to simplify matters the Isle of Man Tax authorities divide trusts into Manx Trusts and non-Manx Trusts.

What are Manx and non-Manx Trusts?

A Marx Trust is any trust where either one of the trustees is an Isle of Man resident, or where the trustees have delegated the management of the trust to a person who is an Isle of Man resident.

A non-Manx Trust is a trust where none of the trustees are resident if the Isle of Man, and where the management of the trust has not been delegated to an Isle of Man resident.

Tax Trust Income not Capital

With regard to Trusts the Manx tax system will only tax income of the Trust and/or beneficiaries and does not tax the capital/wealth of the Trust or the beneficiaries. For this reason in the following discussion we will only refer to the procedures used for the taxation of the income.

Types of Manx Trust and how they are taxed?


Manx Accumulation Trusts

Where part or the entire income of the trust is accumulated and where the beneficiaries are Manx resident. In this instance the trustees are taxed on the accumulated income. Distributions of taxed income to the Isle of Man beneficiaries are treated as capital distributions and hence the beneficiaries are not due to additional tax. Note that it may not possible to allot income as ‘distributed’ to a beneficiaries even if it is not paid out.

In instances where the income in distributed (gross) to the Isle of Man resident beneficiaries, the distributions will be treated as income distributions with the beneficiaries accessed accordingly.

Tax Free Manx Trust

A Manx Trust will not be taxed in the following circumstances:

1. Where the settlor and the beneficiaries are not resident in the Isle of Man and the income is not Isle of Man sourced. Where a proportion of the income of sourced from the Isle of Man then only that income will the accessed.
2. Where the settlor is resident on the Isle of Man but the beneficiaries are not. The tax free status can also be preserved if any Isle of Man beneficiaries are excluded from any benefit from the Trust.
]]> http://www.foresightiom.com/?feed=rss2&p=83 http://www.foresightiom.com/?p=82 http://www.foresightiom.com/?p=82#comments Wed, 11 Oct 2006 17:27:11 +0000 Ben Fairfax Isle of Man Investment Mechanics http://www.webcabcomponents.com/iom/blog/?p=82 My personal goal/guideline in terms of performance with regard to investment is that I intend to earn a return of 25% (ideally more) consistently each calendar year. As with any business activity you should have a clear idea with regard to its profitability before you start. For me the 25% compound return level is the level which I believe is the long-term level of profitability which I should expect. Thankfully, I have just passed this bench mark for the year so I can look out of my office window tonight (as shown below) and feel slightly more relaxed.



]]> http://www.foresightiom.com/?feed=rss2&p=82 http://www.foresightiom.com/?p=81 http://www.foresightiom.com/?p=81#comments Sat, 07 Oct 2006 13:15:00 +0000 Ben Fairfax Market Themes http://www.webcabcomponents.com/iom/blog/?p=81 In banking big is better, and the European market is sufficiently structurally integrated and de-regulated that the emergence of pan-European banking institution is not only conceivable but also highly likely. The driver (as always) will be competitive pressures since a larger pan-European institutions are in a better position to serve pan-European institutions and benefit from the economies of scale that such a size would bring. From which we formulate our main query:

“What institutions will be involved in the development of pan European banks? Moreover, what is the likely path and drivers for the formation of such institutions?”

My motivation is purely that I see the development of the European banking sector taking a similar development path to the US over the past 10 (or so) years. In the US through end-less mergers over the past decade you now have banking institutions which cover all states and have a global presence sufficient to serve US multi-nationals overseas. Now in order to see the likely effects on profits of an institution moving to a global pan-Euro banking giant, we will consider the example Citigroup which over the period 98 - present, has traveled a similar path in the US. In 1998, you could have purchased Citigroup stock at almost any time that year for around $12.50, with a yield of just over 1%. The present stock price is over $50, and the yield is just under 4%. What that means in that you have got 18.9% capital return compounded over the last 8 years, where the yield on the original purchase is over 14%, meaning that the compound increase in the level of dividend is around 27%. Moreover, this return has not been achieved by the expanding of multiples or excess balance sheet debt, and the evaluation now is reasonable with a PE of 10.38, with the Forward PE of 11.07, and as we mentioned above a yield just under 4%.

Now to just put this performance into perspective the DOW (of which Citigroup) is a 1/30th component has performance as follows:

Open Oct-98: 7,749
Open Oct-06: 11,678
Total Capital Return over the 8 year period: 150.7% (5.26% per year compounded)

Hence, Citigroup has had a capital returned of more than three times the market average. If you take real inflation adjusted returns (assuming average annual inflation of 4% over the period), then Citigroup has an annual real return of 14.9%, against 1.26% for the DOW.

Even if you buy into my theory in order to make any money from it, you still need to be able to predict the likely ‘Citigroup type’ banks in Europe. That is, the banks which will become $250+B market cap giants bringing us back to my original query. At present, there are hundreds of banks in Europe (there is more the 200 just in Italy), and as with any dynamic chaotic process knowing what is going to happen with any certainly is just impossible. However, as a starting point I would expect the emergence of such banking giants to start with the merger of two banks from two of the three main European economies of the UK, France and Germany. For example, a merger between two of the following three banks:

Deutsche Bank: Market Cap (approx): $62.19B USD
Royal Bank of Scotland (RBS): Market Cap (approx): $110B USD
BNP Paribas: Market Cap (approx): $98B USD

Any ideas?

]]> http://www.foresightiom.com/?feed=rss2&p=81 http://www.foresightiom.com/?p=80 http://www.foresightiom.com/?p=80#comments Fri, 06 Oct 2006 23:25:41 +0000 Ben Fairfax News Editorial http://www.webcabcomponents.com/iom/blog/?p=80 When I made my BT Group investments I viewed BT’s business as a platform in which to distribute digital products and services. The value was in the access to the customer base, since the revenue from calls where going to zero and in future the revenue growth would come from the products and services (TV, mobile internet, films, broadband, data service outsourcing for companies) which could be offered to the customer base over the ‘platform’. Hence the term ‘platform business’.

Since investing BT has gone from a PE of under 10, to a PE of over 13. Now it seems that the value within this model and the repositioning required has not gone un-noticed by other Telco’s. For example, Vodaphone has decided to enhance its ‘platform’ in Spain by offered broadband lines to it’s 4m+ mobile subscribers, in the US Verizon is investing over $20B in upgrading its ‘platform’ to deliver broadband based digit products and service, and even Deutsche Telekom and France Telecom are taking similar steps. However these other players have not experienced a similar re-valuation by the market.

At some point I would considered switching between BT and one (or many) of these players. At present, I would lean towards Deutsche Telekom within the group which is on a PE valuation of 10.2 (i.e. 30% cheaper than BT). Though I would not switch at present at some point there may be a good case for doing so.

]]> http://www.foresightiom.com/?feed=rss2&p=80 http://www.foresightiom.com/?p=79 http://www.foresightiom.com/?p=79#comments Fri, 06 Oct 2006 23:07:53 +0000 Ben Fairfax Market Themes http://www.webcabcomponents.com/iom/blog/?p=79 The UK is at an interesting pivotal point where the powers at be need to decide whether to bow to political pressure and restrict access of Romanian and Bulgarian workers to the UK which I believe will lead to greater inflationary pressure, or allow open access to these parties which will offer a fresh outlet for inflationary pressures. Inflation as such is purely an imbalance between the supply of money and the supply of goods and services. When the increase in the monetary supply outstrips the increase in the goods and services, then there is inbuilt pressure for prices of good and services will increase since there is relatively more money chasing the same goods. Similarly, if the summary of the goods and services increase faster than the monies supply then we have deflationary pressures.

Now the relationship between the openness of the labor market and inflation lies in the fact that the migrate labor force increases the goods and services which are available. That is, they soak up the excess liquidity which is in the system which leads to decreases in inflationary pressure. Over the past few years the influx of Eastern European workers has offered such an outlet for inflationary pressure which has resulted in lower interest rates than would have otherwise been the case. Now with the housing market priced to perfection, I feel that by blocking further migrate workers will lead to increased inflationary pressure, leading ultimately to higher interest rates which will push the buy-to-let market over the edge.

]]> http://www.foresightiom.com/?feed=rss2&p=79 http://www.foresightiom.com/?p=77 http://www.foresightiom.com/?p=77#comments Tue, 03 Oct 2006 23:28:52 +0000 Ben Fairfax Isle of Man http://www.webcabcomponents.com/iom/blog/?p=77 The talk I gave Component-based Development representing the work of WebCab Components to the BCS (Isle of Man) on the 21^st September has been covered within the national press, namely the Examiner. Anyone, purchasing the Examiner this week will find the article on page 8, of the Business News section. Sherrilynne Starkie (Managing Partner) of Douglas based Strive Public Relations did an excellent job in preparing the article and I wish to pass on my thanks to her.



]]> http://www.foresightiom.com/?feed=rss2&p=77 http://www.foresightiom.com/?p=76 http://www.foresightiom.com/?p=76#comments Tue, 03 Oct 2006 23:05:20 +0000 Ben Fairfax Closed-end Funds http://www.webcabcomponents.com/iom/blog/?p=76 Investment Trust (or Closed-end fund) arbitrage has become sufficiently popular that parties who apply this strategy such as QVT Fund of New York, and Laxey Partners of the Isle of Man, are just running out of potential targets in which pure arbitration is a viable approach. By ‘viable’ I am referring not to the profitability of such strategies but the fact that in order for such hedge funds to justify their high fees the strategies are (at present) not sufficiently profitable.

What is Closed-end fund Arbitration?


Now before I continue let me just detail in broad terms what the essence of closed-end arbitrage is. The activity known as closed-end fund arbitration is essentially a sophisticated version of the ‘building society carpet bangers’ approach of the 1990’s. Naturally the prospectus of such funds will tell you all sorts of tales concerning sophisticated hedging techniques and high level maneuvering within business moguls. But the simple reality is that the core of the strategy comes down to essentially the same approach as what is referred to in the popular press as ‘carpet bangers’. In particular, in a similar fashion to how parties trying to de-mutualise building societies will form collectives of members, the modern day arbitragers will build up a large stake within closed-end funds and then use these large blocks of stock via voting (or just the threat of voting) to force the board to effect changes which allow the arbitrager to exit the closed-end fund at a lower level of discount than was previously prevailing. Typically mechanisms which are enacted to achieve this end result are tender offers of shares or a formal buy-back program to manage the discount level. The arbitrager may or may not hedge the market risk (i.e. ‘beta’) of the underlying assets of the closed-end fund but the discount (i.e. the ‘alpha’) can in most cases be captured.

Narrowing Discounts


The arbitrager is nearly always structured as a hedge fund and in order to make such strategies justify the high fees charged by such parties they really need to be able to enter there large positions at an average discount on the closed-end fund of over 10%. Now at present according to Trustnet the average discount on the 277 funds covered is 4.8%, moreover out of these funds there is only 58 funds with a discount over the required 10% level. Moreover, even some of these funds have either legal challenges or powerful existing share-holders which would and/or has frustrated the activities of the arbitragers. Hence, at present there is rather limited scope for the application of arbitrage to the UK funds sector. Moreover, over the past several years the discounts have been narrowing and the main driver for this narrowing has been precisely the activities of arbitragers.

Recent Activity


Naturally the parties active within this field have been aware of the narrowing of discounts across the UK closed-end sector and this fact has been commented on a number of times within the annual reports of funds active within this area (for example the annual reports of Laxey’s Value Catalyst Fund). Moreover, it appears to be the case from viewing the performance figures that such parties have been limiting the amount of hedging of the underlying exposure in order to capture both the market return (’beta’) and the anticipated return from the narrowing discounts (’alpha’). One could imagine the driver here is to increase to over-all performance, then sell this performance to the investors as ‘pure alpha’ and pick up the hedge fund fees for the generation of ‘alpha’. In the most extreme of cases it would appear that investors have been paying hedge fund fees for what looks like a closet index tracking fund.

China offers Arbs fresh opportunities


Though the application of closed-end fund arbitrage is rather limited in the UK, there are markets particularly suited to these techniques. For example, the dynamics of the Chinese market and Chinese retail investor has resulted in some domestic closed-end funds aimed at the local retail market trading on 40-50% discounts to NAV. However, obtaining direct access to Chinese markets is only really possibly for parties with primary brokerage relationships with the few major investment banks which have been granted access because of a significant investment within the Chinese banking sector. However, there is one particular fund just launched on the AIM which may allow access to an arbitrage strategy applied to Chinese Closed-end funds, the fund in know as:

Pacific Alliance Asia Opportunity Fund Limited, more info, quote

Interestingly, the fund have been backed by a number of parties including QVT Fund would have been active within closed-end fund arbitrage. Though I am not aware of any investments or even if any investments have been made, the mandate and approach of the fund is a good fit for closed-end fund arbitration activities within the Chinese market. Personally, I will be watching this fund to see how things develop. At present, it would appear there is scope for closed-end fund arbitration in China but as is the situation now in the UK there may quickly become too many active players which will quickly render to approach obsolete for everyone even in China.

]]> http://www.foresightiom.com/?feed=rss2&p=76 http://www.foresightiom.com/?p=75 http://www.foresightiom.com/?p=75#comments Tue, 03 Oct 2006 22:37:45 +0000 Ben Fairfax Investment Trusts http://www.webcabcomponents.com/iom/blog/?p=75 Today the successful investment trust, at least in terms of performance, Edinburgh UK Smaller Companies has been forced into liquidation by arbitrageurs. In a similar way to how it is rather ironic that the founder and heart-beat of a technology company can be forced out by a Venture Capitalist (see Don’t Fear the Dragons Den, at Strive Notes) it is rather ironic that a financial manager that is adding value can be forced into liquidation just because his fund (through possibly no thought of his own) falls out of favor.
]]> http://www.foresightiom.com/?feed=rss2&p=75 http://www.foresightiom.com/?p=72 http://www.foresightiom.com/?p=72#comments Mon, 02 Oct 2006 12:18:45 +0000 Ben Fairfax Investment Mechanics http://www.webcabcomponents.com/iom/blog/?p=72 As I mentioned the monies from the maturity of the PLIW.L warrants came through and I have re-deployed about 1/2 of this money back into the market. This re-deployment represents a slight re-alignment of the third parties portfolio in favor of Europe over UK, and an increase in the weighting of energy and mining stocks within the portfolio.

Now this re-deployment with the exception of Royal Dutch Shell consisted of purchasing on the open market via market makers small cap stocks. Now with small cap stocks you typically need to build up and unwind positions over a period of time, and efficiently doing so is one area where a private equity fund manager (such as myself) can really earn their fees. Though I would say obtaining efficient execution does require a certain amount of skill and experience, once a basic technique has been developed getting good execution just comes down to your ability and determination in ‘haggling with the market’.

What I call ‘haggling with the market’ consists of (some times an endless) procedure of placing limit orders which may go to market makers or directly onto the order book via the SETS/SETSmm LSE system. Recall that a limit order as an offer to buy (or sell) a given number of securities at a given specified price. Now by monitoring these limit orders and possibly modifying them in accordance with market dynamics and liquidity is what I refer to as ‘haggling with the market’. When haggling the following issues (and many more) should be taken into account:

1) When buying only buy stock which is readily available, in particular do not initially accept offers outside the normal spread. Similar remarks apply to selling stock in that over supplying the market will just work against you and result in bad execution.
2) Try to hide your true intentions, by varying the size and timing of your trades. For example, if you are unwinding a large position in an illiquid small cap stock do not place the same size limit order at the same time each day, try to mix it up a bit, do not create a footprint in the market. Remember for small cap stocks there can be as few as two market makers and if you act in anything like a predictable fashion you will be found out and the market makers for one will ‘trade against you’.

Though in principle this back and forth game of placing limit orders and then modifying them is relatively straight forward it can be time consuming and laborious activity. For example, on Friday I placed 11 limit orders during the day but only walked away at the end of the day with 2 executed trades. I spent more than 4 hours trying to obtain good fills (aka execution) on 5 transactions but only walked away at the end of the day with 2 good fills. Today (Monday), I have gone back to the market and managed to pick up the stock I was trying to buy on Friday at and slightly better than the prices I was offering on Friday. In terms of ‘value added’ I would stay in terms so these transactions I obtained between 1.5-3% better fills than if I had just placed market orders for the purchases on Friday. Hence, though this activity is labor intensive as I mentioned above it is one activity which any investor should make sure is done correctly. Giving the market makers any of your performance really is unforgivable.

]]> http://www.foresightiom.com/?feed=rss2&p=72 http://www.foresightiom.com/?p=71 http://www.foresightiom.com/?p=71#comments Sun, 01 Oct 2006 10:32:47 +0000 Ben Fairfax Isle of Man http://www.webcabcomponents.com/iom/blog/?p=71 The Isle of Man parliament is called Tywald and has been the legislative body on the Isle of Man for more than 1,000 years which makes it the oldest continuously running parliament in Europe. Now unlike the UK for example the political tradition on the Island in referred to a “consensus” rather than party political. What this means in practice is that when an individual decides to stand to parliament for election he stands as an individual rather than as a part of a political party. Because people stand as individuals there is far more scope for members of parliament to sit on a one-policy agenda which can and has resulted in some rather unusual legislation around the fringes of policy.

Now two such examples are the seemingly island wide ban on Wind Turbines where the rationale claimed behind this legislation is that is endangers certain birds. The fact that global warming may lead to the destruction of whole ecosystems which is primarily caused from the use of fossil fuels seems to have gone unheard. Moreover, the Isle of Man (with the Scottish Islands) is the best location for onland wind generation in the UK. For further background material I refer to interested parties to the following links:

Wind Power Economics
Wind Speed and Power Output
Met Office Average Wind Speeds
IOM Average Wind Speeds

The other example (though not explicit) is the ban on caravans. Though there is no de-facto ban on caravans, Claire Newall (Legislation Development Executive) informs us that, “in order to bring a caravan onto the Island you first need to seek the approval of the Planning Department and provide dates when you plan to arrive and depart”. You must also, “get permission from a campsite to park the caravan during your stay”. Now this may seem all well and good until you realise that there are no caravan sites on the Island because no one has been granted planning permission for such. Whether this situation is some sort of conspiracy by the B&B lobby group I am not sure. But surely a situation where the un-informed caravan holiday maker to the IOM needs to continuously drive (i.e. all day and night) their caravan around the island to avoid committing a criminal offence is complete madness.

]]> http://www.foresightiom.com/?feed=rss2&p=71 http://www.foresightiom.com/?p=68 http://www.foresightiom.com/?p=68#comments Thu, 28 Sep 2006 19:48:40 +0000 Ben Fairfax News Editorial http://www.webcabcomponents.com/iom/blog/?p=68


Today in Woolworth’s (UK store) I noticed a mobile phone with mp3 player, 1.3M pixel camera, and it take memory cards and all for 39.99 GBP (actually it turned out it was 69.99 GBP but it had a 30 GBP calls voucher bundled). For those not in the UK, Woolworth’s is just a standard high street store, with real over heads to pay and even so this seems like a rather nominal price for nice functionality in a compact package. Anyway, after closer inspection the interesting point was that the phones branding only had Virgin Mobile, i.e. no phone manufacturer.

After doing a little research it seems that the mobile provide (i.e. the people with direct access to customers) are doing deals with mobile phone manufacturer in China and just cutting out completely the Nokia’s of this world. By doing so they are able to knock-off 30% of the price they can offer hand-sets for. Moreover the mobile phone company gets complete control over the branding and with there Chinese partners have been able to even customize the phones hardware and software for there exact requirements. This seems like a rather compelling business model, where the Chinese manufacture is able and encouraged to moved up the value chain by offering better and better functionality and the mobile network provider can offer a compelling offer. In fact, those provider who do not take this route may find it harder and harder to compete.

Anyway, I’m off the watch a bit of Bloomberg TV, the DOW today traded at all-time record intra-day highs and it may even close at a new closing high. As I said I last month all the negative commentary was a bit over done.

]]> http://www.foresightiom.com/?feed=rss2&p=68 http://www.foresightiom.com/?p=67 http://www.foresightiom.com/?p=67#comments Wed, 27 Sep 2006 18:30:56 +0000 Ben Fairfax Tax Planning http://www.webcabcomponents.com/iom/blog/?p=67 As a general guide of Offshore Tax planning I would recommend the TaxCafe guide:

Non-Resident and Offshore Tax Planning
http://www.taxcafe.co.uk/non-resident-offshore-tax.html

it accessible, easy to read and tells you what you need to know and nothing more (which is a great feature of any tax guide). You can buy it online and once the CC purchase has gone through you will be emailed a PDF copy and receive the hard copy in a week or so. TaxCafe also provides a book entitled ‘Worlds Best Tax Havens’ which I found less useful (compared with the first guide) but still a useful book to have on your bookshelf.

A work with is not concise but is very interesting is:

Offshore Tax Planning, 12th Edition
By Giles Clarke, MA (Cantab), PhD, FTII, Barrister
http://www.lexisnexis.co.uk/marketing/campaigns/taxation/offshore_tax_plan.html

at 120 GBP its not cheap, but it is certainly more economical buying this book than getting the some information out of a specialist tax lawyer. It is a rather technical long book but if you are seriously about planning complex issues such as Inheritance Tax (IHT) using offshore structures then time invested reading this work, or at least portions of it is time well spent. Please note that even after reading such works you are likely to still need the services of the specialist lawyer but at least you will be in a position to have more informed discussions with the lawyer and hopefully arrive at a better final solution as a result.

]]> http://www.foresightiom.com/?feed=rss2&p=67 http://www.foresightiom.com/?p=66 http://www.foresightiom.com/?p=66#comments Wed, 27 Sep 2006 17:51:59 +0000 Ben Fairfax News Editorial http://www.webcabcomponents.com/iom/blog/?p=66 Even today on Yahoo! Finance I came across two articles which essentially concluded the exact opposite thing, namely that the US House Market slow down will cause a crash/rally in US stocks. Confused!, me to, the particular reports are:

Prepare for a U.S. Market Crash - Motley Fool
Housing slump woes could be Wall Street’s gain - CNNMoney.com

what is interesting at present is not only the particular views held which tend to get endless repeated but how much divergence there is in the commentary.

]]> http://www.foresightiom.com/?feed=rss2&p=66 http://www.foresightiom.com/?p=65 http://www.foresightiom.com/?p=65#comments Wed, 27 Sep 2006 17:48:38 +0000 Ben Fairfax Investment Technique http://www.webcabcomponents.com/iom/blog/?p=65 Listening to market commentary can often drive you completely nuts. Financial news channels such as Bloomberg TV and CNBC are a hot-bed of market commentators and such media content achieve a wide audience among market professions and active private investors. Bloomberg TV and CNBC do provide value and personally though I do not go in for all the market commentary I do like the more purely news reporting on Bloomberg TV such as the ‘US Market Wrap-up’ (at 9pm GMT) and ‘after the bell’ (soon after) which really can be quite good, maybe even enjoyable. Particularly, for investors based in the UK timezone who want to keep a tab on US markets but also do not want to be sitting in front of a PC after 9pm.

Now going back to market commentators just to give you an example of what I am taking about, at present there are some commentators who I will not name (but who you can regularly hear on CNBC) who claim that in the next few months before the end of 2006, the FTSE will drop 25%. In particular, one commentator claims this year the market will trend upwards to around 6,000, before selling off and hitting a low around 4,500 before rallying towards the end of the year. Sounds like a bit of an Oracle to me and unless this individual has supernatural powers I really cannot see how such statements can be made with any certainty. After all the only certainty in financial markets is that they are uncertain. However, what is a certainty is that if you want to buy more details regarding this commentary/research then you will need to part with 500 GBP for 12 monthly issues.

So lets take a closer look at these predictions. Now the up move has played out but since most years in history are up years this was never much of a call. The commentator also claims interest rates will fall later this year and next but this information follows from just reading off the yield curve which has been predicting this exact out-come (at least) over the last 10 months. All the commentator is doing is reading off the yield curve which the bond market crowds activity has produced for the benefit of the stock market crowd. If you do not believe me then take a look at: US/UK Yield Curves.

Anyway, where I differ is the call for an “up to 25% fall in equity prices by the year end”. I assume the 25% fall is from the top, i.e. he is calling for the FTSE to hit:

6,000 * (100-25)% = 4,500,

some time this year. Now, maybe I am involved in wishful thinking, maybe this guy knows something I do not know or understands ideas which are beyond me. But at the present point in time, my view of (my) reality tells me that such an event is just not going to happen. Moreover, if I did (even to a degree) believe such an event may happen then I would be gearing up on (out-of-the-money) put options, for example the ones listed at: FTSE Covered Warrants, since the writers of such securitised equity options (from the prices at least) believe such an event to very unlikely indeed.

The reason why I am going on about this, is not because I actually enjoy writing post on the web which criticizes other people. But because I worry other people will take such views on board without really thinking through the commentary or analyst for themselves. As we will see taking such commentary at face value really can be a bad approach.

For example, going back to May 2005, the article Summer shares - Should you sell? by Naomi Caine appeared in Money Weekly Magazine, and informed us of the then views of a number of market commentators. In particular, quoting from the article:

Robin Griffiths of Rathbones is one of the most closely heeded chartists. He thinks shares could even nosedive to as low as 3,277 – the same level as the nadir in 2003….

Other chartists are similarly downbeat. John Prior, a chartist at Killik, the stockbroker, says: “A drop to about 4,500 in the next 12 months would not be surprising.”

David Schwartz, the stock-market historian, believes the bear market has already begun and that the FTSE 100 index will fall to 4,500 by the end of this year….

Unfortunately, at least for the three commentators in question we now know that the views turned out to be mis founded. Moreover, if you had had been in cash (or worst still gone short) then you would have missed out on a market which moved healthily forward by around 15%.

]]> http://www.foresightiom.com/?feed=rss2&p=65 http://www.foresightiom.com/?p=64 http://www.foresightiom.com/?p=64#comments Wed, 27 Sep 2006 13:51:01 +0000 Ben Fairfax Stocks for Income http://www.webcabcomponents.com/iom/blog/?p=64 If you are primarily interested in producing income for the long term then buying into a closed-end fund may not be the right approach since:
• A fund will typically pay-out less than the full dividend stream from the underlying investments. Moreover in a typical case the costs incurred from running the fund will be split 50/50 between the capital and income accounts of the funds. That is, half the funds management fee and management costs will come from the income steam (which is mostly dividends) further lowering the amount which can be paid out.
• Dividends are historically much more predictable than capital growth since a companies management will generally eer of the side of caution when deciding on the dividend level to ensure that they can be reliably paid and reliably increased. The most likely reason for this is that any cut in a companies dividend in most cases results in many of the senior management being relieved of their posts. Where as capital growth depends on the behavior of other market participants which is much less predictable.
]]> http://www.foresightiom.com/?feed=rss2&p=64 http://www.foresightiom.com/?p=60 http://www.foresightiom.com/?p=60#comments Wed, 27 Sep 2006 11:37:55 +0000 Ben Fairfax Investment Technique http://www.webcabcomponents.com/iom/blog/?p=60 What are Equity Warrants?

Investment Trust warrants (see Trustnet’s list) are all examples of what is referred to as equity warrants which are a close relative of the familiar vanilla call options. Equity warrants are issued by a company in its own stock and are settled by the company at maturity by issuing more stock to warrant holders for a given predefined price (i.e. the strike). The feature of issuing more stock produces an effect known as dilution, since warrant holders have the right to purchase a stock as a pre-defined price not in the present capital structure of the company but in a new capital structure where there will be more shares in issue, that is, a structure where the earnings of the company are dilution over a larger number of shares. If you wish to read-up a bit further of equity warrants then I recommend the guide provided at: Incademy.

Equity Warrants offer a clean exit at maturity

Now equity warrants have the useful feature that even if you do not choose to exercise the warrants in order to obtain the underlying stock, then they will still pay-out their intrinsic value. The mechanics of how this is achieved in that the trustees of the fund will exercise all warrants which have not been exercised which have a (positive) intrinsic value, they will then buy-back the new stock issued at the market price, the strike of the warrant is then deducted from the buy-back price and what remains is returned to the original warrant holder. What this means in practice is that at the maturity of the warrant you always have a clean low cost exit route, where (exiting) dealing costs will not eat into your profits. Remember the spread on equity warrants such as PLIW.L, can be more than 3% and if you want to trade in any volume (i.e. more than say 10K GBP at a time) then the market makers may only offer you a bid outside the normal spread.

Building and unwinding positions in Equity Warrants

Typically with assets such as equity warrants you will need to build or unwind a position of any size over several days or weeks. This can be time consuming exercise, which will consist of a game of cat-and-dog you will need to play with the market makers. Games such as this do have a hidden cost in that they will eat into your investment research time, naturally you do not need to play this game but then you will end up sacrificing a large portion of your return to the market makers. Remember the mechanical performance enhancing parts of investment are the easiest parts to get right, and though getting good fills on exiting illiquid positions can be a tedious exercise, all investors should be putting in the effort and diligence to obtain this.

I was playing this game over the post Christmas 05 - early January 06 period when I unwound my own holdings in PLIW.L. Now when I was unwinding I typically placed a 5K GBP limit sell order at the best market making quote, typically I put the order in after 2pm when the US was active and typically spreads improve. If it filled, I updated my records and then sometimes placed another limit order (of similar but not exactly the same size) or waited to the next day and repeat the process.

Investment Trust (IT) Equity Warrants and Window Dressing

The reason why I selected the post Christmas - early January period in particular to unwind the position, is because of a phenomenon known as ‘Window Dressing’. Now a fund manager such as Mark Barnett of PLI.L can buy back the stock in this own fund using fund monies. By buying back the fund in the end-of-year period when liquidity is rather low, a manager will typically be able to narrow the discount at which the investment trust trades without needing to trade is particularly large volumes. The reason why managers such as Mark are particularly interested in the end-of-year period is that typical bonus and performance figures are typical based on the traded price of the fund at the end of the year. By selling into this manager generating buying can often be an ideal time in which to exit such funds, as was the case this year with PLI.L and PLIW.L.

Example of a Equity Warrant Investment

I detail a particular Equity Warrants investment within the post PLIW.L Equity Warrants Matures.

]]> http://www.foresightiom.com/?feed=rss2&p=60 http://www.foresightiom.com/?p=59 http://www.foresightiom.com/?p=59#comments Wed, 27 Sep 2006 11:04:13 +0000 Ben Fairfax Trades http://www.webcabcomponents.com/iom/blog/?p=59 The PLIW.L equity warrants for PLI.L (Mark Barnett’s, Perpetual’s Income and Growth) matured today and came through at 131.237p, the relative performance vs FTSE so far this year is as follows:

Index/Stock	1st Jan Opening Price	Todays Opening Price	Return
PLIW.L	122	131.237	7.57%
FTSE 100	5618.8	5873.6	4.53%

Note: For details of the investment trust Perpetual Income and Growth we refer the reader to Trustnet It.

Now, though PLIW.L out performed the FTSE 100, by 7.53/4.53 = 166%, one would expect this sort of outperformance for the following reason. The average PLIW.L price over period of 125p, allowed control over an average underlying asset (PLI.L) of 225p over the period implies the warrants had an implies average gearing of 180% over the period. For all you quantative analysts out there, I realise this is back of an envelope stuff (i.e. not 100% rigorous) but I am just using it to illustrate a point. Hence to summarize, in the term of risk adjusted performance the performance was broadly in line with the FTSE 100.

Further details concerning Equity Warrants

Within the post Investing in Equity Warrants we detail a number of practice issues associated with investing in Equity Warrants such as PLIW.L. These including an introduction to Equity Warrants, how one can efficiently trade in and out of positions in Equity Warrants, how and why Equity Warrants often offer a clean exit at maturity, and for Investment Trust Equity Warrants how the phenomenon of ‘Window Dressing’ of investment trusts can effect the associated Equity Warrant.

]]> http://www.foresightiom.com/?feed=rss2&p=59 http://www.foresightiom.com/?p=57 http://www.foresightiom.com/?p=57#comments Mon, 25 Sep 2006 21:19:32 +0000 Ben Fairfax Macro Themes http://www.webcabcomponents.com/iom/blog/?p=57 It is a common misconception that real estate is a wonderful long term investment asset class. Even the term ‘investment’ when referring to real estate seems a misdemeanour to me since property is often not even working capital (in the sense that companies equity is). For example, if we take the period 1984 - present, which includes the second worst equity bear market this century (and one of the best bull markets) and the biggest long term real estate bull market (as well as other interest sensitive interest rate instruments), which has been a direct result of the continued download path of yield and wider use of financial engineering which allow buyer to obtain higher leverage:



With regard to leverage in the UK in 1984, by law you could only borrow 3x yearly salary, now the average buyer gears up to on average over 5x yearly salary. Below I detail why I believe this structural change is unlikely to be repeated and what some of the consequences are.

Historical Real Estate Price Increases (1984 - present)

After doing some research I found:

http://www.nationwide.co.uk/hpi/

which produced the following result:

A property located in UK which was valued at £100000 in Q1 of 1984, would be worth approximately £556138 in Q2 of 2006.

This is equivalent to a change of 456.14%.

From reading off the chart:



The FTSE 100, has gone from around 1,000 to 5,798, i.e. 579.8%. Hence, even over this unusual period equities have performed better than real estate (as least on average).

Use your edge

It is an important point that whatever the averages say unless you buy the averages this information it just not that relevant. For example, if you are a great property investor and a terrible stock investor then maybe real estate would be a better long term bet. Similarly, if you have an edge in the stock market and unless you are an absolute guru with properties then stocks are the natural choice.

Long Term Property Outlook

Long term I see certain problems with property as an investment asset class (at least for me) and I detail my points below. Firstly, I have no specialist skills in this field and hence I can only realistically expect to obtain the average return on real estate (at best). Hence the next question is, at the present point in time what is a reasonable outlook for returns on property. If you accept that the long term dominant factor on property prices is salary levels since the most people pay for properties from there salaries then long term return on property are going to be:

average earnings growth (i.e. 8-9%) multiplied by the percentage increase in the number of years earning which people borrow at.

For example, if people borrow 5x yearly salary now and earn 20K (after tax) income they can borrow 100K, if they increase this to 7x salary then the average (first time) buyers will have 140K. Hence, you get a 40% return due to structural change of moving from 5x to 7x earnings. At 5x earnings and mortgage rates at 7% people are paying yearly in interest:

5 x 20K x 0.07 = 7K (or 35% of take home pay)

If interest rates go up to 10% it raises to 50% of take home pay to cover interest payments. Assuming they borrow 7x, and mortgage rates at 7% we have:

7 x 20K x 0.07 = 9.8K (or 49% of take home pay)

At 7x and 10% interest rates we have: 14K interest or 70% take home pay.

Hence to get the structural effect of the change in borrowing levels going from under x3 in 1984, to over x5, now over the next 5 years you will need to go to a gearing level of:

(5/3) * 5 = 8 1/3 times earnings

Even with mortgages rates at 5%, you are still looking at the first time buying paying 40% after tax salary in interest payments.

Anyway, this just deal’s with affordability and expected capital growth but as a personal view I see the amount of leverage being lower than 5x, rather than above this level in say 5 years times (I say 5 years because this is my usual out-lying investment horizon). I realise I should provide a rationale for this assumption and a rationale will be provide within a later article. Say the earnings multiple at which people borrow just stays the same, i.e. do not get an earnings multiple increase, in this case the return will be the 8-9% earnings growth plus rental income maybe 4-5% (present rates) minus up keep and fees. Hence, you may get 13%. Well for me that is just not good enough, at least for an asset which is considered an investment.

Housing as a Hedge for all Future Rental Costs

Another angle is the idea that when you buy a property you are just hedging all future rental costs. After all if you live in the house until you die this will be exactly what you get. Now with rental yields in the UK around 4-5%, bank deposits paying over 5%, and the upkeep of a property being 1-2% a year, it makes more sense (i.e. better cash flow) to rent than buy. At least from this point of view of hedging all future rental costs.

So what is a reasonable price to buy in at?

Now saying all this I am interested to have a clear set parameter’s (i.e. upper and lower bounds) on what is a reasonable: price/monthly rent ratio at which you buy at property for the following parties:

1. Owner occupier (i.e. hedge for rental costs)
2. Real Estate as a replaced for bank deposit (i.e. real estate as risk free asset class)
3. Real Estate as a replacement for stock portfolio (i.e. real estate as risky asset class)

Clearly the price you buy a property at will affect the long term likely return, but then what is a reasonable risk – adjusted price in order to have a reasonable likelihood of a reasonable return (whatever a reasonable return may be).

]]> http://www.foresightiom.com/?feed=rss2&p=57 http://www.foresightiom.com/?p=56 http://www.foresightiom.com/?p=56#comments Mon, 25 Sep 2006 17:22:49 +0000 Ben Fairfax Investment Strategies http://www.webcabcomponents.com/iom/blog/?p=56 To motivate this point, I just want you to consider for a moment why all news programs concentrate on reporting ‘bad news’.

The reason why I make this observation is because in nearly all cases the reported ‘bad news’ has almost no influence on me, my family, my friends or associates. Moreover, as a viewer I not only realise this fact but also acknowledge that there are many ‘good news’ stories which will have a far greater effect on all of our lives. Hence, it begs the natural question of why these ‘good news’ stories are nearly always just over-looked. If you take financial markets as a particular topic which is reported by the wider media, then in order for the level of FTSE or DOW to be the leading story on say the daily BBC News program then you are going to need a market crash (say a 5%+ down move in the FTSE or DOW). Moreover, anyone who has ever managing money for third parties will know that there is nothing like ‘bad news’ to get your customer base on the phone to you with numerous questions, theories and research.

Now, the simple truth is that an editors jobs aim is ultimately (even at the BBC) to increase circulation. Hence, the reason why ‘bad news’ is so prevalent within news sources is because in short “bad news sells”. I agree that this implies the existence of a rather worrying sociologic strait in people but from observing the facts (as I see them) this is the only reasonable conclusion I can arrive at.

In a similar fashion much of the financial press tends to focus of the negatives with the markets. If you took too much of this material to seriously you would end up heading for the hills, to reside in the nuclear bunker. Of course much on the material it quickly forgotten and because of the constant stream of negative news we have all become desensitized anyway. But even so when I heard this week from a commentator that by “late October” he expected major indices like the FTSE and DOW to be down 20%, my immediate reaction was to call out “this is garbish” (as detailed here).

Remember “bad new sells” and with bad news as with all financial news you should take everything you read with a pitch of salt and more importantly do your own research before making any investment decision.

]]> http://www.foresightiom.com/?feed=rss2&p=56 http://www.foresightiom.com/?p=55 http://www.foresightiom.com/?p=55#comments Mon, 25 Sep 2006 16:08:51 +0000 Ben Fairfax Investment Strategies http://www.webcabcomponents.com/iom/blog/?p=55 I really am not suggesting that you should go out of replicate the portfolio’s of your favourite fund managers. But since there are only so many ideas in the world and it may not be the case that you have all the good ones. But comparing your portfolio with others can often be a prudent move. In particular, by comparing your portfolio with the portfolio of others can often act as a good reality check. Remember that when ever you buy (or sell) a stock there is some one else selling (or buying) you the stock who takes the exact opposite opinion to yourself. Hence, what tells you, you are right and the one selling (or buying) the stock is wrong?

Tracking the portfolios of others is certainly not a new phenomenon and professional Fund managers for example are (in general) basically obsessed with what each other hold. These parties in general continually check the holdings of each other because of the fear of under-performing there peer group (which can result is being fired) and at the same time the passionate (bonus chasing) desire to outperform them. As I am sure you are aware fund managers are generally compared on a relative rather than absolute basis.

By viewing other’s portfolio holdings you can ask yourself similar questions. In short, why does this manager holding these stocks? Two UK focused fund managers who I like to keep a tab on and two managers who’s funds I have invested in (note that I do not hold positions in any of their funds at present) are Mark Barnett of Perpetual and Anthony Bolton of Fidelity. Now back in the period 1999-2005 (when I held at least one of them) they had a heavy orientation towards mid-cap value stocks. For example, Mark Barnett held an large over-weight position in tobacco stocks (which at the time had huge legal challenges but also single digit PE’s) and both as I recall held special situation value plays such a Signet which was still recovering from the then CEO Mr Ratner’s PR disaster.

Now at present Anthony Bolton’s Special Values fund has the largest FTSE 100 weighting it has had for its entire 26 year history. Moreover, Mr Bolton has said several times publicly over the past year than valuations of growth over value are getting compressed, and big cap stocks are getting more appealing. These two themes are certainly reflected in the Special Values portfolio with a high concentration of FTSE 100 stocks and the relatively high weighting of traditional (large cap) growth sectors (i.e. Oil, Financials, media) for a special situations fund. Mark Barnett another great manager has also slowly moved his weighting from a more FTSE 250 value stance to a FTSE 100 balanced focus. Though in the case of Mark Barnett I think he should have exited his tobacco stock positions by now.

Now I am not saying what these managers are doing is right, wrong or otherwise just that personally by running over such portfolios and asking myself “why?” can often help with my own decision making process. At present, I broadly agree with the themes expressed within these funds (i.e. over the period 1999-2006, growth has been getting better value and big cap has been getting better value) but if I was diametrically opposed to the views of such managers though I may not change my investment plans I would take a second look over my research, assumptions and planning.

For those who wish to take a closer look at the two mentioned closed-end funds I provide the following links:

Mark Barnett:
Perpetual Income and Growth PLC
http://www.trustnet.com/it/funds/?fund=52182#top
History of Major Holdings
http://www.trustnet.com/it/funds/port.asp?fund=52182#top

Anthony Bolton:
Fidelity Special Values PLC
http://www.trustnet.com/it/funds/?fund=38675
History of Major Holdings
http://www.trustnet.com/it/funds/port.asp?fund=38675

]]> http://www.foresightiom.com/?feed=rss2&p=55 http://www.foresightiom.com/?p=53 http://www.foresightiom.com/?p=53#comments Mon, 25 Sep 2006 15:18:08 +0000 Ben Fairfax Investment Strategies http://www.webcabcomponents.com/iom/blog/?p=53 It was observed in today’s FT, on FTfm page 1, that fund managers with a specialised mandate over the past year obtained better risk adjusted performance than there fellow brethren who work in accordance with a wider mandate. This really is not much of a surprise to me. Since the start of the industrial revolution specialisation has lead to increased performance, and why should this not apply to fund management as in most other fields. Personally, I like to use the skills of specialist fund managers, for example I have out-sourced the management of funds to parties who specialise in the following two areas: small cap mining stocks, financial stocks. The managers in each case have over 15 years experience managing equity portfolios within there respective fields and are in a position to concentrate solely on their respective investment worlds.

Personally, I like the keep the strategic asset allocation in-house so to speak and outsource the parts of the portfolio where a specialist manager can add value (after fees) within a specialised mandate. I often feel that getting the strategic top-down, sector-down asset allocation right is the major contributor to performance and hence I focus on these macro considerations while out-sourcing some of the micro-management of the particular investment themes which I observe.

]]> http://www.foresightiom.com/?feed=rss2&p=53 http://www.foresightiom.com/?p=52 http://www.foresightiom.com/?p=52#comments Mon, 25 Sep 2006 14:45:07 +0000 Ben Fairfax Macro Themes http://www.webcabcomponents.com/iom/blog/?p=52 Tomorrow the EU will announce that Romania (and Bulgaria) will join in EU on 1st January 2007. In the case of Romania, with growth of 7%, un-Employment at 5%, passed all the EU standards (including budget deficit); it sounds like the UK, French and German Economic ministers should make a trip to Bucharest to learn how to develop such a vibrate economy. Though the head-line income levels are low by Western standards I wish to point out that on a purchasing parity basis information workers (i.e. people in my field) such as IT staff, bankers are roughly the same as there UK equivalents. Also note that the over-all official earnings figures are hugely distorted downwards because a very large section of the economy is un-accounted for (i.e. grey economy).

Anyway, I just wanted to say (before the mass hysteria) that I really am very pleased to hear this news. It shows that even with a recent history as difficult as Romania’s (which is mostly not of their own making) through hard work and dedication are able to rejoin the EU club which with the exception of the past 50 years they have always been an integral part.

]]> http://www.foresightiom.com/?feed=rss2&p=52 http://www.foresightiom.com/?p=51 http://www.foresightiom.com/?p=51#comments Mon, 25 Sep 2006 10:53:35 +0000 Ben Fairfax Investment Technique http://www.webcabcomponents.com/iom/blog/?p=51 In short, if it works (i.e. you make money) then it’s OK. As an example, I recently referred to a commentary within a meeting with fellow investors as “garbish” (there where reasons for this which I will detail another time). This certainly was a little harsh (maybe even rude). What I should have said was “this is garbish for me”, meaning that for me reading this type of commentary has not helped me (at least up to this point in time) make money within financial markets. However, the same commentary may be helping others make great investment decisions and therefore to refer to anything is “garbish” is an absolute sense does not really help matters and may not even be true, even with regard to a small group.

As a general point I would say that any commentary or technique which helps you make money is a good idea. After all we are not doing philosophy or science, and the only meaningful objective measure is how much money you make. Some investors get rather hung-up on technique, and you hear comments like: “I’m a value investor and I have never met a rich technical investor”. Recently, in the last few years quantitative investing has been all the rage and you often hear statements like, “I’m a quantitative investor and this allows me to stay relaxed in times of market turbulence”. Personally, I do not care what box I am put in, or what technique I use just as long as I am making money. My mantra is, “I would rather be right for the wrong reasons than wrong for the right reasons”. Or Warren Buffet would say, “Rule number 1: Don’t lose money, Rule number 2: Don’t forget rule number 1″.

]]> http://www.foresightiom.com/?feed=rss2&p=51 http://www.foresightiom.com/?p=50 http://www.foresightiom.com/?p=50#comments Sun, 24 Sep 2006 08:35:18 +0000 Ben Fairfax Market Themes http://www.webcabcomponents.com/iom/blog/?p=50 The de-equitization (so to speak) has been going on for a number of years with pension funds moving out of equities and companies buying-back their own shares. It would be interesting to do some more research on this matter. For example, I think BT has equity weighting of 19%, which I cannot really see getting lower. As a rule of thumb when I am asked for a conservation equity weighting in ones pension fund then I suggest that the weighting is: (100 - person’s age in years)%. So if you are 30 years old then you have a 100-30=70% equity weighting, at 60 you have a 100-60=40% equity weighting and so on.

Personally I (nearly always) have a 100% (or more) equity weighting and this includes Pension savings. In my mind there is more risk being out of equities than being in equities. After all historically equities as a group have advanced on around 75% of all days, since personally I have no consistent means to second guess what days are the 25% of days which are down days, I tend to stick with equities.

On another note, we should all (continually) remind ourselves that equities out-perform all other assets classes (including real estate, bonds and commodities) consistently and considerable over longer time periods (i.e. all 20 years periods). Therefore, since Pension saving typically takes place over longer periods then selecting equities as the major asset classes within the pension fund really is a no brainer.

]]> http://www.foresightiom.com/?feed=rss2&p=50 http://www.foresightiom.com/?p=49 http://www.foresightiom.com/?p=49#comments Sat, 23 Sep 2006 12:38:20 +0000 Ben Fairfax Isle of Man http://www.webcabcomponents.com/iom/blog/?p=49 Sorry for not posting anything in the past 10 days, hopefully in future such a long break will very rarely happen. Anyway, the reason for the break was that I was in the final stages of preparing for a presentation I gave on Friday to the Isle of Man British Computer Society on ‘Component Based Development (CBD)’. All the materials for the presentation including the slide, more details PDF Presentation Notes, Audio Files (mp3 and Real Media), and various source code examples are available from the page:

http://www.webcabcomponents.com/webcab/talks/

Direct Audio Links: Real Media (7.6M), mp3 (18M)
Presentation Slide: Powerpoint file

In addition, I also provide PDF Presentation notes which expands on what I was able to say within the hour talk, and you are also able to obtain all the source code and associated Component Packages for the presentation.

The talk is also exactly 1 hour in duration and you can read a review of the talk on Owen Cutajar blog.

Much of the presentation discusses our unique technologies and approach regard to development of multi-platforms Component Packages for the Excel, COM, Delphi, .NET, XML Web service, J2SE and J2EE Development Platforms. If after taking a look at the talk any thing is unclear or you have further questions or queries then please feel to get in touch via this blog or email webcab ‘at’ gmail ‘dot’ com.

]]> http://www.foresightiom.com/?feed=rss2&p=49 http://www.foresightiom.com/?p=47 http://www.foresightiom.com/?p=47#comments Wed, 13 Sep 2006 12:27:55 +0000 Ben Fairfax Trades http://www.webcabcomponents.com/iom/blog/?p=47 Transaction
Brought stock in ‘Royal Dutch Shell Plc A Shares of EUR0.07′ at GBP ‘17.4977′.

Fundamentals
The purchase represents good value on a relative and absolute basis with the wider oil and gas section trading on multiple of nearly 12 times earnings and Shell trading on 7.83 times earnings and 8.48 times next years estimated earnings (source Finance Google Quote and Reuters Quote for more details analysis).

Purchase Funded By
The purchase was partly funded by recycling the BT Group final dividend which just came through at 7.6p per share with some other recently paid dividends. At present, I considered Shell to represent better value than adding to our BT position (which is now on 13 times earning, but was on a sub-10 rating earlier in the year).

Compression of Earnings
Like the other oil majors the earnings of Shell have not kept pace over the past several years with the increase in earnings. Hence, all the majors are trading on attractive valuations; see:

ExonMobile: Google FInance Quote
BP: Yahoo Finance Quote

at least which respect to the spot (i.e. present) crude and refined product prices. As far as I can see the price of the majors at present in factoring in price falls across the energy products, maybe even oil falling to $50 (or less). In short, I just do not buy this, and the supply and demand dynamics just do not support this assumptions. Anyhow this is another story which will need to be left to another time.

Hard Assets versus Paper Currencies
Please also note that for me when taking a position in any commodity producer. I also see the trade as representing ’sell paper money, but hard assets’. The point is that very high levels of global liquidity (as noted in Economist article on Global Liquidity), will ultimately mean the re-valuing of paper money versus hard assets such as commodities. Since paper money is being created faster than hard assets are being discovered. For GBP based investors I also believe on the balance of averages that the GBP currency to devalue against other major currencies due to the fundamental outlook of the UK economy and the already high level of sterling.

Shell versus increasing BP position
I already have holdings in BP, and could have added to this position. Sometimes it is better to hold relatively fewer stocks since it allows me more time to monitor each of the business in which I have a stake. But the premium of BP over Shell was just to much, at present it is on 9.5 times prospective earnings, and has the nice feature that it has agreed to return $65bn to shareholders over the next three years via dividends and share buybacks, over the existing 3%+ dividend. But still a 30%+ premium is terms cost to buy per $ of profit is just to much. BP has a slightly better out-look (ie better at replacing reserves) but it is not that much better than Shell’s outlook. Similar remarks would apply to Shell verses ExonMobile.

]]> http://www.foresightiom.com/?feed=rss2&p=47 http://www.foresightiom.com/?p=43 http://www.foresightiom.com/?p=43#comments Mon, 11 Sep 2006 23:14:14 +0000 Ben Fairfax Stocks for Income http://www.webcabcomponents.com/iom/blog/?p=43 The Verizon state of Vodaphone really makes no sense since at present in terms of earnings they only receive the dividend and have no (and our unlikely to get) strategic control over the company. Moreover, Verizon is not using GSM technologies (unlike Europe, Japan) hence there are no ecconomies of scale in terms of technology even if they did get strategic control. Hence, an exit seems the only sensible path. Which begs the question, what price should Vodaphnoe expect for its 45% state in Verizon?

There are some tax implications for Vodaphone on a cash sale but even the worst case senario the tax bill would be 25%. As a high end estimate, analysts have estimated that using the Cingular/AT&T Wireless and Sprint-Nextel deals as the yardstick, Vodafone could get as much as $66 billion for its 45% stake. The management of Vodaphone have also bounded around a range of $40-50B. But my query to all these estimates is simply who would (or even could) pay such a price for a minority stake in a mobile phone company.

Verizon sole market is the US which has a 70%+ mobile penetration and hence the growth is terms of Verizon’s users is limited and personally I would only be a buyer (or holder) of Verizon at value stock valuation levels (ie low PE, high yield). Vodaphone on a PE of 10.8, yielding over 5% (source http://uk.finance.yahoo.com/q/ae?s=VOD.L), is certainly on a value stock valuation, but Verizon with its PE 14.8, Yield 4.6% (source: http://seekingalpha.com/by/symbol/vz) which is not really what I would call a value stock. Moreover, the GSM Vodaphone spread of businesses (see: http://en.wikipedia.org/wiki/Vodafone); certainly contains at least some growth where as Verizons US business is essential ex-growth.

Just doing the sums we can see that a valuation of $66B works out at 51.45p per vodaphone share, a valuation of $50B works out at 34.75p per share, and $40B works out 31.92p per share since:

51.45p = (($66B - 25% tax) / 1.85 USDGBP Exchange rate) / 52B Vodaphone shares
38.98p = (($50B - 25% tax) / 1.85 USDGBP Exchange rate) / 52B Vodaphone shares
31.19p = (($40B - 25% tax) / 1.85 USDGBP Exchange rate) / 52B Vodaphone shares

Now any bid over $40B would certainly enhance Vodaphone’s valuation since even if a $40B offer was paid out as a special dividend, would imply valuation of the remaining business at 83p a share, where the earnings would only drop by:

($35.38 (today closing price) / 1.85 USDGBP exchange rate) * 0.046 (dividend yield) * 0.45 (stake) * 2.90b shares = 1.148B GBP

That is, Vodaphones 2006 average estimated earnings would drop from 10.64 * 52B shares = 5.53B GBP to 4.382B GBP, on a market capitalisation of 83p * 52B shares = 43.16B GBP. That is, Vodaphone would be move from a PE of 10.8, to a PE of 9.85, and new capital structure would most likely pay out a slightly higher level of dividend at around the 6% level.

Hence, if anything like the $40B mark could be acheived on the Verizon stake sale then even after a 25% tax cut, shareholder value would be enhanced by 10%. Moreover, with a Verizon closing price of $35.38 per share, if Vodaphone where to sell its 45% stake at market prices then the price would come to $46B (= $35.38 per share * 45% stake + 2.9B shares), hence a value of at least $40B is more than reasonable.

What will happen next?

However, saying all this at present any moves by Vodaphone to sell its Verizon stake seem rather unlikely in light of the noises eminating from Vodaphone. Quoting from the Press conference of Verizon on the 1st August 2006 available at: http://seekingalpha.com/article/14768
(scroll down about 665 of the conference text).

===========

The operating agreement between the two of us is strong, is sustainable, it has stood the test of time over these five or six years, and their view is that the creation of value available to them over the next several years is far greater than any strategy that they might have to exit the partnership.

He reiterated that was exactly the position of Sir John Bond, his new chairman, and for all practical purposes I had the chance to meet John Bond also within the last month or so, and that is exactly the situation.

===========

Saying this, the capital structural between Vodaphone and Verizon is rather inefficiant and obstructive to the smooth functioning of both businesses. Hence, I would not imagine the present situation being sustained in-definately. What will happen at present is not that clear but as always there is a number of possibilities including Verizon buying out Vodaphone, or even Vodaphone being brought-out by a private equity firm. These and other  possibilities we will consider in a follow up post.

]]> http://www.foresightiom.com/?feed=rss2&p=43 http://www.foresightiom.com/?p=42 http://www.foresightiom.com/?p=42#comments Mon, 11 Sep 2006 13:41:35 +0000 Ben Fairfax Macro Themes http://www.webcabcomponents.com/iom/blog/?p=42 Russia is not a place where normal rules apply and my only safely net is to make sure I invest with the Kremlin. For example, in the case of Shell and ExxonMobil with the Sakhalin project the rule seems to be, if you discover a decent energy resource and invest in the infrastructure to develop this resource, we will take politically motivated legal action which will force you to sell a stake in the resource to our state controlled monopoly Gazprom. Many people refer to such activity as cowboy capitalism, which only makes sense if you are the cowboy (i.e. invest with the Kremlin). More details of the Sakhalin affair at:

Russian watchdog starts checking Sakhalin projects - Reuters Report

]]> http://www.foresightiom.com/?feed=rss2&p=42 http://www.foresightiom.com/?p=41 http://www.foresightiom.com/?p=41#comments Mon, 11 Sep 2006 09:59:00 +0000 Ben Fairfax Stocks for Income http://www.webcabcomponents.com/iom/blog/?p=41 Vodaphone as expected will enter the broadband arena to extend the range of channels which its platform can deliver services over. Interestingly a deal has been worked out where Vodaphone will enter the market by buying capacity from the BT network via the BT Wholesale division. This approach fundamentally differs from other parties who have entered the UK Broadband market such as BSkyB, O2 (of Telefonica), Orange (of France Telecom), who have all installed their own hardware within BT exchanges via the local loop unbundling program. This deal in some sense is not that surprising since BT Group’s mobile service at present just reselling Vodaphone mobile network capacity and hence the broadband deal is just a reciprocal of this existing arrangement.

Broadband as a service is a commodity and hence long term the margins are going to zero, hence the value to BT, Vodaphone and all the other players long term it not the broadband itself but the services which they can distribute over this customer service delivery platform. With this in mind with Vodaphone and BT Group both using the same infrastructure any broadband services they develop will be able to be distributed to both parties customer bases. Hence, the partnership should also been seen as a means by which to combine their development and marketing efforts. What I imagine will happen in practice is that they will delegate between themselves the development of differing services and cross license and cross sell the service offerings. Where BT will concentrate of broadband and Vodaphone will concentrate of GSM mobile services.

This strategy will be self reinforcing with BT/Vodaphone re-presenting by far the largest (UK and Global) development budget for broadband services, by far the largest UK broadband customer base, and once the services have been ported to the GSM mobile platform the largest global customer base to which any services can be distributed. This will create a dominant 600lbs gorilla, which unless unchecked will lead to a virtual monopoly in the UK broadband space, as the BT\Vodaphone services pull away in term of technology, range of services and content from the other (much smaller) providers.

Investment View

Personally, I own stock in BT and for a third party fund I run own stock in both BT and Vodaphone. Both stocks at the present prices, cash generation levels and yields represent great stocks for income purposes. I also liked BT for its capital growth potential, but now at 250p with a fair value as I see it around 300p the growth potential is much lower than when the stock was trading at just over 200p earlier in the year.

]]> http://www.foresightiom.com/?feed=rss2&p=41 http://www.foresightiom.com/?p=40 http://www.foresightiom.com/?p=40#comments Sun, 10 Sep 2006 11:51:06 +0000 Ben Fairfax Market Themes http://www.webcabcomponents.com/iom/blog/?p=40 Interesting the amount of bad news around, and endless negative commentary. The same stories of falling real estate markets, slowing global growth, unsustainable debt; have for two months been repeated several times throughout the media. Hence, the question arises are these observations now reflected in the prices? I.e. is the E in PE going to be weaker than what the market expects.

With stories of slowing global growth, we also get the follow on story of falling commodity demand and prices. Now with commodities I think at present stocks like Shell are already factoring in an oil price of $50, which I see as rather unlikely hence I would be a buyer of such stocks rather than a seller. With commodities generally my take that the smaller caps represented better value than the majors has paid-off since over the past two months when the commodity complexes have been weakening my collection of small cap commodity stocks have slowly been appreciating.

]]> http://www.foresightiom.com/?feed=rss2&p=40 http://www.foresightiom.com/?p=39 http://www.foresightiom.com/?p=39#comments Fri, 08 Sep 2006 10:50:32 +0000 Ben Fairfax Isle of Man http://www.webcabcomponents.com/iom/blog/?p=39 In April this year I moved to the Isle of Man (see my Blog Map) and my experience so far is that it is a very pleasant place to live and an ideal location for a software vendor and active private investor. Often I am asked to summary what it is like in the Isle of Man, and to this end I attach a promotional video about the Isle of Man which has been produced by the Isle of Man Government. The video details many important facts about the Isle of Man and also shows many locations which I have become familiar with:
]]> http://www.foresightiom.com/?feed=rss2&p=39 http://www.foresightiom.com/?p=38 http://www.foresightiom.com/?p=38#comments Fri, 08 Sep 2006 10:35:42 +0000 Ben Fairfax Isle of Man http://www.webcabcomponents.com/iom/blog/?p=38 On the 21st September, I will give a talk on Component-Based Development (CBD) for the British Computer Society (Isle of Man Branch), at the Hilton Hotel in Douglas, Isle of Man. Everyone is welcome, and I ensure you that the talk will be as practical as possible. After all software is engineering not philosophy. The details of the talk are below.

Component-Based Development (CBD) Presentation

Details Title: Component-Based Development Speaker: Dr Ben Fairfax Organizser: British Computre Society (BCS), Web link Time: 6:30pm (6pm Doors Open), Thursday 21st September 2006 Location: Shearwater Suite, Hilton Hotel, Douglas, Isle of Man Synopsis A Software Component (i.e. DLL or JAR) is a piece of technical or business functionality embedded within a self-contained software artifact which can be re-used across an organization or industry. The value of Software Components is that they enable the re-use of software which leads to significant reductions in the cost, time and expertise required in order to undertake a given software development project. Topics Covered: Introduction: What are Business Software Components? How Components turn business domain experts into programmers and programmers into business domain experts? Modern Component platforms: Which platforms support components and how? The advantages and disadvantages of the various platforms? Using Components: How to use a Component within the three generic types of client application? Making Components: How can an existing development team most efficiently start creating re-usable software component packages? Here we will detail many aspects of our internal development process and build systems which have been refined over a number of years which enable a team to efficiently create multi-platform software component packages. About the Speaker Ben is originally from West Sussex (England) and was educated at the Universities of London, Cambridge and MIT (US). After completing his PhD in Mathematics in 1999, Ben founded WebCab Components a software Component vendor. In April 2006, he relocated himself, and his business to the Isle of Man and continues to develop Component Based Software solutions.

]]> http://www.foresightiom.com/?feed=rss2&p=38 http://www.foresightiom.com/?p=36 http://www.foresightiom.com/?p=36#comments Tue, 05 Sep 2006 23:11:13 +0000 Ben Fairfax Macro Themes http://www.webcabcomponents.com/iom/blog/?p=36 Option ARMs were created in 1981 and are essential what we call discounted rate mortgages in the UK. Traditional US home buyers (unlike there UK counter part) take out 30-year fixed rate mortgages. However, in resent years the speculative frenzy in the US market, has created an every greater demand for products which offer higher and higher levels of leverage. The final steps in this path has been the innovation of the Option ARM. For years the ARMs were marketed to well-heeled home buyers who wanted the option of making low payments most months and then paying off a big chunk all at once. For them, key selling point of option ARMs was that they offered flexibility (not that the allow high levels of leverage).

Now, 92% of all new mortgages in the US are ARMs, and they are being marketed to all market categories. Moreover, the sales commissions on these products is generally highest on these mortgages products since they represent the most profitable mortgages product out there for the issuer. They even get bundled and sold on the hedge funds. Now the key motivation at least for the typical “real estate investor” is that they offer the highest level of gearing for a mortgage product. Allowing the “investor” the greatest profit (or loss) from ‘flipping’ as they say in the US which roughly means the buying and then re-selling shortly after (hopefully for a profit). The ARMs can even be structured at over 100% of the initial notional purchase price since you often get cash back from the developer, and can include future home improvements within the mortgage.

For me the one uniform characteristic of all bubbles is that they are supported by debt (rather than earnings). Real estate at present represents to me at least a clear example of a debt inflated bubble with ARMs being the innovation which allowed the bubble to go on a little longer and to a slightly greater degree in the US, than I expected. You can see the extent of the ARMs situation in the chart linked below:

ARM Map of Misery

]]> http://www.foresightiom.com/?feed=rss2&p=36 http://www.foresightiom.com/?p=34 http://www.foresightiom.com/?p=34#comments Mon, 04 Sep 2006 20:11:50 +0000 Ben Fairfax Investment Trusts http://www.webcabcomponents.com/iom/blog/?p=34 The New City Investment team which at present runs a Investment Trust which a mining stock mandate is to lauch a new fund which specifically looks to invest within the Uranium mining sub-sector. The lauch follows on from the lauch of Merrill Lynch Commodities Income Investment Trust a few months ago which is at present trading on a 3% premium.

Whether such activity can be construed as bearish or bullish I am not sure, but at least it shows to there is demand out there for more Investment Trusts within the mining sector.

]]> http://www.foresightiom.com/?feed=rss2&p=34 http://www.foresightiom.com/?p=32 http://www.foresightiom.com/?p=32#comments Fri, 01 Sep 2006 13:03:58 +0000 Ben Fairfax Investment Strategies http://www.webcabcomponents.com/iom/blog/?p=32

This post is password protected. To view it please enter your password below:

Password:

]]> http://www.foresightiom.com/?feed=rss2&p=32 http://www.foresightiom.com/?p=30 http://www.foresightiom.com/?p=30#comments Thu, 31 Aug 2006 12:16:25 +0000 Ben Fairfax Investment Technique http://www.webcabcomponents.com/iom/blog/?p=30 Financial publications will have a tendency (to differing degrees) to form a bias reaffirming present financial fashions because of the very nature of their business. The success or failure of a financial media business is effected by two forces:
1. The size of their circulation which directly effects subscription revenues.
2. Whether the content and readership is valuable to any parties wishing to place advertisement with the publication.

Hence the primarily aim of any editor of a financial publication is to increase sales and produce content which will attract the best advertising rates, and that’s it. That is, the editors job is to increase revenue for his employer which may (or may not) include publishing research which is in the best interest of the readership.

Now the UK retail financial products market has a classic boom-bust cycle, where the financial products (ISAs, Pensions etc) which are the best sellers are the ones which can show the best historical performance. Hence, what was the best seller in Spring 2000, you guessed it, ‘Technology Funds’ only to noise dive over the next 2 years. At present, the best sellers are property related investment products, and as you can tell from the TV guide and newsagents shelfs the associated property investment media mania is in full swing. Hence, not only are the financial products in a boom-bust cycle but the associated media publications also follow the same boom-bust cycle. That is, in the main people buy publications in order to re-affirm views they already hold, at least this is what is implied from the sales patterns.

It is also important to point out that financial products in the main are themselves created for more marketing than investment reasons. That is, a product (for example a unit trust, hedge fund, investment trust) is created because the marketing people within the financial institution believe they can raise money for it (i.e. sell it). Whether the investment rationale is there or not, is not really the point, if they can sell it they will create it. Hence, at present for example we have numerous property investment vehicles being released and associated with these releases are large marketing budgets which will be spent in placing ads on bill boards, newspapers and magazines. Hence, if the editor of a newsletter or magazine publishes (for example) property friendly articles then it greatly increases the advertising real-estate within his publication for parties wishing the advertise property related financial products.

I am not saying that all financial publications are devoid of any value, but the reader of any publication should take everything they read with a grain of salt, and bear in mind that the editor of all such publications will be influenced (to differing degrees) by the factors described above. In particularly, the smaller the publication the more pressure the above factors will exert of the editor because put simple if they do not sell and get advertisers then they simply go bust. The publications of larger more established publications can afford to take a long term perspective but saying this the temptation are still there to effect editorial decisions. Because of the inbuilt bias resulting from the nature of the financial media section I suggest that what ever you read from what ever sources, you always do your own research using as much as possible source data which is unaffected by third party editorial before making any investment decision.

In short, there are no short cuts or quick fixes in making investment decisions, and reading editorial without independently thinking and researching the issues yourself is not a reliable path to long term out-performance.

]]> http://www.foresightiom.com/?feed=rss2&p=30 http://www.foresightiom.com/?p=29 http://www.foresightiom.com/?p=29#comments Wed, 30 Aug 2006 22:27:45 +0000 Ben Fairfax Investment Technique http://www.webcabcomponents.com/iom/blog/?p=29 The fact that each day I get spam emails with tips of micro-cap telling me ‘ABC going to explode’, ‘its time to fill your boots’, ‘reverse the truck and fill up on this one’; which I routinely delete each morning. These emails represent scams which are generally referred to as ‘pump and dump’ and though report to be in the ‘get rich quick’ schemes are in reality in the ‘get poor quick’ category. The site:

http://www.spamstocktracker.com/

follows the performance of share tips after and the initial ‘pump’ has gone out, which clearly shows how an effective ‘get poor quick’ scheme this is, in particular the model portfolio is down more than 60% since 5th May 2005.

For the receiver of the ‘pump and dump’ tip email the scheme is definitely in the ‘get poor quick’ scheme category but the senders of such emails make money from such scams but just buying into the share they are going to tip before the tip it, then after the tip when the price invariably raises they sell for a profit. Though this activity in illegal in all major jurisdictions it is very difficult to police and catch those responsible.

Now if you ever get any such mail (which is very likely if you use investment site) then I suggest you just delete them. Though it would be nice if there where, there is no quick fixes and no short cuts to riches in the investment world. However, there are many things to just avoid and schemes of the ‘pump and dump’ type are one of them.

]]> http://www.foresightiom.com/?feed=rss2&p=29 http://www.foresightiom.com/?p=27 http://www.foresightiom.com/?p=27#comments Tue, 29 Aug 2006 13:00:11 +0000 Ben Fairfax Macro Themes http://www.webcabcomponents.com/iom/blog/?p=27 We pointed out in the post Major mining stocks getting cheaper that at present the analysts estimates for this copper mining stock imply predictions for a sharp decline in the copper price in 2006. Given that we are now in Aug 2006, and the average price already this year is higher than last year the estimates which where prepared for 2006 seem to be completely out.Going forward, even if you take the warehouse supplies as an indication of the likely supply/demand balance then the LME stocks:



are at historically very lower levels implying a limited increase in supply in the near term which prices remaining firm in the near future.

]]> http://www.foresightiom.com/?feed=rss2&p=27 http://www.foresightiom.com/?p=26 http://www.foresightiom.com/?p=26#comments Tue, 29 Aug 2006 11:43:50 +0000 Ben Fairfax Market Themes http://www.webcabcomponents.com/iom/blog/?p=26 If we consider the major copper mining stock of Antofagasta, then a casual glance at the stock chart (shown below) shouts ‘Bubble!’, ‘mania’; and this has often been the line taken within the popular press:



However, closer fundamental investigation implies (against PE at least) that now represents a better buying opportunity than 2001. Over the period 2001 - Spring 2006 the stock rose approximately 500%, from 500 to 2500 (the spike down is due to a stock split), where as the net profit rose from 62.1 M GBP (2001), to 725.8 M GBP (2005), a rise of 1,169%, and the earning per share over the same period rose by 1,172% (Source: Yahoo! Finance see http://uk.finance.yahoo.com/q/pr?s=ANTO.L). Hence, what we have is a PE compression, meaning that the earnings over the period went up at more than twice the rate of the share price appreciation putting the stock on a present PE of 6.03 (where we take todays price of 443.75p and 31 Dec 2005 EPS of 73.62p). So that back in 2001, you needed to invest more than 12 GBP in Antofagasta to buy 1 GBP of earnings where as now you only need to buy only 6 GBP of stock for each 1 GBP of earnings.

Now the Antofagasta business is relatively simple to understand since it primarily involves the mining of copper and hence the stock price is essentially a (geared) proxy on the copper price. Therefore, by taking a closer look at the upward price trend for copper over the past 5 years, see:



explains the dramatic changes in EPS over the same period.

Even going forward with an Average Analyst EPS Estimate for next year of 50.18p would put the stock on a forward PE of 8.82, which implies a sharp decline in the copper price which I for one do not see as a forgone conclusion. So by the PE measure at least major mining stocks such as Antofagasta have got significantly cheaper over the last 5 years.

]]> http://www.foresightiom.com/?feed=rss2&p=26 http://www.foresightiom.com/?p=24 http://www.foresightiom.com/?p=24#comments Sun, 27 Aug 2006 11:06:15 +0000 Ben Fairfax Stocks for Income http://www.webcabcomponents.com/finance/blog/?p=24 On Friday Vodaphone Plc sold its 25% interest in Proximus, the mobile telephone market leader in Belgium, for £1.4 bn, continuing its strategy of releasing capital in either markets where it has a minority position or in companies where it only holds a minority position. As mentioned in the press release available at:

http://www.investegate.co.uk/Article.aspx?id=200608250700031022I

the proceeds from this sale will go down to paying off debt, i.e. a re-allocation of capital within the group. However, Vodaphone will still preserve its position with regard to access of Proximus customer base through a revised long-term Partner Network Agreement which will run for an initial five year term. This means that the Vodaphone will still preserve the Proximus platform for the distribution of its global products and services such as Vodafone live!, Vodafone Mobile Connect Card, Blackberry from Vodafone and international roaming services.

The strategy which Vodaphone is implementing (with Proximus above as an example) is so effective because it allows Vodaphone to invest capital in high growth areas while still preserving access to its huge customer base. Vodaphone’s key business attribute is that it can develop a service or product which is a capital intensive activity (as is the case with all high tech research and development). Then deploy this new service or product to a single market (for example, Japan or Korea) in order to refine the technology and the associated business model of the new service or product. After this initial refinement Vodaphone can instantly get huge economies of scale by re-deploying this new service or product to all markets where it has access via either Vodaphone holding companies or partnership arrangements (as in the case of Proximus).

By applying this model Vodaphone can spread the initial cost of developing the new product or service over its entire customer base which is in fact the largest customer base of any global mobile phone company. These economies of scale which result from the large scale deployment of its key GSM technologies through various holding companies and long-term partnerships are the key long-term competitive advantage which will ensure that Vodaphone will continue to be a dominant force within the mobile telephony industry.

With the shares trading on an average estimated PE of 10.64 for 2006 (see analyst estimates), a highly cash generative business which pays out a 4%+ dividend, and the new strategy of core holdings and partnership being enacting upon we see Vodaphone as a Good Buy for its income or growth potential.

]]> http://www.foresightiom.com/?feed=rss2&p=24 http://www.foresightiom.com/?p=10 http://www.foresightiom.com/?p=10#comments Tue, 22 Aug 2006 14:45:55 +0000 Ben Fairfax Isle of Man http://www.webcabcomponents.com/finance/blog/?p=10 Anglo Irish Bank Corporation (I.O.M.) P.L.C. at present offers the most competitive GBP deposit account on the IOM, with the Privilege Bond - 24 months paying 5.35% (AER). There is a good range of accounts with differing notice requirements, and even if you want instance access then you will still get 4.8% AER from Anglo Arish. For a full break down of the accounts available see:

http://www.angloirishbank.co.im/personal-banking/interest-rate-summary.asp

]]> http://www.foresightiom.com/?feed=rss2&p=10 http://www.foresightiom.com/?p=9 http://www.foresightiom.com/?p=9#comments Tue, 22 Aug 2006 09:29:54 +0000 Ben Fairfax Trades http://www.webcabcomponents.com/finance/blog/?p=9 Earlier in the year and last year I was buying into BT.A with my own money and for a third party. Though the third parties fund is designed partly for income after the payment of Vodaphone special dividend of 15p on the 16th, I discovered after consultation with the individual that there was more cash in the holding bank account that the third party needed in the intermediate term. Therefore, I decided to top-up on the BT.A position this morning with some of the cash, still leaving enough cash to allow the individual in question to go on a spending binge if desired. The trade was just confirmed at 244.16p, which means I was buying in at a PE of 11.35, and a yield of around 5%, OK but not as good as earlier in the year when was buying in at a PE of under 10. Saying that, BT.A still has a very healthy balance sheet and good net operating margins at 8.54%. I am also glad to see BT.A management have the sense to not get involved in a price war in the broadband space.

If you want to read up on BT Group then I suggest that you start at the BT Group PLC page at:

http://www.btplc.com/

and read maybe the last two annual reports, also the special reports concerning the future out-look, future products and plans are very informative, then I would start looking at others analysis and commentary, a good place to start on this is:

http://finance.google.com/finance?q=LON%3ABT.A

Personally, when ever considering an investment I read (or at least try) everything I can find on the stock or topic in question. Then only after I have read a reasonable amount of material on the topic or investment do I try to rationalise the reasons for which an investment should or should not be made.

As Ben Graham (Warren Buffet’s mentor) would say, “It is the quality of your analysis that makes you right as a stockpicker, not whether the market happens to agree with you”.

DISCLAIMER: This post should not be considered investment advice, and it offered for informational purposes only.

]]> http://www.foresightiom.com/?feed=rss2&p=9 http://www.foresightiom.com/?p=8 http://www.foresightiom.com/?p=8#comments Mon, 21 Aug 2006 23:12:03 +0000 Ben Fairfax Macro Themes http://www.webcabcomponents.com/finance/blog/?p=8 The outlook for many UK sectors (for example banking) is primarily influenced by the growth (or decline) in the gross domestic product (GDP). Recall that the UK GDP growth is roughly speaking the percentage change in the sum of all the transactions taking place within the UK. Therefore, trying to understand the likely influences on the UK GDP and the drivers for its change (known as UK Gross Value Added) should be questions which are ever present within the investors mind.

Note: For a formal definition of Gross Value Added see: http://www.statistics.gov.uk/cci/nugget.asp?id=254

Recently the national statistics office released detailed analysis concerning the contributions from differing sections to the UK’s Gross Value Added. The analysis is freely available from the National Statistics Online.

Analysis is this data will more recent data for 2002-2004, shows that:

Top 5 contributors to Growth 1992 - 2004

Industry\Activity	Net change Billion GBP 1992 - 2004	Percentage Change
Letting of dwellings	45.3	119.8
Banking and finance	35.5	139.1
Construction	33.9	109.7
Health and vet services	31.3	120.1
Education	30.8	99.6

Top 5 detractors to Growth 1992 - 2004

Industry/Activity	Net change Billion GBP 1992 - 2004	Percentage Change
Coal Extraction	-2.1	-84.5
Iron and Steel	-1.2	-45.3
Wearing apparel	-1.1	-46.8
Railway transport	-1.0	-29.7
Knitted goods	-0.5	-59.7

Comment on the Bottom 5

The bottom 5, are just a continuation of the lose of competitiveness of UK heavy industry and manufacturing to lower cost locations in Central Europe and the Far East. However, since these once great industries dating back to the industrial revolution are small in absolute terms the over-all effect on GDP growth is minor.

Comment on the top 5

The top 5, are really two groups, the top three of housing/banks/construction and the other two of health and education. The growth in health and education is just a consequence of the huge increase in public expenditure within these sector over the period in question. This naturally has been funded from an increase in the tax burden and increasing public debt (not to mention the off-balance sheet PFI funding arrangements). The top three grouping growth has been driven by the increased availability of credit over this period, the supply side contraints on housing availability and the improvements in the cost-to-income ratios across the banking industry. At present, the housing market is priced to perfection with house prices for example pushed past levels seen in the 1989 housing peak by most metrics (incomes-to-price, rental yields).

The key question which the investor should ask themselves, is whether these themes for growth over the past 12 years can continue. Will the themes change, and if so then where will the next drivers for growth come from?

]]> http://www.foresightiom.com/?feed=rss2&p=8 http://www.foresightiom.com/?p=7 http://www.foresightiom.com/?p=7#comments Mon, 21 Aug 2006 12:14:26 +0000 Ben Fairfax Macro Themes http://www.webcabcomponents.com/finance/blog/?p=7 “The sum of 23,737,038,061 US dollars has been transferred to the Paris Club of creditors,” Vneshekonombank said in a written statement. Highlighting how Russia has moved full circle from its default on its debt in 1998. This year the trade surplus rose to $88 Billion from $66 Billion the year earlier and even if oil did fall to $40 a barrel, which I think is very unlikely Russia would still run a surplus on its foreign trade account.
]]> http://www.foresightiom.com/?feed=rss2&p=7 http://www.foresightiom.com/?p=6 http://www.foresightiom.com/?p=6#comments Mon, 21 Aug 2006 12:02:19 +0000 Ben Fairfax Closed-end Funds http://www.webcabcomponents.com/finance/blog/?p=6 The investment trust Blue Planet Income and Growth Plc (namely BPFU.L, see BPFU Fundamentals for further details on the trust) recently made a 10 for 1 split on its ordinary shares, however even after the change of capital structure the stock has still not become CREST settled, unlike the other two Blue Planet Investment trusts. Being non-CREST settled means that the stock cannot be traded electronically on the SETS/SETSmm order book system (ie via brokers such as selftrade.co.uk, iDealing.com which solely use these platforms) and hence can only be traded via market makers. Such a restriction of the sources of liquidity will generally result in wider spreads and lower depth. Hence the question as to why this situation is able to persist arises.

The situation with CREST is that the Investment Management company which in this case is Blue Planet would need to request from the London Stock Exchange a CREST number. However with the structure of the ordinary shares actually being Units where the units contain 10 shares in 10 identical underlying Investment Trusts would mean that such a request would be rejected. The capital structure could be radically changed by 1 of the underlying trust bidding for the other 9, but as a rough estimate the lawyers/LSE fees to perform these transactions will likely be in the range 300-500K GBP making such a re-organisation too expensive to justify to the existing shareholders who would bear this cost.

Therefore, we have a situation which really should not persist but has because of the costs associated with resolving the situation. This situation has undoubtedly cut into the demand for BPFU.L shares, with potential PEP/ISA demand being a particular area where being non-CREST settled would effect demand. This structural difference between BPFU.L and the other similar two CREST settled Blue Planet Investment Trusts (BPW.L, BLP.L), would appear to be one reason why the BPFU.L funds has consistently traded at a larger discount than the other two funds.

]]> http://www.foresightiom.com/?feed=rss2&p=6 http://www.foresightiom.com/?p=5 http://www.foresightiom.com/?p=5#comments Sun, 20 Aug 2006 20:22:39 +0000 Ben Fairfax Stocks for Income http://www.webcabcomponents.com/finance/blog/?p=5 BT Group 1st Quarter results where released today and can be read of the BT Group PLC web page at: http://www.btplc.com/. With regard to dividends they declared the following:

“BT’s final dividend of 7.6 pence per share will be paid on September 11, 2006 to shareholders on the register on August 18, 2006. The ex-dividend date is August 16, 2006.”

Therefore, one would expect the price to drop 7.6 pence (minus 10% tax) at the open of August 17, 2006; when the shares go ex-dividend. Now, the 7.6p dividend represents a payment of 3.2% at the present share price to be paid in 1.5 months. Also, with the dividend on 13 Feb 2006 of 4.3p i.e. 1.8% at present share price of 237.5p, we have a total dividend of 11.9p or 5% at today’s share price. You can see all the resent historical dividends at:

http://www.btplc.com/Sharesandperformance/Dividends/Dividends.htm


(Further details of Historical Dividends)

]]> http://www.foresightiom.com/?feed=rss2&p=5 http://www.foresightiom.com/?p=1 http://www.foresightiom.com/?p=1#comments Sun, 20 Aug 2006 13:57:11 +0000 Ben Fairfax Market Themes BT Group with a PE of around 11, a yield of 5% and debt of around £7.5 billion; represents a stock which in the heady day of 1999-2000 had a PE of over 40, no dividend to speak of and a debt of £30 billion. This sharp compression of valuations is not only the case for stocks like BT, but also other dot com title bearers such as Microsoft. With Microsoft the earnings have trippled over the past five years but the stock has gone no where leading again to a compression of earnings with the present PE standard around 16. Historically a stock on a PE of around 16, would not be considered a value stock however in present markets many definitive value stocks are on higher ratings. For example, Tesco is on a PE rating of more than 18, and BAT (British American Tobacco) is on a rating of more than 16.
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