Monthly Archives: August 2013

The Power of Pension Funds: Calpers

The largest pension fund in the USA is Calpers. A fund with assets totalling  £169.4 Billion ($263.9 billion)
Calpers is the California Public Employees’ Retirement System.


Calpers provide retirement and health benefits to more than 1.6 million public employees in California at its retirees.

The Pension Fund:-


Growth Funds                                 $170.5                                                  65.0%
Income Funds                                 $42.8                                                    16.0%
Liquidity Funds                               $10.5                                                    4.0%
Real Estate                                       $21.1                                                    8.0%
Infrastructure                                  $3.4                                                      1.0%
Inflation Funds                                $9.8                                                      4.0%
Absolute Return Strategy                $5.3                                                      2.0%
Multi Asset Class                             $0.5                                                      0.0%

Total Fund                              $263.9  billion                          100.0%

Big numbers to meet the pension obligations. Interesting to see the largest segment of assets are held in growth funds (equities). With an aging pension population, the funds needs to invest in growth stocks. This fund controls assets of $263 Billion, and thus has significant influence on the shares it owns and thus the boards of companies it invests in. A long term investor.

Fund Focus: Geiger Counter PLC

Nuclear & Uranium Technology

An unusual investment company, providing investors with exposure to companies involved in the exploration, development and production of energy, predominantly within the uranium industry.


Interesting to see the share price is about 25p but the assets owned by the fund are worth 34p. This means you are buying 34p for the price of 25p. The investment company is trading at a discount of about 20%.

The company has 47 shareholdings in Nuclear & Uranium technology companies:

1. Cameco 13.1%

2. Uranium Energy 11.3%

3. Uranium Participation 8.5%

4. Fission Uranium 7.0%

5. Uranium One 6.1%

Top 5 Holdings Represent 46% of the fund.

A high risk fund that has the usual risks of investments going up and down.

Bank Equity: Too Low

Barclays announced plan to raise more capital:


This got me thinking to look at the equity in Banks.

Look at the balance sheet of our large banks, something that jumps out, is the difference in low levels of equity compared to level of debt (liabilities). It is totally unique to banks.

Take HSBC, the annual report [] page 374. Total shareholder equity= £183,129 million = £183 Billion

Total liabilities   =  £2,509,409 million = £2509 Billion

HSBC Equity:Liabilities Ratio = 0.07

Take Barclays the annual report [] page 233

Total shareholder equity= £62,957 million = £62 Billion

Total liabilities    =         £1,427,364 million = £1427 Billion

Barclays Equity:Liabilities Ratio = 0.04

Then look at other industries: Telecoms.

Vodafone, the annual report [] page 95

Total shareholder equity =  £78,202 million = £78 Billion

Total liabilities    = £61,374 million = £61 Billion

Vodafone Equity:Liabilities Ratio = 1.27

Then look at other industries: Retail

Tesco, the annual report [] page 74

Total equity = 16,661 Million = £16.6 Billion

Total liabilities =  14,483 Million = £14.48 Billion

Tesco Equity:Liabilities Ratio = 1.14.

Our banks have Too Little Equity compared to other industries.


Pi is a constant number where π = 3.1415926535897932384626433832…

A really good read is the book called Stock Cycles by Michael Alexander.


As a scientist (mathematician and physicist), numbers intrigue and fascinate me.

Take Pi, it is mysterious, it is elegant, it is beautiful, and has been known for thousands of years. It is irrational, The number Pi (π) is so magical that its decimal portion is unique and there is no repetition of patterns. It is defined as the ratio of the circumference of a circle to its diameter.  Pi Day is celebrated by math enthusiasts around the world on March 14th. [Pi = 3.1415926535..]

One of the most famous equations in all of physical sciences is theLeonard Euler  identity equation that is the most powerful and yet simple expression: [ei * pi + 1 = 0]

This is the Euler identity [’s_identity]

Just in case you want to know pi (π) is in number format to 1,000 decimal places:


The study of market cycles and market geometry uses pi (π) to pin-point the exact reversal date and price for stock markets and other financial markets. Yes it potentially appears in stock market indices. Imagine that, Pi and Economics.

What is interesting, is that by measuring the average distance between market ups and downs through the 19th and 20th centuries, it is thought that there is a an economic rhythm or  cycle that is now referred to as the Princeton Economic Confidence Interval of 8.6 years. It is thought that a multiple 8.6 year cycles in the markets existed that build in intensity to form a long-wave of economic activity measuring 51.6 years. Now 8.6 years happens to equate to 3,141 days which is very close to the mathematical value of pi (3.14159) times a thousand. Twice pi times 1000 is 6,283 days or 17.2 years.

Hmmmmmmm. Perhaps pure co-incidence or a fluke, or perhaps something beautifully clever in the mystery of Pi.

Sector Components of the FTSE-100 Index

The FTSE-100 Index is made up of 100 companies. They are across many sectors, but what are these sectors, and what are the percentages of these sectors that make up the FTSE-100 ?

Oil & Gas Producers — 16.40%
Oil Equipment, Services & Distribution — 0.34%
Chemicals — 0.50%
Industrial Metals & Mining — 0.03%
Mining — 6.11%
Aerospace & Defence — 2.20%
General Industrials — 0.52%
Industrial Engineering — 0.68%
Support Services — 1.83%
Automobiles & Parts — 0.27%
Beverages — 4.84%
Food Producers — 2.60%
Household Goods & Home Construction — 1.76%
Personal Goods — 0.34%
Tobacco — 5.48%
Health Care Equipment & Services — 0.39%
Pharmaceuticals & Biotechnology — 7.20%
Food & Drug Retailers — 2.42%
General Retailers — 1.24%
Media — 1.83%
Travel & Leisure — 2.21%
Fixed Line Telecommunications — 1.27% [BT plc the only company]
Mobile Telecommunications — 5.59% [Vodafone plc the only company]
Electricity — 0.90%
Gas, Water & Multi-utilities — 3.44%
Banks — 13.45%
Nonlife Insurance — 0.38%
Life Insurance — 3.99%
Real Estate Investment Trusts — 0.94%
Financial Services — 0.65%
Software & Computer Services — 0.24%
Technology Hardware & Equipment — 0.82%
Oil Equipment, Services & Distribution — 0.21%
Mining — 2.09%
Support Services — 1.17%
Pharmaceuticals & Biotechnology — 0.62%
Media — 0.81%
Life Insurance — 0.21%
Construction & Materials — 0.58%
Travel & Leisure — 0.28%

The two biggest sector is Oil & Gas at 16.4% & Banks at 13.45%.

Interesting to see that BT Group PLC is 1.27% of the FTSE-100 and Vodafone PLC is 5.59% of the FTSE-100.

The Paradox of Thrift

This is an economic concept that means if everyone tries to save an increasingly larger portion of their income, they would become poorer instead of richer. This is due to the economy will rapidly slow down from reduction in demand (consumers stop buying and start saving) and the very same people would lose their jobs. This theory, however, applies mainly to Keynesian economics where increased savings represent a diminishing circular flow of income. Thus the notion that an increase in saving, which is generally good advice for an individual during bad economic times, can actually worsen the macro economy causing a reduction in overall income, production, and paradoxically a decrease in saving.

So suppose that members of the household are concerned that a recession is forthcoming. Anticipating that their future incomes might decline, they are motivated to be a bit on the cautious side, and thus begin to save, as such, they curtail current expenditure plans and decide that more income should be diverted to saving to protect against future problems. This is certainly good advice for any individual. In total, the household sector increases saving with new bank deposits. Because this extra saving is NOT the result of a change in income (no payrise)  it is an autonomous change, demand to buy goods drops off.

The paradox states that if everyone tries to save more money during times of economic recession, then aggregate demand will fall and will in turn lower total savings in the population because of the decrease in consumption and economic growth. The paradox is, narrowly speaking, that total savings may fall even when individual savings attempt to rise, and, broadly speaking, that increase in savings may be harmful to an economy. Both the narrow and broad claims are paradoxical within the assumption underlying the fallacy of composition, namely that what is true of the parts must be true of the whole. The narrow claim transparently contradicts this assumption, and the broad one does so by implication, because while individual thrift is generally averred to be good for the economy, the paradox of thrift holds that collective thrift may be bad for the economy

Thus with everyone saving (or not spending), demand for goods from suppliers / manufacturers falls off, and thus everyone gets poorer. This is exactly what happened at the end of 2008, with the financial world in turmoil, people stopped spending, the world slide into recession, people lost wealth.

Permanent Interest Bearing Shares (PIBS)

In the media recently, there has been a lot of news about the Co-Operative Bank, and a whole in the balance sheet. This was down to the level of PIBS issued by the Co-Operative Bank, and level of interest having to be paid, and also loans at the bank turning sour. (Thus issuing PIBS to raise cash, the cash used to create loans, the loans then go bad, the bank then has a problem).

However PIBS offer a great source of income for fixed income investors like pension funds, pensioners etc etc. The interest rate (yield) can be very generous, over 7% !

PIBS, are issued by mutual building societies, like Nationwide and Yorkshire Building Society as simple examples.

Nationwide []

10 funding programmes at Nationwide:

∑ (£200,000,000 + £100,000,000 + £400,000,000 + £350,000,000 + £60,000,000 + £125,000,000 + £60,000,000 + £80,000,000 + £10,000,000 + £30,000,000) = £1,415,000,000 = £1.415 Billion

Yorkshire []

£150,000,000 @ 5.649 %.

What this is, another form of funding for the financial institution. It gives them the ability to raise more finance, to meet the demands from customers for loans and mortgages.It is a form of wholesale funding, borrowing on the fixed income market place.


Fund Focus: Global Technology

Having exposure to companies like Apple is of great benefit. A company that has changed the way we listen to music, we way with interact with mobile phones to the way we use computers from lap tops to tablets.

Look at the share price.

$454 = £292 a share.

Another way is to buy into a fund, a low cost fund that has all the famous technology names like Apple, Google, Microsoft is the Legal & General Global Techology Tracker


A £28million fund, grown by 60% in the past 5 years.

Its top 10 holdings:  

Apple Technology  12.78%
Microsoft Corp.  8.98%
Google  8.21%
International Business Machines  7.31%
Cisco Systems  4.43%
Intel Corp.  4.16%
Oracle Corp.  3.86%
Qualcomm Technology  3.63%
Taiwan Semiconductor 3.04%
SAP AG 2.23%

These ten companies account for over 58% of the £28 million fund.

A low cost way to gain access to the most dynamic companies that change our world.

UK Interest Rate Policy…the next 3-5 years…

On Wed 7th August, the Bank of England made clear, UK Interest Rate Policy.

The Bank of England governor Mark Carney has said the Bank will not consider raising interest rates until the jobless rate has fallen to 7% or below.

In the Inflation Report, published on the 7th August.


Some important comments from Mark Carney.

While job growth has been a relative positive in recent years, unemployment is still high.
There are one million more people unemployed today than before the financial crisis; and
many who have jobs would like to work more than they currently can.”

In practice, that means the MPC intends not to raise Bank Rate above its current level of
0.5% at least until the Labour Force Survey headline measure of unemployment has fallen to
a threshold of 7%. While the unemployment rate remains above 7%, the MPC stands ready
to undertake further asset purchases if further stimulus is warranted. But until the
unemployment threshold is reached the MPC intends not to reduce the stock of asset
purchases from the current £375 billion.”

So looking at the comments and facts, with the UK unemployment rate currently standing at 7.8%, the UK base rate will remain at the historic low of 0.5%, great news for people on fixed rate mortgages but a crushing blow for savers. The Bank of England is determined to fight unemployment, buy keeping the cost of capital ultra-low, in the hope to create jobs, but giving certainty to the market and thus creating investment.

In all likelihood, rates are now to be fixed for the next 3-5 years at least.

The BT Pension Fund

The BT Pension Fund is the largest UK pension scheme. The scheme is so large it has a dedicate investment house to manage the fund, Hermes Investment Management.

Some interesting facts can be found in the annual report

Some useful information from the report:

page 4: to mitigate the risks facing the Scheme from the on-going effects of the financial crisis and, in particular, the resulting economic and political fallout in the Eurozone. This was achieved through a lower exposure to Eurozone assets, particularly the countries in Southern Europe, and a lower exposure to equity markets.

page 6 The scheme’s assets are £38,783 million

page 32 Asset Allocation:

Equities                            31%
Fixed interest                  22%
Inflation-linked                15%
Alternatives                     21%
Property                           12%

page 33 External Fund Managers also manage the fund:

Hermes managed approximately 52% (In house manager)

The Scheme holds the majority of its UK equities in a passive portfolio managed by Legal & General Investment Management (LGIM) which tracks the FTSE 100 Index
M&G Investment Management manages the majority of the Scheme’s UK corporate bond investments, totalling  approximately 10% of Scheme assets
[M&G is a part of Prudential PLC]

Page 76 lists the top 30 Investments

Investment                             Market value £ million     % of net assets
UK Treasury 0.625% 2040                  642                                         1.7%
UK Treasury 2% 2035                         566                                         1.5%
UK Treasury 2.5% 2024                      550                                         1.4%
UK Treasury 0.75% 2034                    496                                         1.3%
Kemble Water Holdings                      487                                         1.3%
UK Treasury 1.875% 2022                  444                                         1.1%
UK Treasury 0.125% 2044                  433                                         1.1%
UK Treasury 4.125% 2030                  430                                         1.1%
UK Treasury 1.125% 2037                  405                                         1.0%
UK Treasury 1.25% 2027                    359                                         0.9%
The Centre: MK Property                    329                                         0.9%
UK Treasury 2.5% 2020                      313                                         0.8%
Bridgewater Pure Alpha Fund II        303                                         0.8%
UK Treasury 0.125% 2029                 299                                         0.8%
UK Treasury 1.25% 2032                   296                                         0.8%
UK Treasury 0.625% 2042                 281                                         0.7%
Milton Park Property                         280                                         0.7%
Network Rail 1.75% 2027                   271                                         0.7%
BlueCrest Capital International        257                                         0.7%
BBTPS Fund                                       245                                         0.6%
Hermes GPE Global Secondary        236                                         0.6%
UK Treasury 1.25% 2055                  194                                         0.5%
Ashmore Debt Fund EMarkets         176                                         0.5%
UK Treasury 0.5% 2050                    167                                         0.4%
RWC Specialist UK Focus Fund        162                                         0.4%
UK Treasury 0.375%                        162                                         0.4%
UK Treasury 0.75% 2047                 161                                         0.4%
RH Fund 1 L.P.                                 141                                         0.4%
Bluewater Property                          132                                         0.3%
Castle Court Property                      130                                         0.3%
Totals                                               9,347                                     24.1%

Interesting to see that the top 30 Investments  of £9,347 million (£9.347 Billion) account for 24.1% of the fund.
Also notice the need to invest in government yielding gilts, the need is clear, to meet monthly pension payments to deserving retired people who have worked hard for BT. This is known as Liability Driven Investment, the investments held are meeting immediate liabilities.

Standard Life

Standard Life is the revered Scottish financial institution. It was a mutual life insurer, founded in 1825, and de-mutualised in 2006 and floated on the London Stock Exchange to become a member of the FTSE-100.

Just looking at basic financials, in these 0.5% interest rate times, Standard Life PLC is able to pay a 3.8% coupon on this shares.

A financial giant, with expertise in long term investment, the 2012 annual report, one can collect some salient information.

page 5: Focus on Emerging Markets: Dubai, India, China and Singapore.

page 11: Assets under administration of £218.1 Billion (£218,100 Million)

Page 15: Highly Liquid with £1,064 Million (£1.064 Billion) in cash and short term debt securities)

page 19: Investment in technology is delivering lower costs.

page 126: Investment return of £13,982 Million (£13.982 Billion) on its investments.

page 136: Investment in property of £8,565 Million (£8.565 Billion)

page 141: Derivative Financial Instruments held for trading: £82,979 Million (£82.979 Billion)

A very strong institution with a prudent approach to investment management.

HM Government July 2013 Monthly Borrowings.

In July 2013, the HM Government had to borrow money to meet the difference between tax revenues and public sector expenditure. The term for this is The PSNCR: The Public Sector Net Cash Requirement.

There were 3 auctions of Gilts (UK Government Bonds) by the UK Debt Management Office ( to raise cash for HM Treasury:-

11-Jul-2013 3¼% Treasury Gilt 2044, £2,575.0150 Million

09-Jul-2013 0 1/8% Index-linked Treasury Gilt 2029, £1,487.1650 Million

02-Jul-2013 2¼% Treasury Gilt 2023, £3,849.7770 Million

When you add the cash raised:-

∑(£2,575.0150 Million + £1,487.1650 Million + £3,849.7770 Million) = £7,911.96 Million

£7,911.96 Million = £7.911960 Billion

On another way of looking at it, is in the 31 days in July, HM Government borrowed:-

£255 million each day for 31 days. We are fortunate, the global banking and financial markets still has the confidence in HM Government to buy the Gilts. The budget deficit keeps rising. What is also alarming, is the dates these bond mature, 2044, 2029 & 2023. All long term borrowings, we are mortgaging our futures.

Fund Focus: Emerging Markets

The Templeton Emerging Markets Investment Trust PLC.

The Templeton Emerging Markets Investment Trust (TEMIT) was one of the first dedicated emerging markets funds in the UK. Run from Singapore as a part of the investment house of Franklin Templeton.


A £1,800,000 million (£1.8 Billion Fund), it is one of the largest emerging markets investment companies listed on the London Stock Exchange.

If one had invested £10,000 in (TEMIT) when it opened for business 1989, one’s holding would have grown to over £220,000 today, (the beauty of hindsight). An incredible track record, run by Dr. Mark Mobius based Singapore. He is a bit of an investment guru with numerous accolades and books to his name “Trading with China” “The Investor’s Guide to Emerging Markets” “Mobius on Emerging Markets”  to name just three.

The top 10 holdings:

Brilliance China Automotive Holdings Ltd. (Consumer Discretionary) Hong Kong/China 9.7%
Tata Consultancy Services Ltd. (Information Technology) India 5.0%
Dairy Farm International Holdings Ltd. (Consumer Staples) Hong Kong/China 4.9%
Siam Commercial Bank PCL, fgn. (Financial) Thailand 4.6%
PT Astra International Tbk (Consumer Discretionary) Indonesia 4.4%
VTech Holdings Ltd. (Information Technology) Hong Kong/China 4.1%
Banco Bradesco SA, ADR, pfd. (Financial) Brazil 4.1%
Itau Unibanco Holding SA, ADR (Financial) Brazil 4.0%
Akbank T.A.S. (Financial) Turkey 3.9%
Kasikornbank Public Co. Ltd, fgn (Financial) Thailand 3.4%.

Interesting to see the no Russian companies in the top ten, when one thinks of emerging markets, one immediately thinks of BRICS (Brazil, Russia, India and China), as named by Jim O’Neil of Goldman Sachs Asset Management. One here can see the importance of Thailand and Indonesia now in emerging markets.

Over the past 10 years, TEMIT has delivered a total return of 541%, which represents a compound growth rate of 20% a year. This does including the reinvestment of dividends.

Word of caution, past performance is no guide to the future performance of the fund.

Vodafone’s Creditors.

Vodafone PLC is one the largest telecommunications operator in the world, a household name and is 2nd largest company in the UK FTSE-100 Index.

Apart from its shares in issue it has a large debt issuance programme, its bond issue programme to finance its day to day business operations

Vodafone issues bonds (debt) to investors who are looking to get a regular fixed income.
It has two programmes a US Shelf [] and a EU Shelf [].

What is the level of debt issued by Vodafone ?

US Shelf = $16,739,400,000
EU Shelf = $16,683,496,000

∑ ($16,739,400,000 + $16,683,496,000) US Dollars.

That is $33,422,896,000 = $33 Billion = $33,400 Million of outstanding bonds.

With such strong cash flows, (eg prepaid sims, where Vodafone gets the cash up front, or contract customers paying every 31 days) servicing this debt is no problem, but also Vodafone is able to satisfy fixed income investors such as pension funds by offering them bonds that gives a safe, regular and stable fixed income to meet monthly pension commitments to pensioners.

The bond market is essential to the smooth functioning of the Global Banking and Financial Markets.

Merger & Acquisitions in Global Banking & Financial Markets

In the banking, insurance, fund management & financial markets industry some names have vanished, due to merger and acquisition. Here is a snapshot of a few famous names that no longer exist.

Smith New Court:Acquired by Merril Lynch
Mercury Asset Management:Acquired by Merril Lynch
Merril Lynch:Acquired by Bank of America
James Capel:Acquired by HSBC
National Westminster Bank:Acquired by Royal Bank of Scotland
Schroders Investment Bank:Acquired by Solomon Smith Barney
Midland Bank:Acquired by HSBC
William & Glyns Bank:Acquired by The Royal Bank of Scotland
SG Warburg:Acquired by UBS
Dillon Read:Acquired by Swiss Bank Corporation
Swiss Bank Corporation:Acquired by UBS
Philips & Drew:Acquired by UBS
Barings Bank:Acquired by ING
Adam & Co:Acquired by Royal Bank of Scotland
Morgan Grenfell:Acquired by Deutsche Bank
Murray Johnstone:Acquired by Aberdeen Asset Management
Edinburgh Fund Managers:Acquired by Aberdeen Asset Management
ING Direct UK:Acquired by Barclays
Newton Investment Management Limited:Aquired by Bank of New York Mellon
Hambros Bank:Acquired by Soc Gen
Kleinwort Benson:Acquired by Dresdner Bank
Scottish Life:Acquired by Royal London Assurance
Egg:Acquired by Yorkshire Building Society
Wachovia:Acquired by Wells Fargo
Barclays Global Investors:Acquired by Blackrock
Merril Lynch Investment Managers:Acquired by Blackrock
Standard Life Bank:Acquired by Barclays                     
Abbey National:Acquired by Santander
Alliance and Leicester:Acquired by Santander
Samuel Montagu:Acquired by HSBC
Morley Fund Management:Acquired by Commercial Union
General Accident & Commercial Union:Mergered to form CGU
Norwich Union & CGU:Merged to form Aviva
Robert Fleming:Acquired by Chase Manhattan
Chase Manhattan:Acquired by JP Morgan
Hill Samuel:Acquired by TSB
TSB and Lloyds Bank:Mergered to form LloydsTSB
Scottish Widows:Acquired by LloydsTSB
Cheltenham & Gloucester:Acquired by LloydsTSB
Clerical Medical:Acquired by Halifax
Halifax & Bank of Scotland:Mergerd to form HBOS
HBOS:Acquired by LloydsTSB
Woolwich:Acquired by Barclays
Friends Provident:Acquired by Resolution
New Star:Acquired by Henderson Investors
Gartmore:Acquired by Henderson Investors
M&G Investment Management:Acquired by Prudential
Scottish Amicable:Acquired by Prudential
Bear Stearns:Acquired by JP Morgan Chase