Monthly Archives: January 2014

Fund Focus: The Biotech Growth Trust

The late Joshua Lederberg made the very famous quote:

The single biggest threat to man’s continued dominance on the planet is the virus

This quote is used at the start of the 1995 film, Outbreak starring Dustin Hoffman, Morgan Freeman and Kevin Spacey. Joshua Lederberg at the age of 33 years won the 1958 Nobel Prize in Physiology or Medicine for discovering that bacteria can mate and exchange.

Today medical and pharmaceutical research is trying to fight disease and solve some of the most deadly threats to mankind.
There are many funds that financing investment into companies that are focussed on Bio-Technology and research into finding cures for medical conditions.

The Biotech Growth Trust is a £350 million fund that is investing in companies that are looking for solutions in the world of medical research.


It’s top 10 holdings are:

Gilead Sciences Inc 9.90%
Celgene Corporation 9.60%
Biogen Idec Inc 8.91%
Regeneron Pharmaceuticals, Inc. 5.84%
Incyte Genomics 5.54%
ONO Pharmaceutical Co., Ltd 4.85%
Amgen Inc 3.86%
Illumina, Inc 3.56%
Impax Laboratories, Inc 2.97%
Alexion Pharmaceuticals, Inc 2.77%

A dynamic fund whose potential investments could herald a breakthrough in life sciences.

Real Estate: Spending £5.7bn and acquiring assets worth £10bn.

In the news recently, has been coverage of activist investors trying to unlock value in companies. Carl Icahn has been said to think Ebay should unlock the value of PayPal the payments business it owns, and give that value back to shareholders. In the UK press there are similar articles about UK Supermarkets who have locked up value on the balance sheet from their property portfolios, and there is the case to try and unlock this value.

Morrison’s [] has a share price of about £2.45 a share, and its market capitalisation is about £5.728 Billion.

The actually value of all the supermarket land it owns is about £10 Billion.

This means the shareprice of Morrison’s does not reflect the true value of the business. Or another way of looking at it, is that perhaps one can buy shares in Morrison’s, spend £5.70 and get an asset worth £10, potentially.

Lots of ways to cut this cake, perhaps a more simple way to explain the share price of Morrison’s is that the share price of about £2.45 is about 57% of the total assets (inventory, business brand, customer base, property etc etc) that it owns. By following this argument, then the share price of £2.45 is only reflecting 57% of the true value of the company, and then perhaps the share price should be higher than market quoted price of £2.45 and be actually £4.30.

Or perhaps it is easier to simply state that markets are irrational.

Japan’s Trade Deficit

A consequence of “Abenomics” is now the massive trade deficit.

The Japanese Prime Minister Shinzo Abe has lead a policy to devalue the Japanese Yen to ensure Japanese exporters have an advantage with cheaper goods on the international market.  This has lead to an export boom for major Japanese firms like Toyota whose Japanese made products exported onto the international market, then command prices at much lower levels than rivals. Thus these products are cheaper and attracter buyers.

However a side effect of the weaker Yen is that imports become more expensive. So when oil and gas are rising in price on the international market, and it is these two commodities that Japan needs to import, then it means these energy products become more much expensive to Japanese importers.

The Japanese trade deficit for 2013 was £67 Billion.

The BP Dividend

In 2013, BP plc, ( paid 4 cash dividends to shareholders, as they have a quarterly dividend policy.This makes BP an attractive investment option for investors seeking an income, such as Pension Funds or Investment Funds.


See how this fund the Legal and General Equity Income Fund has investments in BP, the fund needs to pay out to its investors, and thus why 3% of the fund is held in BP.

BP paid the following in 2013:-

28-Mar-13 6.0013p per share
21-Jun-13 5.8342p per share
20-Sep-13 5.7630p per share
20-Dec-13 5.8008p per share

So the interesting calculation is what the actual Ordinary Share dividend costs BP. The issued share capital of BP p.l.c. comprised of 18,638,693,405 shares.


28-Mar-13: = 18,638,693,405 x £0.060013 per share = £1,118,563,907
21-Jun-13: = 18,638,693,405 x £0.058342 per share = £1,087,418,651
20-Sep-13: = 18,638,693,405 x £0.057630 per share = £1,074,147,901
20-Dec-13: = 18,638,693,405 x £0.058008 per share = £1,081,193,327

For 2013, the cash dividend cost BP:

(£1,118,563,907 + £1,087,418,651 + £1,074,147,901 + £1,081,193,327)

= £4,361,323,786

That is £4.361 Billion = £4361 Million paid out to the deserving shareholders of BP plc. Pension Funds and Income seeking investors deserve a decent dividend stream. BP is delivering stable returns.

PIMCO & Mohamed El-Erian

Yesterday on Tue 21st Jan 2014, Pimco ( the world’s largest bond manager (with over £1.198  Trillion = £1198 Billion which is about 85% of the annual UK GDP) under management, made the suprise announcement that it’s Co-Chief Investment Officer, Mohamed El-Erian was to step down, and leave Pimco in March.


It is news that will affect the market, as PIMCO dominate opinion in the fixed income market.


Warren Buffet Investment Quote

A fantastic quote by Warren Buffett of Berkshire Hathaway.

Be Fearful When Others Are Greedy and Greedy When Others Are Fearful

What this means, is when there is a bubble, and asset prices are rising, and then prices are further fuelled by the shear volume and greed of more and more investors rushing in, with the herd mentality, then that is time to be worried and frightened.
When markets are tumbling, and all of a sudden certain assets seem to be oversold and undervalued as everyone is selling, that is the time to enter the market, be greedy and buy assets below their real value.

Big Oil

Despite the term “Big Oil” which is referring to the largest energy companies in the world, the famous names like BP, Shell, Statoil, ExxonMobil, Chevron, Total, Repsol, ConocoPhillips,  etc, the numbers actually tell the real story.

The so called “Big Oil” companies only account for 25% of oil production.

OPEC (The Oil Production Exporting Companies) account for 75% of oil production.
Yes, Saudi Arabia, Oman the UAE, Qatar, Iraq and Kuwait dominate oil production.

Reading the BP Statistical Review of World Energy one gets a grip on the numbers

Total Oil Production = 86,152,000 barrels a day.
A barrel of oil is about US $111.

Thus crude oil production per day is worth a staggering $9,562,872,000 = £5,814,890,000 a day

Total Oil Consumption = 89,774,000 barrels a day.
A barrel of oil is about US $111.

Thus crude oil consumption per day is worth a staggering $9,964,914,000
= £6,059,360,000 a day

And note consumption is based on production, and the production of £5,814,890,000 per day (£5.8 billion) over 75% of this is from OPEC. The interesting fact is that we consume more oil than we produce, meaning we are pulling against oil reserves to meet consumption demand.

The so called oil majors that make up “Big Oilare actually oil minors.

UK Interest Rates Jan 2014

On Thursday 9th Jan, The Bank of England (BoE)’s Monetary Policy Committee (MPC) has kept the UK base interest rate at the record low of 0.5% for the 58th consecutive month.

Yes, it is getting close to 5 years now when rates were cut to 0.5% in March 2009.

Since then we have seen £375bn of Quantative Easing, cheap money pumped into the economy. Infact it is more than £375bn, as one has the interest (the coupon) on all the HM Government Gilts that are owned by the Bank of England, that is rarely reported.

Now the Bank of England stated it would not even consider raising interest rates until unemployment reached a threshold of 7.0%, which gave certainty to the market back in mid-2013, so the question is whether rates in 2014 will remain at 0.5%.

It all depends on the UK recovery and the reduction in unemployment.

Savings Tax (ripping off savers)

The International Monetary Fund published a working paper [] on the Sovereign Debt Crisis.

A non-trivial paper [] that actually makes very scary reading.

Recall in 2013, during the Cypriot Banking Crisis, where people with over €100,000 on deposits last substantial savings, (the term haircut) was used. They lost over 40% of their money from savings above €100,000. It is effectively ripping off savers.

Or to be polite, an enforced deduction, effectively a savings tax on the ones who have saved hard.

The IMF paper is referring to a similar way for governments to pay back these massive debts that they have taken on since 1997 when  the financial crisis began

By reading this one cane make some deductions:

The sheer size of the Western debt pile is just so vast that wealthier countries will need  haircuts, and with higher inflation and financial repression which really means a tax on diligent savers. This has been used in countless IMF rescues for emerging markets.

It seems that savers are getting a bad deal in general. With Quantative Easing it is savers who are being punished, with near zero interest rates with their money on instant access deposit.

If one looks at what happened in Cyprus, then savers were effectively ripped off by having their life savings taken if they had over €100,000. Anything over €100,000 was effectively taxed at over 40%.

There is something very wrong with what has happened, and the school of thought of taxing people for saving is a worrying thought.

Understanding Working Capital.

The term Working Capital is a very mis-understood term, when one reads the financial press and media.

It is the blood stream of any business, as it is the money needed to run the business, to invest in the business, buying infrastructure, paying staff and also paying for procurement of assets.

if this is miscalculated, the business could run out of cash, and thus potentially fail.
Also, by ‘bungling’ and not understanding the cash in hand means, one cannot use the cash to invest in the business and get a better return or the bad situation, running low on cash and having to borrow and pay a higher rate.

Working capital is a simply the money (cash) locked into running the actual business. When I refer to being locked into the business that cannot be easily used.

Also with the financial crisis, the ability to borrow is not always feasible, in risk adverse markets, if a company is in distress, and is running low on cash, then the company may not be able to borrow, locked out of capital markets, just look at The Royal Bank of Scotland, in the Autumn of 2008, unable to access cash from the global liquidity markets and fund its day to day operations, at which point the UK HM Government had to rescue the bank, as it was unable to borrow on the financial markets, and needed a life line from The Bank of England, and the same was true in 2007, when Northern Rock had to borrow £30 billion from The Bank of England, when it too was locked out of the capital markets.

Thus well run companies have a close watch on working capital, and have also a “headroom” where they can borrow on re-arranged credit facilities to allow them to access funding.

HM Government December 2013 Borrowings…

Another month, and guess what, take a wild guess, it is the same old story, HM Government, spends more money than it receives via taxes. Another deficit month, thus to bridge the gap, needs to borrow on the bond market.

In December 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 “only” 2 auctions of Gilts (UK Government Bonds) by the UK Debt Management Office ( to raise cash for HM Treasury :-

12-Dec-2013 1¾% Treasury Gilt 2019  £4,552.3520 million

10-Dec-2013 0¾% Index-linked Treasury Gilt 2047  £1,000.0000 million

When you add the cash raised:-

∑(£4,552.3520 million + £1,000.0000 million) = £5,552.350 million = £5.552 Billion

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

£179 million each day for 31 days. We are fortunate, while 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, 2049. All long term borrowings, we are mortgaging our futures.

New Year Quote: Keynes

With the new year upon us as usual there is media speculation from financial pundits on what the FTSE-100 will do in 2014.

It is just an exercise of guess work with clever words. No one can predict the future.

One of the best investment quotes is that of the intellectual giant, John Maynard Keynes.

Investing is an activity of forecasting the yield over the life of the asset; speculation is the activity of forecasting the psychology of the market