Wednesday, 1 October 2014

Friday, 26 September 2014

Why Do Punters Love AIM so much? Mid-Caps are so much better...

OK, so I am misleading you - in the title of this post, I ask the question "Why do punters love AIM so much?", when I know the answer. It is like lottery gambling, where you are hoping to strike it rich by unearthing a multi-bagger of an investment!

And clearly there have been some notable successes chalked up, like ASOS (LON:ASC) (before its recent travails) which has been a very impressive multi-bagger if you got in early on.

But for a "real" investor who does his or her own spadework and has a well-defined investment process that they use, does it make sense to invest much cash or time on AIM companies? Let's look at some very basic statistics:

Exhibit 1: Price Performance of UK Indices since the AIM 100 index
started in late 2005

In this chart, the black line is the benchmark FTSE-100 index, the soaring blue line the FTSE Mid 250 index, the green line the FTSE SmallCap ex investment trust index, and the purple line bringing up the rear is the FTSE AIM 100 index.

Looking at these 4 indices, it is apparent that the FTSE Mid 250 index has more than doubled since late 2005, while in contrast the AIM 100 index has nearly halved, with both large- and small-caps somewhere in the middle, both with relatively modest gains. That means a near four-fold difference in performance between mid-caps and AIM stocks over 9 years!

The basic point is this: the AIM market is NOT the same as the main LSE market - the listing rules are not anything like as stringent, and the failure rate for young companies is, as we all know, high. So the risks inherent in investing not just in stocks, but in AIM-listed stocks in particular, are clearly very high. This means that investors venturing into the murky AIM waters need to do even more due diligence in their research than they would for a larger, more established company which has a longer track record and typically more mature products and services. 

OK, I understand, you don't just want to invest in the largest, boring UK-listed companies like Vodafone (LON:VOD) and GlaxoSmithKline (LON:GSK), which in any case are arguably not very British as companies these days given their global footprints.  

What is interesting is even if you invested instead in the average UK stock within the MSCI UK index (a collection of FTSE 100, FTSE Mid 250 and the largest FTSE SmallCap stocks), you would still have done substantially better than the market-cap weighted FTSE 100 index!

Exhibit 2: Equal-Weight UK Index vs. FTSE 100, FTSE Mid 250 from 1999 on

While the FTSE Mid 250 index (in green) still did much better than the FTSE 100 index (yellow line), the equal-weight MSCI UK index still gave you a cumulative 81% price gain from 1999, as opposed to only 12% from the FTSE 100. Yes you would have gained slightly more in dividends from the large-caps, but nothing like enough to start bridging this enormous gulf in performance. 

Morals of this story:

  1. The AIM market should come with a strongly-worded health warning, only experienced investors should venture in, and even then they should tread very carefully.
  2. All other investors wanting to get exposure to UK stocks would be far better off investing in either the FTSE Mid 250 index (yes there are low-cost FTSE 250 index ETFs available from both iShares and Deutsche Bank's x-trackers), or in a broad range of UK stocks drawn from the FTSE 100, Mid 250 and SmallCap market segments, weighted in equal proportion in the final portfolio. Normally, 15-20 stocks should give a decent level of diversification.

- See more at: Stockopedia post

Wednesday, 24 September 2014

Guest Host on CNBC Europe this morning... Video talking about IPOs

Here is a video link from my appearance today on CNBC Europe's Squawkbox programme, discussing my cautious stance over Initial Public Offerings where the seller is a Private Equity firm...

Monday, 22 September 2014

I have been featured in the Mail on Sunday (Financial Mail)!

Mail on Sunday: Web Link to the article -

As UK investors eye up Alibaba, the £140billion Chinese internet retail phenomenon that floated on the New York Stock Exchange last week, we ask whether the US stock market still represents a good investment opportunity – and show you how to cut the cost of trading shares on the other side of the Atlantic.

Edmund Shing, 42, works in the City of London, lives part-time in Paris, works for a Moscow-based fund management company – and knows a thing or two about investing globally.

For his own portfolio he likes US shares that give broad exposure to high growth industries such as technology, biotech, shale oil and shale gas.

He says: ‘It’s harder to get equivalent exposure from UK or even European shares. In the US there is a cast of thousands.’ 

Edmund, who is married to Kim and has four children, will be shunning Alibaba as he favours ‘real’ technology firms such as Microsoft. He is also eyeing up Apple because of its phenomenal ‘global brand’. He adds: ‘I also like Kulicke and Soffa, a company that makes inspection equipment for semiconductors. Few people in the UK have probably heard of it but I think it’s cheap and its earnings are growing.’

Edmund, left, has a wide knowledge of markets through his work but he also uses research tools such as Stockopedia. ‘I like the way it boils down the information and gives each stock a ranking based on value, quality and momentum.

‘It’s a great starting point for filtering out thousands of companies.’

(yes I know, not the most flattering photo, but you can't make a silk purse out of a sow's ear!)

Tuesday, 16 September 2014

UK Housing Becoming a Buyers' Market? Not good for estate agents...

The UK media has not tired of bombarding readers with news stories about the runaway nature of the London property market in particular, and the UK housing market in general, this year. As I have been looking to buy a bolt-hole in London, this strong price momentum has been particularly annoying, with properties literally flying off the shelves soon after being put up for sale.

This trend looks finally to be on the turn, despite continued reports of London seeing 19% price growth in the year to July, according to the Office for National Statistics. 

RICS Survey Points to Big Slowdown

The Royal Institute of Chartered Surveyors' latest monthly survey for August highlights this London slowdown in a number of revealing charts (Figures 1-3):

1. Newly Agreed Sales Are Slowing Fast

2. New Buyers Are Cooling Their Interest Given High Prices

3. Particularly in London

European House Prices Hardly Advance

While UK house prices have gained 12% in the year to July, the latest Knight Frank Global House Price Survey reveals that European house prices overall have only gained 2% over the last 12 months, with certain markets such as Spain still seeing falling prices.  In fact in Europe, only Turkey (+14%) and Ireland (+12.5%) have seen faster house price growth than the UK. But remember, in the case of Ireland, that this rebound in house prices has only come after a terrible 50%+ fall in house prices during the Global Financial Crisis, a far cry from the UK situation today. 

Can we really expect the UK housing market to continue to march upwards, even as affordability ratios deteriorate rapidly and force ever more 20- and 30-year olds live at home for longer in order to try to save up a deposit? And what if the Bank of England decides to begin raising its base rate, even if only gently? This could have a further negative impact on affordability to add to this price growth. 

Seasonal Effects: Q4 is the Weakest Period of the Year for House Prices

I have looked at the quarterly variation in UK house prices from the Nationwide house price index going back to 1952: From this, it is quite clear that Q4 (October-December) is the weakest of the year from the point of view of house price momentum (Figure 4): 

4. Q4 is on Average 0.7% Below Year Average House Price Growth

If we delve deeper and look by month using the Halifax House Price index data back to 1983, we see an even more obvious seasonal effect with August-January registering average house price growth well below the overall long-term average (Figure 5), with a similar if not exactly the same seasonal effect also found in Rightmove monthly asking prices (going back to 2001, Figure 6): 

5. August-January Sees Pronounced Seasonal Weakness in House Prices

6. Rightmove Asking Prices Also See A Weak August-January Trend

Two Conclusions To Reach

  1. With discounts of achieved to asking prices currently widening according to Hometrack, it is time for homebuyers, especially in the pricier London and the South East regions, to be more discerning and to bid lower, particularly if a cash or non-chain buyer and thus able to complete relatively quickly.

  2. Estate agents like Foxtons (FOXT.L) and online property listing websites like Rightmove (RMV.L) and the recently-listed Zoopla (ZPLA.L) should see their premium valuations come under further attack as top-line growth inevitably slows along with overall housing market activity. I see a forward P/E of 22x for Rightmove and 27x for Zoopla as far too high when their core market is slowing, particularly as their dominance and cost to estate agents is spawning rivals like Agents' Mutual. Even estate agents are seeing their percentage-based fee structure under attack from fast-growing online estate agents charging a flat fee (e.g. £500) such as Rightmove and Zoopla could thus be interesting short candidates...

There will be a Time when Estate Agents Are Interesting Stocks

There will inevitably be a time to look at estate agents such as Foxtons and LSL Property Services (LSL.L), but I feel that this will be when they trade on single-digit P/Es and dividend yields of well above 5%. Foxtons may have nearly halved from its post-IPO high but has not hit these valuation levels yet, while LSL is not far away (9.8x forcast P/E and 4.9% dividend yield according to Stockopedia) and may warrant further attention in the months ahead. 

But for the moment, I shall be biding my time and keeping a close eye on house price developments, in the hope of buying either a London property in the months ahead, or at least snapping up the shares of a bargain basement estate agent!


Thursday, 11 September 2014

Warm Up on Polar Capital!

Polar Capital: A Good Time To Warm Up

Polar Capital (LON:POLR) is an asset manager, managing a selection of investment trusts (like the Polar Capital Technology Trust, PCT; and the Polar Capital Global Financials Trust, PCFT). They also manage a number of unit trusts and hedge funds, with their Assets Under Management (AUM) up to $13.6bn as of the end of June this year.  

Why I Like Asset Managers

I like asset managers for a number of reasons: 

  1. Firstly, their business model tends to be asset-like, but highly profitable. 
  2. Secondly, as a result of this they are often serial dividend payers and growers, and 
  3. Thirdly, they also tend to hold net cash on their balance sheets, a good buffer to have against periodic stock market and economic downturns. 

They Should Benefit from Financial Repression

We remain mired in a strange economic scenario, where global economic growth is struggling and requires a very helping hand from central banks around the world, in the form of Zero Interest Rate Policies (ZIRPs) and Quantitative Easing (QE) programs. While these ultra-low interest rates have been manna from heaven from borrowers, they have been dreadful news for savers, with UK deposit savings rates falling year on year (Figure 1).

1. UK Deposit Rates Hit a New Historic Low

And yet, scarred no doubt by 2 stock market crashes since the year 2000, the average UK household has preferred to keep a large amount of savings in the form of cash, rather than any other higher-yielding investments like stocks and shares. This is a global trend; In the US and Germany, for example, cash held on deposit by households continues to hit new highs at over 0.4% of GDP (red line and right-hand scale on Figure 2), in spite of the five-year old stock market rally and the US S&P 500 index recently breaching the 2000 level. 

2. US Savers Keep Record Amounts in Cash

As these ultra-low interest rates on cash deposits remain, there will be added pressure over time on households to find better yields elsewhere, in other asset classes like stocks and bonds.

Right Now, Stocks Yield the Most

The Hunt for Yield should push investors towards stocks, given the already-depressed yields now available on government bonds; note that you now have to pay the German government in effect for them to keep your money for 1 year (Figure 3)! While the FTSE 100 index is due to pay out 3.7% this year...

3. Stocks Yield More than Bonds or Cash

So for asset managers like Polar Capital (LON:POLR) who specialise in stock-based funds or higher-yielding specialist areas like emerging market bonds, this should ensure positive inflows over the medium-term. 

Polar Capital: High Dividends, Backed By High Profitability and Cash on Balance Sheet

Running Polar Capital by the numbers reveals a number of strengths that attract me to the stock. Firstly, the dividend yield is high at 7.3% on a prospective basis (Figure 4), although Stockopedia registers an even higher 7.9% yield number. these compare very favourably to yields available elsewhere in the higher-yielding Asset Management sector. Moreover, this dividend has grown steadily from 4.5p for March 2010 to a forecast 30.8p for the fiscal year ending March 2015. 

4. US + UK Asset Managers' Dividend Yields

You might be concerned that Polar Capital's dividend cover ratio is only 1.1x, but there are a couple of further positives that should allay these dividend payment fears. 

Profitability, as measured by last year's Return on Equity, are also generally high across the Asset Management sector, with Polar Capital posting a very respectable 23% ROE (Figure 5):

5. US + UK Asset Managers' Return on Equity

Finally, net cash on balance sheets is high across UK asset managers, averaging over 14% across the sector ex Polar Capital, while Polar Capital itself has an even better 24.6% level of net cash on balance sheet as a percentage of current market capitalisation, better than any other major asset manager bar Man (LON:EMG) (Figure 6):

6. UK Asset Managers' Net Cash on Balance Sheet as % of Current Market Cap.

Basic Valuation Also Looks Attractive

Aside from the high dividend yield, bear in mind that the forecast P/E (once cash on balance sheet is substracted) comes out very cheaply at under 9x for March 2015 and an Enterprise Value/EBIT ratio of only 7.3x, while book value growth has been impressive since 2010 too. 

So What's The Catch? Slowing AUM Growth, Stock Market Risk

a. End-June: First Outflow in 15 Quarters 

The latest statement on assets under management as of 30 June revealed that AUM had only grown 3% in the quarter since the end of March, in effect suffering a net outflow for the first time in 15 quarters. This marks a pause in their impressive growth rate, which had seen AUM grow from just $2.5bn in March 2010 to $13.2bn by March of this year (Figure 7):

7. Polar Capital's Impressive AUM Growth Track Record

b. High Stock Market Beta: Great When Stocks Rise, But Painful in a Bear Market 

Clearly, while asset managers tend to see growth in AUM and thus rising profits in a bull market, they are also very sensitive to a bear market, when they tend to under-perform benchmark stock indices like the FTSE 100, as was the case back in 2008 and 2011, when both US asset managers (black line) and UK asset managers (yellow line) suffered greatly (Figure 8):

8. High Market Beta Means Pain During Bear Markets for Asset Managers

With all this in mind, I still find Polar Capital (LON:POLR) very tempting at the current share price of a tad under 430p, resulting in a single-digit ex-cash P/E valuation, particularly given that one is paid to wait by the generous dividend yield. 

Remember that with 32% of Polar's shares held by directors and employees, their interests are very much aligned with other shareholders!

But of course, Do Your Own Research as ever!


- See more at: