Owain Bennallack is joined by Mark Rogers and Nate Weisshaar to discuss whether revelations about a covertly filmed sex tape really matter in the long-running fraud saga faced by GlaxoSmithKline (LSE: GSK) in China. The scandal continues with a look at the latest allegations leveled at embattled bank Barclays (LSE: BARC), before the team moves on to calmer waters to consider whether the higher annual allowances now in force for ISAs make them superior to pensions. Plus three shares the team are watching right now: Rightmove (LSE: RMV), Ocado (LSE: OCDO) and Berkeley Group (LSE: BKG).
The following is an unedited transcript of this podcast
Owain Bennallack: Hello, and welcome to Money Talk, the investing roundtable from The Motley Fool. I’mOwain Bennallack, and joining me from across the table we have U.K. analyst Mark Rogers, while from across the pond in the U.S. we have Nate Weisshaar. Both these fine gentlemen hail from our Pro and Share Advisor services.
Good to see you guys.
Mark Rogers: Hey, Owain.
Nate Weisshaar: Glad to be here.
Bennallack: So, guys, we’re exactly halfway through the year, and what a “meh” year it’s been so far; no financial crisis, no World War III, FTSE basically flat for the last six months. Obviously no news is good news on the global Armageddon front, but are you guys getting concerned that the stock market is perhaps running out of steam here? Are you just getting bored?
Rogers: We are in the middle of the summer, Owain. I think we say this every summer, don’t we?
Bennallack: I don’t know … last year, there was about a 20% gain in the first six months, I think.
Rogers: Yes, we weren’t talking about how exciting things were, though. We were like, “Yeah, things are just muddling along. Things are all right.”
Bennallack: Nate, you’re normally a man who’s incredibly excited and pumped about every fluctuation in the stock market — that’s ironic, listeners.
Weisshaar: Yes, I think last year we may have been climbing the proverbial “wall of worry” and, as you say, this year we do have issues out there, but there are few headline-grabbing ones that are catching everyone’s attention. I think we are in a bit of a lull here.
Bennallack: Yes. We’ve seen it in the volatility statistics that traders use. It’s incredibly low volatility. That can’t go on forever; it could be that the market races up, of course — it doesn’t necessarily mean there’s going to be a crash — but it will be interesting to see what happens.
Let’s crack on because, despite the boring stock market, we found a few juicy stories to discuss. First, GlaxoSmithKline’s woes in China have taken a turn for the sensational, with the emergence of a sex tape! Such sex tapes have done wonders for certain Hollywood starlets over the years, but I can’t see it being anything other than bad news for Glaxo.
Next up, another British behemoth is under the cosh. This time it’s Barclays, the bank. The former master of the universe are now accused of fraud by the U.S. authorities — is there any hope?
Then, in our occasional series on the basics of investing, we’ll take a look at the relative attractions of saving into ISAs versus pensions. I know you’re all going to pretty much be setting your clock to tune in for that thriller! That’s going to come up later on.
But if you get through that you’ll have your reward, which is that we’ll each propose a company that we think is worth a closer look today.
Sound okay?
Rogers: That sounds fantastic.
Weisshaar: Let’s do this.
Bennallack: GlaxoSmithKline’s troubles in China have got even more troubling, with allegations of a sex tape involving senior staff and … I’m sorry, I’m just going to interrupt, because Mark seems to be …
Rogers: I just can’t even believe we are talking about this on a …
Bennallack: You seem to be performing a sort of a rap role there, where I say certain things and then you come in and go, “Uh-huh, uh-huh” like you’re in some rap video where you’re …
Rogers: Hang on a sec. We’re not in a rap video?
Bennallack: The rap video, we’re recording later. Let me get back to the sex tape — as I’ve said many times in my life — the sex tape involving senior staff and the obvious inference that someone was trying to possibly blackmail someone; at the very least say, “Hey look, guys, we’ve got a sex tape. What else do we know about you?”
Mark, we have blackmail, we have corruption. I think we need a recap here. What’s going on with Glaxo?
Rogers: First off, this is a developing story. The facts aren’t 100% clear.
Bennallack: “Allegations” is the word.
Rogers: Right, a lot of allegations involved here.
Let’s talk about what has just come out very recently, when we’re recording this. We’ve basically discovered that the Glaxo/China controversy pretty much started — it was triggered — by this sex tape, which was sent to senior management in March of last year.
Bennallack: Along with a bunch of allegations.
Rogers: Along with a series of allegations of corruptions and such.
Bennallack: Fraud, that kind of thing — bribery.
Rogers: Exactly.
Bennallack: All the good stuff.
Rogers: The subject of the tape, the man involved in it, was the boss of Glaxo China, Mark Reilly, allegedly.
He hired a British investigator to find the source of the threats and the tape, but it seems that in their investigations, and this is a quote, “Glaxo appeared to tread on a big toe” — an individual who is pretty well-connected in the Chinese government, allegedly.
Bennallack: Who is that a quote from?
Rogers: That’s a quote from “a source close to the matter,” according to the BBC.
Bennallack: According to the BBC.
Rogers: So, the BBC are responsible for that one.
Bennallack: Just checking you didn’t phone your sources in …
Rogers: Send your lawsuits to the BBC, please!
Bennallack: You weren’t phoning your sources in China.
Rogers: Right!
They trod on a big toe, apparently. The investigators were arrested, and shortly after that the Chinese police publicly accused Glaxo of bribery at that point.
Bennallack: We don’t want to make light of this; people’s livelihoods, if not where they’re going to spend the next 10-20 years, are obviously on the line. As we have said, they’re innocent until proven guilty, at least in this country. Possibly not in China!
But Nate, what on earth should shareholders in GlaxoSmithKline make of all this?
Weisshaar: I think the big question is, what does it mean for Glaxo in China, going forward? We’ve already seen the massive impact that this situation has had on Glaxo’s sales in the country.
Last year Q3, which is when this scandal really took off, sales of pharmaceuticals and vaccines in China dropped 61%. In Q4 they were down 29%, and in Q1 this year they were down 20%. Previously, Glaxo had been growing their sales in China around 15-20% annually, so those were some pretty big fall-offs.
Overall, it’s not that big a deal for the company right now; Chinese sales are somewhere between 3-5% of total sales. But as I said, it was growing around 15-20%, which is a really great number for a company the size of Glaxo, and the emerging market strategy is key for Glaxo’s future. China is a key to any emerging market strategy, and this could have long-term impacts.
But right now, it’s a relatively small blip on the overall radar.
Bennallack: I guess I would say all that is true. But if you’re going to have a scandal in the emerging markets or in China, I guess it’s better to have it when your sales are 3-5% and not 30%, say, of your sales.
On that note, Mark, I would argue — and I’m biased, because I own the shares — but I would argue that they have attractions at under £16. Would you look at them here?
Rogers: Yes, I think Glaxo is a solid, core holding. I think it could be the foundation of just about anyone’s portfolio. It’s a massive global business, and a lucrative one too. They have about 40 drugs in late-stage development at the moment, just to give you some idea of how diverse a portfolio of treatments they have.
I think the company is going to carry on churning out cash. It’s a very attractive 5% yield they’re offering at the moment. I don’t own the shares personally, but I personally wouldn’t be put off by the headlines we’re seeing at the moment.
Bennallack: Turning from one embattled British giant to another, we now have Barclays being accused of fraud in the U.S.! Again, I don’t want to pre-judge the findings, but you can see how an international onlooker might well decide that the U.K. PLC is just up to no good.
Sex tapes, fraud … all we really need now is for some corporate titans to be caught in shenanigans with some premier-league footballers!
Nate, what is Barclays accused of, this time?
Weisshaar: This time around, they are accused of fraudulently portraying a product that that they offer to institutional investors, called a “dark pool.” The idea behind a dark pool is that these large investors, who have massive positions, could buy and sell in these dark pools anonymously, and not cause market-moving reactions.
The idea was to give these institutional investors a bit more privacy in how they’re dealing, so they don’t have to go into public markets. Unfortunately, it would appear that Barclays was not exactly transparent with these institutional investors about who else was using these dark pools, and it seems that Barclays was opening up these pools to high frequency traders, who could have been taking advantage of the information in the dark pools.
Bennallack: When we say “it seems” and whatnot, these are the allegations from a U.S. prosecutor, aren’t they?
Weisshaar: Yes. The New York State Attorney General, Eric Schneiderman, is the one levelling these charges. He says he’s been working with former senior Barclays traders to put this case together, and he apparently has some moral outrage and needs to take a stand right now.
Bennallack: I can see why Barclays wanted these dark pools. Obviously, if all the trading is going on in its own dark pool, then it’s making more of the commission, so probably this was another plank of Barclays’ business that was going to be meaningful, and is now imperilled.
We’ve already had the Libor-fixing scandal. We’ve had the gold-fiddling farrago. We’ve had the fuss — that may be where you want to come with one of your rap “uh-huh, uh-huh,” Mark.
Rogers: Right!
Bennallack: We’ve had the fuss over mega pay for Barclays poor-performing U.S. bankers — no more alliteration there. But it is fair to say that Chief Executive Antony Jenkins’ attempt to clean up the bank is floundering, isn’t it?
Rogers: Yes. I really don’t envy the task that he’s faced with, honestly. He’s trying to turn round this massive business, and you’ve got the key staff who are making the money — the profit-centres of the business, who obviously have huge egos, huge salaries — and then you’ve got regulators trying to tie your arms behind your back.
Bennallack: Or just hit you up for cash.
Rogers: Yes, or just steal from your wallet! Not an envious situation.
Bennallack: Obviously, if Barclays has been at fault here, the U.S. is completely within its rights to prosecute them.
Rogers: Right.
Bennallack: I did a video — talking of videos — I did a video for The Motley Fool site a few weeks ago. I’m really frustrated, because I speculated that the reason that Barclays shares are trading at such a steep discount to book value, even as the economy, etc. seems to be getting better, is that there might be another big fine on the way, and the market had sort of intuited this. Sadly, the video went up after the big fine threat came out!
Rogers: That’s a lie, isn’t it, Owain?
Bennallack: No, it’s deadly true. You can go and talk to our technical expert, Sam Robson. And I haven’t give him £5 to confirm that!
Anyway, it came out. I’m not a prescient guru after all. Nate, you can be a prescient guru here. You can say that this is the time to buy Barclays. I’ve got a feeling you’re not going to say that, but is this the time to buy Barclays?
Weisshaar: For me, it isn’t, and it goes a bit beyond this current issue. I’m still not clear that Jenkins has the wherewithal to put forth the changes that he says he wants to. He’s trying to completely alter the culture within a massive bank, which is driven, as Mark has said, by a relatively few, very highly-paid, investment bankers — and that is not an easy task.
His turnaround strategy and his ability to execute on it and make Barclays a profitable operation in this new world of very close scrutiny by regulators and politicians and, for now at least, the public … I think it’s a very hard task, and it won’t be easily done.
Bennallack: Something that’s key on that front is that this is alleged to have happened after he began, isn’t it, into his tenure? The other stuff was before his time, but this is in the new cosy world of Barclays, this apparently happened.
Weisshaar: Yes. It’s a slightly different thing, but again I don’t view this as necessarily the downfall of Barclays. If they do end up falling, this may be the straw that broke the camel’s back, but there are really … it’s a massive operation with opaque controls, and it’s really hard for an outside investor to feel confident in what they’re looking at.
Bennallack: There you have it, Fools: banks are tricky investments, whatever the pundits say. Indeed, if you want to learn more, you could grab our free report on stock picking the banks, and learn how to analyse them for yourself, and maybe understand a bit more what the pundits are saying, and when they’re right and when they’re wrong.
You can download that in just a split second by going to fool.co.uk/banks. Go there, download that free report.
Now we hit the sensational news segment of the show, where we go back to investing basics for the erudition of listeners — even the erudition of me, Mark; I’m prepared to learn something here.
This week we’re going to look at the case for investing in ISAs versus pensions. Of course, the ISA allowance has now increased to £15,000 a year, and the name has acquired an “N” — it’s now a “NISA,” a New ISA.
As a result, we’ve seen a lot of headlines about the awesomeness of ISAs. But over the long term, as I understand it, investors could still actually be better off putting most of their savings into pensions, because of the way the maths works.
Before we consider those numbers though, Mark, let’s just quickly recap the differences between ISAs, SIPPs, pensions — SIPPs are basically personally-invested pensions — in what I think are the three most important respects, which is tax relief, annual allowances, and access to your cash.
Rogers: A SIPP, like you say Owain, it’s a Self-Invested Personal Pension. The way that works is you get tax relief on your contributions at your marginal rate of income tax, so 20% if you’re a normal-rate taxpayer, and so on.
You can contribute as much as 100% of your income into a SIPP each tax year, up to a limit of £50,000, and all the dividends and capital gains made inside the SIPP are tax-free. But you’re more limited in how you can actually access that cash.
You can’t access the money until you’re 55, and apart from getting access to the 25% tax-free from your pot drawdown straightaway at that point, any money that you take out beyond that is subject to income tax.
Now, with an ISA, you get no tax relief on what you put in. You can add up to £15,000 a year to the ISA under the new rules, and again, any dividends and capital gains aren’t taxed inside the ISA.
On the plus side, though, compared to pensions, you can withdraw the money from your ISA at any time, no matter what your age, and you can withdraw as much as you like from that, without having to pay income tax on it.
Bennallack: Just to be clear, when people talk about ISAs or pensions, sometimes they get confused about this. We’re not talking here about what you can put into the ISA or the SIPP, are we? That’s a separate discussion.
Rogers: Exactly. ISAs and SIPPs are just wrappers, basically. I think there is just one other quick point that I’d like to put in here, which is that sometimes some company pension schemes will offer to match the contributions you make to a SIPP.
Bennallack: I.e. your employer will.
Rogers: Right, exactly, which can actually tip the scales in the favour of a SIPP as opposed to an ISA.
Bennallack: Nate, the pension rules have been loosened quite a bit in the Chancellor’s recent budget. But as I understand it, as they say, pensions still work out as the best vehicles for saving for retirement; pretty much down to the maths, as Mark says, the way the tax relief works.
Theoretically, if all things were equal, there would be no difference. But all things are not equal because you get the tax-free lump sum, and because people tend to pay a lower rate of tax when they’re withdrawing their money in retirement. That’s kind of correct, isn’t it?
Weisshaar: Yes. It’s really a question of where your future tax rate will be, more than where your current tax rate is — although obviously the current tax rate is important, because you do get the tax-free investment into the SIPP.
But let’s just say that you and Mark were both going to start saving for your retirement. You’re both going to save £8,000 a year.
Bennallack: £8,000 a year? I’m looking at Mark. He’s nodding. He’s saying that’s the very minimum that he’ll be saving.
Rogers: Yes, absolutely.
Weisshaar: That’s the least that he’ll be doing.
We’ll pretend that you’re both 20% rate payers, so if Mark’s putting his money into an ISA, that money has already been taxed, so he’s got £8,000 going in. Owain, you are putting your money into a SIPP.
Bennallack: Just to be clear, that’s the better option, isn’t it? I just want to make sure how you’ve structured this one.
Weisshaar: Obviously.
Bennallack: All right, carry on!
Weisshaar: Actually, your effective investment now becomes £10,000. We can all see that that’s a nice little head start as well.
If you both invested your money annually, the same amount every year for 20 years, earning 4% return from the investments — obviously you two are outstanding investors if you’re only getting 4% returns.
The pot you would end up with, Owain, your pot would be 25% larger at the end of 20 years, at which point …
Bennallack: Sorry, was that my pot would be that much larger, or larger than Mark’s pot?
Weisshaar: Larger than Mark’s.
Bennallack: Yes. Good.
Rogers: That’s unacceptable, Nate! Can you just change the numbers around a bit? Put me back in the lead?
Weisshaar: At that point, Owain could take his 25% lump sum, which would reduce his remaining pension to a pot underneath Mark’s level. But the important part here is, that income that you withdraw from your pension, Owain, would be subject to tax — except for the fact that we have the personal allowance, which next year, starting in April 2015, will be £10,500.
If you were to withdraw 4% annually from your remaining pension, after you took your lump sum, your income from your pension would be £9,291, so you would actually have tax-free income at that point.
Bennallack: Nice. Obviously people have to do their own sums, because there might be a state pension that would complicate things and whatnot, but the essence there is that it’s this tax arbitrage of the tax brackets that really helps out pensions, isn’t it?
Weisshaar: Exactly. It seems like the big hurdle that people might be running up against is the fact that they will have to pay taxes on what they take out of their pension in the future. But you have to realise that what is being taxed at that point is probably not going to be as much as you’re earning today. That’s really where the difference comes into play.
Bennallack: Of course, just to conclude on pensions and ISAs, we should say it’s not an either/or decision. Speaking personally, I’ve got a SIPP and I’ve been filling up my ISAs for years. What’s really important is that you investigate and use these tax-saving vehicles, because really tax will pound your returns away. Investigate them and figure out what works best for you.
On to our three shares. Mark, we’re going to start with you. What have you been looking at?
Rogers: I’ve been keeping a close eye on Rightmove recently, which has dropped around about 25% from its peak since the start of the year. Now, if you’ve moved house, bought, sold, or rented property in the last few years, you’ll probably already be pretty familiar with what Rightmove does.
It’s by far the U.K.’s leading online property advertising portal. It has more than 80% market share in that market. Rightmove charges estate agents usually about £600 on average, per month, to connect their properties with the millions of house hunters who go online and use Rightmove’s property search engine.
It’s a really interesting business; it’s about 70% margins, and it’s expected to grow at double-digits in the years ahead. I’m looking at it, as it has fallen in the last few weeks.
Bennallack: It’s one of those companies that always looks expensive, I guess.
Rogers: Yes, it does. I think it’s relative to a few other growth companies that you’ll look at. Trading at 21x forward earnings isn’t too unreasonable.
Bennallack: Is there a danger that with housing transactions, or certainly mortgage approvals now falling — possibly a short-term blip because of some of the new affordability checks that have come in — is there a danger that that could hit the volume of business that goes through estate agents, and thus has knock-onsfor Rightmove?
Rogers: Yes, that is a potential headwind for Rightmove. But at the same time, they do have the rental business as well, so if people aren’t buying homes necessarily, they’re staying to rent, then Rightmove will, you would think, get some of that business too. But it’s not quite as lucrative for them as the sales.
Bennallack: It grew fairly nicely through the last housing slowdown, I suppose.
Rogers: Oh, absolutely. From 2008 onwards, just remarkable growth that they had during a period that was just so hard for the housing market on a whole. I’m really impressed with them.
Bennallack: Nate, I guess you can’t wait to put your hard-earned cash into Barclays shares. Did I misunderstand what you were saying earlier?
Weisshaar: You might think that, but you would be mistaken. I’m actually interested in Ocado, which has reported recently and, for one of the first times in its 10-plus years of existence, is reporting a profit.
Rogers: Wow.
Weisshaar: That’s a big landmark.
Rogers: Yes. It feels like ages that we’ve been waiting for them to actually record a profit.
Weisshaar: Yes, it looks like they may have found their groove, potentially, here. For those not familiar, Ocado is the online-only grocery delivery business. They now do pet supplies as well.
They are fighting against the entrenched supermarkets in trying to earn your shopping pound by delivering to your home, and they look like they may have found the volume that they’ve been looking for to justify their cost of operations.
It’s still not proven, but I think it’s a good sign that they’ve found profit as they have decided to leverage more of their intellectual property. Rather than doing it on their own, they’re actually doing it for Morrisons, which gives them access to another source of volume which, for them, the more business they can churn through their distribution centres, the better.
Rogers: Nate, that’s what I was going to ask you. Do you see them, going forward, as being more of a logistics partner for other supermarkets, or do you see the consumer-facing side of the business being what really drives Ocado in the coming years?
Weisshaar: I think it’s really going to have to be partnerships, and they seem to have realised that. They’re looking to partner with some international retailers. They’re not giving any names at this point, but they do say that their plan is to operate more as a logistics provider, and that does seem to be where their differentiation comes from, is their efficiency and the software that they use for the logistics side of it. I think that is really where their opportunity lies.
Rogers: That’s interesting.
Bennallack: Two growth stocks there. We’ll turn to me and … it’s not really a growth stock, but it is kind of an expensive stock. That is Berkeley Group. This is the high-end, very London-focussed housebuilder. It builds lots of swanky apartments that overlook the river and cost a million pounds.
The reason I actually bought some of the shares in it last week was that Mark Carney and the Bank of England came out with their eagerly-awaited curbs on the housing market. Without going into detail, I think they were pretty sensible. They really don’t necessarily change anything but confidence at the moment.
What they do do is, in the future, if banks were to go crazy and start trying to lend an awful lot of money at high multiples to income, then it would become very expensive for them to do so because they would have to hold more capital against it. In fact, there would be a cap at how much high loan to value lending they could even do, in some instances.
I think this was a proportionate response to nip a housing bubble in the bud, but possibly not a housing boom. Also, Berkeley sells a lot to foreign investors and cash-rich buyers, and it’s possible that they won’t be affected at all.
Then finally, the fact that these measures may cool the housing market a little bit might mean that we can postpone an interest rate rise, or at least the severity of it, for maybe another six months, which would be good for the housing recovery.
Berkeley is one I’ve always liked. The management is very good at riding the cycles. I’m pretty sure we’ve discussed them before in the podcast. They’re paying a lumpy but pretty hefty dividend stream over the next several years, which equates to about a 7% yield, so I’ve picked up a few of the shares — again, on the dip before this news.
I think it’s really interesting, the housebuilders. Potentially they’re, as we’ve said before, very undervalued. But not if there’s a housing crash, so inasmuch as this perhaps stabilises the market — stops there being a housing crash but allows the potential for the housing recovery to continue — I think it was good news for housebuilders.
Weisshaar: Owain previously touted Berkeley Group as a great company, and one that has successfully ridden the cycles up and down over the past several years. The big question I have is, you pointed out they’re very exposed to London which, given their particular clients, is probably not a big deal.
But you also pointed out that they don’t look exactly cheap right now, and really I would expect the bigger upside to be for homebuilders outside of the London market, which has already had quite a rise. We don’t really have a whole lot of room for more building here in London, so the question I have is why Berkeley Group over, perhaps, some other homebuilders out there?
Bennallack: Yes, I think that’s a very good question, and one that has just occurred to me. I’m going to sell my shares!
No, I’m not, but it is a very good question. I like it for the management, and basically what I’ve decided for myself — I think I got them at £22, thereabouts — was that they’ve committed to this capital redeployment programme, or redistribution to shareholder programme, and I think it’s going to come.
I’ve become more convinced that a lot of their future value is almost in the bag, even if prices didn’t go up much from here. As long as they didn’t slump, that capital is coming back to me.
Whereas, outside of the capital, the market has still a bit of a “show me” potential that has to actually get recovering — we have to see that people have disposable income to spend more on housing, and to even just buy more houses. We all expect that’s going to happen, but we don’t necessarily know it’s going to happen.
In the case of Berkeley, I think it’s kind of in the bag unless there is a big bombshell like rates jacking up to 6%, or some massive curb on lending. I guess I just feel confident that this dividend is going to be paid, but I agree with you; you could look at other housebuilders. I do own other housbuilders, which is the other reason why I added this one, because I have already got exposure to the wider market, through some others.
One that’s worth looking at is Persimmon, which has a similar dividend policy over the next few years, but does have a wider exposure.
There you have it, guys. Don’t forget that there’s loads more share talk on the main fool.co.uk website, and if the National Lottery is not working out for you or your World Cup bets have gone awry, you could go and download our analysts’ report on becoming a millionaire at fool.co.uk/millionaire, and that is probably a better way of becoming a millionaire than buying lots of lottery tickets.
Nate, I should say — it will be too late by the time this podcast comes out — but the U.S.A. are playing in the World Cup finals today, aren’t they? I should say good luck, because you did a lot better than our rubbishy old team.
Rogers: No thanks to that Mr Sterling.
Weisshaar: We’ll take all the luck we can get. We haven’t shown the best skills out there yet, but we’ve stumbled our way into the elimination round, so hopefully we last a bit longer.
Bennallack: Yes, I’m torn because you’re very determined. I admire the team for being so determined, but I do also fear what would happen if Americans got into soccer/football in a big way, and what that would do to the game.
I think you’ve probably gone far enough. What I want to see is a plucky performance, where you go out but everyone says, “Well done.”
Weisshaar: Thank you for those semi-well wishes, then.
Bennallack: Thanks very much, guys.
