Irregular Roundup, 26th February 2024

We begin today’s Irregular Roundup with CGT.

CGT

For the FT, Sam Fleming revealed that capital gains tax (CGT) is only paid by a small share of the UK population.

• The article originally went out with a tagline of “Less than 3 per cent of UK adults were liable for levy in the decade to 2020, suggesting it could be raised fairly painlessly”.

The second half of this was a little bit too much of “other people’s money” even for the FT, and it was quickly removed.

• I’m guessing that Sam (or the sub-editor responsible) doesn’t pay CGT himself (neither do I, though I expect to from next tax year).

As a Reddit user pointed out, you could also say:

Less than 3 per cent of UK adults are receiving cancer treatment, suggesting it could be withdrawn painlessly.

The FT doubled down on class envy with a map showing that gains are geographically concentrated (in rich areas).

More gains were received by residents in a part of Notting Hill in London than in Liverpool, Manchester and Newcastle combined, the research [by the University of Warwick and London School of Economics] showed.

And they are mostly paid by rich people:

Just 0.3 per cent of people with income under £50,000 had taxable gains in an average year, the report said. By contrast, almost 40 per cent of taxpayers with incomes over £5mn received some gains.

More than half of all taxable gains in 2020 went to just 5,000 people, who received an average of more than £6.8mn per person in gains.  70 per cent of gains were from business assets.

There are three obvious points:

1. IHT shows that a tax doesn’t have to be paid by a lot of people to be unpopular (though I suspect plenty of people would like to “soak the rich” on CGT)
2. Soaking the rich doesn’t work, as they (a) leave and (b) change their behaviour to pay less tax, leaving the middle classes to actually pay for excess government spending
3. Every tax leads to less of what is being taxed, in this case investing in things likely to lead to gains – do we want less of that?

The points may be obvious, but despite Rachel  Reeves’ pledge not to touch CGT, I’m sure Labour has plans to equalise it with income tax at a suitable juncture (perhaps the annual NHS funding crisis).

US Dividends

The Economist noted that dividends are back in the US, at least for Meta, who announced on its 20th anniversary that it would start paying one (alongside more stock buy-backs).

• The dividend is only around 0.5% pa, but the share price responded with a 20% increase.

This small payment represents a change of direction:

Since the early 1990s, regular cash payments to shareholders have been in retreat, losing out to stock buy-backs. Managers love buy-backs because they cut the number of shares on the market, lifting earnings per share—and thus often executive compensation, too. 

Buybacks are good for investors, too as capital gains tend to have a better tax treatment than income (and are easier to time).

So why the change?

Daniel Peris of Federated Hermes, an investment house, and author of a new book, “The Ownership Dividend”, puts the decline of cash payments down to decades of falling interest rates. Cheap money enabled investors to plough capital into non-dividend-paying growth stocks.

But now we have higher rates once more.

Investors can put income to work. Many are enjoying respectable, risk-free returns in money-market funds. Higher risk-free rates also lower the value of future earnings meaning some investors will prefer cash in hand today to higher stock prices tomorrow.

Higher rates also make it harder to find reinvestment opportunities for profits and make issuing debt to fund buybacks less attractive.

But dividends aren’t something to cheer – they don’t make you richer and they could hand you a tax bill. On the other hand:

A firm that issues a dividend is signalling that it has confidence in its future cash flows, since shareholders often assume dividends will be permanent and managers are loath to cut them. 

It also means the firm has nothing better to do with the money.

Life X annuities

For Morningstar, Amy Arnott looked at the LifeX funds from Stone Ridge Asset Management, a product similar to an annuity, but structured as a series of mutual funds.

• They also have some similarities to tontines (illegal in the UK) since they offer longevity risk pooling.

As we all know, the big problem with retirement is that you don’t know when you will die, so you don’t know how much you can spend without risking running out of money in the future.

LifeX promises to solve this problem by offering steady monthly payouts up until an individual reaches age 100.

That’s around 15 years past my life expectancy, and an age I have just a 3.3% chance of reaching (according to the ONS calculator).

Each fund is targeted to a specific age and gender cohort, with birth years currently ranging from 1948 to 1963. Each age and gender cohort is available in two versions: a standard one with flat payouts and an inflation-adjusted version.

So I am covered, as no doubt people my age are the target market for annuity-like offerings.

The funds are tradeable to age 80, at which point they lock down, but payments continue.

• At age 100, the funds will be liquidated and the proceeds distributed to anyone still alive.

This is a big design flaw to me – the income should rise from age 80 depending on how many people are still alive.

• Who wants a big payout at age 100?

On the other hand, getting a 50% boost to your “annuity” income at age 80 could be very handy.

• I guess the objection is the same as that to tontines – you shouldn’t directly benefit from the deaths of others in your pool (or not until age 100, at least).

On the plus side, at least you can change your mind and sell the fund up to age 80.

Amy’s main objection is cost:

The LifeX funds have one obvious drawback: a 1% expense ratio. Given that their underlying holdings are simple portfolios made up of Treasury bonds or Treasury Inflation-Protected Securities, it’s tough to justify a fee that high.

You can say that again – 1% on an underlying yield of currently 4.3% is pretty scandalous.

• The comparison Amy uses shows the LifeX funds to yield 1.9% less than a comparable annuity (and annuities themselves are terrible value).

There are also advisor fees since they are only sold through (US) advisors.

• I wish we could have tontines back.

Hipgnosis

This week’s update from the Hipgnosis (SONG) saga is that the fund is now suing its manager (Hipgnosis Song Management, HSM) and its founder (Merck Mercuriadis) in the hope of gaining an indemnity from another legal action.

• Hipgnosis Song Limited (HSL) was wound up before Mercuradis launched SONG in 2018 and the liquidator is suing him for (alleged) “diversion of business opportunity”.

Mercuradis and HSM say the case is without merit, but SONG doesn’t want to be stuck with any costs.

State Pension

This week’s Election Watch update centres on reports that Labour remain committed to the state pension triple lock, hoping to secure the votes of older citizens.

The triple lock can sometimes generate resentment, but the underlying issue is that the state pension is very low compared to average earnings.

• The gap could either close slowly or via a one-off adjustment, but making all workers pay into a scheme which won’t support their retirement is another policy with bad optics.

The issue is that funding a decent pension means that as the worker-to-pensioner ratio falls (as life expectancy increases) you need to increase the age at which people receive the cash.

• Eventually, you run into physical limitations – not every 70-year-old will be fit to stay at work.

The fix is workplace pensions and the idea that between work and state you have sufficient income.

• But auto-enrolment is only a dozen years old, and the contribution rates remain too low.

Things should work out in another 25 to 30 years, but how do we get to that point?

Globo

For the FT, Dan McCrum reported that the FCA has decided not to prosecute the executives involved in the Globo fraud back in 2015.

Globo was an Aim-quoted provider of mobile phone software that collapsed in 2015 after short seller Gabriel Grego and FT Alphaville revealed that claimed business partners and resellers had never heard of the company. One turned out to be a laptop repair shop in Mumbai.

Greece refuses to extradite the two men involved and they have been acquitted in a local trial.

• Apparently, the acquittals happened in 2021, but Greece has only just informed the FCA.

In 2018 the Financial Reporting Council decided not to take action against Grant Thornton over its Globo audits.

Grego’s New York hedge fund Quintessential Capital Management had accused Globo of “massively overstating its revenue and profit by generating fictitious sales invoices from shell companies [posing as] legitimate clients.

It was big news on the AIM bulletin boards at the time, and some private investors (including Paul Scott from Stockopedia) also flagged up the potential fraud.

Globo raised £100M from investors and was once valued at £300M.

• Only £33K was recovered.

White-collar crime would appear to pay.

Quick Links

I have four for you this week:

1. Alpha Architect wrote about the Lottery Preference and Biotech Stocks
2. Mutiny Fund described the Herschel Walker Syndrome
3. A Wealth of Common Sense asked What’s Driving the Stock Market Returns?
4. And Flow FInancial PLaning said You Have Millions of Dollars. Perhaps You *Can* Invest in Fancy Investments, But You Needn’t.

Until next time.