Monthly Archives: July 2014

Quick update on the Obliquity London portfolio: I’ve sold Inditex (Zara, etc) and acquired Asos (internet clothing chain) instead. Sector exposures are thus unchanged.

Inditex: technical and tax reasons

I’ve not changed my mind on Inditex fundamentals as such (nice company, few issues other than family control) but there were technical reasons to rotate it.

It  was my only mid-size non-UK-listed position (all other non-UK stocks are full size large caps), which is untidy.

The second reason is that since I’ve bought it, I’ve properly understood how the taxation of international dividends works in my UK pension account: UK and US dividends are paid tax free, everything else is paid with the maximum withholding tax, 21% or so for Spain, which is arguably not outrageous. It’s often theoretically possible to reduce that tax according to double taxation treaties, that often mutually recognise pension schemes, but the bureaucracy makes it tricky. Thankfully that is another factor that vindicates my strategy to get most of my international economy exposure via London-listed companies in this account. The current excess withholding tax paid due to the continental European stocks is modest. Still every little helps and I may switch some other holdings, or hold them in another account or via derivatives, as opportunities arise.

Asos: quality at a temporary discount?

Asos is a well-run self-funded online clothing retailer, which has seen remarkable success so far. It used to be a darling momentum stock that has more than halved in value, after a profit warning which does not really affect the fundamentals. It’s expanding and investing significantly, and thus variation in sales or slight hiccups in the expansion process, which are normal, produce a profit warning. Nobody is going to do linear growth. Some of the growth is priced in, even after the price correction but I tend to think that clothing retailing tends to be a winner-take-all model with a handful of top players (see H&M and, precisely, Inditex), and so remains cheap if it grows to be a midsize player (say 1/4 the size of the current big ones). Of course they could succumb to poor execution or fickle customers they lose touch with, but on balance it seems the odds are good value balancing failure risk with growth potential. It also seems to treat employees unusually well according to reports on job review sites.

Some extra upside may be obtained if it does another momentum spike, that my max weight rules systematically would catch. It’s a bit more racy than other holdings in this portfolio, but there’s some scope for that given how pedestrian most other holdings are.

OsRam clean up

I had some shares from OSRAM, the lightbulb manufacturer, as a result of its demerging from Siemens some time ago. The company seems fine, but the position was too small — it’s of course tiny relative to Siemens — to be worth keeping.

Tickled by architect John Hill’s wonderful coverage of new storage facilities in New York City, I’d like to discuss the hypothesis that one of the core forces that drives American economics and society, and many others beyond but perhaps not in such a pure form, is the Pursuit of Storage.

What is the purpose of economic activity? In prosperous societies, the basics of food, shelter, and essential healthcare are pretty quickly covered and can only explain a small fraction of the frenzied economic activity that can be empirically observed.

The accumulation of artefacts seems central.

People buy stuff; and store it. Many an economist could then appeal to utility, and say that people buy objects because of the functions they provide to them. This is easy to disprove, because if people were interested in objects from a utilitarian perspective they would, most of the time, rent them. Many objects that people store in their dwellings, or even corporations and government agencies in their facilities, have a one-time or only occasional uses. If you don’t live in a ski resort you don’t go skiing every day, so owning skis makes no sense for most people. Still many part time skiers own skis. It is almost permanently idle capital, with the additional costs of storage and transport adding to the economic loss caused by the choice of ownership other rental. This can also be observed in wealthy people collecting multiple instances of easy-to-rent objects whose use is exclusive — due to petty quirks of the laws of physics, people cannot be in two cars at once — and where the benefits of ownership over rental are oft negative.

A Storage Deluxe facility

The American Dream (source: Storage Deluxe via John Hill)

The primacy of accumulation of inert artefacts over their use can be seen in the organisation of labour: if people wanted objects for their use, a natural balance between the time spent producing objects and the time using them would be attained. But in work-centric societies like America, a cult of long hours and short holidays can be observed, both in a cultural sense — long hours give high status rather than leading the culprit to be ostracised as it does in more relaxed societies — and in a functional sense — the more hours spent on the production side, the fewer left for the use of artefacts. Storage is leverage for the workaholic: it enables the production of many more artefacts than justified by function, by maximising idle capital.

We could further argue that it extends to immaterial things: in insurance and finance, a lot of activity is dedicated to accumulation of titles, deeds and scorekeeping which has no effective purpose other than the self-referential accumulation of inert claims. At least they are more environmentally friendly than their material counterparts, as long as their “storage facilities” (banks, brokerages, etc) don’t blow up causing collateral damage to the truly functional parts of the system.

The endless pursuit of storage is also visible in the built environment and in the structure of American cities. People value vast houses with ample basements, where they can store a great number of discarded objects, never or rarely to be used, but proudly stored. A kitchen with vast cupboard space will add to the value of a home, as will ample storage space in all rooms above ground. Technology has largely enfranchised man from objects — a late twentieth century home may have been full of books and engravings of single sound recordings, all of whom now fit nicely on a single USB stick and can be comfortably viewed by a handful of compact devices. Preferences such as vast houses with good storage facilities in distant suburbs over compact places in town near to work express the sacrifices people are ready to make to live near their store of objects. The home is self storage first, and place for living, second. The destiny of man is to be a custodian of the objects they collect, catalogue and keep protected from the elements.

Rendering of Uovo art storage facility under construction

Art storage shed near a rail line, reminding commuters of their life’s purpose (Uovo via John Hill)

This is where I part company with John when he complains that new storage facilities in prominent urban locations are eyesores. When the point of modern life is to acquire objects and store them, with a little bit of quick display for status building — the Uovo display rooms nicely mirror the squeezing of some living space between the storage and display function of private homes. These boxes are not out of place: they are a reification of the American Dream. They can remind people why they get up in the morning: so that they, too, one day, can have inert capital stored in a shed to their own name.

Bonus ball for actuaries

John’s post contains another wonderful nugget. The Uovo art storage facility is spit into two sections separated by some sort of fire wall, because “insurance companies don’t want too much art in one place.” It’s a spectacular realisation of regulatory arbitrage, poured in actual concrete, and as is customary with such constructions likely to fail, as most risks beyond fire seem bound to be extremely correlated — there’s apparently even an internal door between the spaces, presumably to facilitate burglaries. It’s reassuring for the financial industry — in so far as the high end art trade is not a branch of finance — to see that the dishonest practices it pioneered are spreading across society.