Jeremy Warner's Outlook: Unsafe and high cost: despite Tony Blair's backing, nuclear still has a mountain to climb

Unknown Finn succeeds Bolton; High-risk debt shows resilience
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The Independent Online

Last week, Martin Bell, the veteran broadcaster, staged a dramatic revisiting on BBC Radio 4 of the events of March 1979, when the nuclear reactor on Three Mile Island came within a whisker of complete meltdown. As the Government commits itself "with a vengeance", as the Prime Minister put it, to the nuclear solution to Britain's long-term energy needs, Mr Bell's report was a timely reminder that nuclear can never be the entirely safe, "clean" form of power its supporters claim.

Admittedly, the design, efficiency and inbuilt safety features of nuclear reactors have improved enormously since 1979. The nuclear industry may be right to insist that nothing similar could happen today. Yet history has a nasty habit of demonstrating that what cannot happen does eventually happen. In the case of nuclear, the consequences of such an unlikely eventuality would be so catastrophic as to be almost unthinkable.

Notwithstanding assurances at the time of the Three Mile Island incident that the core suffered only a partial meltdown and that there was never any real danger once the correct remedial action had been taken, it later emerged that the core came within 15 per cent of total meltdown. An extraordinarily slim margin separated the inhabitants of Pennsylvania from death and desolation.

Had that 15 per cent been eroded, it would have transformed great tracts of the state into a nuclear wasteland for hundreds if not thousands of years. Whatever the design enhancements, nuclear has an almost impossibly high safety hurdle to surmount before it could be considered a remotely acceptable alternative.

And doesn't the nuclear lobby know it. British Energy, the repository for most of Britain's remaining nuclear power stations, yesterday became the latest voice to insist that a new generation of nukes could be privately financed without a penny of Government subsidy. This is an almost laughably optimistic claim, the sort of triumph of hope over experience which has long been the hallmark of this extraordinarily costly form of power generation.

A number of recent studies have pointed to favourable cost comparisons with other forms of "clean" energy - renewables and clean coal - and even some forms of carbon emitting power generation, but these are in the main just self-serving assertions which would never pass muster once the City began to run its slide rule over the assumptions on which they are based.

The industry's intention is to get a clear-cut commitment to nuclear out of ministers first. Costs can be debated later. It wouldn't pay to frighten the horses by admitting the industry will in fact need very substantial Government support before they even get to the starting gates.

British Energy insists that the only support that would be necessary would be decent long-term contracts with retail suppliers. These could be commercially negotiated. Oh really? Why would Centrica and other retailers want to sign up to such sources of supply when there is no way of knowing that nuclear would be, and would remain, price competitive with other forms of power generation?

For obvious reasons, the industry refuses to admit that there is really only one way of ensuring a new generation of privately financed nuclear plants, and that is to place a nuclear obligation on suppliers, similar to the existing renewables obligation, which would force them to source a proportion of their power from nuclear. This, of course, would be a nuclear tax in all but name, tantamount to a Government guarantee. Certainly it would be a profound interference in the market. But please let's not call a spade a spade when we don't have to.

Unknown Finn succeeds Bolton

Does active fund management ever justify the enhanced fees it charges for the supposed Midas touch of its money managers? Fidelity's Special Situations Fund suggests that it can do. The fund has outperformed the FTSE 100 by nearly 100 per cent over the past 10 years, easily justifying the 5.25 per cent initial payment and 1.5 annual management fee charged by its creator and figurehead, Anthony Bolton.

Yet the truth is that Mr Bolton, sometimes described as Britain's very own Warren Buffett, is the exception that proves the rule. Most active fund managers don't justify the fee; retail investors would do better to stick their money into a low-cost index tracker. My own personal experience bears this out. Of the 10 equity funds that my pension is invested in, the one that has lost the least during the current market correction is a bog-standard UK index tracker. Hey ho.

Mr Bolton announced last September both that he was splitting the fund and that in time he would be moving on to some unspecified role in the Fidelity mother ship. As if to prove the old rule that it is the man and not the fund that investors stick their money into - who's going to invest in Berkshire Hathaway once Mr Buffett departs this world? - his share of British retail investment inflows has since slumped.

I doubt that the announcement of Jorma (who he?) Korhonen as heir apparent to half the empire, will stem the flow. The Finnish-born fund manager is said to be one of Fidelity's rising stars, but he's unheard of in the UK market. Still less likely is that he'll build on Mr Bolton's record of out-performance. Successful investment management, more art than science, rarely outlives the man.

With nearly £6bn of funds under management, the Special Situations Fund is by far the biggest UK equity fund of its type. Put simply, Mr Bolton has become a victim of his own success, attracting a following which is far bigger than he would have wished for.

As every investor knows, the bigger an investment pot becomes, the harder it is to invest the money successfully. There are just not enough special situations or obviously undervalued companies out there for the billions to pour into, or to be precise, not enough for a single investment team with a particular approach to investing to get their heads around.

Unusually for an investment manager as successful as he, Mr Bolton tends to turn over his entire portfolio every 18 months. The bigger the fund becomes, the harder it gets to maintain such a high level of churn.

Mr Bolton's answer is to split the fund in two, with half the money left in its traditional home of UK special situations and half directed into a new fund which will attempt to do the same thing on a global canvas. Mr Korhonen will run the latter. Good luck to him, but I fear it will be others who eventually assume Mr Bolton's mantle as Britain's Warren Buffett.

High-risk debt shows resilience

A curiosity of the present "flight from risk" among investors is that it hasn't yet spread to the high-yield, corporate debt market. True enough, spreads are not as low as they were, but they are still thin, almost incredibly so, compared to where they would normally be given that around the world short-term interest rates are rising.

As our story on page 34 reports, some recent corporate bond issues have had to be downscaled because of poor demand. This may be a harbinger of things to come, but in general investors haven't been able to get enough of them. Despite the stock market correction and the flight from risk, demand has remained strong.

What explains this phenomenon? Central bankers around the world may be in tightening mode, but the system remains awash with liquidity. As this liquidity withdraws from more obviously high-risk emerging markets, it has to go somewhere. One still relatively high-return home for it is corporate debt, where private equity, with its ever more heroic levels of debt gearing, has ensured a healthy supply.

There is some evidence that the carry trade of borrowing cheap and lending more expensively, sustained by the past four years of extraordinarily low interest rates, has merely been transferred from emerging markets into the corporate bond market. It would be wise to refinance while what is plainly an unsustainable position continues. Rising interest rates must eventually have an impact on corporate debt yields too. Either that or the sell-off in equities has been grossly overdone. You pays your money and you takes your choice.

j.warner@independent.co.uk

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