Alliance Trust AGM 2024 Report

I attended the Annual General Meeting of Alliance Trust (ATST) this morning using the Lumi AGM platform. It was physically held in Dundee which is their traditional location and they intend to continue with that in future apparently.

The Lumi platform normally works well although there was a hiccup during the Chairman’s introduction and I had to log in again.

I have held shares in this trust since 2015 and am very happy with recent performance.  The Chairman, Dean Buckley, reported a “very strong investment performance” last year – total return up 21.6% and significantly better than their benchmark plus better than their competitors. Good performance has continued in 2024. The trust has increased dividends for 57 years and the discount to NAV is only 5.4% and heading down.

Craig gave an overview of their investment approach – a global stock picking based on “high conviction” choices but diversified. They were underweight the “magnificent 7” technology stocks last year but that was offset by good performance in other holdings.

I will only report on the question I asked which was “According to page 9 of the Annual Report you seem to be selling the winners and increasing exposure to losers. Please comment as this is contrary to my investment philosophy”. The answer given was that “Individual stock pickers may have different views on this. But it only applies to stock pickers overall performance. It is just a matter of rebalancing the portfolio, avoids a big bias to growth and helps manage risk while lowering volatility.

Comment: It seems to work.

The meeting was well organised and managed by the Chairman. I am happy to continue holding the shares as a foundation holding which I don’t have to continually monitor. As their Annual Report says “Our ready-made portfolio does all the hard work for you….We provide a simple, high-quality way to invest in global equities at a competitive cost”.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Lords Debate on NHS Sustainability

Last week I wrote a blog post on “The NHS is killing us” – see https://roliscon.blog/2024/04/12/the-nhs-is-killing-us/ . Last night I had a dialysis session and after watching a couple of old movies I turned over to the BBC Parliament Channel and was surprised to see my sister (Baroness Murphy) speaking on a debate on NHS sustainability – recording here: https://www.bbc.co.uk/iplayer/episode/m001yg9p/house-of-lords-sustainability-of-the-nhs?seriesId=unsliced&page=1 .

She made a good contribution and there were several others. Often from people very knowledgeable about the NHS (for example by sister worked in it for many years and latterly chaired an NHS trust).

Many people think the House of Lords should be replaced by an elected body or similar but it actually does good work as it’s now full of people who are expert in their fields. Perhaps the hereditary peers should go but otherwise I would leave it unchanged.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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How Sweden’s Stock Market Became the Envy of Europe

“How Sweden’s stock market became the envy of Europe” is the title of an interesting article published by the FT today. Many small and medium-sized businesses are deciding to list in Stockholm. With 501 IPOs in the last ten years “the Nordic country has been highly successful at encouraging smaller domestic businesses to stay at home, encouraged by the depth of its stock market” according to the article and “A key driver has been the country’s investment culture, which Carnegie’s Elofsson says has attracted ‘everyone from the man on the street to very engaged private banking investors, entrepreneurs, but also the small and mid-cap investment community’”.

Compare that with the UK where AIM listings have been falling and the main market has failed to attract new listings – larger companies such as Shell are looking to move to the USA instead which they perceive has a more vibrant equity culture, better share valuations and more liquidity.

Swedish insurance companies have big equity holdings while in the UK insurance companies and pension funds have been reducing their equity holdings, particularly in UK companies.

Another quote from the article: “Compared with the rest of Europe, Swedish households hold among the highest proportion of their investments in listed companies and among the lowest in bank deposit holdings, while financial literacy is greater than in Germany, France or Spain. In 1984, the government introduced Allemansspar, a product enabling ordinary Swedes to invest in stock markets. By 1990 there were already 1.7mn of these accounts, helping drive the launch of domestically focused small and mid-cap funds”.

Education about financial markets in schools seems to be one reason for the vibrancy of equity investment in Sweden, while UK schools seem to be spending a lot of time on education on gender differences, black history and eco issues.

Having worked for a Swedish company for a couple of years I would comment that the business culture is somewhat different. The UK AIM market is full of companies whose management I would not trust, while that is a key attribute of any successful stock market investment. Cleaning up the AIM market is a prerequisite if more IPOs of small and mid-cap companies are to happen. There are still too many dubious IPOs in the UK – companies that list at optimistic prices and quickly run into difficulties – such as Dr Martens. The promoters of such businesses are part of the problem. Too many people looking for a quick return.

Anyone who is interested in improving the UK stock markets should read the FT article.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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The FTSE 100’s Magnificently Unglamorous Seven

Oliver Ralph wrote an interesting article for the FT on Monday. It was entitled “Let’s hear it for the FTSE 100’s magnificently unglamorous seven” and covered the history of Vodafone which has halved its share price in the last two decades while unglamorous Bunzl and Howdens have increased their share prices by 565% and 488% respectively.

Other well-known companies who have done poorly are Barclays and HSBC who did not make it into positive territory while BP, Tesco and GSK did but still underperformed the FTSE-100. Meanwhile lesser-known companies such as Compass, Diploma, Intertek, Experian, Howdens, Bunzl and Relx have done a lot better.

Vodafone should have done well operating in the high growth sector of mobile communications and I looked at them more than once when they were tipped as “cheap” but never purchased the shares. But I have held Diploma, Experian and Relx so it seems I may not be completely daft after all.

The article mentions the acquisition strategies of the successful companies – basically small and low risk ones are preferred.

My prejudice against banks has also worked out well and a preference for smaller well-managed companies with high returns on capital has been successful – Diploma is a classic example.

It’s an article well worth reading. And maybe I should look at Howden and Bunzl to see if they are likely to keep up their performance.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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The NHS Is Killing Us?

That was the title of an article by Allison Pearson in the Daily Telegraph a couple of days ago – see https://www.telegraph.co.uk/columnists/2024/04/09/nhs-enemy-of-british-people-cancer-deaths-waiting-lists/ . This was an article that covered some personal experiences and statistical data on the performance of the NHS and it makes for depressing reading. The BBC seemed to want to counter this with a Panorama item on the problems of private hospitals (no intensive care units if things go wrong which they exaggerated).

As a big user of the NHS I have some view on this (I have suffered from IgA Nephropathy, a serious kidney disease for over 30 years, and have had one transplant and two dialysis periods). I have also used private GPs and consultants including an operation in a private hospital because minor ailments are a particular problem if you want quick treatment.

It is clear to me that the NHS GP service is failing and A&E units are often overstretched. Overall I am not unhappy with NHS care. But they do need more staff and more hospital beds (I did discharge myself from one A&E unit after realising there would be no overnight bed and no diagnosis for symptomless extreme blood test numbers). The ambulance service also seems overstretched in some areas.

The NHS IT systems have improved over the years enormously but communications do not always go smoothly. In essence, some parts good but some parts poor.

In summary I don’t think the NHS needs a lot more money but they do need more effective management, more staff and more facilities. As regards privatisation of some parts, bring it on I say. My current dialysis provider is Diaverum who do a good job. They seem to be owned by a private equity firm.

P.S. Suella Braverman wrote a good follow up article for the Telegraph on this subject here: https://www.telegraph.co.uk/news/2024/04/09/our-ailing-nhs-needs-fundamental-reform/

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Bango Webinar

I attended the Bango (BGO) webinar on their full year results this morning. One of my long-standing and smaller speculative AIM holdings. Total revenue was up by 62% to $46 million but I asked the following question:  “Revenue growth looks OK but capitalised development costs rose to 17.6 million. Please explain why this is so high and what is being obtained from this high investment?”.

The answer given was not totally clear but it was suggested that this arose from further investment in the Digital Vending Machine (DVM) product. I am very sceptical that this is a full explanation. It’s simply too much for improving an existing product. This company does continue to grow revenue well but costs are not under control.

Compare that company with Intercede (IGP) who published a full-year trading update this morning. Revenue was up 65%, i.e. similar to Bango. The full year financials are not yet available but the half-year results show a very different picture to Bango. Minimal capitalisation of software development and positive overall cash flows. Intercede said: “Tight cost control continues to be a focus for the Group in conjunction with considered project expenditure and new hires to support revenue growth”.

I remain to be convinced that Bango is on the right track.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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They Do Things Differently in the USA

The sentence of 25 years in prison by a New York court on Sam Bankman-Fried for the fraud he orchestrated at crypto exchange FTX should be compared to the weak handling of financial fraud cases in the UK. In England it takes years to get them into court, if they ever are, and any penalties are feeble in comparison.

The FTX case was perhaps an obvious case of fraud – using client’s money to prop up the business – but the legal system in England is clearly defective in comparison. The amount that disappeared was about $9 billion and it shows how far a glib talker can go.

The speed of the prosecution is also a lesson. From the collapse of FTX to conviction is only 2 years. The English legal system needs wholesale reform to make it more expeditious and more effective as a deterrent to financial crime. The English legal system is designed more to benefit lawyers, both in civil and criminal cases, rather than ensure justice is obtained swiftly.

Previous comments: https://roliscon.blog/2023/11/03/sam-bankman-fried-found-guilty

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Alliance Trust and Witan – Why Is One Doing Well But Not the Other?

As a shareholder in Alliance Trust (ATST) I have been reading their Annual Report. They had a very good year last year with a Total Shareholder Return of 20.2%, beating their benchmark MSCI index which only managed 15.3%. Total Return over 10 years was 206.7.

Alliance Trust now use a multi-manager approach to achieve their performance. The investment manager’s report says this which is interesting: “As in previous years, we kept all our so called “factor” positions well balanced relative to the benchmark in 2023 through regular small adjustments to stock picker allocations, allowing stock selection to shine through as the key source of return. However, we did add a Japan specialist, Dalton Investments (‘Dalton’) in July, which was discussed in detail in the Interim Report. Excluding Dalton, the table on page 15 which details stock picker weights at the beginning and end of the year shows little change. But this disguises the fact that, to keep pace with shifting market dynamics, from one factor to another, we regularly take money away from the best performing stock pickers and give it to those who are underperforming. It may seem counterintuitive to trim exposure to “winners” and increase exposure to “losers” but this process helps to keep portfolio exposures balanced across sectors, countries, and styles, thereby avoiding the build-up of excessive concentration risks that can result from leaving allocations unchanged. The idea is to ensure that stock selection based on business fundamentals makes the key difference to returns, not over or underweight sector or country exposures, which can be subject to sentiment-based mood swings. However, this rebalancing process is not automatic. Although we have target weights for each stock picker, changing allocations is ultimately a judgment call. For example, we did not add to Jupiter Asset Management (‘Jupiter’) or Lyrical Asset Management (‘Lyrical’) last year, despite their underperformance, as they often invest in smaller companies that are inherently riskier than the stocks typically chosen by of some of the other stock pickers, such as Veritas Asset Management (‘Veritas’), who tend to focus on large, higher-quality value, companies.”

Coincidentally one of my contacts pointed out that Witan Investment Trust (WTAN) who are another global equity trust with a multi-manager approach seem to have run into problems. They have recently announced a review of “investment management arrangements” and also said this: “In 2004, in a major strategic shift, Witan adopted a multi-manager approach to investing in global equities, at the same time becoming independent of any single investment management group. For much of the subsequent period, the approach proved successful and, although the volatile conditions in recent years have eroded earlier outperformance, Witan’s performance remains in line with its equity benchmark in net asset value total return terms and ahead in share price total return terms since making that strategic shift. However, in more recent years the asset management and investment trust sectors have seen considerable changes in markets, competition, governance and regulation. These pose new investment and communication challenges for independently managed investment trusts to address successfully and cost-effectively. In view of these structural changes, Andrew Bell’s forthcoming retirement after over 14 years as our CEO is an appropriate opportunity for Witan to review proposals for the future management of the Company’s portfolio.”

According to the AIC, Witan’s one year share price total return is 15.1% and only 136.7 over ten years so you can see why shareholders might be getting nervous and it is time to review the management of the portfolios.

If you are a holder or prospective holder of Witan shares there is a webinar organised by ShareSoc at which you can learn more – see https://www.sharesoc.org/events/sharesoc-webinar-with-witan-investment-trust-plc-wtan25-april-2024/

A question to ask might be “why has Alliance Trust made a success of a multi-manager approach but Witan has not?”

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Should Unilever Dispose of Ben & Jerrys?

Unilever has announced that as part of its “Growth Action Plan” it plans to “separate” its ice cream business. To quote from the announcement: “The Board believes that Unilever should be increasingly focused on a portfolio of unmissably superior brands with strong positions in highly attractive categories that have complementary operating models. This is where the company can most effectively apply its innovation, marketing and go-to-market capabilities. Ice Cream has a very different operating model, and as a result the Board has decided that the separation of Ice Cream best serves the future growth of both Ice Cream and Unilever. Following separation, Unilever will become a simpler, more focused company, operating four Business Groups across Beauty & Wellbeing, Personal Care, Home Care and Nutrition. These Business Groups have complementary routes to market, and/or R&D, manufacturing and distribution systems, across both developed markets and Unilever’s extensive emerging markets footprint”.

Having recently acquired some shares in Unilever I do have a view on this. To my mind this makes sense as selling ice cream is hardly a good business to be in. There are no barriers to entry and although strong branding can help ultimately it’s a “me too” kind of business.

The history of Ben & Jerrys is interesting. You can read the founders book under the title “Ben and Jerry’s Double-dip: Lead with Your Values and Make Money Too”. They told a good tale of their “social values” but in reality they sold a premium, high fat, ice cream when the competitors were selling bland products. That enabled them to build a niche and a reputation. When Unilever acquired the business in 2000 there were protections put in place that could enable the social mission to continue – for example to block sales to Palestinian territory – which has resulted in hampering Unilever ever since. This was in essence a pretty daft deal as mixing commerce with politics never makes sense but Unilever were so keen to acquire the brand that they went along with this nonsense.

Selling ice cream, premium sector or not, is bound to be a low margin and a very seasonal business so disposal of this problem child by Unilever makes good sense.

Megan Boxall has published an article on Unilever’s ice cream business here: https://www.stockopedia.com/academy/newsletters/a-lesson-from-the-fallout-of-misaligned-acquisitions/ . She argues that sales in the ice cream business have been driven mainly by price rises not volume growth. It is surely true that this is a mature sector and the move to more “healthy” foods is probably limiting growth. Megan is critical of the past acquisitions and the poor allocation of capital.

If Unilever spins off Ben & Jerry’s to become an independent listed business and gives Unilever shareholders shares in the new entity I will be selling those shares.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Fundsmith Shareholder Meeting

I just watched a recording of the Fundsmith Equity Fund Shareholder Meeting – see https://www.fundsmith.co.uk/tv/ . As usual it was a mixture of jokes and serious analysis of Terry Smith’s investment process.

Yet again his prejudices (and to a large extent mine) were made plain – no banks, no insurance companies, no miners, no oil/gas companies, no property companies, etc. But the portfolio companies achieved a Return on Capital Employed of 32%. That’s better than in previous years and almost twice the return of companies in the FTSE-100.

I have no doubt that the Fundsmith Equity Fund will continue to have a decent performance so I am happy to continue holding.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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