Comments on Primary Markets Effectiveness Review

The Financial Conduct Authority (FCA) have launched a public consultation on potential changes to the regulations regarding the listing of companies on public exchanges (see link below). This is in response to concerns about the fall in the number of companies listing (the number listed is down by 40% since 2008). There is particular concern that the UK regime is tougher than other international markets and particularly deters certain types of companies from listing.

You only have to read the consultation document to understand how complex the rules on main market listing are and they are surely due for simplification. Over complex rules not just deter companies from listing but add to the costs of doing so and those costs fall on investors.

A survey by PWC in 2018 indicated that regulatory burdens and costs are the main reasons for not listing as opposed to raising finance by other means. A fall in the number of listed companies particularly affects private investors who want to invest directly in companies and wish to have a direct connection with where their money is invested.

Other factors are also involved such as the low cost of debt at present and the ability of private equity firms to act quickly and provide a less onerous corporate governance regime. But it would certainly be a retrograde step if public stock markets fell substantially in size.

Among the proposals to make listing more attractive in the UK are 1) allowing dual class structures where some shareholders can have disproportionate voting rights; and 2) relaxing free float levels required. But there is also a proposal to increase the minimum market capitalisation substantially from the present level, which surely would not help.

There are also proposals to alter the primary segment qualifications or remove segments altogether which I favour.

I support the relaxation of free float levels but am opposed to dual class structures. Dual class structures enable founders to retain control but that is not necessarily a good thing. In practice there are other ways that founders can retain substantial influence – for example by retaining significant shareholdings and board seats. I do not see that permitting dual class structures (DCSS) is necessary to make listing in the UK more attractive.

What will make listing more attractive is a simplification of the listing rules and a reduction in cost plus a reduction in the regulations such as onerous corporate governance regulations (such as the recently proposed climate disclosure regulations I commented negatively upon).

You can read my detailed responses to the FCA consultation here:

https://www.roliscon.com/Primary-Markets-Effectiveness-Review-Response.pdf

The FCA Consultation is here: https://www.fca.org.uk/publications/consultation-papers/cp21-21-primary-markets-effectiveness-review

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

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Comments on Ultra Electronics Bid

Ultra Electronics (ULE) have announced a possible cash offer for the company from Cobham. The “non-binding” offer is for £35 per share, which is 42% up on the closing price last night. Before I say any more, it’s worth stating that I own quite a few shares in the company which I started buying over a year ago as it looked reasonably priced and a defensive stock during the pandemic.

But as Ultra operates in the defence sector (a strong focus on anti-submarine warfare for example), the Government may have a say in whether the deal goes through. That is why the company says it is “minded to recommend” the offer subject to a number of conditions including the “establishment of safeguards for the interests of Ultra’s stakeholder groups”.

Cobham is a UK company but is now owned by US based private equity business Advent International. Their takeover of Cobham was also controversial as this was another example of what was perceived to be a great UK technology business with exposure to sensitive defence operations.

The deal may not go through which is why the share price is trading below the likely offer price. But with such a high bid premium (82% to what I first started buying it at), I am unlikely to vote against the offer.

The only question in such circumstances where completion is uncertain, and even if a bid goes through is likely to take many months to complete, is whether to sell shares in the market on the principle a bird in the hand is worth two in the bush, or whether to wait out the result. I tend to hedge my bets in such circumstances by selling a proportion of my shares and awaiting the outcome for the others.

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

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Changes to KIDs Proposed by the FCA

Yet another public consultation issued by the Financial Conduct Authority (FCA) in mid-summer is one on KIDs (Key Information Documents). This is relevant to private investors and is designated CP21/23 – see link below.

KIDs are imposed and regulated under the PRIIPs regulation as devised by the EU for packaged investment products such as funds and trusts. KIDs give basic financial information, risk indicators and likely future performance based on past performance. Those who purchase investment trusts for example will be asked to confirm they have read the KID before purchasing a holding.

But in reality KIDs are grossly misleading for many investment trusts.  This is because their estimate of future returns are based on short-term historic data. This has caused many fund managers of investment trusts to suggest that they should be ignored and investors should look at the other data that the companies publish to get a better view of likely future returns. The AIC has also criticised them and this writer certainly ignores the KIDs for the investment trusts I hold.

The FCA says “Our proposals should address the existing conflict between PRIIPs requirements which on the one hand require PRIIPs manufacturers to ensure the information in the KID is accurate, clear, fair and not misleading while at the same time prescribing the production and presentation of information on performance and risk which, in some cases, can be seriously misleading”.

The production of KIDs does require substantial effort on the part of fund managers so they add to investors’ costs while not being of substantial benefit to investors in many cases. The intention might have been good but excessive complexity has undermined their usefulness. The FCA admits that the mandated methodologies for calculating performance can produce misleading illustrations across almost all asset classes.

The proposal is to remove performance scenarios from KIDs which seems a very good idea. Alternative performance information is suggested be provided., such as narrative about the factors that might affect performance.  But they have avoided providing past performance data which is what is likely to be most important to investors.  

The PRIIPs regulations required the publication of a Summary Risk Indicator (SRI). But the methodology to be used seemed to rate some trusts as low risk when they are not – for example Venture Capital Trusts. So it is proposed to introduce new rules requiring an updating of an SRI if it is obviously too low.

The proposals from the FCA seem generally sensible although the AIC is still not happy. They say in a press release that: “….the SRI methodology does not work properly and needs a complete rethink. We were raising concerns about KIDs even before the rules were finalised and we have been calling for changes since their introduction on 1 January 2018. Investment companies are still at a disadvantage in having to produce these toxic disclosures, whilst UCITS funds have repeatedly been let off the hook. It’s high time the Treasury conducted a comprehensive review of KIDs rather than relying on a piecemeal approach to their reform”.

Respondents to the consultation can give their own views of course. There is a simple on-line response form.

Reference: CP21/23 Consultation Paper:

https://www.fca.org.uk/publications/consultation-papers/cp21-23-priips-proposed-scope-rules-amendments-regulatory-technical-standards

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

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Climate Related Bureaucracy to be Imposed by the FCA

It’s summer holiday time, so what better time to issue public consultations of which there are a spate of late? Is this because the authors wish to clear their desks before the holidays, or because they hope to get more or fewer responses at this time of year?

Anyway here are some comments on the first one I have looked at which is a consultation from the Financial Conduct Authority (FCA) on “Enhancing climate-related disclosures by asset managers……(CP21/17).”.

The changes proposed to the FCA Handbook which will apply to all asset managers, life insurers and pension providers aims to tackle the “climate challenge” by providing more information on climate-related risks.

But there will be substantial costs imposed with no obvious benefits. For example, asset managers are expected to incur implementation costs of £202 million with on-going annual costs of £116 million. What are the benefits? This is what the consultation report says: “We do not consider that it is reasonably practicable to quantify the benefits of our proposals. We have therefore not sought to quantify the benefits to the market of addressing the identified harms”. In essence they are saying that there is no obvious cost/benefit justification.

But they do argue that “the estimated costs of compliance are small relative to total assets under management of in-scope asset managers and asset owners. Total one-off and ongoing costs represent 0.002% and 0.001% of total assets under management for asset managers and asset owners, respectively”. They may be small figures but bureaucracy tends to grow over time.

How will such disclosures make any difference to climate? Won’t it just become a virtue signalling exercise by asset managers?

I have posted the following response to the consultation. I suggest readers say something similar:

“I have not answered the individual questions posed because I consider the imposition of the need for asset managers and others to produce climate related disclosures will be a costly exercise with no benefits. There are significant costs being imposed with no clear benefit to the investors in the assets covered. It’s just adding more bureaucracy to an already high level of regulation which will deter new entrants to financial markets and reduce competition. It is adding costs to investors with no benefit.

The FCA seems to barely have the resources to police and enforce the existing regulations in the FCA Handbook so adding more superfluous regulations is pointless. It is not at all clear how new ESG regulations will improve the returns to investors”.

Reference: CP21/17 Consultation Paper: https://www.fca.org.uk/publications/consultation-papers/cp-21-17-climate-related-disclosures-asset-managers-life-insurers-regulated-pensions

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

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Government Powers Ahead with Decarbonising Transport

An announcement from the Government yesterday spelled out the world’s first “greenprint” for decarbonising all modes of domestic transport by 2050.

Plans include a ban on the same of all new “polluting” road vehicles by 2040 and net zero aviation emissions by 2050. The former includes the phasing out of all petrol and diesel HGVs by 2040 – subject to consultation. Consultation will be very important because the practicality of HGVs that need to go long distances without repeated refuelling is important economically. LGVs can probably be electrified but HGVs need to use alternative fuels.

The 2050 commitment applies to aviation emissions and a consultation on that is also launched under the “Jet Zero” banner. It is clear that new technologies and aviation fuels need to be developed to achieve a major reduction in aviation emissions. Whether such changes to reach zero emissions are achievable is not at all clear and the cost, which might be very considerable, is not given.

Similarly, the costs of electrification of all rail transport is likely to be enormous as the UK lags far behind other European countries in that regard. Less than 50% of the UK rail network is currently electrified. For example the cost of electrifying the Great Western mainline to Cardiff was estimated at £2.8 billion.

The Daily Telegraph has speculated on a new system of road pricing to replace the £30 billion currently raised through taxes on petrol and diesel. But the latest Government announcement leaves out any mention of how that issue is to be tackled.

As with all good political missives, the Government document contains lots of fine words about how the environment will be improved while not inhibiting us from travelling when or where we want (for example, taking holiday flights). It’s a policy statement in essence that leaves out all the detail of how this nirvana is to be achieved and at what cost. It ignores a lot of the practical difficulties. But it’s worth reading to get an impression of what might happen in the next few years.

Where is the cost/benefit analysis that justifies this revolution in transport modes? It’s nowhere to be seen. It’s as if the Government has signed up to the global warming religion so as to save humanity while ignoring the fact that reductions in UK emissions, particularly those that are only transport related, will have very little impact on worldwide emissions. The UK generates about 1% of global emissions while transport related emissions are an even smaller proportion. The UK appears to aiming to be a saint among sinners which may make us feel good but may make us economically poor.

What are the implications for investors? It’s clear that many billions of pounds will be spent by the Government to achieve this new world. But there is one simple message to take on board. The UK will be impoverished in comparison with countries that have not become quite so committed to the new religion. So investment in China, India, even the USA, in fact anywhere except the UK and the rest of Europe, might make more sense.

Government GreenPrint Paper: https://tinyurl.com/8ymtap38

Telegraph Article on “Road Toll Confusion”: https://tinyurl.com/edxxh4rp

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

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Only the Best Will Do

There was a good article in Investors Chronicle two weeks ago. It covered a book by Peter Seilern entitled “Only the Best Will Do”. This is one of the few books on investment I admit to not having read. But the IC review makes it look like the author has very much the same approach to investing as I have developed over many years (and is documented in my own book “Business Perspective Investing”).

Peter Seilern gives his ten commandants of quality growth investing as follows:

  • Scalable business model.
  • Superior industry growth.
  • Consistent industry leadership.
  • A sustainable competitive advantage.
  • Strong organic growth.
  • Wide geographic or customer diversification.
  • Low capital intensity and high return on capital.
  • A solid financial position.
  • Transparent accounts.
  • Exceptional management and corporate governance.

Finding companies that match all those criteria is not easy but when there are thousands of listed companies to select from why invest in lesser quality businesses?  You just have to make sure you don’t overpay for the good ones.

Note the lack of emphasis on buying cheap businesses, i.e. those on a low p/e or paying high dividends. It’s more important to pick quality businesses that will outperform in the long term.

Mr Seilern founded his own investment management company in 1973 which has had a good track record in terms of performance, so his book might be a good one for summer reading.

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

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Public Consultation on Prospectus Regime Review

Last week, Chancellor Rishi Sunak gave a Mansion House speech that “set out the government’s vision for an open, green, and technologically advanced financial services sector that is globally competitive and acts in the interests of communities and citizens, creating jobs, supporting businesses, and powering growth across all of the UK”. See https://www.gov.uk/government/collections/mansion-house-2021 . The most important supporting document so far as stock market investors are concerned is the launch of specific proposals to reform the prospectus regime.

The Government wants to facilitate wider participation in the ownership of public companies when currently share issuance can be blocked to retail investors by a complex and rigid prospectus Directive as imposed by the EU. The commitment is to make the regulation of prospectuses more “agile” with the regulations better tailored to UK markets. The proposals follow on from Lord Hill’s Listings Review which recommended a fundamental review of the UK’s prospectus regime.

Investors in new stock market shares rely on the content of a prospectus when deciding whether to buy shares so it is important that the content is accurate and useful. But that is not always the case at present and the Government wishes to encourage the inclusion of more forward-looking statements.

Another problem is that the Prospectus Regulations are set in law and are extremely complex. That adds to the costs of prospectus preparation and also makes it difficult to revise them to meet changing needs (like the need to cover public offerings of securities in private companies such as “crowd funding” offers or offerings of overseas companies). One of the key changes proposed is to take prospectus regulation out of statute law and put it into the hands of the Financial Conduct Authority (FCA) to enable them to make or revise regulations as necessary.

A particular problem at present is the need for the costly preparation of a prospectus when issuing new shares in smaller companies that can easily breach the £8 million threshold under the regulations, thus requiring a prospectus. This is why so many private shareholders are excluded from participation and the shares are issued only via a “placing” to a small group of institutional or “inside” investors.

Another oddity is that a prospectus is often required when shares are being issued even though the company’s shares are already listed and the share purchasers already own the shares and hence are presumably already familiar with the company. The Government’s proposals aim to simplify the regulations in essence to make it easier to issue shares to the aforementioned groups.

The FCA would also be given discretion to say whether a prospectus is required and a further objective is to simplify the content of prospectuses for secondary issues.

There are a lot of detailed questions in the public consultation which I will not attempt to deal with here as they mainly cover many of the technical issues involved in this area. But you can see my responses in this document: https://www.roliscon.com/Prospectus-Review-Roliscon-Response.pdf

Readers are encouraged to submit their own responses to the public consultation.

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

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Abcam Remuneration Vote Only Narrowly Won

There was a vote by Abcam (ABC) shareholders last week on a new Remuneration Policy including a new “Profitable Growth Incentive Plan (PGIP)”. I voted against them because the proposals seemed very generous to me particularly bearing in mind that they are in addition to existing bonus and LTIP schemes and could involve up to 2.8% of shares being awarded to participants in the scheme (including 1.36 million shares to the CEO, currently valued at £14.25 per share).

The outcome of the vote was that 46% of shareholders voted against the revised Remuneration Policy and 44% against the PGIP. The company says that those who use proxy advisors did not support the resolutions but that “Abcam’s Remuneration Committee received positive indications of support for the final proposals following an extensive consultation process” prior to the meeting.

It seems the company plans to do nothing about this substantial opposition to the remuneration proposals which I consider most unfortunate. All they say is “The Board remains firmly committed to maintaining an open dialogue with its shareholders to ensure it fully understands their views and it will continue to constructively engage with those shareholders who were unable to support the proposals”. This is simply not good enough. I will also be voting against the current Chairman in future as I have done in the past after he failed to answer some simple questions I posed at a previous AGM.

This company’s financial performance has been declining in recent years. Perhaps the PGIP was designed to incentivise improvements in that regard but I think the directors and managers have incentives enough.

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

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It’s Important to Read the Prospectus!

I am never very keen to invest in new IPOs of which there are plenty launching into the market of late. They tend to be launched on a wave of enthusiastic promotion while the company’s management gets distracted by their new wealth and responsibilities. But I do look at some of them. One I have just reviewed is Victorian Plumbing (VIC) which joined AIM last week.

The company sells plumbing accessories through to complete bathroom and toilet suites (see https://www.victorianplumbing.co.uk/ ). The company has been growing rapidly by focussing on internet ordering and deliveries direct to consumers or to fitters. It only has one showroom in the country.

The valuation looks quite high but not ridiculous bearing in mind that it is profitable and growing rapidly. But the information provided on page 48 of the prospectus is enough to put me off.

This is what it says: “While the Directors are not aware of any current third party claims, the Group’s competitors, or other entities and individuals, may claim to own or have exclusive rights to intellectual property or other proprietary rights used in the Group’s business. From time to time, third parties may claim that the Group is infringing their intellectual property rights, and the Group may be found to in fact be infringing such rights. Conversely, the Group may be sued by third parties for alleged infringement of their proprietary rights. In a case brought by one of the Group’s competitors, Victoria Plum, the High Court in England and Wales ruled in November 2016 that both the Group and Victoria Plum’s activity of bidding on certain Google keywords amounted to passing off and the Group was found to have been infringing certain of Victoria Plum’s trade marks in bidding on certain Google keywords including its name. The Group is subject to an undertaking not to bid on such terms. Under the same court order, Victoria Plum is subject to an undertaking not to bid on the term “Victorian Plumbing”, which amounted to passing off of Victorian Plumbing”.

So far as I can see the business named Victoria Plum is very similar if somewhat smaller in size. They are also focussed on internet sales and sell very similar products, possibly even from the same suppliers.

If you type in “Victoria Plumbing” into Google you get Victorian Plumbing listed first followed by Victoria Plum – I guess Victorian Plumbing are paying more for Google adwords.

“Victorian Plumbing” is a registered trade mark of Victorian Plumbing Ltd but it’s still very messy that there is a similar business with a very similar name. This potential confusion should have been sorted out before the company chose to do an IPO in my opinion.

The failure to have clear ownership of associated intellectual property such as brand names is enough to me off investing in the shares.

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

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Platform Transfer Finally Completed and Pointless Trust Changes

Good News! A transfer of one of my SIPPs from one platform to another has finally been completed today (22nd June). I initiated the transfer on the 12th January this year so this has actually taken over 5 months. A totally unreasonable period of time for what should have been a simple transfer of cash and a few direct shareholdings of UK listed crest stocks. However their failure to collect the tax refunds on PID dividends on some of the holdings remains outstanding and my complaint about both parties involved in the transfer to the Financial Ombudsman is ongoing.

Two investment trusts I have holdings in are Montanaro European Smaller Companies Trust (MTE) and JPMorgan European Smaller Companies Trust (JESC). The latter company has decided to change its name to JPMorgan European Discovery Trust with a new TIDM code of JEDT. Shareholders were not given any say on the matter, although the company says it “had discussions with major shareholders and the wider investor base”. All I can say they did not ask me! If they had, I would have objected.

The company claims the former name was inappropriate as some of their holdings have large market capitalisations but the new one is totally meaningless. There are lots of other investment trusts with out of date and inappropriate names – such as Scottish Mortgage. It’s just pointless changing the name and the new one is a poor choice. Brand recognition is important in naming trusts and changing the name unnecessarily will not help. They could at least have chosen a less bland name.

The other trust (MTE) has decided to do a 10 for 1 stock split. The company gives no justification for the change although the usual excuse for such a change is to improve the marketability of the shares. But who are they fooling? A share split makes no difference to the value of shares held. The current share price is about 1700p but if Berkshire Hathaway can happily get by with a market price of $417,290 why would MTE be bothered?

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

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