Baronsmead VCT AGM and P.J. O’Rourke Obituary

This afternoon the Baronsmead Venture Trust (BVT) is holding its Annual General Meeting. I made some very negative comments about corporate governance at this company in a previous blog post – see  https://roliscon.blog/2021/12/24/baronsmead-vct-more-corporate-governance-issue/ . But the good news is that long-standing Chairman Peter Lawrence is stepping down in March according to a recent RNS announcement. And about time too, one might say.

Unfortunately I will be unable to attend the AGM as it is only being held as a physical meeting so will be unable to raise the other issues mentioned in my blog post. I hope somebody else will.

The bad news yesterday was the death of wit and comic writer P.J. O’Rourke from lung cancer at the age of 74. A writer on a wide range of subjects including politics and economics and it’s not many writers who can make those topics amusing. He wrote a digest and analysis of Adam Smith’s book “The Wealth of Nations” which I commented on previously and he wrote on the war in Iraq and on motoring stories in such books as “Give War a Chance” and Holidays in Hell” which are also worth reading.

A sad loss to the world indeed and it always makes one feel depressed when someone younger than you dies – but his lifestyle certainly did not encourage an extended career.

There are lengthier obituaries in the national media which you can find on the web and which shows how influential and popular he was.

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

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How the World Really Works – Book Review

It is important for investors, and indeed for everyone, to understand what factors are driving the world’s economies. This is particularly so when there are concerns about global warming and the alleged degradation of the environment as the world’s population continues to increase.

A good primer on this subject is a recently published book by Prof. Vaclav Smil entitled “How the World Really Works”. The author covers wide ranging topics from energy supply to food supply in a very analytic way based on established facts rather than polemics which he criticises as being far too common in the modern world.

His chapter on food production is particularly interesting and he shows how we now manage to feed 8 billion people reasonably well which would have been inconceivable 100 years ago. How do we do it? By using energy supplied mostly from fossil fuels to create fertilizers and by manufacturing farm machinery and road/rail/shipping transport to distribute the products efficiently. The author points out that if we reverted to solely “organic” farming methods we would be lucky to feed half the world’s population.

He covers the supply of key products such as steel, plastics and cement which are essential for our modern standard of living and how they are not only energy intensive in production but that there are few alternatives. He clearly supports the view that the climate is being affected by man’s activities but points out that the changing of energy production, food  production and the production of key products cannot be easily achieved. Certainly it will be difficult to achieve that in the timescales demanded by European politicians when the major carbon emitters of China, India, USA, and Russia are moving so slowly.

Meanwhile any forecasts of the use of oil declining or reserves running out should be treated with scepticism as the price of oil reaches a 7 year high of $95 per barrel. Perhaps investors in oil companies (I hold none) should not be too keen to exit the sector rapidly particularly as the book teaches you that forecasts of economic activity are notoriously difficult.

The author looks at the risks in the future for the world, many of which are uncertain. He mentions the risk of a big “Carrington event” – a geomagnetic storm occurring today would cause widespread electrical disruptions, blackouts, and damage due to extended outages of the electrical grid. If that is not enough to scare you he suggests that another pandemic similar to Covid-19 is very likely as such epidemics have happened about every 20 years in the past and might be more virulent in future. But planning for such events, which were historically well known, was minimal and continues to be so.

He does not propose solutions to global warming other than that we do have many tools to enable us to adapt and cope with the issue. For example, farming could be made more efficient and wasted food reduced. Electrification of vehicles might help in a minor way and he is particularly critical of the increase in the use of SUVs in the last 20 years which has been particularly damaging (I cannot but agree with him on that point). But this is not a book containing simple remedies to the world’s problems. It is more one that gives you an understanding of how we got to where we are now and where we might be going.

For example, the use of coal in energy generation can be much reduced, and oil/gas also to some extent. Nuclear fission is a good source of clean energy and fission is a possibility even if he was not aware of the latest announcements on the latter. But it is inconceivable that there will be short-term revolutions in energy supply.

Altogether the book is worth reading just to get an understanding of how the world currently works – as the book’s title suggests.

Incidentally some of the events covered in How the World Really Works are also discussed in my own recently published book entitled “A Journal of the Coronavirus Year” which covers not just the recent pandemic but the changes that have happened in the last 75 years of my lifetime. It’s now available from Amazon – see https://www.amazon.co.uk/Journal-Coronavirus-Year-2020-2021-Biographical/dp/0954539648/ for more information.

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

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Should BP Pay a Windfall Tax?

There have been calls for BP (BP.) to pay a “windfall” tax out of their record profits which were announced yesterday. For example Richard Tice, leader of the Reform Party, had this to say on Twitter: “BP highest profit for 8 years. Even bigger profits likely in 2022, not thanks to own efforts but to Putin’s warmongering. Shareholders likely above average wealth. So higher energy prices transfer wealth from poorer to richer. Windfall tax right in moment of crisis”. [I corrected a couple of grammatical errors]

The Labour Party has also put the Government under pressure to tackle the cost-of-living crisis by calling on MPs to support its bid for a windfall tax on gas and oil companies.

But is BP actually that profitable a company? Not being a shareholder in it I thought I would have a quick look at its numbers over the last few years. They are in fact quite abysmal. The company lost $20 billion in 2020 and in the previous 5 years never achieved a better return on capital employed of more than 7% in any one year and averaged only 1.4% over those 5 years.

Prior to that they tripped over the Deepwater Horizon Gulf oil disaster which meant not just profits disappeared but also dividends.

BP said “Generally, a windfall tax on UK oil and gas producers would not encourage investment in producing the UK’s gas resources”; and “”Very importantly, we also believe the UK should continue its [low carbon] energy transition as fast as possible. BP is committed to playing our part here.”

I think this is a “we need the money” kind of argument. But the simple fact is that BP’s profits, like those of oil companies, are very sensitive to the market prices of oil and gas. They have to invest billions of pounds on likely future profits in researching and developing new resources with no certainty that market prices will reward them. The level of profitability of BP over the last few years is not an encouragement to anyone to invest in this business. Taxing them with a windfall tax would discourage folks even more.

It’s unfair and unreasonable to penalise them when profits rise in a good year. They have to ride the peaks and troughs of market prices because nobody is going to protect them against market forces, unlike the Government’s unwise attempt to protect the public from them.

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

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Abrdn Vote Delayed by Paper Shortage

It has been reported by Sky News and the FT that the vote on the acquisition of Interactive Investor by Abrdn (ABDN) has had to be delayed. The reason is simply that there is a shortage of paper it is suggested. Abrdn have about 1.1 million shareholders and the offer document is 120 pages long. Company law requires the document to be sent to everyone on the share register, and quite rightly you may so for such an important transaction.

Does this not highlight the absurdity though that email addresses are not held on share registers, only postal addresses. Some shareholders may prefer a paper document but most might prefer an option to receive it electronically, particularly as they are unlikely to read the whole 120 pages.

It is surely time to update the Companies Act to ensure all shareholders (including beneficial owners currently in nominee accounts) are on the share register with an email address. This would save companies a large amount of money and improve communication between companies and their investors. The absence of an email address also thwarts the ability of shareholders to communicate with other shareholders at reasonable cost which was a basic principle of Company Law since Victorian times.

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

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New Book Published – A Journal of the Coronavirus Year

This is a war story, but it is not a story of heroic deeds. It is how an ordinary family faced the Covid-19 epidemic that killed millions of people in 2020 and 2021. The battles were fought in hospitals and other medical facilities but the fear of infection spread panic among the population and Governments took aggressive steps, often misguided, to try and control the pandemic.

This journal was commenced in March 2020 after the Government advised the author to stay at home and not associate with anyone at all as he came into the category of someone who was especially vulnerable to the coronavirus. It provides an interesting record of events in the following eighteen months as recorded at the time, and his reactions to them, in what was a particularly historic period in more than one way.

It focuses to some extent on the impacts on the stock market and the economy in which the author had a particular interest as an active private investor, but also covers how his family and others survived the epidemic and the way life changed as a result for many people. And it gives some insights in how the author became an active and successful investor by adding some biographical notes including the successes and failures in his life in the last 70 years and other events that will be of interest to readers.

For more information and to purchase a copy go to: https://www.roliscon.com/journal-coronavirus-year.html

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

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Why People Hate the BBC

There is an active campaign to “defund the BBC”, i.e. strip it of its license fee. Having watched a programme they broadcast on the 25th of January one can understand why. The programme was entitled “The Decade the Rich Won” and its key proposition was that the effect of QE following the banking crisis of 2008 was to make the rich richer while the poor suffered.

This joint BBC/Open University production pretended to be a documentary of the financial crisis and subsequent events. It included a number of interviews with major personalities involved such as Mervyn King, Alastair Darling, Nick Clegg, George Osborne and Guy Hands but also a few nonentities. It appeared to have been carefully edited to present a slanted view of history and in effect an attack on capitalism.

The purpose of QE was to increase economic activity by providing more liquidity to banks and this is what it did. As Mervyn King said it prevented a great depression as we had in the 1930s. Guy Hands said it was the right decision but it had unintended consequences. The problem was it inflated asset values as money was pumped into the economy.

That of course meant that those who owned assets such as buildings or company shares became wealthier. But it is wrong to suggest that just benefited the rich and hedge fund managers as the programme implied. In reality anyone with a pension scheme or who owned a house tended to benefit, i.e. a large percentage of the population. And those who did not at least had their employment protected by the economy being supported rather than being allowed to decline with job losses following.

There was a clear attack on the big banks and their owners although nobody mentioned that the owners of banks such as RBS and others suffered from full or part nationalisation (i.e. confiscation of their assets).

There was no discussion about what else the Government and Bank of England could have done instead.

This programme was a polemic against the bankers and asset owners of all kinds. It was likely to encourage a very distorted view of history as opposed to being an unbiased analysis of the financial difficulties of the era covered.

It looked like a left-wing socialist manifesto in essence by implying the rich toffs escaped the economic crisis while everyone else suffered. That’s not the reality.

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

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Allianz Technology Trust Webinar and Covid Impact

Yesterday (26/1/2022) I attended two interesting webinars. These overlapped in time and it’s rather tricky to watch two at the same time but I think I got most of the interesting parts covered.

The most important one was a presentation by Allianz Technology Trust (ATT) organised by ShareSoc. This has been badly hit by the fall out in the technology sector in the last few weeks which has affected my holding in the Trust and many other holdings in my portfolio – the rout continued this morning after some recovery yesterday. I commented on this situation a week ago when I said “My feeling is that maybe prices of some of the stocks favoured by these companies have become over-inflated but that I still feel that they are better long-term bets than the traditional “value” plays. The world has been changing and technology has responded to meet the new challenges. Those companies that will meet the new demands of world markets are the ones where profits will rise in future”. So it was interesting to hear what investment manager Mike Seidenberg had to say about it.

He quoted the CEO of Microsoft who reportedly said “we are part of the digital transformation of businesses”. Mike suggested companies need to become digitally transformed because of the impact of the Covid epidemic.

In response to a question about the higher valuations of businesses they hold he agreed they are on higher P/Es than the market but they are also higher growth. What are they excited about? He answered collaboration software and automation to reduce the cost of labour – there is a global labour shortage.

He was asked why they sold out of Tesla but bought it back so it’s now the second largest position. Mike suggested that Tesla was now taking cost out of the product by vertical integration giving them a strong competitive position and there was a “halo” effect as Tesla cars hold their resale value. With more EVs in the market, more people now see them as mainstream. This bullish view of Tesla was backed up on the same day by results from the company as it reported a record net profit of $2.3bn in the fourth quarter of 2021. Despite some supply chain issues Elon Musk expects sales volumes to grow by more than 50% this year.

Another question raised was on performance fees in the trust and why invest in an active manager rather than an equivalent index fund. Mike suggested you are investing in a team and a process – you need to look at the long-term performance.

He concluded by saying it was a distinct advantage being immersed in the technology in the Bay Area which I can well understand being familiar with the area. In fact they have an office in Francisco on Mission Street in downtown San Francisco.

This was very amusing as on the same day the Financial Times ran an article on how San Francisco was “scaring away the tech crowd” due to crime and homelessness. Housing is also very expensive and technology companies have been moving employees to other cities. The social problems in San Francisco have been known about for many years and the Mission District was never an area to be wandering about in late at night. The FT article was clearly written by someone with little knowledge of the area.

In summary Allianz Technology Trust still looks to be well managed to me and I did not perceive any concerns with their market stance but clearly as they are focussed on technology companies they won’t be avoiding the general trends in that sector.

The other webinar I attended was one organised by Kidney Research UK which covered the impact of the Covid epidemic. As all of my family, other than I and my wife, have recently caught the disease there was interesting data on vaccination impact. I actually had a fourth vaccination two days ago because it seems that 25% of those with poor immune systems have not been creating antibodies. This was data from the “Melody” study in which I participated. Whether a fourth dose of a vaccine might help has yet to be determined.

But the heart-warming session was a talk by a young lady named Andrea who had been on kidney dialysis since being a baby but had recently had a transplant from a relative. She said she now felt “invincible”. It was a great example of how kidney transplants transform the life of such patients.

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

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Paul Myners Obituary and BHP Unification Meetings

Lord Myners has died at the age of 73. He had a big hand in the rescue of the banks in the financial crisis of 2008 as a Treasury Minister in the Labour Government after becoming the socialists’ favourite capitalist. He was also responsible for the Myners Report into institutional investment which had some influence on corporate governance and institutional stewardship in the UK.

I met him a few times and he had a very persuasive personality but as the comments from Lord Rose below indicate he was not always straightforward. That included evasive answers in Parliament. For example, this comment on the nationalisation of Northern Rock: “The essential intention in taking Northern Rock into temporary public ownership was to stabilise the banking system and to reassure people that a deposit placed with a British bank is a safe deposit”. His forceful actions during the banking crisis which resulted in the effective nationalisation of big UK banks were not appreciated by many.

Stuart Rose made extensive comments in an adulatory article in the FT on his work with Myners during the attempted takeover of M&S including this: “The climax of the takeover battle, following the shareholder presentations and the massively attended annual meeting at The Royal Festival Hall, was the final board meeting. Paul’s sure-handed chairing saved the day. Using a combination of wisdom, wit, guile, persuasion and patience we saw off Green’s opportunistic approach”.

BHP Meetings

I watched the General Meetings of BHP Plc (BHP) today where there was a vote for unification of the Australian and UK companies. BHP will retain a UK listing but it will only be a “standard” listing so will no longer be in the FSTE-100. AGMs will only be held in Australia although on-line access will be provided.

This prompted a question regarding future “engagement” with the board from a shareholder who expressed concerns that hybrid AGMs reduced interaction with the directors and made follow-up questions difficult. He was certainly right in that regard. On-line access is not nearly as good as being physically present and clearly most investors will not find it practical to fly to Australia to attend in person. This is one of the few downsides of the unification, but it otherwise makes sense. The result of the voting is still awaited at the time of writing.

Postscript: There was overwhelming support for the unification by both Ltd and Plc shareholders.

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

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Mello Trust Event and Tech Stocks

I attended the Mello Investment Trusts and Funds webinar yesterday (see https://melloevents.com/upcoming-event/mello-investment-trusts-funds-18th-january-2022/ for the programme). This was a useful event for those people like me who like to hold investment trusts as a way to provide diversification in my portfolio and access those markets outside the UK or outside my sphere of competence.

One thing that was very apparent from what some speakers said was that there is a rotation out of high growth technology stocks into more “value” sectors such as commodities. So trusts such as Scottish Mortgage (SMT), Allianz Technology (ATT), Polar Capital Technology (PTT) are now on discounts to NAV when they have previously been on significant premiums. The current discounts on those three stocks according to the AIC are 3.0%, 6.7% and 8.2% which might suggest they are bargains but if you look at the history of discounts on these trusts they vary widely over time (the AIC provides a useful chart of the discounts under the “performance” tab.

Some of the companies held by these trusts have fallen out of favour and this has been magnified by the discounts being affected by the similar lack of popularity of these trusts of late.

Many of the companies they hold are victims of the manic/depressive nature of US stock markets which historically are often more extreme than in European markets. That arises from the nature of the investors and the way the markets operate with low dealing costs, no stamp duty, low taxes and easy margin trading. This encourages speculation so prices can get divorced from reality.

But is the switch away from high growth and technology stocks a short-term trend or a long-term one? Should we be bailing out of the former? My feeling is that maybe prices of some of the stocks favoured by these companies have become over-inflated but that I still feel that they are better long-term bets than the traditional “value” plays. The world has been changing and technology has responded to meet the new challenges. Those companies that will meet the new demands of world markets are the ones where profits will rise in future.

As one speaker said at the event yesterday, investment trusts should be long term holdings. Trading them in response to short-term market moves can be expensive. But private investors can take advantage of the discounts to improve overall performance. Unlike individual company shares, investment trusts should be purchased when they are out of favour and sold when they are in favour as reflected in their discounts to NAV. Don’t be a trend follower in trusts in other words.

Note: the writer holds some of the trusts mentioned.

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

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Cladding Rectification – Persimmon et al.

My first big investment mistake of the year came to light yesterday. In October last year I started to buy a holding in Persimmon (PSN). The outlook for the housing market seemed bright and the company was trading on a prospective p/e of 11 with a yield of 8.6%. Revenue and earnings growth were forecast for the next couple of years.

But Michael Gove yesterday put a spanner in the works of my decision process by announcing that the Government is going to force developers to fix the cladding crisis – initially by persuasion but if they don’t come up with the money by early March there is threat of legislation to force them to act. The share price of Persimmon dropped sharply as a result along with all the major public housebuilders.

In April last year the company said that they were “Committed to undertake fire remedial works on buildings constructed using cladding materials that may no longer comply with current Government guidance and building regulations; £75m fund created to cover developments identified”. In addition the Annual Report said this: “As announced on 10 February 2021, we have therefore decided that for any multi-storey developments we have built, we will ensure that the necessary work to protect residents is undertaken. Where we own the building, we will act to do what is necessary to keep the residents safe. Where we do not own the building, we will work with the owner and offer our support. Ultimately, if the owners do not step up and meet their obligations, we will ensure the work is done to make the buildings safe. To meet this commitment, we have recognised a £75m provision”.

This seems reasonable but the Government is now asking them to do more. In a letter the Secretary of State has asked companies to agree to:

  1. make financial contributions to a dedicated fund to cover the full outstanding cost to remediate unsafe cladding on 11-18 metre buildings, currently estimated to be £4 billion.
  2. fund and undertake all necessary remediation of buildings over 11 metres that they have played a role in developing.
  3. provide comprehensive information on all buildings over 11 meters which have historic safety defects and which they have played a part in constructing in the last 30 years.

See https://www.gov.uk/government/news/government-forces-developers-to-fix-cladding-crisis for the full Government announcement.

How did this devasting situation arise that has left hundreds of thousands of people with unaffordable bills to rectify defects and unsaleable homes? It all stems from the Grenfell Tower fire disaster after which it was discovered that cladding used was inflammable despite it being sold as meeting fire safety regulations. In addition it was found that many buildings had other defects such as inflammable insulation, inflammable balconies, missing fire gaps, or other fire safety defects so the total bill to rectify all affected buildings might reach many billions of pounds.

The Government has already committed £5 billion to rectification work but more is needed to cover buildings up to 18 metres high and big builders are being asked to stump up much of the cost irrespective of whether they were to blame or not. Clearly much of the blame should be assigned to those who manufactured and sold the defective cladding, or even the Government for not imposing and enforcing adequate regulations. Housebuilders are complaining they should not have to foot all the bill.

Will the actions of the Government even fix the problem? The devil is in the detail as it is unclear that the leaseholders will not still be left with bills beyond their means to pay and years of uncertainty while their properties remain unsaleable. One has to have sympathy with their predicament but I also feel that the big housebuilders are being unreasonably targeted. Those who were at fault should certainly pay the cost of rectification but the Government seems to be wanting to bully those with money to pay up by using the court of public opinion, and threats. This is wrong.

The Government should identify who was at fault and assign responsibility in a clear legal and regulatory framework. Otherwise there may be years of legal battles which will not help those who are suffering.

Perhaps the moral of this story is that it is always a mistake to invest in companies that might be affected by Government interference or political whims.

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

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