M&G Property Fund Closed and M&C Saatchi Accounting Problems

The really bad news yesterday for many investors was that the £2.5 billion M&G Property Portfolio Fund had been closed to redemptions. This is of course an open-ended fund where sales of units by investors causes the manager to sell some investments to realise cash to meet those redemptions. The fund holds a number of large retail shopping centres in the portfolio which must be particularly difficult to sell at the present time. The fund has seen withdrawals of over £1 billion in the last year and the fund has recently seen “unusually high and sustained outflows”.

Is this another Woodford Equity Income Fund case where investors are going to be locked in for many months and unable to sell their holdings and ultimately lead to a wind-up or substantial write-down of their investments? The simple answer is quite possibly but there is little they can do about it.

The announcement seemed to have a negative impact on many property shares and trusts even those that are not invested in retail assets. The message that investors should learn from this is that holding illiquid investments in open-funded funds is positively dangerous. The FCA did announce new rules in September to ensure investors were warned about the risks of closure in such funds. But to my mind the simple solution should be to ban such funds altogether. If platforms list such funds, then some fools will buy them regardless of warnings.

This not just relates to property funds, where direct holdings of property are always going to be illiquid because selling buildings always takes time, but holdings of unlisted shares which was another problem that Woodford faced. Even big holdings of small cap listed companies can be difficult to shift rapidly. The realisation by investors in the M&G fund that such funds were positively dangerous might of course have contributed to the large redemptions in the last year.

Another item of bad news yesterday was for holders of shares in M&C Saatchi (SAA), the advertising agency. The share price fell by almost 50% on the day, after the company issued a statement on an “Accounting Review and Trading Update”. It seems that the announcement back in August of “accounting issues” has turned into worse news than expected, rising the total adjustments required to £11.6 million (pre-tax). There will also be a bill of £1 million for the associated accounting and legal work.

Trading is more bad news. The company says “Underlying profit before tax, before exceptional costs, is expected to be significantly below the levels expected at the time of the Company’s interim results due to weaker than expected trading in the final quarter of the year and higher than expected central costs”. In addition there will be a restructuring of the UK office which will cost an additional £2.5 million in exceptional charges.

Part of the problem here is that the advertising world is changing. Much expenditure is moving to social media such as Google Adwords, Twitter and Facebook where creativity is possibly less important. The M&C Saatchi business model seemed to be to take over or build small teams who ran their own accounting system. The company had lots of different local systems which are only now being merged into a common Oracle cloud-based system. The company also announced a change of auditors to PwC.

As I have said before, and in my book, accounts are not to be trusted and what one needs to look at is the business model and their operational systems. In Saatchi the former was vulnerable to market change and the latter were clearly of poor quality.

Can this company recover to its former glory? Perhaps because it claims it will have net cash of £5 million at the end of December. But looking at the last interim results in June indicates a current ratio of only 1.06. Revenue, and cash seem to be falling so this business seems to be subject to rapid changes. Predicting the outcome is not likely to be easy. One for speculators, or only those who have some very deep and current knowledge of the business would be my conclusion.

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

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Santa Rally and Maven VCT Merger

After a very strong upward run in my overall portfolio valuation over the last three weeks, it’s down by 1% today. Does that mean the traditional “santa rally” is over? I do get the impression that the rally happens earlier every year. Are folks wising up to the phenomenon or perhaps they are simply getting paid their Christmas bonuses earlier?

Certainly the racy technology stocks were particularly bouyant of late, leading me to sell a few shares in some of my holdings (“top slicing” to keep them not too large a proportion of my overall portfolio). But selling one’s winners is a very dangerous game to play.

Or perhaps the market has been depressed by other bad news such as the fact that your life expectancy has just been cut by up to 3 years by the Office of National Statistics (ONS). It seems their previous estimates that 34% of newborn boys would reach 100, and 40% of newborn girls would reach that age were wildly optimistic. Or was it some other bad news that caused markets to fall? Both the S&P500 and the FTSE-100 are both down 0.8% at the time of writing so my portfolio is just mirroring national trends it seems. Perhaps the US/China trade battle is hotting up? Sometimes stock markets are just volatile for no great reason other than investors following other investors.

I received notice of a proposed merger between Maven Income & Growth VCT 4 (MAV4) and Maven Income & Growth VCT 6 (MIG6) today. I hold the former but not the latter.

I am usually in favour of VCT mergers as combining them usually means the overhead costs can be reduced as a percentage of the asset value. Administration and management costs are often high in VCTs so combining portfolios can spread the fixed costs over a bigger portfolio and the costs of a merger can be recovered in a few years. The costs of this merger are high at approximately £408,000 but they expect to recover that in 32 months.

MIG6 was previously named Talisman VCT and so far as I recall had a pretty dismal track record. It was effectively bailed out by Maven when they took over management I believe. It’s difficult to see the performance of it since then because it is not a subscriber to the AIC service.

The document received says that “both companies have investments in predominantly the same unlisted private companies (with only 2 exceptions as at the date of this document)….”. But looking at the individual holdings in the two companies in their last annual reports gives me some doubts. They have different year end dates and there is clearly some overlap but they don’t appear to be identical.

I can see why the merger might be in the interests of Maven as the manager, and in the interests of investors in MIG6, but I see little benefit for MAV4 shareholders so I will probably vote against it. But if other investors have any views on this merger, please let me know.

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

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Ted Baker Audit Failure, SRT Marine Big Deals and Population Growth

The bad news this morning for holders of retailer Ted Baker (TED) is that the company has announced an independent review of its inventory. It says it has identified that the value of inventory held on its balance sheet has been overstated. It estimates that the figure is up to £25 million and that it relates to prior years. This looks like yet another audit failure (the auditors are KPMG).

The share price is down 10% today at the time of writing but it’s been falling for a long time so it’s now down well over 80% from its peak at the start of the year. Warnings about its stock holding are not new. This is what the Investors Chronicle had to say in October: “Ted Baker’s stock levels have been a cause for concern. Inventories have grown consistently in recent years, reaching a peak of 37 per cent of revenues at the full year”. For a clothing retailer to hold that much stock seems simply unreasonable. That report came after an unexpected half year loss. I suspect that even worse news may come out in due course.

On Friday an article by Simon Thompson in Investors Chronicle contained a puff for SRT Marine Systems (SRT). This made for interesting reading as I used to hold the stock – sold at 25p in 2012, price now 52p. I sold because of repeated lack of progress and overoptimistic forecasts of big deals in the pipeline. The CEO (he’s still there) seemed to be a perennial optimist and even analysts started to become wary. Revenue and profits jumped around from year to year (big profits in 2019 after losses in 2018) and the share price jumped around similarly. Simply not the kind of company I like to hold.

Has anything changed to cause Simon to tip the share? The basis is a big deal (a “game changing contract worth £31.8 million”) to sell AIS systems for marine surveillance in the Philippines. There are also other similar deals in the pipeline. This is what is says in the recently published Interim Report in which they also reported a major loss: “Most of our system discussions are confidential in nature and usually have a long gestation period due to the nature of a government turning a general idea into a real system with all the necessary regulations, budgets and approvals. Over the last few years, we have followed a very steep learning curve in respect of understanding the realities of the intricacies and complexities of the processes that each of these large contracts must complete prior to SRT being contracted. Whilst predicting timescales remains imperfect, this knowledge now enables us to more accurately characterise system opportunities with regards to their status within a customer’s process and better understand the real time window within which we would expect to be contracted and start implementing an SRT-MDA system. We hope this will reflect in an improving ability to provide market updates on the status of future system contract opportunities”.

Big projects also create big risks though, and soak up working capital. Will they be completed on time and within budget? Will the customers be satisfied and pay on time? I won’t be jumping in to follow Simon Thompson’s tip just yet. I’ll wait to see if the leopard can change its spots.

Another interesting article over the weekend was one by David Miles (Professor of Economics at Imperial College). It was headlined: “Why our rising population will bring with it a decreasing standard of living”. The article argues that with a rising population the country needs to invest more simply not just to maintain the capital asset stock but to cover the demands of the extra population – for housing and transport for example. But the higher the population growth, the less your ability to maintain assets per person unless you raise savings. But that means lower consumption, hence we become individually poorer.

Population growth is certainly a concern of mine, and likewise for many other people who live in the London area. What follows is a article I recently wrote on that subject for another organisation:

London Congestion – It’s Only Going to Get Worse

As anyone who has lived in London for more than a few years probably knows, the population of the metropolis has been rapidly rising. This has resulted in ever worse congestion not just on the roads but on public transport also. The roads are busier, rush hours have extended and London Underground cannot handle the numbers who wish to travel on some lines during peak hours. Even bus ridership has been declining as the service has declined in reliability and speed due to traffic jams.

The Greater London Authority (GLA) has published some projections of future population numbers for the capital and the conclusion can only be that life is going to get worse for Londoners over the next few years.

The current population is about 8.8 million but is forecast to grow to 10.4 million by 2041, i.e. an 18% increase. This increase is driven primarily by the number of births and declining death rates. The relatively high numbers of births in comparison with what one might expect is because London has a relatively youthful population. One can guess this is the case because of the high numbers of migration from overseas which results in a net positive international migration figure while domestic migration to/from the rest of the UK is a net negative, i.e. Londoners are being replaced by immigrants.

But population increase in London does not have to be so. The chart below shows you the trend over the last 100 years and as you can see London has only recently reached the last peak set in 1939. During the 1960s to 1990s the population fell. What changed? In that period there was a policy to reduce overcrowding in London and associated poor housing conditions by encouraging relocation of people and businesses to “new towns”. But when Ken Livingstone took power he adopted policies of encouraging more growth. His successors have continued with those policies and have promoted immigration, e.g. with Sadiq Khan’s “London is Open” policy.

London Population Trend

Many Londoners complain about the air pollution in the London conurbation without understanding that the growth in businesses and population have directly contributed to that problem. More people means more home and office heating, more transport (mainly by HGVs and LGVs) to supply the goods they require, more emissions from cooking, and many other sources. The Mayor thinks he can solve the air pollution issues by attacking private car use and ensuring goods vehicles have lower emissions but he is grossly mistaken in that regard. The problem is simply too many people.

Building work also contributes to more emissions substantially so home and office building does not help. But the demand for new homes does not keep pace with the population growth resulting in many complaints that people have to live in cramped apartments or cannot find anywhere suitable to live at all. Likewise new public transport capacity does not keep pace with the increased demand. There is some more capacity on the Underground but only on some lines and not much while Crossrail which might have helped has been repeatedly delayed.

The economy of London is still buoyant.  But all the disadvantages of overcrowding in London mean that Londoners are poorer in many ways. Indeed if Professor Miles is right, they will be cash poorer as well. Those who can move out by using long-distance commuting or relocating permanently thus leaving London to be occupied by young immigrants.

Any Mayor who had any sense would develop a new policy to discourage immigration, encourage birth control and encourage emigration to elsewhere in the UK or the Rest of the World. But I doubt Sadiq Khan will do so because a poorer population actually helps him to get elected. It’s a form of gerrymandering.

If Sadiq Khan wanted Londoners to live in a greener, pleasanter city with a better quality of life then he would change direction. But I fear only intervention by central Government will result in any change.

Go here for more details of the GLA projections of London’s population: https://data.london.gov.uk/dataset/projections-documentation

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

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Why Shareholders Have Little Influence

There was an article in The Times newspaper this morning by Mark Atherton which covers the subject of shareholder voting and the nominee system. I am quoted as saying “The nominee system needs a total rewrite to reflect modern reality and restore shareholder democracy”.

As is pointed out in the article, only 6% of private shareholders vote the shares they own. This is mainly because of the obstruction of the nominee system. The US system is not perfect but they get 31% of shares voted. Everyone agrees that ensuring shareholders in public companies return votes for General Meetings is important. This ensures good corporate governance and “shareholder engagement”. But very few people, and hardly any institutional investors, actually attend such meetings in person. So most votes are submitted via proxies.

Fifty years ago most shares were held in the form of paper share certificates which meant two things: 1) All shareholders were on the register of the company with a name and address recorded and 2) All shareholders would be issued with a copy of the Annual Report and a paper proxy voting form. This ensured a high turnout of votes.

Due to the growth of on-line trading via “platforms” and the “dematerialisation” of shares in Crest, most shares held by “direct investors” (see below for indirect holdings) are now held in electronic form. For retail investors this means a very high proportion are held in pooled nominee accounts. This has resulted in very low numbers of investors actually voting the shares that they “nominally” own. The problem is that the nominee system obstructs both the information flow to investors and their ability to vote easily and quickly.

For institutional investors the turn-out is higher – typically above 60% but such investors often have a low interest in the outcome so tend to vote in support of all the resolutions. Institutions suffer from the “agency problem”, i.e. they are commonly not owners in their own right and thus may have other motives. For example, they may not have the same interest in controlling the pay of directors in companies which has got out of hand of late for that reason. They are keen to retain access to management which can be made difficult if they oppose management proposals or pay.

The nominee system as operated in the UK also undermines the rights of shareholders, creates major problems when stockbrokers go bust (as they regularly do) simply because of the legal uncertainty of who owns the shares. The “pooled” nominee system is particularly dangerous because it means that it is impossible to know who owns which shares in a company.

The nominee system also undermines shareholder democracy (i.e. the influence of shareholders on companies). When every direct investor was on the share register of a company, under the Companies Act one has the right to obtain the register so as to write to all shareholders to raise your concerns or invite support or resolutions (e.g. if a requisition to remove or add directors has been submitted). This is now almost impossible to do as the register simply contains mainly a list of nominee names and the nominee operator will not pass on communications to their clients. The other problem associated with the current system is that it makes it very difficult for even the companies themselves to communicate with their own shareholders.

The high cost of postage also now frustrates communication with shareholders except for very wealthy organisations or individuals. The Companies Act has really not been updated to reflect the modern digital world and the reality of how markets operate and how shares are now held and traded via electronic platforms. It needs a total rewrite to reflect modern reality and restore shareholder democracy.

Many investors and savers now hold shares indirectly via their interest in pension funds, insurance funds or mutual funds of various kinds (OEICS etc).

At the end of 2014, and based on “beneficial” ownership, the Office of National Statistics indicated that individuals held 11.9% by value of shares listed on the LSE. That compares with 16.0% held by pension funds, insurance companies and other financial institutions. But 53.8% of shares were held by foreign investors, which presumably would also be mainly held by institutions. Direct ownership had been falling for many years but seems to have increased somewhat lately perhaps due to more interest in “self-select” ISAs.

Institutions do suffer from the “agency” problem mentioned above and the underlying investors have little influence over the actions of the investment managers. Indeed one problem with funds is that investors often know little about what the fund is invested in – see the recent problems at the Woodford Equity Income Fund for example which most holders of the fund simply did not know about until it was too late. Pension funds are even less “transparent”. This results in perverse outcomes. For example a trade union pension fund might have no influence on the affairs of companies in which the fund is invested even though that might be of very direct interest to the union members.

Mark Atherton suggests investors in funds should have the right to influence how fund managers vote the shares in the fund. But how to enable underlying investors in funds to influence how the fund manager votes their shares, or otherwise influences a company, is an exceedingly complex and difficult problem. Funds can own interests in hundreds of companies and have hundreds of thousands of underlying investors. The latter are never likely to understand or take a close interest in the affairs of individual companies held by a fund. One reason they are investing in funds is so they can ignore the details and rely on the fund manager to look after corporate governance issues.

Even direct investors often don’t bother to vote because they don’t wish to spend time considering the issues or filling out the forms. Making it easier to do the latter by providing on-line voting systems would help but would only be a partial solution. Some collective representation of private investors (such as by organisations such as ShareSoc) might be one answer. Investors would simply give ShareSoc a standing mandate to represent them. But that is currently impossible because of the nominee system as the investors cannot appoint proxies themselves – only the nominee operator can do so.

Clearly it would help to encourage direct investment rather than reliance on funds. This would reduce investors costs (intermediation costs take a very high proportion of investment returns in public companies). Note that the risk of amateur investors underperforming the professionals should be discounted. Professional fund managers mostly perform no better than a monkey with a pin and many funds are now “tracker” funds that simply follow an index. Tracker funds are particularly problematic regarding shareholder democracy as they have no interest in influencing management whatsoever. Their share trading is solely influenced by the market, not by their views on the merits of the company or its management.

The UK, although we have one of the largest stock markets in the world, has very poor legal and operational systems for recording and representing shareholder interests. This probably has arisen from our tendency to stick with Victorian traditions when we were the leader in such matters. The Companies Act, which was last revised in 2006, still primarily assumes paper processes with rather half-baked additions to support digital systems. Stockbrokers have avoided regulation and as a result have implemented electronic nominee systems that protect their own interests rather than that of their clients in ensuring shareholder rights and democracy.

Major reform is needed!

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

More information:

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

De La Rue, Excessive Debt, Victoria and Link’s Debt Monitor

Link Asset Services have issued a note pointing out that De La Rue (DLAR) has net debt that now exceeds its market cap. The high debt in the company and recent falling revenue no doubt accounts for much of the recent fall in the share price, although the report of an investigation by the Serious Fraud Office (SFO) cannot have helped. But if you read the last interim report which was issued a couple of days ago, there are lots of other points that might put you off investing in the company. For example, it declares the business is in “turnaround” mode so restructuring is being accelerated, and that all of the Chairman, CEO, senior independent director and most of the executive team have left or resigned in the period.

How do you judge whether a company has excessive debt? There are two simple ratios which I look at for companies. The Current Ratio (current assets divided by current liabilities) and the interest cover (operating profits divided by net interest paid). For operating businesses I prefer to see a current ratio higher than 1.4 and interest cover of several times.

Why because companies go bust, or have to come to some accommodation with their bankers or raise urgent equity finance – all of which can be very damaging for equity shareholders, when they run out of cash. A low current ratio or low interest cover means that any sudden or unexpected decline in revenue and profitability can mean they get into financial difficulties. They simply have no buffer against unexpected adversity.

De La Rue’s Current Ratio is only 0.63 according to Stockopedia and as there were negative profits (i.e. losses) in the half year the Interest Cover is zero.

There are some exceptions to the Current Ratio rule so sometimes it is necessary to look more closely at the reasons for a low figure, but De La Rue just looks like a business in some difficulty.

Link Asset Services’ note also points readers to their Debt Monitor (see https://www.linkassetservices.com/our-thinking/uk-plc-debt-monitor ) which gives a comprehensive overview of the indebtedness of UK listed companies. They point out that it has risen by 5.8% to a new record of £433 billion. For comparison that’s only just higher than the Labour Party proposes to borrow for its “Infrastructure Fund”! But it’s worth pointing out that the FTSE is dominated by relatively few very large and traditional companies. They have probably been using financial engineering to enable them to maintain dividends and the result is higher debts. Or they are dedicated to the mantra of having an “efficient” balance sheet where there is significant debt so as to maximise shareholder returns, and have been buying back shares using debt.

Debt has become easier to obtain after the financial crisis of 2008/09 when banks were reluctant to lend at all. Interest rates have also come down making debt very cheap for those with good credit ratings and good security. It’s worth reading the Link Asset report to see which major companies and sectors have the most debt.

In smaller companies, particularly technology companies, there tends to be much less debt partly because they have few fixed assets against which to secure cheap debt. So they find equity less costly and more readily available. Or perhaps they just have more sense in realising that business is essentially uncertain so equity is preferable to debt.

There is relatively little debt in the companies in which I am invested (De La Rue is definitely not one of them) with one exception which is Victoria (VCP). If you wish to be convinced of the wonders of debt financing read the comments of Victoria’s CEO Geoff Wilding in their last Annual Report. In such companies one has to have faith in the management that they can control the risks that come with high debt levels. But most investors get very nervous in such circumstances which is probably why it’s only on a p/e of 10 (and my personal holding is relatively small). That’s so even though it has a Current Ratio of 1.8 and Interest Cover of 1.2 – the latter is too low for comfort in my view.

Of course it depends whether this is a temporary position (say after an acquisition) and how soon the debt is likely to be repaid. So you need to look at the cash flows. In the case of De La Rue it was minus £42 million in the half-year before investing/financing activities which is yet another negative sign, but it was a positive £38 million at Victoria in their half-year results announced on the same day. Clearly two very different businesses!

Note that there are some other financial ratios that you can look at to see the risk profile of a company but as always, a few simple things that you actually pay attention to plus getting an understanding of the business trends are to my mind more important.

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

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

 

The Political Manifestos and their Impacts on Investors

Here are some comments on the manifestos of the major political parties, now that they are all available. I cover specifically how they might affect investors, the impact of tax changes and the general economic impacts. However most readers will probably have already realised that political manifestos are about bribes to the electorate, or to put it more politely, attempts to meet their concerns and aspirations. However in this particular election, spending commitments certainly seem to be some of the most aggressive ever seen.

Labour Party: I won’t spend a lot of time on this one as most readers of this blog will have already realised that financially it is very negative for the UK economy and for investors. It’s introduced with the headline “It’s time for real change”, but that actually seems to be more a change to revert to 1960s socialism than changes to improve society as a whole. It includes extensive renationalisation of water/energy utility companies and Royal Mail, part nationalisation of BT Group and confiscating 10% of public company shares to give to employees. It also commits to wholesale intervention in the economy by creating a £400 billion “National Transformation Fund”. That appears to include a commitment to revive declining industries, i.e. bail-outs of steel making companies one presumes.  It includes promises to invest in three new electric battery gigafactories and four metal reprocessing plants for steel and a new plastics remanufacturing industry “thus creating thousands of jobs”. This is very much old school socialism which expected that direct intervention in the economy could create new industries and new jobs, but it never really worked as Governments are inept at identifying where money should best be invested. Companies can do that because they have a keen interest in the return that will be made while civil servants do not.

The best comment on the BT proposals was in a letter to the FT by the former head of regulator OFTEL Sir Bryan Carsberg. He said his memory was clear about the shortcomings of BT before privatisation even if many other people do not remember. The lack of competition meant that the company had no incentive to improve efficiency or take advantage of new technological developments. Monopolies are always poor performers in essence.

Trade union law will have the clock turned back with a new Ministry of Employment Rights established. Incredibly there is a commitment to “introducing a legal right to collective consultation on the implementation of new technology in workplaces”. Clearly there are some Luddites in the Labour Party. The more one reads their manifesto, the more it reminds you of years gone by. This writer is old enough to remember the Harold Wilson speech on the “white heat of a scientific revolution” by which he intended to revitalise the UK economy. It only partly happened and at enormous cost. In the same speech he also said that there was “no room for Luddites in the Socialist Party” but that has changed apparently. The manifesto includes a very clear commitment to “rewrite the rules of the economy”. A rise in the minimum wage might also damage companies.

The cost of financing all the commitments is truly enormous, and that is not even taking account of the £58 billion just promised to restore pension commitments lost to some women due to rises in their pension age which is not in the manifesto. Taxes will need to rise substantially to finance all the commitments – that means increases in corporation tax which may damage business, and rises in capital gains tax to equalise it with income tax plus higher rates of income tax for high earners.

But the real damage to UK investors will be the wholesale intervention in the economy in the attempt to create a socialist paradise. And I have not even covered the confusion and contradictions in Labour’s Brexit policy which is downplayed in their manifesto.

Conservative Party: The other main parties are all focusing on Brexit so the Conservative’s title headline in their manifesto is “Get Brexit Done – Unleash Britain’s Potential”.  In comparison with the other parties it is relatively fiscally conservative with no major changes to taxation but some commitments on spending.

Many of their commitments, such as on longer-term social care funding, are subject to consultation but there are some short term increases in that, and for education, for the Police and for the NHS.

Immigration will be restricted by introducing an Australian-style points-based system. This might impose extra costs on some sectors of the economy, but may result in more investment in education/training and more capital investment. This might well increase productivity which is a major problem in the UK.

There is a commitment to invest £100 billion in additional infrastructure such as roads and rail. That includes £28.8 billion on strategic and local roads and £1 billion on a fast-charging network for electric vehicles. Compare that though with the cost of £81 billion now forecast in the manifesto for HS2 a decision on which is left to the Oakervee review.

It is proposed to “review and reform” entrepreneurs tax relief as it is not apparently meeting objectives. There will be further clampdowns on tax evasion and implementation of a Digital Services Tax already planned for 2020.

Reforms are planned to insolvency rules and the audit regime which must be welcomed, but details of what is planned are minimal. They also plan to “improve incentives to attack the problem of excessive executive pay and rewards for failure”. It will be interesting to see how that is going to be done in reality.

There is a plan to create a new independent “Office for Environmental Protection” which will introduce legal targets including for air pollution. This could be very expensive for both companies and individuals. The Government has already committed to a “net zero” carbon target by 2050 but Cambridge Professor Michael Kelly has said that the cost of decarbonising the economy has been grossly underestimated. He has suggested the cost should run into trillions of pounds. But again there are few details in the manifesto on how these commitments will be implemented in practice. Nobody really knows what is the real cost of such a policy.

There are though firm commitments to review the Fixed Term Parliament Act, to retain the “first past the post” voting system, to improve voter identification and reduce fraud, and to avoid Judicial Reviews being used to undermine political democracy. They also commit to review the workings of Parliament – this might lead to a written constitution which this writer thinks is sorely needed to avoid a repeat of recent events which led to gridlock in Parliament and allegedly partisan decisions by both the Speaker and the Supreme Court.

With promises not to increase income tax, VAT or National Insurance (a “triple-tax lock” in addition to the expensive triple lock on pensions which will be retained) this is generally a positive manifesto for most investors and apart from the issues mentioned above should be positive for the economy. A Conservative Government might also restore confidence in overseas investors which may well account for the recent pick-up in the stock market indices as the Conservatives look like they are heading for a significant majority. Such an outcome will also remove some of the uncertainty, if not all, over Brexit which will give more confidence to UK businesses to invest in the future.

In summary the Conservative manifesto is likely to please many and displease few (apart from those opposed to Brexit) so it could be seen as a “safe bet” to avoid any last-minute popularity reversal as happened at the last general election.

The minority parties are losing votes in the polls as they always do when a general election looms and the public realise that there are only two likely candidates for Prime Minister – in this case Jeremy Corbyn and Boris Johnson. Is that a question of whom the public trusts? This was an issue raised in one of the recent panel debates but I think nobody trusts any politicians nowadays. It is more a question of whom the voters personally like as regrettably hardly anyone reads the manifestos.

But here’s a brief view of the minority parties’ platforms:

Brexit Party: Their manifesto (or “Contract with the People” as they prefer to call it), is definitely sketchy in comparison with the two main parties and is many fewer pages in length. They want, unsurprisingly, a “clean-break Brexit”, and they want a “political revolution” to reform the voting system.

They would raise £200 billion to invest in regional regeneration, the support of key sectors of the economy, the young, the High Street and families. Note the traditionally socialist commitment to support “strategic industries”. The £200 billion would be raised by scrapping HS2, saving the EU contribution, recovering money from the EIB and cutting the foreign aid budget, although I am not sure that adds up to £200 billion.

They would scrap Inheritance Tax and scrap interest on student loans and cut VAT on domestic fuel which will all be quite significant costs. They also promise more investment in the NHS but so do all the other parties – at least there is a consensus on that point.

The Liberal Democrat Party:  They have clearly decided their vote winning approach will be a commitment to stop Brexit, i.e. revoke Article 50. They have a strong endorsement of “green” policies and propose a new tax on “frequent-flyers”. That might include Jo Swinson herself it seems as she has taken 77 flights in 18 months according to the Daily Mail.

Two unusual commitments are to legalise cannabis and freeze all train fares (rather like the freeze in London on bus and Underground fares which has resulted in a £1 billion deficit in TfL finances, but even more expensive no doubt).

Corporation Tax would revert to 20% and Capital Gains tax will be unified with income tax with no separate allowances so private investors would certainly be hit.

The Scottish Nationalist Party (SNP) are focusing on another referendum for an independent Scotland as usual, an unrealistic proposition as no other party is supporting that and it would be make Scotland much poorer, plus a ragbag of populist commitments. They clearly oppose Brexit.  As most readers will not find an SNP candidate standing in their local constituency I shall say no more on the subject. You can also go and read their manifesto on the web where it is easy to find all the party manifestos. Likewise for the Welsh and Irish leaning parties.

In summary, this election is somewhat of a no-brainer for investors unless they feel that the Boris Johnson version of Brexit is going to be very damaging for the UK economy, in which case they have a simple choice – vote LibDem or SNP as Labour’s position is too confusing. Alternatively they can play at “tactical voting” to get the party they want info power. There is more than one tactical voting web site to advise you which is the best alternative option but be wary – they seem to be run by organisations with a preconceived preference.

If readers consider I have missed out anything important from this analysis, please let me know.

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

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

General Meeting Requisition at Allied Minds

Crystal Amber Fund (CRS) have requisitioned a General Meeting at Allied Minds (ALM). Allied Minds is an investment company that invests in technology and life science businesses such as university spin-outs focused on the USA.

Crystal Amber aim to remove most of the board of Allied Minds and appoint two new directors. They claim the board has not acted in the best interests of shareholders with excessive HQ costs, insufficient excess cash distribution to shareholders and failure to deal with the excessive discount to net asset value (currently over 40%).

They also criticise the management incentive scheme that pays out 10% of gains on individual holdings while ignoring losses incurred across the whole portfolio. Comment: this is the kind of incentive agreement seen in some VCTs to which I have always objected as it’s simply irrational.

You can read more about the reasons for the requisition in an RNS announcement from Crystal Amber. There has been no reaction at the time of writing from Allied Minds.

Comment: Looking at the historic track record of Allied Minds this has been a less than successful company. The share price peaked at 700p in mid-2015 after listing in 2014 and is now about 50p. I always favour such requisitions when companies clearly need a revolution and regret that we do not see them more frequently. Engagement behind the scenes, as was apparently attempted by Crystal Amber, is rarely successful in achieving substantial change. Shareholders can make their own mind up about the votes at the General Meeting but they should also urge the board of Allied Minds not to waste a great deal of money (i.e. shareholders’ funds) on defending against it. That often happens in such circumstances.

Note: I have had never had an interest in either company.

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

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.