Year End Review – Better than Expected

As I have published in previous years, here is a review of my own stock market portfolio performance in the calendar year 2020. I’ll repeat what I said last year to warn readers that I write this is for the education of those new to investing because I have no doubt that some experienced investors will have done a lot better than me, while some may have done worse.

One feels wary of publishing such data because when you have a good year you appear to be a clever dick with an inflated ego, while in a bad year you look a fool. Consistency is not applauded on social media. But here’s a summary of my portfolio performance which turned out to be a lot better than expected earlier in the year.  Total return including dividends was up 10.7% which I consider a very good result bearing in mind that the FTSE All-Share was down 12.5% which I use as my benchmark (the latter figure does not include dividends though). It was helped by having significant US holdings and technology company holdings via investment trusts and funds. Dividends received were down by about 17% as many companies reduced their dividends or cut them altogether.

It was partly a good year because I had no bad failures but when you have a large number of holdings, as I do, then there are always one or two disappointments. The worst loss was on trading in the shares of 4Imprint (FOUR). This is an AIM listed seller of promotional products, mainly in the USA. In March I was reducing my stock market holdings, particularly in those companies that were being badly affected by the pandemic or seemed likely to be. The share price of FOUR was 3480p at the start of the year and I sold a large proportion of my holding at about 1390p (i.e. near its bottom). The share price has since recovered to 2565p so that’s a good example of the volatility of small cap stocks when everyone wants to get out, or how it is foolish to exit prematurely when the news appears bad. I chose not to buy back into the shares of FOUR but instead chose other companies, particularly investment trusts that had moved to high discounts. That partly compensated but not altogether.

My holdings in investment trusts focused on technology or US markets did particularly well such as Polar Capital Technology (PCT) – share price up 43% during the year, Scottish Mortgage (SMT) – share price up 107%, or Fundsmith Equity Fund – share price up 19%.

I avoided big FTSE-100 companies such as banks, insurance companies, pharmaceuticals and retailers which was all to the good, although I did make money on miners BHP Group (BHP) and Rio Tinto (RIO). Only minor aberration was a punt on AstraZeneca (AZN) which I rapidly exited.

My portfolio also includes some Venture Capital Trusts (VCTs) which would have generated a less good overall return because they tend to be vehicles for turning capital into tax free dividends. As usual they mainly showed small capital losses although two VCTs focused on AIM stocks (Amati and Unicorn) did relatively well for the second year running so the overall result was a small capital profit. My own AIM portfolio holdings were a very mixed bunch with technology companies showing a good profit but others showing losses as small caps generally fell out of favour. I analyse in detail the profits and losses on all my individual holdings during the year so as to try to learn from my mistakes. But last year was dominated by a rush to safe havens and into stocks that might benefit from the epidemic so it undermined my previous choices and required some rapid portfolio re-allocations during the year.

What will happen in the coming year for stock markets? I have no idea and simply prefer to buy good companies and hold them for as long as it makes sense to do so. But certainly the discounts, or premiums, on investment trusts in popular sectors seem to suggest some optimism for the future when surely western economies are going to be severely damaged. Meanwhile Governments are borrowing in a very big way to keep their economies afloat (or printing money to do so) while taxes are surely to rise to cover the cost of the pandemic. The stock market has become detached apparently from the real-world economy which cannot bode well for the future. But that’s not necessarily a basis for making decisions about stock market investment where investors have longer time horizons and still expect the epidemic to be under control this year.

But some things may permanently change as we have become used to doing more on-line shopping, working from home, travelling less and getting our education on-line. Those are the trends that one should follow I suggest. Plus of course the movement to improve the environment and halt global warming which is requiring substantial changes to the UK and other economies. But one has to be very careful about enthusiasm for “hot” market sectors – they often turn out to be flashes in the pan.

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

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Stock Market Rally and Improving Market Regulation

The free trade deal with the EU has finally been settled. It just needs passing in the UK Parliament and ratification by the EU which is expected to occur without difficulty. Boris Johnson has good reason to celebrate because he has achieved almost all his objectives and got a deal that many thought would be impossible. From the 1st January, when the EU exit “transition period” ends, we will no longer be subject to EU laws.

This is a very satisfactory outcome so far as I am concerned as we will escape the horrible bureaucracy of the EU and once again be a truly independent nation. EU laws will not automatically be translated into UK law. We will maintain alignment on some matters such as labour rights, but we will have the ability to diverge to some extent. And there is an agreement on a new framework for the joint management of fish stocks which was being argued about until the last minute apparently.

For the UK, it gives us potential opportunities such as trade deals with other countries that we could not do as part of the EU. This is truly a historic moment in history and should reinvigorate UK politics. 

All we need now is to get the Covid-19 pandemic under control. To quote Judy Garland from the film “Meet Me in St. Louis” which I watched yet again over Xmas: “Have yourself a merry little Christmas, next year all our troubles will be out of sight…”. Let us hope so.

The AstraZeneca vaccine has been approved by the UK regulator so a massive expansion of vaccinations is now expected to commence. It is hoped this will control the epidemic by the spring. The stock market continues to rise based on the positive Brexit free trade deal, the vaccine news and a massive stimulus to the US economy by the Government sending cheques to everyone. My portfolio is now ahead of where it was at the start of the year which is somewhat surprising after such a turbulent year – more analysis may follow when I have done my full end of year analysis which takes me some time. Some shares were so buoyant of late, particularly investment trusts where discounts have narrowed, that I sold a few shares this morning. (P.S. – only from ISAs where no tax on the gains will be payable. Trading investment trust shares on short term horizons is rarely a good idea).

On the issue of stock market regulation, there was an article in this week’s Investors Chronicle by James Deal, the COO or Primary Bid. That company aims to enable private shareholders to take part in share placings from which they are normally excluded. As such placings are often at substantial discounts to the market share price, private investors miss out. They also get diluted.

The article mentions the £8 million cap on “undocumented” deals (i.e. ones without a prospectus) imposed by the EU’s Prospectus rules. The writer says “Brexit affords policy makers an opportunity to revisit this cap”. That’s one of many EU Directives that have been translated into UK law in the last few years. The Shareholder Rights Directive is another one that has been poorly thought through in terms of applicability to UK investors.

EU Directives are frequently excessively complicated as a result of trying to meet the needs of 27 EU countries all with different financial traditions. Let us hope that Brexit enables the UK to look again at many aspects of stock market regulation and the rights of individual shareholders.

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

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Boom and Bust Book Review

Avoiding buying into the peak of booms and selling at the bottom of a bust is one of key skills of any investor. But what causes them? The recently published book entitled “Boom and Bust” by academics William Quinn and John D. Turner attempts to answer that question by a close analysis of historical market manias.

I found it a rather slow read to begin with but it proved to be a very thorough and interesting review of the subject. It covers bubbles through the ages such as the Mississippi and South Sea schemes back in the seventeen hundreds, through the railway and cycle manias plus Australian land boom of Victorian times to those in more living memory. That includes the Wall Street boom and 1929 crash, the Dot.com bubble of the 1990s and the sub-prime mortgage crisis in 2007/8.

The latter resulted in a world-wide financial crisis with particularly damaging effects in the USA and UK. Banks had to be bailed out and bank shareholders lost their lifetime savings. But the dot.com bubble had relatively minor impacts on the general economy.

I managed to sell a business and retire as a result of the dot.com bubble at the age of 50 because it was obvious that IT companies in general had become very highly valued. Software and internet businesses with no profits, even no sales, had valuations put on them that bore no relation to conventional valuations of businesses and forecasts of future profits were generally pie in the sky. One of the things the authors point out is that insiders generally benefit from booms while inexperienced retail investors and unwise speculators with little knowledge of an industry are often the losers.

How are bubbles caused? The authors identify three big factors which they call the “bubble triangle” – speculation, money/credit and marketability. The latter is very important. For example, houses owned by occupiers tend to be part of markets that are sluggish and not prone to volatility as buying and selling houses is a slow process. But when sub-prime mortgages were created a whole new market was brought into being where mortgages could be easily traded. At the same time, the finance for mortgages was made easier to obtain.

The latter was by driven by political decisions to encourage home ownership by easier credit and by the relaxation of regulations. Indeed it is obvious from reading the book that politicians are one of the major sources of booms. Governments can easily create booms, but they then have difficulty in controlling the excesses and managing the subsequent busts.

The Dot.com boom was partly driven by technological innovation that attracted the imagination of the public and investors. It might have contributed positively to the development of new technologies, new services and hence to the economy, but most companies launched in that era subsequently failed or proved to be poor investments in terms of return on capital invested. Amazon is one of the few success stories. As the book points out, market bubbles tend to disprove the theory that markets are efficient. It is clear that sometimes they become irrational.

There are particularly good chapters in the book on the Japanese land bubble in the 1980s and the development of China’s stock markets which may not be familiar to many readers.

The authors tackle the issue of whether bubbles can be predicted and to some extent they can. But a good understanding of all the factors that can contribute is essential for doing so. Media comments can contribute to the formation of bubbles by promoting companies or technologies but can also suppress bubbles if they make informed comments. But this is what the authors say on the Bitcoin bubble and the impact of social media and blogs: “The average investor was much more likely to encounter cranks, uninformed journalists repeating the misinformation of cranks, bitcoin holders trying to attract new investors to increase its price and advertisements for bitcoin trading platforms”. They also say: “Increasingly the nature of the news media is shifting in a direction that makes it very difficult for informed voices to be heard above the noise”.

Incidentally it’s worth reading an article by Phil Oakley in the latest issue of Investors Chronicle entitled “Tech companies still look good”. He tackles the issue of whether we are in another Dot.com era where technology companies are becoming over-valued. His conclusions are mixed. Some big established companies such as the FANGs have growing sales and profits and their share prices are not necessarily excessive. But some recent IPOs such as Airbnb look questionable. Tesla’s share price has rocketed up this year but one surely needs to ask an experienced motor industry professional whether the valuation makes sense or not.

The authors suggest that buying technology shares can be like a casino. Most of the bets will be losing ones but you may hit a jackpot. I would suggest you need to pay close attention to the business and its fundamentals when purchasing shares in such companies.

In conclusion the book “Boom and Bust” is well worth reading by investors, and essential reading for central bankers and politicians!

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

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The Season of Goodwill – But Not Everywhere

As this is may be my last blog post before the New Year, other than a review of the book “Boom and Bust” which I have just finished reading, I would like to wish all my readers a Happy Christmas and best wishes for the New Year. It cannot be a worse one than this year surely!

In this traditional season of goodwill, it seems rather thin on the ground of late. The French have blocked lorries from crossing the Channel ports because they apparently fear the spread of the new Covid-19 strain. The result is that at least 150 trucks are queued up on the M20 in Kent with more spread around the country. On a normal day as many as 9,000 lorries cross the Channel and there is a fear we might run out of lettuce and strawberries over the holidays.

In reality the French are mainly blocking their own countrymen and other European truck drivers from returning home for Christmas. They will be stuck on the motorway with no toilets or other services. How uncharitable is that! And it’s all pointless as the new virus strain is undoubtedly already widespread on the Continent.

Meanwhile the Brexit free trade negotiations are still stuck on arguing about fish. Let us be generous in this season of goodwill and let the French have some cod, haddock and mackerel which can swim over the border anyway. They have for hundreds of years traditionally fished in English waters so to abruptly kick them out along with the Spanish and other European fishing fleets just seems spiteful when we otherwise might get what we want from a trade agreement. It’s not being fair to put much of the French fishing industry out of work on New Year’s Day for the sake of a principle.

We need a new Entente Cordiale and to stop this petty bickering.

Have a good Xmas.

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

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Seminar on Woodford Legal Case

Yesterday evening I attended a webinar hosted by ShareSoc on a proposed legal action over the substantial losses suffered by investors in the Woodford Equity Income Fund (WEIF). It was chaired by Mark Northway and Cliff Weight with other speakers being Boz Michaelowska from legal firm Leigh Day and David Ricketts. The latter is a financial journalist who has written a book entitled “When the Fund Stops” which covers the past events at the Woodford funds and which will be published in the New Year. It is already available to pre-order.

Leigh Day have identified a case against Link Fund Solutions, the Authorised Corporate Director (ACD) for the fund and which is part of a large financial group (Link).  Leigh Day’s investigations lead it to believe that Link allowed WEIF to hold excessive levels of illiquid or difficult-to-sell investments, and that this caused investors significant loss. In doing so, they consider Link breached the rules of the FCA Handbook and failed to properly carry out the management function of the Woodford Equity Income Fund.

This writer never personally held any of the Woodford funds, but having been involved in two previous large legal actions (over Northern Rock and the Royal Bank of Scotland), it was interesting to hear about this one. ShareSoc is endorsing and supporting the Leigh Day case and is providing a discussion forum for investors – see https://www.sharesoc.org/campaigns/woodford-campaign/ . They are taking up other issues not covered by the legal claim such as the failure of regulation to prevent the collapse of WEIF.

Some 600,000 investors were affected by the closure and wind-up of WEIF and have lost very substantial sums of money – over 25% of what they invested based on some calculations over a few years, in a period when the stock market was otherwise booming. As much as £1 billion in losses were suffered. The decline and eventual closure of WEIF was driven by investment in small cap, often unlisted, companies which proved very difficult to sell and could be considered unwise investments to begin with.

Leigh Day seem to be putting together a sound legal structure required for such an action – a Group Litigation Order, with after the event insurance to protect claimants with a “no win, no fee” financial structure and support from litigation funders. The latter and the associated costs mean that claimants, even if the case is won, will only receive about 70% of the proceeds, even assuming Link can pay which is not clear.

However, investors in WEIF have little to lose from supporting this legal claim although Leigh Day have not yet disclosed the details of their claim.

Note that they are not at present pursuing Neil Woodford, nor his fund management company, nor Hargreaves Lansdown who actively promoted the Woodford funds. Nor are they pursuing a case over investment in the Woodford Patient Capital Trust now taken over by Schroder (NAV down 73% in the last 5 years).

But there are several other legal firms mounting cases over the Woodford funds who might be covering other claims. As I experienced in the past legal cases in which I was involved, lawyers are keen to get involved as they see potential fees of several millions of pounds in the pipeline from pursuing such cases.

Note that investors might also consider a complaint to the Financial Ombudsman which might be an alternative route to redress.

Comment: The ShareSoc seminar provided a very clear exposition of the legal case and past events. It is good to see that ShareSoc is not backing off from involvement in legal claims where they have examined the case carefully and have some assurance that it is being well managed.

My view is that investors in WEIF should support the Leigh Day claim and should register their interest, but they need to be aware that such legal actions are always uncertain and can take many years to come to a conclusion. But if the case focusses on the role of Authorised Corporate Directors (ACDs) that might ensure that they take more care in future to monitor the activities of individual fund managers.

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

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Mello Meeting Report, Stopping Market Abuse and FRC Fraud Meeting

So far this week I have attended a couple of webinars. These are now getting totally out of hand now that folks have realised they are so easy to set up. I seem to have at least one lined up every day recently and sometimes as many as three. This can get very tedious if they last more than a few minutes each.

The first one I attended on Monday was the Mello meeting and I dropped out after a couple of hours so can only report on the first two sessions. The first one was Keith Ashworth-Lord and a colleague in Sanford DeLand Asset Management talking about their Buffettology Fund. Keith is always worth listening to as his approach to investment very much the same as mine, although I don’t actually hold the fund as I prefer investment trusts. The Buffettology fund has a great performance record, and is of course based on the investment style of Warren Buffett.  

One interesting comment he made was “one day we will stop investing in retail – probably now”. His key tips for investors were “do your research” and “monitor the delta” (i.e. the changes in financial ratios).

It was disappointing that the company did not manage to launch a new small cap investment trust, but they tried to do so when nobody was buying anything in the market. Shares might have been cheap then and have since recovered so it was a missed opportunity.

Of course like all fund managers Keith talked his own book, i.e. promoted the merits of his holdings, some of which I also hold. Keith was of course very careful in what he said – no direct encouragement to buy the shares. But this is a form of market abuse of course, in the same way as the shorting brigade rubbish the holdings where they are short by publishing derogatory articles. It has occurred to me that one way to stop both the approaches is to introduce a simple rule that nobody (person or company, or their associates) can publish articles or talk about companies in which they have an interest. That would surely stop both the positive and negative promotions.

That would of course imply that only independent journalists and media could comment on stocks or funds. Would that be a bad thing?

Some people argue that those who short stocks and publish derogatory articles on companies at the same time are doing a public service in bringing to the attention of the public the issues, and without them the problems might go unreported. But that is not necessarily so – see the reporting by the FT on Wirecard for example.

The second Mello session was a presentation by Sumo Group (SUMO), a video game development company which was new to me. There is a big demand for their services, revenue has been growing rapidly and financially the profits also now look good. It’s worth looking at their web site for examples of some of their work. They are clearly operating in a growth sector.

But I have my concerns. Do they have any IP or barriers to entry? Not apparently so. It also looks a very labour-intensive business, dependent on recruiting skilled developers. At the same time they seem to be mainly sub-contractors to game publishers, rather than owning their own games. Also they appear to have a “project” based business model which I never like. This is the kind of business that does well when demand is strong, but can come a cropper when it fades away.

Yesterday I attended a presentation by the Financial Reporting Council (FRC) on a revision of Audit Standards to assist the detection/prevention of fraud. This was a joint UKSA/ShareSoc promoted event. The main presenter was James Ferris.

The intention is to remove the ambiguity over auditor responsibility to identify fraud, and not just a director responsibility (because as one person pointed out, sometimes the directors are complicit in a fraud as happened at Patisserie and in other companies).

These changes to the relevant audit standard might be helpful but there is also the question of increasing the obligations of directors to identify and prevent fraud – this is an issue the Government is considering.

Mr Ferris said that auditors need to generally develop more fraud awareness which one cannot dispute.

There is a public consultation on this matter which has recently been published and which you may care to respond to – see https://www.frc.org.uk/news/october-2020/consultation-on-revised-auditing-standard-for-the . The first document mentioned there contains useful appendices on how to identify fraud.

I consider most of the proposals therein to be sensible, but of course prevention is better than cure. Auditors are unlikely to detect fraud until they have been running for some time, and the money extracted may have long disappeared. Tougher penalties for corporate fraud and the publishing of false accounts are also needed.

Finally we seem to be heading into the normal pre-Xmas market boom that happens most years. This has been accentuated by many people not being able to spend on shopping, holidays, restaurant meals, etc, so the savings ratio has gone up (less spending, more saving). With deposit interest rates at record lows, a lot of money has clearly gone into the stock market. The hope of a Brexit free trade deal at the eleventh hour is also boosting optimism while the economic impact and high Government borrowing associated with the epidemic and lock-downs is ignored.

I think I’ll stand aside from this market euphoria as I am already fairly fully invested.

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

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Companies House Changes – 3 Consultations, and Banning Short Selling

The Government has issued three public consultations covering these subjects:

  1. Improving the quality and value of financial information on the UK companies register.
  2. Enhancing the powers of the registrar.
  3. Implementing the ban on corporate directors.

These follow on from a previous consultation entitled “Corporate Transparency and Register Reform” which contained proposals to reduce fraud and improve transparency, and which I reported on here: https://roliscon.blog/2019/05/11/changes-proposed-at-companies-house/ and you can see my response to that consultation here: https://www.roliscon.com/Corporate-Transparency-and-Register-Reform.pdf

The latest consultations can be found here: https://www.gov.uk/government/news/government-launches-consultations-to-crack-down-on-company-fraud-and-improve-corporate-transparency

These proposed changes will certainly improve the quality of information on the Companies House Register and in general should be welcomed, but they will impose more obligations on smaller companies. The consultations may be of particular interest to company directors and those who file information with Companies House such as accountants and company secretaries. But they ask a lot of questions, so perhaps best to review and respond to these consultations over Xmas. There are easy on-line questionnaires to which you can respond.  

Banning Short Selling

There was an interesting article in the Financial Times on short selling yesterday. It reported that South Korea is to attack those who bet against companies by short selling and is threatening jail and hefty fines. They are particularly concerned about “naked” short selling where stock is sold when not owned (e.g. rather than by borrowing it first), but they have also extended a ban on all short selling. Similar bans are in place in Malaysia and Indonesia.

The intention appears to be to halt speculative trading. Is it wise to do so? My view is that short selling as such can assist markets to identify a realistic price on stocks, but the problem is that it can also be associated with abusive practices where those doing so do not just keep their opinions to themselves but broadcast negative comments on a stock. Those comments can be sometimes fair and accurate but at other times they are not. It is very difficult for companies to respond to such comments and get them corrected or removed.

Of course one can argue that this sometimes happens in reverse, i.e. stocks are promoted by puffs or ramping to drive the price higher. Company directors themselves can be the source of such activity. The real issue is about media regulation where in the modern world both positive and negative commentary can be widely promoted on the internet without any regulation whatsoever.

That is the problem that needs tackling in essence, and banning short selling is at best a temporary measure that does not attack the underlying issue and in particular the excessive speculation that can take place in stock markets.  

Naked short selling might reasonably be banned though on the principle that nobody should be trading shares in which they do not have a financial interest. At least if they have a long holding, they may take the interest of the company into account. But if they have a short holding, their interest may be solely in damaging the company.

It is a long-standing principle of insurance that you cannot insure something in which you do not have an interest – for example someone else’s life unless you might suffer financial loss as a result of their death. Why? Because it is widely acknowledged it could lead to abuse, or in the case of life insurance that death might be hastened! You have to have an insurable interest to obtain insurance. That I suggest is a good principle to follow on share trading.

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

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Brexit, Ocado Trading and Facebook Law Suit

As I expected Boris Johnson’s visit to Brussels did not produce a positive outcome. A firm deadline of Sunday has been set for concluding discussions. I suspect that will be another deadline passed, and it won’t be the end of talks completely. In the meantime, the EU has unveiled plans to prevent chaos in case of a no-deal Brexit. Specifically planes between the UK and Europe will continue to fly and trucks will be able to continue crossing the Channel. The EU is also proposing temporary measures on fishing rights. These temporary measures could last for many months I suspect.

Good results from Ocado (OCDO) this morning in terms of revenue, driven by the epidemic encouraging internet food shopping. With three new warehouses opening in 2021, which will ultimately give the company 40% more capacity to the business, that is a positive trend as customers have been hampered by limited delivery slots. But they are finding it difficult to sell their technology solutions it seems because of the travel restrictions on which much of the future value of the company depends. The share price has fallen by 6% at the time of writing.

The real big news on the financial scene though is the law suit launched by the US Federal Trade Commission against Facebook. They allege the company has demonstrated anti-competitive behaviour particularly by the acquisition of Instagram and WhatsApp who were potential competitors. But it cites other issues as in addition. They wish to break up the company. The legal action is supported by attorney generals in individual states.

The big problem is that Facebook is a natural monopoly as more people are attracted to the biggest network. So it’s rather like AT&T and the Bell operating companies who used to have a monopoly over US phone traffic and were broken up in the 1970s by an anti-trust law suit.

Also it’s reminiscent of the break-up of Standard Oil even earlier who developed such a dominant control of oil production, refineries and even rail transit lines that they could force competitors out of business. Google (Alphabet) is also facing a big anti-trust lawsuit because of its very dominant position in the search engine market.

Comment:  These lawsuits will probably take years to come to a conclusion but they are clearly a major threat to Facebook and Google. Regrettably it’s probably a case of power going to the heads of the chief executives of these companies where they think they can do no wrong. In the case of Standard Oil and Rockefeller he argued, unsuccessfully, that their monopolistic position was for the good of their customers because it avoided wasteful competition and enabled products to be delivered at the lowest possible prices. No doubt Zuckerberg may use similar arguments which may not get upheld by the courts, but it’s not easy to see how the core Facebook product could be broken up.

The dominant positions of Facebook and Google in internet advertising should be the bigger target though which is what is generating most of their profits. There are surely some solutions to that such as price controls or giving other companies the ability to piggy-back on the companies’ software platforms. Lawyer’s can get very creative on possible solutions.

Note: I hold a few shares in Ocado, but not many because the valuation of the company looks like it is based on future hope that it will be a world beater rather than actual short term financial data. I do not hold Facebook or Alphabet, but no doubt like many readers, do hold them indirectly because of holdings in funds. The threat to their finances may be long-term rather than short-term, particularly bearing in mind how long anti-trust law suits take to run through the courts.

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

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Ideagen Placing

Ideagen (IDEA) announced a placing of shares yesterday at 4.50 pm, i.e. after the stock market had closed. I predicted the placing in my previous blog post on the 3rd December and it was obviously common knowledge that one was about to take place.

They also announced an offer via the Primary Bid platform at 4.53 pm yesterday which did potentially make it accessible to private shareholders. But you would have had to move very quickly because this morning at 7.00 am the results of the placing and Primary Bid offer were announced and the offer was closed.

Note that I do not consider this arrangement to be an acceptable alternative to an Open Offer for individual shareholders. It simply does not provide enough time for shareholders to consider the offer and locate the required cash.

It is also not a good idea to have knowledge of the placing becoming widespread before it is announced. I suggest that when placings are being hawked around the market, that the shares are suspended to avoid market abuse.

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

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Invinity Open Offer, Ideagen, and AJ Bell Results

I have recently taken a strong interest in those shares that are involved in electrification of the world. It’s not just the UK Prime Minister who wants to save the world from global warming and air pollution with Joe Biden likely to be much more environmentally conscious than Donald Trump. Those companies or trusts that are involved in alternative energy sources such as wind and solar, and systems to manage the fluctuations they impose on the grid, are of particular interest.

One such company is Invinity Energy Systems (IES) who announced a placing and open offer this morning. This was a company that was mentioned at a recent investor discussion group I attended and I did some research into it and bought a very few shares.

It produces vanadium flow batteries which are typically large batteries used in large energy storage projects. They are alternatives to lithium-ion batteries which have limitations and lithium is a relatively rare element that we might run out of or it might become very expensive. Vanadium is the 20th most abundant element in the earth’s crust and is mainly used in steel making at present. Vanadium flow batteries have advantages in that they can be cycled many times, have a 25-year lifetime, with no risk of thermal runaway and are cost competitive. They have been around for many years but not in high volume production mainly because they are bulky and hence only suitable for certain applications – Invinity plan to change that. It’s still a relatively early stage business but it seemed worthy of a punt as their sales prospects, of which details are provided, look promising.

Their placing is at a discount of 8% to the pre-placing market price and dilution is only 16% so I consider that acceptable and the other good aspect is that they are including an “open offer” so existing private shareholders can participate.

For those interested in the environmental sector the following shares may be of interest (Note: I hold some of these): Gore Street Energy Storage Fund (GSF), Greencoat UK Wind (UKW, Gresham House Energy Storage Fund (GRID), Impax Environmental Markets, (IEM), Octopus Renewables Infrastructure Trust (ORIT) and The Renewables Infrastructure Group (TRIG). Some of these are effectively private equity trusts that invest in storage systems, windfarms and solar power installations. Much of their revenue comes from guaranteed prices for power supply and their assets are valued on a discounted cash flow basis. This enables them to pay high dividends with some capital growth but they are currently typically trading at a high premium to net asset value as they have grown in popularity as good reliable dividend payers have disappeared from the market. Whether the assets are fairly valued is anyone’s guess and clearly it depends on what discount rate is used – never an easy thing to determine in DCF calculations.

There is a lot of enthusiasm for these companies in the market at present so readers need to decide whether it is a bandwagon that will fade or grow stronger.

Last night I attended a webinar on Ideagen (IDEA) run by ShareSoc. I have held this company since 2012 and it has been highly profitable but one aspect I am unhappy with is that they regularly do placings, typically to fund acquisitions, but never include open offers, so I have been diluted. As Chairman David Hornsby said last night, they do at least only do placings at near the market price, but I am not convinced that is a good excuse. Market cap of Ideagen is £500 million while that of Invinity is £138 million so if Invinity can include an open offer why cannot Ideagen?

From David’s other comments it seems they are planning a placing to enable them to do more acquisitions to meet their growth plans. That might be why the share price has been drifting down of late as expectations of this have become known.

AJ Bell (AJB) announced their final results this morning (they run the YouInvest platform). Revenue was up 21% and pre-tax profit was up 29% but on a forecast p/e of 48 according to Stockopedia for next year the price is clearly discounting more growth but there must be limits on how much market share they can grab.

One interesting item mentioned in the AJ Bell announcement was that the FCA has delayed implementation of the “Making Transfers Simpler” rules due to the Covid-19 epidemic. The new rules were designed to make transfers between platforms easier so as to encourage a more price-competitive platform market. Let us hope these changes are not abandoned although AJ Bell mention they feel the new rules could be improved and have made alternative suggestions.

As anyone who has moved an ISA or SIPP between platform operators knows, it takes way too long and is too expensive. The FCA’s new rules may have helped in some regards but are not a total solution.

At least AJ Bell have substantially reduced their exit charges in their new price list effective from January. They have made a number of other changes to their prices which overall do not seem unreasonable and they will remain competitive.

Platform operators have generally been edging up their prices as the interest they receive on client cash has disappeared as interest rates have shrunk while regulatory costs have increased. This has also undermined the few “free dealing” platforms that wanted to conquer the UK market like Robinhood have done in the USA with commission free trading. Operators such as Freetrade were potentially a threat to AJ Bell but with the former offering only a limited service that threat seems to be receding.

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

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