Goals Soccer Centres, Renishaw, Economic Forecasts, Politics and Portfolio Transfers

It’s Friday in August, the markets and the pound are falling, the Conservative Party have lost a bye-election meaning their majority in Parliament is vanishing, and the Governor of the Bank of England has forecast a shrinking economy as a result of Brexit. It’s gloom all around which explains the falling UK stock market today. But Mark Carney is only forecasting a 33% chance of a contraction in the UK economy in the first quarter of 2020, which means that there is a 67% chance it won’t and even then for only a short period of time. That’s assuming you have any confidence in Bank of England forecasts which are notoriously unreliable. The media are not exactly reporting matters in an unbiased way. Those who support Brexit are unlikely to be worried by such forecasts and they would probably accept a temporary disruption to the economy. Remaining or leaving the EU was never a primarily economic decision so far as Brexiteers were concerned – it’s about democracy and who makes our laws.

But there is certainly bad news for investors in Goals Soccer Centres (GOAL) who have reported that the defects in their accounting go back to at least 2010. The 2018 audit has had to be suspended, there is no time frame for producing the accounts and therefore the company is going to be delisted from AIM. This looks to be another example of defective audits – the past auditors were KPMG and BDO.

I have complained about the length of time it takes to switch portfolios between investment platforms in the past. The good news today is that I finally completed one. This latest one I have done has taken from the 23rd May to the 31st July, i.e. 70 days. And that’s one where it was a transfer of holdings in a personal crest account with Charles Stanley, after they raised their charges on such accounts, to another personal crest account with another provider which was already in existance. That should have been very simple as there were no fund holdings in the account – just all direct holdings on the register.

It is really quite unreasonable that account transfers should take so long and require so much effort, including numerous emails and letters to get it completed. It’s anti-competitive to allow such delays to continue.

Well at least that’s one simplification of my portfolios. I also sold out from Renishaw (RSW) yesterday after disappointing final results – revenue down 7% and below forecasts mainly as a result of alleged economic conditions in the Asia Pacific region. The share price is down another 5% this morning at the time of writing. This may be a fundamentally sound business with good products in essence but clearly investors like me are losing confidence that the company can justify its high p/e rating when growth is going into reverse.

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

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Brexit Investment Strategies

Investors may have noticed that the pound is in free fall and heading towards US$1.20. That’s near the low after the initial Brexit vote. Pundits, not that they can be relied on for forex forecasts, suggest it could go lower now that we seem to be heading for a “no-deal” Brexit.

With the pound falling, and potential damage to the UK economy from a hard Brexit, investors should surely have been avoiding companies reliant on UK sales, or UK consumers, or those such as engineers and manufacturers that rely on just-in-time deliveries from Europe. The key has been to invest in those UK listed companies that make most of their sales overseas in areas other than the EU.

One such company that announced interim results today is 4Imprint (FOUR), a supplier of promotional merchandise. Most of its sales are in the USA and its accounts are in dollars. Revenue in dollar terms was up 16% at the half year and pre-tax profit up 22%. The share price rose 6.5% yesterday and more this morning but the former suggests the good news leaked out surely. With the added boost from currency movements, this is the kind of company in which to invest but there are many other companies with similar profiles. For example, many software companies have a very international spread of business, or specialist manufacturers such as Judges Scientific (JDG). Those are the kind of companies that have done well and are likely to continue to do so in my view if the US economy remains buoyant and the dollar exchange rate remains favourable.

The other alternative to investing in specific UK listed companies with large export revenues and profits is of course to invest directly in companies listed in the USA or other markets. But that can be tricky so the other option is to invest in funds such as investment trusts that have a global spread of investments with a big emphasis on the USA. Companies such as Alliance Trust (ATST), Scottish Mortgage (SMT) or Polar Capital Technology Trust (PCT) come to mind. Alliance Trust has a one-year share price total return of 11% according to the AIC and the share price discount is still about 5%. I received the Annual Report of PCT yesterday and it makes for interesting reading. Net asset total return up 24.7% last year and it again beat its benchmark index. The investment team there has been led by Ben Rogoff for many years and what he has to say about the technology sector is always worth reading. Apparently the new technology to watch is “software containerisation” which is compared to the containerisation of cargo shipments in its revolutionary impact.

Another interesting comment is from the Chairman complimenting Ben on having the skill of buying shares and holding those which go on to outperform, but also knowing when to sell at the right time which the Chairman suggests is not common in fund managers.

Another hedge against a hard Brexit is to invest in companies that own warehouses because a lot more stockpiling is already taking place as a protection around the Brexit date by importers, but also more will be required to hold buffer stocks for manufacturers in the future. Companies such as Segro (SGRO), Tritax Big Box (BBOX), and Urban Logistics (SHED) have been doing well for that reason. They have also been helped by the trend to internet shopping which requires more warehousing space and less retail space. These trends are likely to continue in my view and the retail sector is likely to remain difficult for those retailers reliant on physical shops. You can see that from the results from Next (NXT) this morning. Shop sales down while internet sales up with the overall outcome better than expected as on-line sales grew rapidly. Anyone who expects the high street or shopping malls to revive is surely to going to be disappointed in my view.

There are bound to be some problems for particular sectors if we have a hard Brexit. The plight of Welsh sheep farmers was well covered by the BBC as Boris Johnson visited Wales yesterday. Most of their production currently goes to Europe but they may face 40% tariffs in future. The Prime Minister has promised assistance to help them but they have been heavily reliant on subsidies in the past in any case. There will need to be some difficult decisions made about the viability of farming on marginal land in future.

The falling pound has other implications of course. It will help exporters but importers will face higher prices with the result that inflation may rise. However, there are few products from Europe that cannot be substituted by home grown or produced equivalents, or by lower cost products from the rest of the world. With import tariffs lowered on many imports the net effect may be very low in the long term. But it will take time for producers and consumers to adjust. Tim Martin of JD Wetherspoon is well advanced in that process so you can see just how easy it will be to adapt.

In summary, investors should be looking at their current portfolios and how they might be impacted by Brexit now, if they have not already done so. There will clearly be winners and losers from the break with Europe and investors should not rely on any last-minute deal with the EU even if Boris is expecting one. Any solution may only be a temporary fix and the policies suggested above of international diversification are surely wise regardless of the political outcome.

Note: the author holds some of the stocks mentioned.

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

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Accesso Up For Sale

One time favourite of private investors, and at one time one of my biggest holdings, Accesso Technology (ACSO) has announced that following approaches it has decided to start a formal sale process. It is inviting offers for the business.

Now I would have picked this up sooner but Investegate which I use for RNS announcements has a problem at present which is delaying emails. I told them about that issue this morning. Anyway what with that and taking some rubbish to the local waste tip, I only picked up the news when I saw the price change an hour later. The price jumped from last nights 755p to 1350p for a very short time but has now settled back to about 1100p so I missed the peak – and at 1350p I would have considered that a very fair price.

I think I’ll wait and see what offers come in now as it’s a difficult company to value. It depends how much prospective buyers want their customer relationships, which are good, and the technology they have developed even if the latter is being redeveloped to a large extent.

As I normally do in such uncertain situations, I hedged my bets by selling a few more shares and holding the rest today.

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

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New Stockopedia Version and Abcam Trading Update

Like many private investors, I use the Stockopedia software to provide me with a summary of key financial information on a company. I also use it to provide “alerts” on price changes and for occasional stock screening. It’s one of the key elements in my share portfolio management. It has always been quick and easy to use, without too much complexity. They have just released a new version of the software that now supports mobile devices much better – that was certainly an issue with trying to use it previously on my mobile phone.

I have spent a few minutes trying the new version and reported quite a number of issues with it to Stockopedia support. Here’s a few of the key ones:

  • Portfolio holdings and alerts only show 40 stocks when my portfolio has many more than that, so cannot easily scroll up and down the whole portfolio.
  • Not supported on Internet Explorer which is still my default web browser.
  • Printing a stock page uses more pages – for example printing a report on Abcam now uses 5 sides in Chrome, i.e. 3 pages on a duplex printer instead of one page on Explorer with the old version. Print format screwed up also at top left. As with many new software versions, testing of print functions seems to have been limited.
  • Cost of holdings sometimes shows nil.

In general the testing of the new version seems to have been too little, even if I am very experienced at picking up bugs in software. As a result I won’t be switching to the new version just yet until they sort out some of these problems. However it is very easy to switch back and forwards between the versions. Let us hope they do not abandon the old version until all the problems are resolved.

On the subject of Abcam (ABC) yesterday the company issued a trading update for the year ending June. It looked fairly innocuous to me but the share price promptly fell sharply and finished the day down 13.3%. The only possible issue mentioned was the announcement that CFO Gavin Wood was stepping down “over the next year in order to continue his career closer to his family home”. He has been with the company for 3 years.

Did that justify the investor panic? Surely not. The FT commented that the company’s expansion plans had unsettled investors, but the announcement really only suggested a continuation of the growth strategy and formulation of plans to achieve that. Perhaps it was simply that investors had realised that a prospective p/e of 40 for the current year after a strong recent share price run was a bit too high. Or perhaps it’s that summer season problem where liquidity is low and hence share prices tend to be volatile. Anyway the share price is recovering today at the time of writing and my portfolio loss on Abcam yesterday was mostly offset by the rise in Learning Tecnologies (LTG) which issued a very positive trading update. It’s share price rose about 20% on the day.

Abcam is of course a producer and distributor of antibodies. On a personal note, last week I was injected with monoclonal antibody named Prolia from Amgen to control osteopenia. If I had looked at the side effects and user reports on the internet beforehand I might have chosen not to have it, but no concerns so far. Only costs about £1,000 per shot apparently for six months. No wonder the NHS needs more money.

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

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Removing Directors, Ventus VCTs, Rent Controls and HS2

Replacing the directors of companies by shareholders can be enormously difficult. Although I have been instrumental in the past in helping that process in several companies, it takes enormous effort and a lengthy timescale to achieve it. ShareSoc director Cliff Weight has published a very perceptive article on the problems of doing so at the Ventus VCTs.

Problems faced by shareholders who are unhappy with the directors of a company are a) communicating with all other shareholders now that many are in nominee accounts and the costly process of writing to shareholders on the register via post (and processing the register into usable format for mailing); b) the existing directors of a company using the resources of the company (i.e. shareholders funds) to campaign actively against any change including the use of expensive proxy advisors to contact shareholders via telephone; c) the role of IFAs who advise their clients or who manage their portfolios and who can influence the shareholder voting; and d) the inertia of institutional investors (or to quote someone from the FT today: about 60% of company investors are passive shareholders and ‘don’t care’).

In the case of the Ventus VCTs, some shareholders are unhappy with the management fees as no new investments are being made by the company and are unhappy with the actions of the directors. They have tabled requisitions for the Annual General Meetings at Ventus VCT and Ventus 2 VCT on the 8th August to remove all the directors and appoint new ones. Of particular concern is the current two-year termination notice on the management agreement which is now being proposed to extend further. It is never a good idea for investment trusts to have long termination periods in contracts with the manager.

You can read Cliff Weight’s blog article here: https://tinyurl.com/y2de9vaa . There is also an article covering this topic in this weeks Investor’s Chronicle under the title “Limits of Influence”. It’s well worth reading.

How to solve these problems? I suggest the following: a) a reform to put all shareholders (including beneficial owners) on the register of companies; b) put shareholders email addresses on the register so that communicating with them can be done at reasonable cost – it’s surely unreasonable in the modern age to only have postal addresses which adds to costs enormously; c) limit how much can be spent on proxy advisors to oppose shareholder requisitions; and d) exclude passive institutional investors who have no interest as owners from voting.

Rent Controls

The Mayor of London, Sadiq Khan, is intending to develop proposals for rent controls in London so as to “stabilise” or reduce property rents in London (or make them “more affordable” as he puts it). That’s despite the fact that he has no legal powers to do so and a Conservative government would likely block such proposals. But Jeremy Corbyn supports the idea. The Mayor clearly sees this as a vote winner for his re-election campaign next year as he claims 68% of Londoner’s support rent controls!

Some of my readers probably invest in buy-to-let properties so such proposals will worry them considerably. On the other hand, those who rent houses or flats in London are undoubtedly concerned about the cost of renting and the rapid rise in rents in London. Some are being forced out of London or have to move to smaller properties.

But rent controls never work and create all kinds of negative side-effects, or unintended consequences. When I moved to London in the 1960s, rent controls were in place and had been since 1945 in various forms (there is good coverage of the history of rent controls in London on Wikipedia). In the 1960s, unfurnished properties were almost impossible to find or were horribly expensive as landlords had withdrawn from the market. Rachmanism to force tenants out of rent controlled properties was also rife and what property there was available for rent on the market was often in very poor condition because landlords simply could not justify spending money on maintenance. We definitely do not want to return to the 1960s despite Jeremy Corbyn’s desire to put us there!

Rent controls are not the answer, as many studies of such schemes has shown. The Mayor needs to do more to tackle the housing problem in London by ensuring more home are built, encouraging movement of people out of London, and discouraging new immigration into the capital from elsewhere. But you can read the Mayor’s press release here if you wish to learn more about his plans: https://www.london.gov.uk/press-releases/mayoral/to-tackle-affordability-crisis

HS2 and Brexit

The latest report that HS2 may cost an extra £30bn, meaning it could cost as much as £85bn in total, surely makes it even less justifiable. Enabling a very few people to save a few minutes on the train journey time from London to Birmingham at that cost makes no sense, although there might be more justification for expanding capacity and speed on routes in the North of England. However, it would surely be much better to spend that kind of money on an improved road network where the benefits are much greater. The Alliance of British Drivers has just published an analysis of road expenditure versus taxation which includes a comparison of road versus rail expenditure. It’s well worth reading – see here: https://www.abd.org.uk/road-investment-and-road-user-taxation-the-truth/ .

Now the Office of Budget Responsibility (OBR) have recently suggested that a “no-deal” Brexit would blow a £30bn hole in the public finances. Even if you accept that is true, and many do not, there appears to be a simple solution therefore. Cancel HS2 just to be on the safe side.

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

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Pay at HSBC and Santander, Net Worth, Duplicate Dividends and Persimmon

Apparently bankers still live in an unreal world so far as most of us are concerned, even after the financial crisis of ten years ago when their remuneration was attacked. The Financial Times covered two stories on the pay of bankers in today’s edition (16/7/2019). The first was on the opposition to pay at Standard Chartered and comments from the CEO, Bill Winters, on it after a vote of almost 40% against their pay policy in May. The concern is mainly about his pension arrangements which will mean he gets a pension allowance of £474,000 this year which is about 20% of his overall pay. But that includes bonuses when usually pensions are related to base salary only.

Mr Winters comments on his pay were quoted as “I think it’s quite appropriate for the board not to ask me to take a pay cut. And they didn’t – I don’t think it ever occurred to them to ask”. Is that not most amusing. Perhaps the FT coverage might remind them to consider the matter.

The other article was on the pay offered by Santander to Andrea Orcel as an incentive to join the company as CEO. It included a €52 million figure as a “joining bonus” including partly cash and partly in shares to offset the loss of deferred pay from him leaving UBS. In fact the offer was subsequently withdrawn and Mr Orcel is now suing but it just shows how bankers’ pay is still in fantasy land.

As it’s a quiet time of year I thought I would take a look at my and my wife’s “net worth” (we jointly manage our financial affairs). Over 20 years ago one of my US business associates talked to me about his net worth which was something new to me and ever since then I have reviewed it occasionally. It’s something everyone should do to tell whether you are getting richer or poorer, separately from your stock market speculations. How do you work it out? You simply list and add up all your assets and debts – like this:

Assets:

  • Cash in your bank accounts
  • Value of your investment accounts
  • Your cars – market value
  • Market value of your home
  • Value of Business interests
  • Personal property, such as jewelry, art, and furniture
  • Cash value of any insurance policies and pensions

Liabilities (outstanding balances):

  • House Mortgages
  • Car loan and other loans secured against assets (e.g. H/P agreements).
  • Credit card balances
  • Student loans
  • Any other debts

The Net Worth is simply the Assets less liabilities. If it is growing from year to year you must be doing something right. If you are getting poorer every year, then you need to do some hard thinking. It gives you a “reality check” on your overall financial position. However there are clearly periods in your life when you are likely to be building up wealth (such as the CEOs of banks mentioned above) but in later life you might be consuming it or giving it away. At least that’s the conventional assumption.

How did we do in the last year? Net worth was up 7% which rather surprised me as UK stock markets have been down over the last year in capital terms and our house (in London outer suburbs) was not revalued as the market is static. We must donate some more to charity.

Dividends do help of course, particularly when a company pays them out twice! This morning I received duplicate cheques from Pets at Home (PETS). I contacted the company and have spoken to their registrar. They will let me know whether to present the cheques or not. I suspect they may want to cancel all the dividend cheques they have issued. This is the first time this has happened to me, and it simply looks like the same cheques have been printed twice. I suggest other holders of shares in this company await advice, not that many people receive their dividends in cheque form these days.

Persimmon (PSN) shares were down slightly today which is not surprising after the documentary about the defects in their newly built houses on a Channel 4 Despatches programme last night. It highlighted the poor quality of the houses while Persimmon was raking in money from the Government “Help to Buy” scheme which encourages house buying and has probably contributed to rising house prices. Persimmon has been making a profit of £66,000 on each home sold on average, and it was suggested that they paid more attention to the profits of the company than to their customers. Such profits also enabled enormous bonuses to be paid to their management.

I used to hold Persimmon shares but no longer. I have been concerned for some time about the future of the Help-to-Buy scheme and the general unaffordability of houses which may get a lot worse if interest rates rise. House builders are certainly looking cheap on fundamentals at present but can the bonanza continue much longer is the question investors need to ask themselves. A few more programmes like that on Channel 4 and the Government may decide there are better ways to help those without houses.

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

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Woodford Changes, FT Political Comment, and Digital Services Tax

Apparently Neil Woodford is losing some of his senior staff. Perhaps he needs to cut costs as the funds being managed by his firm have shrunk as investors have walked and holdings in the funds have shrunk in value. But the Equity Income Fund is still closed to redemptions with no certain date when it will reopen, and there is no sign of the vigorous action I suggested. I put forward these alternatives on June 5th, but Neil Woodford is clearly not rushing into action:

1) That Neil Woodford appoint someone else to manage the fund – either an external fund management firm or a new fund management team and leader. Neil Woodford needs to withdraw from acting as fund manager and preferably remove his name from the fund; 2) Alternatively that a fund wind-up is announced in a planned manner; 3) Or a takeover/merger with another fund be organised – but that would not be easy as the current portfolio is not one that anyone else would want.

Once a reputation is lost, resignations should follow, with new leadership put in place. Which brings me onto the subject of the comments in the Financial Times over the last two days over the position of our ambassador to the USA and Brexit.

Yesterday I sent these comments to the FT’s political editor about his views on the position of Sir Kim Darroch which were headlined “Darroch pays price for would-be PM’s craven and shameful conduct”:

“Dear Mr Shrimsley,

I found your article in today’s FT on the US Ambassador and Boris Johnson most objectionable. Mr Johnson’s comments on Sir Kim Darroch’s position were restrained and not unreasonable. President Trump has indicated he will not work with our ambassador which surely makes his position untenable. There is no point in the UK defending or retaining him in post. He has subsequently resigned – and quite rightly.

Sir Kim clearly made some injudicious comments which unfortunately have leaked out even though foreign embassies have very secure communications facilities. Was this in a private communication by him? If so it was unwise in the extreme. But if there is to be any witch hunt it should be focussed on that issue alone.

This has nothing to do with Brexit and it should have nothing to do with your newspaper’s dislike of Trump or support for Brexit. So I suggest your article was misconceived as was the accompanying FT article printed on the same page about the relationship between the Civil Service and Government Ministers. The fact that Boris Johnson failed to defend or back Darroch while Jeremy Hunt rushed injudiciously to do so surely shows which politician is wiser.”

Today we have another article in the FT so extreme as to be comic by Martin Wolf which is headlined “Brexit means goodbye to Britain as we know it”. It suggests the UK will lose its reputation for being stable, pragmatic and respected. It describes Boris Johnson as a serial fantasist and concludes that the UK is no longer a “serious country”.

But the FT did cover well the publication of draft legislation on a new Digital Services Tax – see https://www.gov.uk/government/publications/introduction-of-the-new-digital-services-tax . This will impose a tax on companies that operate social media platforms, search engines or online marketplaces to UK users. This is aimed to collect tax on revenues in such companies that are currently avoided by the fact they frequently operate from low tax jurisdictions. The focus is clearly on companies such as Alphabet (Google) and Facebook who generate large revenues from the UK but pay relatively little tax.

However there are some UK companies that are potentially liable such as Rightmove or Just Eat but they are likely not to have to pay because a group’s worldwide revenues from these digital activities needs to be more than £500m with more than £25m of these revenues derived from UK users.

The USA is crying foul over a similar French tax and surely quite rightly. The size exclusion means only the big US firms are going to be liable, and there is the issue of double taxation – they will be taxed on both revenue in the UK and potentially profits also. I suggest the USA has a justifiable complaint. It should surely be a tax on all such companies other than very small ones, with a deduction from Corporation Tax allowed to offset the double taxation issue.

There is one thing for certain. Such measures from the UK and France may threaten retaliation by the USA and might certainly jeopardize any new trade agreement between the UK and USA post-Brexit.

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

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