Author: rogerwlawson

Impressions of the British Land AGM

I attended the Annual General Meeting of British Land Plc (BLND) today. This is a large FTSE-100 property company of course, focused on London offices (39% of portfolio) and Retail stores (most of the balance).

The trading statement issued in the morning was a mixed bag. Loan-to-value (LTV) further reduced to 26% (they have been selling off developments and repaying debt plus buying back shares with the resulting cash). There were positive comments about the office sector – the Chairman indicated in the meeting that the Brexit threat had put new developments on hold so there was a growing shortage of good quality office space in London. But retail comments were less positive – long term structural change driven by the internet and short-term trading headwinds, so the market “remains challenging”. The share price fell this morning as it has been doing since mid-June.

The Chairman, John Gildersleeve, mentioned NAV was up 6% last year but profits were down because of disposals (which reduce the rental income). He gave the impression that he thought British Land have been doing a good job of managing their property holdings and “reshaping” their retail portfolio. He also talked about their new ventures in flexible office space (“Storey” – now 80% let) and in homes to rent (e.g. on Canada Water). Whether these new ventures will be sufficient to offset the negative trends in retail property in general is not yet clear.

Shareholder questions focused on whether the portfolio valuations were accurate – the Chairman defended them; should they be developing offices in Dublin – answer No; or warehouses – no clear answer but general impression is to focus on what they know and stick to the UK; and the risk of rent controls on housing – risks are uncertain and it’s only a small element in their portfolio. There were some other questions of little consequence.

More than one shareholder questioned the large buy-backs undertaken by the company – they could have doubled the dividend instead (dividend yield will be about 4.0% this year, but they are doing more buy-backs). The Chairman said as they can buy their own shares (i.e. their assets) at 30% discount why should they not do it? Can’t say I am convinced by such arguments. The company is clearly reducing its size by selling assets and hence generating surplus cash but if they cannot find a good use for it they should return it to shareholders via dividends or a tender offer, not market share buy-backs.

I asked whether they could use the new “hybrid” AGM capability (part physical, part on-line) capability in the new Articles but the Chairman seemed to think that investors were not yet ready for that, which is a disappointment. It would have saved us all traipsing into the West End of London on a hot day.

The questions only lasted about an hour before we moved to a poll vote. No questions on remuneration which is excessive (4.5% voted against), or on why they need 13 directors a number of whom seemed to have no relevant backgrounds. Thirteen directors must surely make for dysfunctional board meetings. Perhaps more questions were deterred by the witty put-downs given by the Chairman to some shareholders which is a style I do not like even if it makes such events somewhat less boring.

There were also 14% of shareholders voted against the change to 14 days notice for General Meetings – good for them. But we did not see the voting figures until later so no opportunity to comment on them.

In summary, an unexciting AGM at an unexciting company. A typical PR event for geriatric shareholders on the whole so only useful to a limited extent.

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

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Investment Platforms Market Study

The Financial Conduct Authority (FCA) have just published an interim report on their study of “investment platforms”. It makes for very interesting reading. That is particularly so after the revelations from Hardman last week. They reported that the revenue per assets held on the platform from Hargreaves Lansdown (HL) was more than twice that of soon to be listed AJ Bell Youinvest. HL is the gorilla in the direct to consumer platform market with about 40% market share. HL earns £473 per £100,000 invested while Youinvest earns only £209.

That surely suggests that competition is weak in this market. Indeed the FRC report highlights that investors not only have difficulty comparing the charges of different platforms, but they do not seem too concerned about high charges as they focus more on other aspects of the service provided. It also says on page 23 of the report: “Our qualitative research also found that consumer satisfaction levels are sometimes linked to satisfaction with overall investment returns, which tend to be attributed to the performance of the platform. This suggests some confusion about consumers’ understanding about platforms’ administrative function as opposed to the performance of investment products. So it is possible that consumers’ relatively high satisfaction levels with platforms could be influenced by the positive performance of financial markets in recent years”. In other words, the consumers of such services are very complacent about the costs they pay at present.

Another piece of evidence that this is not a competitive market obtained by the FRC was that they found that when platforms increased or decreased prices it had no significant impact on flows in and out of the platform. No doubt some platform operators will read that with joy, but others despair! 

Indeed when I made some comments on Citywire effectively saying I thought it suspicious that there were so many positive comments about Hargreaves Lansdown in response to an article reviewing the Hardman news, particularly as they were clearly much more expensive than other platforms who provided similar effective services (I use multiple ones) I was bombarded with comments from lovers of the HL service. Bearing in mind that platform charges can have a major impact on overall returns in the long term from stock market investments, you would think investors would pay more attention to what they are being charged.

One particular problem is that switching platforms is not only difficult and a lengthy process but can also incur charges. This is clearly anti-competitive behaviour which has been present for some years and despite complaints has not significantly improved.

The FRC summarises its findings as:

  • Switching between platforms can be difficult. Consumers who would benefit from switching can find it difficult to do so.
  • Shopping around can be difficult. Consumers who are price sensitive can find it difficult to shop around and choose a lower-cost platform.
  • The risks and expected returns of model portfolios with similar risk labels are unclear.
  • Consumers may be missing out by holding too much cash.
  • So-called “orphan clients” who were previously advised but no longer have any relationship with a financial adviser face higher charges and lower service.

That’s a good analysis of the issues. The FCA has proposed some remedies but no specific action on improving cost comparability and the proposals on improving transfer times are also quite weak although they are threatening to ban exit charges. That would certainly be a good step in the right direction. Note that a lot of the problems in transfers stem from in-specie transfers of holdings in funds and shares held in nominee accounts. Because there is no simple registration system for share and fund holdings, this complicates the transfer process enormously.

One interesting comment from the AIC on the FCA report was that it did not examine the relative performance of different investment managers, i.e. suggesting that lower cost investment trusts that they represent might be subject to prejudice by platforms. They suggest the FCA should look at that issue when looking at the competitiveness of this market.

In summary, I suggest the platform operators will be pleased with the FCA report as they have got off relatively lightly. Despite the fact that the report makes it obvious that it is a deeply uncompetitive market as regards price or even other aspects, no very firm action is proposed. But informed investors can no doubt finesse their way through the complexities of the pricing structure and service levels of different platform operators. I can only encourage you to do so and if an operator increases their charges to your disadvantage then MOVE!

The FCA Report is present here: https://www.fca.org.uk/publication/market-studies/ms17-1-2.pdf

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

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Brexit and Other News

It’s been a busy few days even if stock market news is thinning out now we are into summer. The white paper outlining how Theresa May’s cabinet (at least those who are left) would like to do a deal with the EU has been published. I advised my followers via Twitter to read it rather than simply read the media commentary on it which tends to be slanted based on the writer’s emotions to “leave” or “remain”. You can find the white paper here: https://www.gov.uk/government/publications/the-future-relationship-between-the-united-kingdom-and-the-european-union

Needless to say I have taken my own advice, and read it all. As a supporter of Brexit primarily because I think it is necessary to regain democratic control of our laws, I think it gives me most of what I was looking for.

On goods and agri-products it does mean that we will be adhering to EU standards but is that a major problem? It will ease trade if we do so, just as we adhere to internationally agreed standards in some areas. I do not see that it will necessarily thwart any free-trade agreements with the USA or any other country, regardless of what Trump says. A free trade agreement is primarily about having no tariff barriers but there are bound to be issues about technical standards. For example, does Mr Trump expect the UK to accept US cars built to US technical standards for us to get a free trade deal with the USA? If he does then we would risk becoming a poodle of the USA rather than the EU. That makes no sense when we are much closer to the EU, already conform to their standards in many areas, and do more trade with them. Some Brexiteers argue that we should not be a poodle of either of course, but for us to start setting our own standards and enforcing them would be a massive task in the short term. Likewise continuing to adhere to EU standards on employment rights and competition law, at least for some time, does not seem totally unreasonable even if the European Court of Justice might give rulings on issues that relate to them.

Whether the EU will accept Mrs May’s proposals is far from certain. The proposed customs arrangements where we collect EU tariffs on goods coming into the UK that are destined for EU countries seems particularly problematic. Is that workable in practice and at reasonable cost? And the refund arrangements for goods that do not get forwarded might be a recipe for large scale fraud I suspect.

So on the whole, I am supportive of the white paper’s proposals if in any negotiation with the EU no more is conceded. I hope Donald Trump gives Mrs May some advice on hard bargaining while he is here.

But as I said before, read the white paper and make up your own mind. Your comments are welcomed.

How Not to Run an AGM

On Wednesday I attended an AGM of an EIS company named British Smaller Country Inns 2 Plc (one of four similar companies). The directors have managed to turn my investment of £2,400 into £670 over 12 years (based on the latest estimate of net assets). I think the directors are fools for not trying to exit the pubs market years ago and this AGM gave other examples of their incompetence. Firstly the Chairman, Martin Sherwood, does not know how to run the voting at an AGM according to the Companies Act. He announced a “show of hands” vote but then proceeded to add the submitted proxy votes to the count of raised hands before declaring the result. In essence you can only take into account the proxy votes if a poll is involved in which case the show of hands vote is ignored. Mr Sherwood did not understand this point when I raised it.

I also raised the fact that the company had sent out from it’s email address an “invite” that was clearly “phishing” of some kind. When I raised this at the time he said the company had been “hacked”. Bearing in mind the email had been sent to a number of shareholders, and probably everyone in their email contact list when that could be thousands of people, I asked whether they had reported it to the Information Commissioners Office (ICO)? Who are they, never heard of them, was the response at the AGM. Well for Mr Sherwood’s information and everyone else, if there is a significant leakage of personal information, then it should be reported to the ICO (see https://ico.org.uk/for-organisations/report-a-breach/ ). This is a legal requirement since the 25th May. It simply astonishes me that a director of a Plc is not familiar with the ICO and their responsibilities under the GDPR regulations.

As there is only one pub remaining to be sold in British Country Inns 2, after which the company is likely to be wound up, I may get an exit within a year or so and will then be able to claim “loss relief”. Shareholders in the other linked companies are not so fortunate as they may take longer to reach wind-up. Originally I did not invest directly in this EIS company but via a fund. I am now very wary about EIS fund offerings. How many really show a profit rather than just provide a vehicle for tax refunds?

Proven Growth & Income VCT

After the above AGM I moved on to the Proven Growth & Income VCT (PGOO), another tax relief focused vehicle but with a much better track record. In this case I am at least showing a profit even ignoring the generous tax reliefs. Total return last year was 4.35% according to my calculations, but only 2.7% according to the company. I queried the difference and it’s probably accounted for the fact they are calculating it on the mid-year average asset value when I do it on the year start figure. Total return (change in net asset value per share plus dividends paid out) is the only measure to focus on for VCTs and other investment trusts.

Not much to note at this AGM with only 4 ordinary shareholders present. I queried the length of service of the directors, with 2 having served more than 9 years. They are not apparently in any hurry to refresh the board however.

The manager said it was difficult to find new deals – a “wall of money” going onto companies that would qualify for VCT investment. But they are doing more marketing to raise awareness of their company.

Oxford Technology VCTs

Yesterday I attended the AGMs of the Oxford Technology VCTs in Oxford (all four of them) who are a very different beast altogether with a very disappointing track record since formation. Figures for total return (after tax relief) were given as 107.4, 52.9 122.2 and 82.9 respectively since foundation. As manager Lucius Cary said in his presentation, “not a great result – not brilliant but not a disaster either”. They have had some disappointments and a lack of really big hits which one needs when investing in early stage technology companies. But clearly many investors attending were unhappy with several suggestions for winding-up the companies. That was particularly vociferous for OT4 where there is no problem with investors having claimed capital gains roll-over relief.

The directors, who were all changed not so long ago, suggested wind-up would be difficult. They also think there is value to be realised that would be lost in any “fire sale”. They recognize these VCTs are too small and with no major new investments being made and no fund raising likely, they are aware of the strategic issues. But they are apparently looking at possibly doing a similar deal to that done by the Hygea VCT who appointed a new, experienced manager to raise a “C” share fund. That company has been renamed the Seneca VCT accordingly.

We had presentations from three of their investee companies: Ixaris (electronic payments business), Scancell (a listed pharma company) and Select (printer management software). The last one was somewhat interesting as I am familiar with the sector from my past career. But Select used to be a company that had its own products and IP but seemed to have turned into a distributor of other people’s products. Distributors are not valued highly and in the presentation the typical problems of being a distributor became apparent – they lost money last year due to a change in the relationship with their major supplier to their disadvantage.

Scancell and Ixaris are both major proportions of the portfolios so a lot depends on their future results. Scancell result is very dependent on the outcome of clinical trials which won’t be available until 2019. But it was mentioned that one analyst values then at 55p when the current market price is 12p.

The presentation from Ixaris was by David Sear via Skype who was appointed Chairman a year ago. They also changed CEO a week ago. Note: for those who saw a presentation by LoopUp recently at the Amati AIM VCT agm where one member of the audience suggested that everyone should use Skype as it works fine, this latest event was a good demonstration of why Skype is not fit for business use – audio out of synch with video, download delays, etc.

I have to admit to knowing a lot about Ixaris as I was a founder investor 14 years ago and still hold a few shares directly. It has been slow progress, although revenue has been increasing and they are near EBITDA profitability. The new management team does seem to be improving the business but it was suggested that a “possible liquidity event” was 2 years away and it might be via a public flotation. But the bad news was Sear’s mention of a contractual issue with Visa for their Entropay pre-paid card service. Incidentally if you want a pre-paid card for security reasons then the Entropay service is a good one. Ixaris do have a second major division though that seems to be doing well.

Some of the other investee companies were covered in brief, and they do appear to have prospects in some cases. But Plasma Antennas for which there were high hopes at one time has been written off.

When it came to the votes, all the resolutions were passed on a show of hands, including re-election of all the directors, and perhaps even more importantly on the votes to continue with the companies, including even on OT4!

It was an educational AGM and my conclusion is that the directors are actually doing the right things with these problem companies. These VCTs are trading a high discounts to NAV, partly because there are no company share buy-backs unlike in many VCTs. But it would be a brave investor to buy the shares in the market. I only have a small holding in one of them.

K3 Business Technology (KBT), MaxCyte (MXCT), Eservglobal (ESG) and FairFX (FFX)

On Wednesday I attended presentations on the above four companies at the ShareSoc Growth Company Seminar in London. The last of those four I hold some shares in, and at least they made a small profit last year whereas all the others reported losses. With AIM companies, as the private equity world often says, you have to kiss a lot of frogs before you find a prince.

K3 showed the same problems historically as in Select mentioned above. Being a distributor is not an easy life and it’s difficult to make money doing that. But new management is changing the focus which may improve matters. Maxcyte is a typical pharma company and I never understand the technology in these businesses. I think you need a degree in biochemistry to even get to grips with developments in the sector. I have no idea whether it will come good in the end. Eservglobal seem to be moving from a mobile payment offering to focus on “Homesend” – sending money internationally more quickly and at lower cost than traditional banks can do. Earthport is a similar business I believe and that has not yet been reporting profits.

FairFX has a number of electronic money/payment offerings with the latest being a “business” account for SMEs. That might be very attractive to the large numbers of such companies. I have seen this company present before and the message is always clear and the questions answered well whereas the other companies presenting failed to convince me.

An eventful week, compounded by stock market volatility. Summer is the time to pick up bargains and sell the over-hyped stocks when buyers depart for their holidays.

Curtis Banks

One final item; I seem to be having some payment problems with Curtis Banks (an AIM listed company) who manage one of my SIPPs that is in drawdown. They took over a business called Pointon York and since then there have been delays in payments, or in one case two payments made in error. Reviews of the service, including comments from employees on the web seem somewhat poor. If anyone else is having problems with them, please contact me.

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

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Brexit – Good or Bad?

Prime Minister Theresa May convinced her ministerial colleagues to back her Brexit vision, but now our Brexit negotiators David Davis and Steve Baker have resigned and there are grumblings from the “hard” Brexit wing of the Conservative Party. Like no doubt many Brexit supporters I am somewhat puzzled by this outcome mainly because it is not at all clear what the plan is in detail, nor what the ramifications are. But it’s worth reading the letter sent by Mrs May in response to David Davis’s resignation letter. It included these words:

“At Chequers on Friday, we as the Cabinet agreed a comprehensive and detailed proposal which provides a precise, responsible, and credible basis for progressing our negotiations towards a new relationship between the UK and the EU after we leave in March. We set out how we will deliver on the result of the referendum and the commitments we made in our manifesto for the 2017 general election:

  1. Leaving the EU on 29 March 2019.
  2. Ending free movement and taking back control of our borders.
  3. No more sending vast sums of money each year to the EU.
  4. A new business-friendly customs model with freedom to strike new trade deals around the world.
  5. A UK-EU free trade area with a common rulebook for industrial goods and agricultural products which will be good for jobs.
  6. A commitment to maintain high standards on consumer and employment rights and the environment.
  7. A Parliamentary lock on all new rules and regulations.
  8. Leaving the Common Agricultural Policy and the Common Fisheries Policy.
  9. Restoring the supremacy of British courts by ending the jurisdiction of the European Court of Justice in the UK.
  10. No hard border between Northern Ireland and Ireland, or between Northern Ireland and Great Britain.
  11. Continued, close co-operation on security to keep our people safe.
  12. An independent foreign and defence policy, working closely with the EU and other allies.

This is consistent with the mandate of the referendum and with the commitments we laid out in our general election manifesto: leaving the single market and the customs union but seeking a deep and special partnership including a comprehensive free trade and customs agreement; ending the vast annual contributions to the EU; and pursuing fair, orderly negotiations, minimising disruption and giving as much certainty as possible so both sides benefit.

What exactly are the moaners complaining about if that deal can be achieved? Their concerns seem to be focused on points 5 and 6 above. Will adopting common product standards (or whatever EU standards they might determine subject to UK Parliamentary consent) really hobble the UK and make it difficult for us to negotiate trade deals with other countries? I do not see why – it just means that exporters to the UK will need to comply with UK/EU regulations just as UK exporters to the USA now have to comply with US products rules and regulations. What is so difficult or damaging about that?

Note that only industrial and agricultural products are covered by these proposals. Services are not so such matters as financial regulations where the EU has been particularly inept will presumably fall into abeyance unless we decide to conform. But such phrases as “A commitment to maintain high standards on consumer and employment rights and the environment” do need explaining more – does this mean we have to accept EU regulations or what in those areas?

With those reservations otherwise my view is that if Mrs May can achieve her objectives this would look to me to be a reasonable outcome as it will meet the main objectives desired by Brexiteers. Sovereignty and the ability to lay down our own laws and regulations in most areas and in a democratic way will be returned to us. Would anyone care to explain to me why it is otherwise?

But whether these proposals can be agreed with the EU is another matter of course. Perhaps David Davis has resigned because he sees the impossibility of getting their agreement to this “fudge”. The borderless objective in Ireland looks particularly problematic. We need a clearer explanation of how that might work in practice.

My conclusion therefore is that this might be a way forward, but the game of Brexit negotiations is a long way from being concluded.

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

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Open Season on Auditors?

I attended a joint ShareSoc/UKSA meeting hosted by PwC yesterday. There was a lively debate as one might expect on the problems of the audit profession where there have been just too many issues with listed company accounts in recent years. The latest is an investigation announced by the FRC into the audit of Conviviality but there have been lots of other problem cases in both large and small companies – Carillion, Interserve, BHS, BT, Rolls-Royce, Mitie, RSM Tenon, Connaught, Autonomy, Quindell, Globo and Blancco Technology are just a few not to mention those in the financial crisis a few years back such as HBOS, RBS, Northern Rock et al. There are simply too many such examples but whenever I go to meetings run by auditors or the FRC I get the distinct impression of complacency. They all think they are doing a great job and the bad apples are exceptions. Yesterdays event was no different.

Reading the London Evening Standard on my way home, there was an article on this topic written by Jim Armitage which was headlined “It’s open season on auditors as others dodge the bullet”. He blamed the incompetent management at Conviviality for the company becoming bust but did the audit report at that company highlight the risks being taken?

Even if it did it seems unlikely from comments from the audience at the PwC meeting that anyone would have noticed them. Only a minority of investors read the audit report part of the annual report because most of it consists of boiler plate text following by the comment “nothing to report”. Indeed it was very clear that auditors will do everything possible to avoid a “qualified” report as that might damage the company and its share price. The result is that a “qualified” report is a rare beast indeed.

There are two ways to improve performance of anyone: the carrot or the stick. Perhaps auditors should be paid more so they can put more time and effort into their audits but company boards might be reluctant to do that. There were a few suggestions raised in the meeting on how to improve matters. One was having auditors appointed by a shareholder committee rather than by the board of directors. But I suspect that would only help if such a committee had the power to approve expenditure of the company’s money. Certainly one problem at present is that auditors are selected to a large degree on price rather than quality.

Another suggestion was to have an independent audit committee (i.e. not made up of board directors), rather like a supervisory board which is used in some European countries. But that would surely add complexity and cost that only the largest companies could justify.

The stick approach would mean more penalties for auditors when they make mistakes. The Financial Reporting Council (FRC) could be tougher and impose higher penalties although they probably need more resources budget-wise to enable them to do that. But one advantageous change would be to reverse the Caparo legal judgement and make auditors liable to shareholders. At present it’s much too difficult for investors to sue auditors while companies rarely want to do so.

As regards the FRC, the Government have recently announced a review of the role of the FRC to be chaired by Sir John Kingman – see https://www.gov.uk/government/news/government-launches-review-of-audit-regulator

Sir John is looking for evidence so if you have some, please send it to him. I will probably be submitting something and ShareSoc/UKSA are likely to do so also. But if you have evidence of individual cases where auditors have fallen down on the job and the FRC have not been helpful then please submit it. The FRC also has responsibility for Corporate Governance so you may like to comment on that also. There may be hope of some change from this review – at least the advisory committee is not full of auditors and accountants.

One idea proposed in the PwC event to help auditors was for a mechanism to enable shareholders to suggest to auditors what they should be looking at in the accounts of a company. That might assist but from my experience of once doing this on a company, it had no impact on a clean audit report – the company subsequently went into administration.

There were some interesting comments on the general quality of accounts with one speaker suggesting that the failure to depreciate goodwill was distorting balance sheets and it was now obvious that investors ignored the statutory accounts and paid attention to the “adjusted” figures for profit or other non-statutory measures. Should not the auditors be auditing the latter and commenting on them? Perhaps we should have alternative measures as part of the statutory accounts?

In conclusion the PwC event was undoubtedly useful as it highlighted many of the current problems and also covered the technological future of auditing (the tools PwC now uses in its audits were covered). One can see that technology might embed the status quo of the four large audit firms as smaller organisations might not have the resources to develop their own equivalent software products.

The more one considers the accounts of companies and the audit profession in the modern world, the more one comes to realise that substantial reform is required.

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

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Book Review: Debtonator by Andrew McNally

Now here’s a book well worth reading on your summer holidays. It’s called Debtonator by Andrew McNally. Indeed if you are taking a long-haul flight to your holiday destination, you might be able to read it in one sitting. Like all good books it is short at only 98 pages excluding notes and index, and the format is small as well. But there is an enormous amount of information embodied in there.

It covers the problems caused by excessive debt in the modern world. The author explains how the balance of company finance has moved from equity to debt which has had many negative effects. He links the rise in income inequality, a major social concern in leading economies, to the excessive use of debt and the discouragement of investment in equities by Governments and pension regulators. The housing market is another example of the distortion created by too much debt at very low cost, engineered by Government and central banks.

The author suggests we need to move to an equity financed, rather than a debt financed economy and proposes how that could be achieved. Reform of the tax system is one aspect of achieving that.

He is also scathing about the current costs of equity investment for retail investors due to high “intermediation” with too many people taking a cut of the real investment returns before they arrive in the hands of the beneficial owners. That’s despite his apparent long career in the investment industry.

The book is a very good summary of what is wrong with the modern financial system. But it also gives the reader some tips on how to become one of the wealthy few rather than the impecunious many. You need to take a direct stake in the real economy where companies are generating real returns, and minimize the costs imposed by advisors, brokers, platform operators and all the other gougers who erode the returns.

In summary one of the best books I have read lately on the defects in the modern financial world. A little gem of erudite analysis.

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

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Amati AIM VCT AGM and Retailers

Amati AIM VCT is one of those peculiar beasts – a Venture Capital Trust. Yesterday I attended their annual general meeting and here are some general comments on the company and the meeting:

Amati AIM VCT (AMAT) is the result a merger of the two Amati VCTs. They had very similar portfolios so this made a lot of sense, and the result is a large VCT with total assets of £147 million. This figure was also boosted by excellent performance last year – a total return of 45.2% on VCT2 for example. That of course was helped by a surprising good performance from AIM companies in general last year, but the Numis AIM index was only up 29%.

How was the performance achieved? By selective stock picking primarily, and by holding on to the winners. So the top ten holdings are now: Accesso Technology, Frontier Developments, Keywords Studios, Quixant, Learning Technologies, Ideagen, AB Dynamics, GB Group, Tristel and the TB Amati UK Smaller Companies Fund. The fact that I hold 5 of those companies directly tells me I should keep an eye on what the VCT is investing in.

Note that I learned to take a jaundiced view of AIM VCTs who traditionally did worse than private equity (i.e. generalist) VCTs due to being suckered into investing in dubious IPOs in what was historically a poor-performing AIM market. But there are always exceptions and perhaps this shows that AIM is improving and AIM fund managers are learning to be more discriminating.

There were presentations from fund managers Anna Wilson (new to the company) and founder Dr Paul Jourdan. The latter gave a somewhat “spaced out” presentation as if he had not spent much time preparing it. It included coverage of a chess match between two software programmes, indicating how clever they had become. Perhaps Paul is worried about being replaced by a computer. But I think the main message we were meant to receive was that the world is rapidly changing with disruptive new technology such as AI.

Anna Wilson covered the worst and best portfolio performers and some of the new investments. The latter include i-Nexus Global (INX: software to help companies to implement strategies), Water Intelligence (WATR: leak detection and remediation), AppScatter (APPS: app management platform) and Fusion Antibodies (FAB: antibody based therapeutics for cancer treatment).

There were also presentations from investee companies Loop-Up (LOOP) and FairFX (FFX) both of which I hold directly. In the latter case, and as the CEO said in his presentation, they should probably change the name as it does not just do foreign exchange provision which is now a crowded market. That was particularly so after the announcement in the morning about a new service to provide business banking to SMEs. By using their new e-money issuing licence they can act like a bank in almost all regards except that they cannot lend client funds out to others. But that just makes them safer.

As I hold both Loop-Up and FairFX directly I did not learn a great deal more but they were interesting nonetheless. It’s always good to be reminded why one bought a stock in the first place.

As Paul Jourdan indicated there are rapid changes in some markets and retailing is certainly one of them. There has been wide media coverage of the fact that even John Lewis, that favorite destination for middle-class shoppers along with its Waitrose stores, is now not making a profit. Here’s a good quotation from Sir Charlie Mayfield, John Lewis Chairman: “It is widely acknowledged that the retail sector is going through a period of generational change and every retailer’s response will be different. For the partnership, the focus is on differentiation – not scale”.

This is undoubtedly true. Competing with other supermarkets with a general “stack them high, sell them cheap” approach certainly makes no sense. It seems John Lewis is having some success with clothes by using “personal style advisors” (rebranded shop assistants).

Clearly the future is internet shopping for many products, perhaps with some “destination” warehouses for viewing and collecting goods. There are some categories of products where viewing the merchandise, particularly on big ticket items or where one cannot simply return them, may still be essential. Those where advice is required might also require a personal touch but some of that can be done remotely. Where the damage will be mainly done is to high street outlets and shopping malls for which I can see no good purpose. Perhaps if they can turn themselves into entertainment and drinking/eating venues they can survive but it’s clearly going to be a lot tougher for such venues and the smaller retail chains that rely on them. Department stores will likely suffer as they already have so investing in companies such as Debenhams is surely questionable unless they become much more internet focused with the shops changing in function.

The high streets are already changing. Banks going, clothes shops closing and more restaurants, cafes, fast food outlets and charity shops if my local high street is anything to go by. Do I regret the changes? Perhaps but I also know it’s not wise to piss against the economic and technological winds. For investors the message is that with such rapidly changing markets, one has to keep an eye on evolving trends and how company management is responding, or not, ever more closely.

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

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Stopping Another Beaufort Case

Readers are probably aware of the administration of stockbroker Beaufort, how PwC are running up enormous bills to the disadvantage of creditors and how they also claimed to be able to charge the bills against client assets under the Special Administration Rules. See here for more information if you are not familiar with this debacle: https://www.sharesoc.org/campaigns/beaufort-client-campaign/

I hope all stock market investors have already written to their Members of Parliament on this topic, not just to get the Special Administration Rules changed but to get a proper and full reform of the share ownership system in the UK. If you have not, please do so now.

But another way to get the Government’s attention is to get enough people to sign a Government e-petition. One of the people affected by the Beaufort case has created just such a petition which is now present here: https://petition.parliament.uk/petitions/222801 . Please sign it now!

The Special Administration rules that apply to financial institutions (banks and stockbrokers for example) are helpful in many ways and were well conceived following the banking crisis in 2008. But rule 135 which allows client assets to be filched by an administrator, even when they are held in trust, seems to have been snuck in without notice and without consultation. It means anyone who holds shares in a nominee account (as most people do nowadays) is at risk of substantial losses if the broker goes bust. That’s a more common occurrence than most people realise mainly because most brokers operate in a highly competitive and low margin market.

SO MAKE SURE YOU SIGN THE PETITION TO ENSURE YOUR ASSETS ARE SECURE

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

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Just Eat – Capital Markets Day

I recall other ShareSoc Members complaining about how some companies publicly announce “Capital Market Day” events on the morning that the event takes place. This ensures that private investors are excluded as only institutional investors are given advance notice. A very good example was that for Just Eat (JE.) yesterday. Given in an RNS at 7.00 am in the morning, with the event commencing at 9.00 am.

Usually such announcements say something like “no new information will be provided”, or in this case it said “no update on trading will be provided”. But in fact there was obviously very significant new information provided because the share price fell 7.1% on the day, mainly in the afternoon.

There was a webcast provided and I tried to listen to a recording of it in the evening but it kept breaking up so I did not hear anything of interest. The Financial Times reported this morning that “management comments about costs and profitability jolted investors”, and that “investment levels in the coming years would remain elevated and margins were likely to flatline at its marketplace business”. Consensus forecasts were likely to fall it suggested. There was no announcement this morning from the company clarifying what was said or why the share price fell.

This debacle follows a similar sharp fall in the share price following an unexpected statutory loss due to exceptional write-offs in the annual results in March. It is also clear the market for food delivery is changing rapidly with new entrants in addition, meaning the sector is getting more competitive and more investment seems to be required.

I did previously hold a significant number of shares in the company but sold the remainder today. Just too many unexpected events at this company. I hate unpredictable companies and lack of clarity in management statements (or no statements). When confidence in a company and its management evaporates, it’s always time to sell in my view.

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

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Directors Removed But One Reappointed at Telit

More interesting events at the Telit Communications (TCM) AGM yesterday. This is a company that has been through troubled times of late with the departure of former CEO Oozi Cats under a cloud and lots of questions about their accounts being raised. But events at the AGM were even more surprising when the Chairman Richard Kilsby and two other non-executive directors were voted off the board on a poll. The meeting lasted all of ten minutes apparently.

Existing non-executive director Simon Duffy took over as Interim Chairman and one of the removed directors, Miriam Greenwood, was promptly reappointed (i.e. co-opted to the board). This was so as to ensure the “board and its committees continue to be quorate with an appropriate number of independent, non-executive directors” according to the announcement by the company.

Is it legal for a board to reappoint a director just removed by a vote of shareholders? The answer is yes unless a resolution was passed to the contrary. Whether it is acceptable practice is another matter altogether.

I have come across this situation once before at Victoria where the Chairperson reappointed someone just removed by a vote of shareholders. I did not like it then when the justification given was the need to have at least two directors to maintain the company’s listing. I recall saying at the time: “is there nobody else in the company who is willing to step forward”. The Chairperson was subsequently removed by shareholders.

Does the justification for re-appointing a removed director by the Telit board make any sense? Not really in my view. Board committees don’t sit frequently and new non-executive directors can usually be recruited relatively quickly. Perhaps the board anticipated some problems in that regard as joining this board might be perceived as being risky. But Telit is an AIM company so is not bound by the UK Corporate Governance Code regarding the number of independent directors and composition of board committees and nor is there any AIM Market Rule that I am aware of that would require them to immediately appoint another non-executive director. Even if the company is adhering to some other corporate governance code, the rules are typically “comply or explain” and obviously the company would have a good explanation for non-compliance.

It would seem to me that the board simply considered it a good idea to reappoint Miriam Greenwood, but when shareholders have voted to remove her, I suggest she should have stayed removed. Shareholders views and rights should not be abused in this manner. It is surely time for the FCA or FRC to lay down some guidelines on what is permissible in such circumstances as the Companies Act does not cover it.

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

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