Author: rogerwlawson

Savings Income Tax Review

In addition to the review of Inheritance Tax previously covered, the Office of Tax Simplification (OTS) are also undertaking a review of ways to simplify the taxation of income from interest on savings and dividends. Although 95% of the population pay no tax on such income as they have relatively little, the complexities of calculating the tax due on those with higher levels are mind boggling. Here’s a couple of quotations from the OTS Report (see https://www.gov.uk/government/publications/simplifying-the-taxation-of-savings-income ) which explain why:

“Many of the issues have arisen because of a series of changes, each working well enough taken by itself but which together create significant complexity that is not easily resolved”; and:

“The starting rate for savings (SRS), personal savings allowance (PSA), dividend allowance and other allowances and features of the tax system mean that most people pay no tax on their savings, but the interactions between the rates and allowances is sufficiently complex at the margins that HMRC’s self-assessment computer software has sometimes failed to get it right. It is proving to be very difficult to create an algorithm that calculates the tax correctly in all circumstances and HMRC does not expect to bring the complete calculation online until 2018-19.”

For those with complex tax affairs, or significant levels of dividend income who are probably some of the readers of this blog, this is not a trivial problem. Even my large firm of accountants who do my personal tax returns seem to be having problems with the software they use of late. I would certainly hate to try and do my own tax returns now.

One of the past simplifications which has been very damaging to stock market investors was the introduction of a “dividend allowance” of £2,000 to replace the dividend tax credit system. Although investors can put money into an ISA where dividends are not taxed (and could be paid out), there are severe limits on the amounts that can be invested in an ISA. That limit is £20,000 in the current tax year but has been much lower in the past and may get reduced again. For those shareholdings not in an ISA or SIPP, the removal of the dividend tax credit system means that the Government is collecting tax twice on the same company profits. Once when corporation tax is paid by the company and again when dividends are paid to investors out of those profits. This is surely iniquitous even with the current relatively low level of corporation tax. This change was allegedly made to prevent small incorporated businesses from avoiding income tax by paying profits out via dividends instead of via salaries subject to PAYE, but there were other simple rule changes that could have prevented that.

What does the OTS propose to do to simplify the calculation of savings tax? They wish to introduce a “personal tax roadmap” incorporating a plan for consolidation of the savings income tax rates and allowance. Also they wish to improve guidance because it is clear that people have difficulty in understanding the existing system. More flexibility in ISAs might also be considered to allow partial transfers of money and simplify the rules.

One specific threat in the document is this: “A more radical option would be to end the differential tax rates for dividend income. If all taxable income was taxed at the same rates, it would not matter how the personal allowance was used. Making this change would have the effect of increasing the amount of tax due from those who receive amounts of dividend income above the allowance. It would also impact on the taxation of profit extracted as a salary or as a dividend, from family owned companies.”

Investors receiving substantial dividends directly have already suffered a major tax increase from the removal of the tax credit system (the £2,000 tax free allowance is trivial in comparison with the income likely receivable by a portfolio large enough to fund a retirement for example). The new suggestion that dividends should be taxed the same as earned income would be another damaging imposition (the former are currently taxed at somewhat lower rates, although Trust rates are higher – another anomaly that is difficult to explain).

You can send your own comments to the OTS via email to: ots@ots.gsi.gov.uk .

As I said in the Inheritance Tax Review you might suggest to them that the present arrangements seem to generate work for tax accountants while baffling the general public. Like IHT, income tax is certainly a tax that requires simplification. A more fundamental review is surely required. However it’s worth bearing in mind that individuals have often planned their financial affairs based on existing tax rules. Abrupt changes to tax rules and allowance should be avoided, but that’s all we have had for the past few years, driven by political imperatives. The result has been the unintended consequence of a very complex tax system that few people understand and which makes tax calculations only possible by experts.

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

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Belated Action by FRC Re Autonomy

I commented previously on the conviction of former Autonomy CFO Sushovan Hussain for fraud in relation to the accounts of Autonomy Plc (see https://roliscon.blog/2018/05/02/they-do-things-differently-in-the-usa/ ). Just to show that this was not solely a case prompted by Hewlett Packard over their disastrous acquisition of the company and supported by a partisan California court as some have alleged, the Financial Reporting Council (FRC) have now announced formal complaints over the conduct of auditors Deloittes and senior finance staff of Autonomy – including Mr Hussain.

Allegations include: failings by the auditors to adequately challenge Autonomy’s accounting and disclosure of its purchases and sales of computer hardware; adequately to challenge Autonomy’s accounting for transactions with value added resellers (“VARs”) and to correct false or misleading communications made by Autonomy to the Financial Reporting Review Panel (“FRRP”) of the FRC.  Sushovan Hussain and Stephen Chamberlain are alleged to have breached the fundamental principle of integrity by acting dishonestly and/or recklessly when preparing and approving Autonomy’s Annual Report and Accounts for the years ended 31 December 2009 and 31 December 2010 and related charges.

There will be tribunal hearing to hear these complaints for which a date has not yet been set. It seems likely that the claims will be defended.

So 8 years later we have a non-criminal action by the regulatory authorities in the UK over accounting and audit failures while the US prosecuted for fraud. Surely this is not good enough if the allegations are true? Plus it’s been too long before action has been taken. If the claims are upheld then the accounts were wrong and sufficiently wrong not just to mislead the investors in Autonomy but to prompt Hewlett Packard to purchase the company at a grossly inflated price – that is their claim which is the subject of an on-going civil action. But it could also be seen as a fraud on stock market investors which is a criminal offence in the USA but not the UK. That is what needs changing.

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

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Inheritance Tax Review

The Office of Tax Simplification (OTS) have published two items that will be of interest to investors. Firstly they have called for evidence to support a review of Inheritance Tax (IHT) and secondly a note on “routes to simplification” of the taxation of savings income. The latter is horribly complex so I will deal with that later in a separate post.

Inheritance tax is slightly less complex but since recent Chancellors decided to use it as a sop to the middle classes with such rules as the ability to leave property to children and grandchildren of up to £1 million, it’s been getting a lot more complex. It’s now reached the level where few people understand it and what effect it may have even when their tax affairs are otherwise relatively simple.

Part of the problem has been rising property prices. More than 14,700 homes were sold for more than £1 million last year according to Lloyds, and a lot of those will have been in London and the South-East. The Government sees it as a popular political stance to enable such homes to be passed on to children, rather like one can pass on certain pensions now, while not requiring their sale to meet medical or social care in later life.

Rather than simply raise the inheritance tax threshold, to stop the rapid increase in the number of people who are liable for inheritance tax (although that’s still less than 5%), the clever folks in the Treasury devised alternative rule changes that ameliorated the impact of increasing property wealth for certain sections of the population (e.g. property owners). But those who have to act as executors and deal with probate are faced with increased complexity.

You can see the impact of rising property prices if you know that IHT is charged at 40% and applies to assets as little as £325,000 (that’s where the nil rate band ends) – so almost everyone living in London may pay it if they have no close relations or other “allowable” exceptions such as business assets.

It’s not just property that causes complications though. Unlisted companies such as AIM stocks are business assets and hence with typical private investor share portfolios now often holding a significant proportion of such shares these complicate the calculation. That is particularly so as not all AIM shares qualify and they need to have been held for some years.

The OTS are keen to hear from individuals as well as professionals with an interest in this area. There is an easy on-line survey you can complete here: https://www.gov.uk/government/consultations/inheritance-tax-review-call-for-evidence-and-survey

Please help them by responding. You can also send comments to them via email to: ots@ots.gsi.gov.uk . You might suggest to them that the present arrangements seem to generate work for tax accountants while baffling the general public but at the same time generating very little in revenue to HMRC. It’s certainly a tax that requires simplification. The original objective of inheritance tax seems to have been the socially beneficial aspect of preventing large wealth being passed on and accumulating through the generations. But at present the rich mainly avoid it – they set up trusts or move to another country. Meanwhile the middle classes tend to pay it and suffer the absurd complexity at the same time.

Here are some personal suggestions from me for simplification:

  1. The nil rate band should be raised to £2 million – effectively covering most normal family homes and avoiding the need to sell the house to meet IHT liabilities for children still in occupation. The Osborne changes that permitted property to be passed on should be scrapped.
  2. The IHT exception for AIM shares should be abandoned. The complexities of what may or may not qualify for that make planning difficult and potential savings on IHT are a poor reason or motivation for buying high-risk AIM shares. The desire to encourage investment in early stage companies is hardly a justification for most retail investors as they can rarely buy AIM company shares in IPOs and management/founders have other tax incentives such as entrepreneur relief. If such encouragement is required then other tax concessions (e.g. on capital gains) might be better.
  3. The seven-year rule for exemption of gifts is actually more complex than it first appears to be and can extend more than 7 years if multiple gifts are made I understand. Together with the tapering of such relief, it can become difficult to predict the likely liability particularly as forecasting when the donor might die is usually not easy. I suggest this relief be restructured to provide more certainty about the tax liability and it’s worth considering switching to a tax on gifts received.
  4. The existing IHT rate of 40% should be reduced as it encourages complex, and expensive, tax planning. A lower rate of tax might actually encourage more people to pay it rather than go to the trouble of setting up complex plans to avoid it.

In summary IHT has become too complex and needs to be simplified. However it’s worth bearing in mind that individuals have often planned their financial affairs based on existing tax rules. Abrupt changes to tax rules and allowance should be avoided.

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

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Should Trust Managers Attempt to Unseat the Board in a Dispute over Fees?

Investment trust directors should be independent of the manager. But sometimes the latter appear to think otherwise. Such is the case at Invesco Perpetual Enhanced Income Ltd (IPE), an investment company that invests in high yield bonds and other assets. It is managed by Invesco Perpetual. The latter have resigned as fund manager after a dispute over fees it is alleged. They have now also requisitioned a general meeting of the company to remove the trust’s Chairman, Donald Adamson, and director Richard Williams and to appoint two new directors. The two new directors who are proposed are currently directors of Aberdeen funds which is an odd coincidence – see below.

Invesco hold 17 percent of the shares and are supported by two other large institutional investors but a lot of the shareholders in this trust are private individuals.

The dispute over fees arose apparently because the trust wished to reduce the level of fees, and possibly remove the performance fee. The AIC gives the “ongoing charge plus performance fee” of 2.16% which is surely high for what is primarily a bond fund. Performance fees in trusts are also, and quite rightly, becoming unpopular with investors.

Historically the performance of this trust looks good but the company says it has received attractive offers from well qualified alternative managers. However the key question is whether it is morally right for a fund manager to challenge the board of directors in this way. How is that in shareholders’ interests and clearly there is a conflict of interest here. What is in the best interests of shareholders is surely for the board to decide, not the fund manager.

I have come across this situation once before some years ago when Aberdeen attempted to thwart the change of fund manager of a Venture Capital Trust (VCT) where the shareholders (including me) had caused a revolution that resulted in a change of board after a quite dire performance track record. I was not best pleased with that attempt although it was unsuccessful and the manager was changed.

My view is that fund managers should not interfere in this way and the FCA should introduce rules to ensure that trusts are truly independent and not poodles of the manager (a common problem in VCTs for example). The directors should be independent and threats to try and remove them by the fund manager should be treated with contempt. I hope shareholders in this trust will vote against the requisition.

Brewin Dolphin, a leading retail broker, has supported the board in resisting Invesco’s desire to retain a performance fee. Guy Foster, Head of Research, has been quoted in Citywire as saying Invesco should “leave the board to continue working to reduce fees and shore up the uncovered distribution for the benefit of shareholders”. Let us hope other retail brokers take the same stance.

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

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RedstoneConnect Disposals and Royal Weddings

Interesting announcements this morning were issued by RedstoneConnect (REDS). Along with their annual results they are proposing to sell two major divisions that provide systems integration and managed services for £21.6 million in cash. That was actually more than the market cap of the company before the announcement.

That will leave them with a division that provides software for managing office occupancy (for example, hot-desking, car parking, access control, meeting room management, way-finding and other systems). The division had sales of £5.3 million last year. The company has some debt which may be repaid out of the proceeds of the sales but it is likely to have cash of at least £15 million.

The share price jumped on this news and is now about 114p at the time of writing, which values the business at nearly £24 million. It seems investors like the deal but don’t place a great value on the remaining software business.

My view is that strategically this move makes a lot of sense because the businesses being disposed of were low margin ones operating in competitive sectors. The software business is like all such businesses capable of being built around proprietary IP with barriers to entry and high recurring revenues streams. As a holder of RedstoneConnect shares I am therefore likely to vote in favour of this deal.

It is of course possible that the management of the company will blow the cash on poor acquisitions or other diversions but they do seem to have managed to turn around this company which has had a disappointing history, and head it in a positive direction. Adjusted profits almost doubled last year for example. It is claimed this reflects “the successful implementation of the strategy to focus on higher quality, higher margin business”.

The wedding of Prince Harry and Meghan Markle was certainly a well-managed affair, but I was astonished to learn that it might have cost over £32 million even if Mum and Dad did pay a large share of it. Some estimates were even higher. I trust the heart attack of Meghan’s father was not caused by his being asked to contribute. But it’s the “opportunity cost” that really concerns me. For £32 million the parents could have purchased a sound business such as RedstoneConnect for £20 million and still had £10 million to spare for partying.

A number of commentators in the popular press vied with stories of how their weddings were so cheap in comparison. But can you beat mine of 1971 for “cheap”? I and my wife got married at Marylebone Registry Office (if it’s good enough for Paul McCartney it’s good enough for anyone). We then went back to our flat in Maida Vale where we had cohabited for some time for a reception with a few friends and relatives. I don’t recall our parents having to contribute and the cost in total must have been a few hundred pounds at best.

As regards the latest royal wedding, one omission was perhaps the lack of a writer of the skill of Victorian war correspondent William Russell to commemorate the event. This is a sentence from his report of the wedding of the Prince of Wales (later Edward VII) to Princess Alexandra: “With trumpet-flourish and roll of drum, in cadence measured and timed, tossing plume and lustrous train, gold and jewel, cloth of gold, satin and ermine, ribands and stars condense and form a pyramid of colours which tapers in at the door of the chapel and lights up that space which can be seen through the archway, as peer and peeress, Knights of the Garter, and ministers gather in their places”.

That is from a compendium of his reports for the Times recently purchased in a second-hand bookshop. They cover the Crimean war, the coronation of the Czar in Russia, the Indian Mutiny, the laying of the first Atlantic telegraph cable, the start of the American Civil War and much more that I have yet to read. But oh to be able to write like William Russell is one of my few remaining desires.

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

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Learning Technologies AGM and Brexit

I went to the Learning Technologies (LTG) Annual General Meeting yesterday, only to find my son Alex was there also (we both hold the shares). So we did a joint report which can be found on the ShareSoc Members Network. What follows are a few particularly interesting points from it.

LTG was a workplace digital learning solutions provider up to the beginning of last month when it announced it was to buy PeopleFluent – a cloud based talent management platform. Chief executive Jonathan Satchell described the deal as “transformative” for LTG’s US presence and that is surely the case. He also noted that “learning and talent are closely aligned” with cross-selling opportunities adding possibilities for further growth.

When the formal business was considered the first resolution was to accept the annual accounts and directors report. This had a surprise vote of 56 million proxies against (12%). I asked why the large vote against a resolution that normally gets a high percentage “yes” vote. Chief exec Jonathan Satchell replied that ISS (a proxy advisory firm) had recommended shareholders vote against the resolution on the grounds that there was insufficient disclosure in the Directors remuneration report, and shareholders had not been given a chance to vote on directors’ remuneration. Jon felt the complaint by ISS was overblown, but that LTG had discussed the issue with ISS and will look to improve disclosure next year. Jon noted it was not necessary to hold a vote on remuneration although I pointed out it was preferable to do so and many AIM companies did have remuneration votes. ISS had also noted that the Chairman Andrew Brode was on the remuneration committee, which they didn’t like. Jon did say that Andrew would be more than willing to give this role up and so in the coming year Jon said to expect a change on this committee.

A shareholder asked if the £13.3m Civil Service contract was a one off. Jon replied that there is scope for a one year extension to the contract but at the moment the accounts are based on the contract ending with no extension.

I asked about the PeopleFluent acquisition and questioned the use of a “cash box” transaction as this ignores shareholder votes in prior resolutions. A cash box placing allows a company to issue new shares by bypassing pre-emption requirements – meaning without shareholder approval. It works by a company forming a new subsidiary into which it puts cash via a placing and then buys that shell, paying with shares priced at whatever level it deems suitable. In effect it sidesteps the legal requirements of Company Law, and the resolutions previously passed by shareholders re share issuance.

Jon replied that LTG was up against US private equity and it was felt this was the best way to get the right amount of funds needed in a timely fashion to give the highest quality offer LTG could make. Comment: with the Chairman and CEO holding over 45% of the shares any vote would have surely gone through so it may not be so prejudicial to shareholders interests. But it sets a bad legal precedent as I think such transactions should be made illegal. Apparently Numis, their Nomad/Broker, suggested they do this. Otherwise it was a placing with no open offer which prejudices private shareholders although the discount to the previous share price was minor.]

Jon talked about the recent Pluralsight IPO, a similar US business. The company lost $90m on $160m revenue. Valuation $2Billion. Comment: this is obviously a “hot” sector for investors.

Summary: The enthusiasm of the CEO for the future prospects of the business were very evident and this seems to have been communicated to shareholders in recent weeks. The share price has been motoring upwards so it’s now on a prospective p/e of 44 according to Stockopedia. Certainly the high recurring revenue feature of the PeopleFluent business is positive as I always like companies with high recurring revenues and I said that in the meeting. However there are significant risks in such a major acquisition of a US business where there may be cultural and management style differences. The business also seems to have some difficulties and they have already be making some management changes.

In addition to that the large civil service contract in the UK will probably not be extended – or at most by a year – so historic revenue may not be representative of future revenue, and in addition the change to adopt IFRS 15 (see page 12 of the Annual Report) will impact 2018 financial figures. The corporate governance and the way the placing was done are also negatives. In summary there are a number of negative aspects in this business and potential high risks from the acquisitions that have been made (not just the latest one). The enthusiasm of investors for this business might be ignoring the substantial risks now associated with it so investors should keep a close eye on the progress of the acquisitions and their associated restructuring.

But as always, I learned a lot about this business and the individuals involved from attending the AGM. There were less than a dozen ordinary shareholders at the meeting which is disappointing given the opportunity it provides to quiz the management.

Brexit: I have not said much on the hot topic of Brexit of late although it’s no secret that I am generally in favour of it. The regulations that have come out of Europe such as MIFID II, the Shareholder Rights Directive and GDPR might have had good intentions behind them but in practice the detail regulations that result have been horribly complex and bureaucratic. The result has been very high costs imposed on many businesses and often with ineffective results. The key problem has been bureaucrats in Brussels with little knowledge of the real world and the business environment in the UK designing regulations without adequate consultation (or ignoring feedback submitted) and producing gobbledygook which few people understand. GDPR had positive objectives but the law of unintended consequences has resulted in people receiving hundreds of pointless emails.

The latest example of ridiculous claims of the cost of Brexit was the statement by Jon Thompson the head of HMRC that the “maximum facilitation” (Max Fac) option could cost UK businesses as much as £20 billion per year. This is apparently based on the cost of filling out customs declarations (200 million per annum at a cost of £32.50 each, plus other form filling according to the FT). This seems to assume that forms are filled out manually when in reality that can be done by computer software surely. Business might also look to reduce the costs by bulking up orders, or simply choosing not to export or import, i.e. to do business in different ways or with different people.

Whether Max Fac is a sensible option it’s difficult to say without a lot more evidence but staying in the Customs Union simply to avoid a hard border in Ireland does not seem to make sense because it means our trading policies and practices will be dictated by the EU. That’s not what people voted for in Brexit. People voted for political and governmental independence. Many people accept there may be some extra cost involved as a result but scare stories about the costs are not helpful.

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

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Two AGMs (Accesso and Foresight VCT) in one day

Yesterday I attended the Annual General Meeting of Accesso (ACSO) in Twyford at the somewhat early time of 10.00 am with the result that I got bogged down in the usual rush hour traffic on the M25. What a horrendous road system we have in London! A symptom of long term under-investment in UK road infrastructure.

Accesso provides “innovative queuing, ticketing and POS solutions” to the entertainment sector (e.g. theme parks) although they have been spreading into other application areas. The business has been growing rapidly under the leadership of Tom Burnet who moved from being CEO to Executive Chairman a while back.

Tom opened the meeting by introducing the board, including new CEO Paul Noland who is based in the USA where they now have 5 offices apparently. He also covered that morning’s trading statement which was positive and mentioned deals with Henry Ford Health System and an extension to an existing agreement with Cedar Fair Entertainment. Expectations for the year remain unchanged. Questions were then invited – I have just covered a few below.

I raised a concern about the low return on capital in the company (now less than 5% irrespective of how one cares to measure it). I suggested the reasons were large increase in administrative expenses (up 43% last year) and the cost of acquisitions. Did the board have any concerns about this? Apparently not. The reason is partly the acquisitions and the costs might come down as they rationalise operations but they are in no rush to do so.

The Ford deal was mentioned and Tom said this is one deal where the acquisition of TE2 has provided the technology to assist closure. This is what the company said about TE2 when they bought it: “The Directors of accesso believe that TE2’s cloud-based solution offers market-leading personalisation capabilities and data orchestration technologies which capture, model and anticipate guest behaviour and preferences not only pre- and post-visit online, but in the physical in-venue environment.  Personalisation is achieved via many heuristics, including machine-learning-based recommendations, in order both to enhance guest experiences and to provide actionable analytics and insights to the operations, retail and marketing organisations.”. I am sure all readers understand that. Hospital systems are clearly one target for this technology.

The vote was taken on a show of hands so far as I could tell, although the announcement the next day of the votes suggested it was done on a poll which is surely wrong. But there were significant numbers of votes (over 2 million) against several directors and against share allotment resolutions. I asked why and was told it was because of a proxy advisory service recommending voting against, allegedly because of some misunderstanding. The answer to my question seemed somewhat evasive though.

In summary, shareholders are clearly happy with the progress of the company but with a prospective p/e of 41 (and no dividends), a lot of future growth is clearly in the share price. Corporate governance seems rather hit and miss.

I then drove into London to the offices of Foresight in the Shard, again journey time a lot more than it should have been due to road closures, lane removal for cycle lanes, etc, etc. Interesting to note a large hoarding on the elevated section of the A4 inviting anyone who had a complaint against RBS and the GRG operation to contact them.

Also interesting to note when I stopped for fuel at a service station on the M4 that at the desk they were serving Greggs food and coffee as well as taking payment for fuel. I know that Greggs have kiosks in some motorway service areas but this is perhaps a new initiative to expand their market. It’s rather like the small Costa coffee outlets that are in all kinds of places. I am a shareholder in Greggs but this was news to me. Obviously I need to get out more to see what is happening in the real world.

The visit to Foresight was to attend the AGM of Foresight VCT (FTV) one of my oldest holdings. Effectively I have been locked in after originally claiming capital gains roll-over relief. It’s also one of the worst of my historic Venture Capital Trust holdings in terms of overall performance over the years.

I did not need to tell them again how dire the performance of the company had been over the last 20 years because another shareholder did exactly that. But I did query whether the claimed total return last year of 6.5% given by fund manager Russell Healey in his presentation was accurate. It was claimed to be so. Perhaps performance is improving but I am not sure I want to stick around to see the outcome.

One particularly issue in this company is the performance fee payable to the manager which I wrote about in my AGM report and on the Sharesoc blog last year. You can see why the manager has such plush offices as they have surely done very nicely out of this and their other VCTs over the years while shareholders have not, and will continue to do so.

Several shareholders raised questions about the reappointment of KPMG bearing in mind that in Foresight 4 VCT the accounts were possibly defective and a dividend might have been paid illegally. But the board seemed to know nothing about this matter. KMPG got about 6 hands voting against their reappointment and the board is going to look into the matter.

The above is just a brief report on the meeting as I understand Tim Grattan may produce a longer one for ShareSoc.

To conclude, both AGMs were worth attending as I learned a few things I did not already know. For example it seems my holding in Ixaris, an unlisted fintech company where Foresight have a holding, may be worth more than I thought. But I still think their valuation is a bit optimistic.

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

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More Regulation of Social Media?

In a couple of previous blog posts I have commented on the problems of social media and internet blogging sites, particularly with regard to how they affect the financial world, and what might be done about it. I suggested the Government hold a public inquiry into the whole area, but it seems they are not waiting. Such inquiries can take years so perhaps that is a good thing.

Yesterday the Sunday Times reported that the Government’s Media and Culture Secretary, Matt Hancock, was intending to introduce laws to control on-line bullying and harassment. He is quoted as saying: “The overall goal it to make Britain the safest place to be online as well as the best place to start and grow a digital business. We are committing to legislate on internet safety, potentially including a statutory code of conduct to make sure that we tackle bullying and harassment, which is a problem across social media but particularly for children. It will also include transparency reports so we know what bad behaviour is happening on social media and looking at the advertising that happens online”.

He is apparently suggesting that the technology platforms that support social media would be responsible for the content which is a major step forward and that penalties for ignoring the law would be severe. His major concern seems to be focused on children (he has some young ones of his own), but obviously such legislation could have a very wide scope.

The Government is rightly recognizing the seriousness of the problem so this is surely a positive move.

There are more details given here in a press release: https://www.gov.uk/government/news/new-laws-to-make-social-media-safer

This section in the document published in response to a green paper makes it clear that it will not just cover individuals such as children but business activity also:

“The code is intended to make it easier for people to report bullying content by providing guidance to social media providers as to policies they should have in place for removing this content. The Digital Economy Act 2017 section 103 sets out that the code of practice should only cover conduct which is directed towards an individual. However, we have set out additional guidance, not required under section 103, stating that the code of practice should also apply to conduct directed at groups and businesses, as users can be upset by content even if it’s not directed towards them individually.  

Examples of online bullying that will be addressed by the code include, but are not limited to:

  • Threats of harm made to individual(s);
  • Threats to share images (‘outing’);
  • Impersonation;
  • Posting personal information including information that can locate an individual(s);
  • Posting text or images to bully, insult, intimidate or humiliate an individual(s);
  • Posting an image of the individual(s) used without consent;
  • Posting false information about someone;
  • Nasty or upsetting comments;
  • Sending repeated unwanted messages to an individual(s);
  • Trolling – deliberately offensive or provocative online posts;
  • Flaming – brief, heated exchange between two or more people;
  • Dog-piling

It is clear therefore that this will be quite broad-based legislation that might well inhibit some of the commentary published in the financial sector.

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

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Solving the Irish Border Problem, Harry for King of Ulster

On this bright sunny day, with crowds out for the Royal Wedding, my thoughts turned to a simple solution to the Irish border problem. That is the problem faced in the Brexit negotiations on how to maintain a frictionless border with the Irish Republic (Eire) from Northern Ireland.

Surely the simple solution is to make Northern Ireland an independent country while still retaining its connection to the UK by appointing Prince Harry and Meghan Markle as the King and Queen of Ulster. The latter has strong Irish connections in her ancestry so this could appeal to many. Such titles are surely more impressive than the Duke and Duchess of Sussex which they are otherwise going to be endowed with.

As an independent country Ulster could retain all its traditional ties with the UK including use of the Union Jack in some form, and all the existing UK legislation. It could negotiate free trade agreements with the EU and the UK to sidestep the border problem. If there is any border control required, it would solely be on the sea ferry crossings, not on the Irish land border and therefore much easier to manage.

Those sceptics in this world will no doubt think of numerous objections to this plan, but it’s surely worth considering.

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

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Elecosoft AGM, British Land, Apple, Social Media and GDPR

Yesterday I attended the Annual General Meeting of Elecosoft (ELCO) as a shareholder. Elecosoft produce software products for the building/construction industry. It’s a fairly new purchase of mine so I thought I would go along and get an impression of the company and its management.

The meeting was held in the City of London at the convenient time of 12.00 noon and there were about 20 shareholders present. That’s more than I expected given the size of the business (market cap only £56 million). The share price has been rising recently after the company now seems to be growing rapidly after a period of relative stagnation. But like many software companies they capitalize a lot of software development which will not please some investors. They do have substantial recurring revenue from maintenance contracts which is an aspect of software businesses I always like. The company issued a positive trading update on the morning of the AGM.

The Executive Chairman, John Ketteley, is a former merchant banker apparently. He commenced by welcoming attendees to the 78th Annual General Meeting of the company (did I hear that right?), and that he found that easy to remember as he was also 78 years old. Yes this is a somewhat unusual leader for a software business.

The Chairman then launched straight into the formal business of the meeting without inviting questions – not a good sign – so I had to interrupt him. Questions should be taken first.

I asked why the company was requiring shareholders to “opt-in” specifically to receive a cash dividend rather than a scrip dividend. I have never seen this before in any company. The answer given was because those in nominee accounts had difficulty in taking up scrip dividends instead of receiving cash. But I had to tell him that as some of my holding was in a SIPP I had queried how they were going to handle this option and was advised that they took up the cash option for all investors in such cases, which rather defeats what the Chairman was trying to achieve. Some shareholders, like me, tend to prefer cash dividends as otherwise it can get complicated keeping track of one’s holdings. Only those with large direct holdings (not in tax free ISAs or SIPPs) are likely to want to take a scrip dividend.

There were a few questions from other shareholders. Might the company consider moving to the main market from AIM (or moving back as it turned out)? The Chairman saw no benefit in doing so and two shareholders say they would be definitely opposed. There are good tax and other benefits for shareholders from being on AIM. Another question was on moving to SAAS platforms – it seems some of their software is still PC based, but new development is moving to the web.

I would not say the Chairman handled the meeting particularly well despite his experience. Perhaps his age is showing. I did speak to him directly after the meeting and asked about the high number of management changes in the last year and whether he was considering retiring. He indicated that he needed to rebuild the team and that he was now very confident he had a good team in place. But succession planning does not seem to be a priority.

But it was a useful and interesting AGM, as many are. They often turn out to be more interesting than expected. There was also a goody bag of useful kit – a baseball cap (something us baldies can always use as I said to the Chairman), a UBS Memory Stick and a Notebook.

Let’s now consider two companies at the other extreme in terms of size. Firstly British Land (BLND) – a property company with a market cap of about £7 billion. This company has a large portfolio of City offices and retail stores. I first invested in this company in December 2015 when I bought a few shares at 795p on the basis that the falling prices of property companies due to fears over Brexit were overdone. The share price is now 695p so not exactly a great initial purchase!

But the share price has been recovering and in fact taking into account dividends received I am now at breakeven after some more purchases when it became even cheaper. But it has certainly been a poor investment in comparison with other property companies I hold (e.g. big warehouse providers). Any company with an interest in the retail sector has suffered and British Land has been selling such properties. That has reduced their income and impacted profits.

But I do like to have some more defensive large cap stocks in my portfolio to offset the more speculative small cap stocks such as Elecosoft (I run a “barbell” portfolio in essence). When I first purchased British Land it offered a yield of 3.6% and was at a discount to net asset value of 10%. The prospective yield is now 4.4% and the discount is over 25% even after recent share price rises, which is unusual for a property company.

British Land seemed to adopt a defensive stance although City centre office values have not been declining as expected. The company has been reducing debt with LTV (loan to value) now down at 28% based on the full year results published yesterday. Perhaps the lesson here was not to buy shares that start to look cheap unless they become really, really cheap. But non-executive director Preben Prebensen just spent £140,000 on buying shares so perhaps the future is looking brighter.

Apple Inc (AAPL) is the largest company in the world with a market cap of $919 billion. That’s still ahead of Amazon. I don’t hold Apple directly although some indirectly in the investment trusts I hold. Some people have questioned whether Apple can continue to grow and maintain its profit margins when a lot of the revenue comes from iPhone sales. Surely the mobile phone market is now quite mature with everyone having one (indeed some of us have two) and new models not providing much in terms of new features?

I can possibly provide some light on this having just upgraded from an iPhone 6 to an iPhone 8. They look and weigh the same. I only changed because of contract expiry and a concern that the battery was wearing out, but in fact I think the poor battery life was down to using a smartwatch which connects via bluetooth. The new phone has very similar battery life. Perhaps the camera is a wee bit better, but then I don’t use it a great deal. So in essence, I think I have wasted my money in upgrading. This surely brings into question how long Apple can continue to grow unless some of their other products take off. Their smartwatch has not been as successful as might have been expected – smartwatches still seem to be a minority interest.

Finally let me say some more on the issue of the abuses in social media which I covered in a previous blog post. Just to clarify one point, when I suggested a Government inquiry into social media, I was not necessarily advocating more legislation. I think laws can be very ineffective in mandating or enforcing social norms. For example, one existing problem is that libel laws are pretty useless to most people – only the wealthy can afford to pursue libel cases and even if they do, enormous costs end up being paid to lawyers while the resulting remedy may be ineffective. Making them criminal offences would be no more likely to be effective partly because the police have no resources to enforce most existing laws.

I think there needs to be an inquiry into the causes of the breakdown in social norms about what is and what is not acceptable behaviour. The fact that folks can post garbage anonymously is one issue to look into. Is education a solution perhaps? Or perhaps another solution might be to enable “trusted” reviews to be invoked – for example Wikipedia seems to be good at ensuring reasonably accurate and responsible public information and commentary even though in essence there is complete freedom for anyone to post there. Moderation of posted material is obviously advantageous which some platforms do not do, or do in a very limited way. Simply the publication of a “standard” or set of norms for public forums (as Wikipedia also has of course) might assist. A combination of approaches might be the solution, and perhaps more research into the causes is required. Those are the issues that a public inquiry might look into and provide some recommendations upon.

At present there is a focus on making the national press more responsible (the Leveson inquiry and its recommendations) while ignoring the new world of social media, blogging sites and other forums. They need to be embraced also as there is no longer a firm dividing line between media. Perhaps a social media regulator is required to take responsibility for and provide guidance in this area, as the Information Commissioner does for Data Protection? But with a lighter touch than we are getting with the GDPR rules which seem to be another example of excessive regulation from the EU which is unexpectedly imposing major costs on even the smallest organisations. I am not convinced the new rules will stop the spam that we all receive.

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

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