Category: Companies

Alliance Trust AGM 2024 Report

I attended the Annual General Meeting of Alliance Trust (ATST) this morning using the Lumi AGM platform. It was physically held in Dundee which is their traditional location and they intend to continue with that in future apparently.

The Lumi platform normally works well although there was a hiccup during the Chairman’s introduction and I had to log in again.

I have held shares in this trust since 2015 and am very happy with recent performance.  The Chairman, Dean Buckley, reported a “very strong investment performance” last year – total return up 21.6% and significantly better than their benchmark plus better than their competitors. Good performance has continued in 2024. The trust has increased dividends for 57 years and the discount to NAV is only 5.4% and heading down.

Craig gave an overview of their investment approach – a global stock picking based on “high conviction” choices but diversified. They were underweight the “magnificent 7” technology stocks last year but that was offset by good performance in other holdings.

I will only report on the question I asked which was “According to page 9 of the Annual Report you seem to be selling the winners and increasing exposure to losers. Please comment as this is contrary to my investment philosophy”. The answer given was that “Individual stock pickers may have different views on this. But it only applies to stock pickers overall performance. It is just a matter of rebalancing the portfolio, avoids a big bias to growth and helps manage risk while lowering volatility.

Comment: It seems to work.

The meeting was well organised and managed by the Chairman. I am happy to continue holding the shares as a foundation holding which I don’t have to continually monitor. As their Annual Report says “Our ready-made portfolio does all the hard work for you….We provide a simple, high-quality way to invest in global equities at a competitive cost”.

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

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The FTSE 100’s Magnificently Unglamorous Seven

Oliver Ralph wrote an interesting article for the FT on Monday. It was entitled “Let’s hear it for the FTSE 100’s magnificently unglamorous seven” and covered the history of Vodafone which has halved its share price in the last two decades while unglamorous Bunzl and Howdens have increased their share prices by 565% and 488% respectively.

Other well-known companies who have done poorly are Barclays and HSBC who did not make it into positive territory while BP, Tesco and GSK did but still underperformed the FTSE-100. Meanwhile lesser-known companies such as Compass, Diploma, Intertek, Experian, Howdens, Bunzl and Relx have done a lot better.

Vodafone should have done well operating in the high growth sector of mobile communications and I looked at them more than once when they were tipped as “cheap” but never purchased the shares. But I have held Diploma, Experian and Relx so it seems I may not be completely daft after all.

The article mentions the acquisition strategies of the successful companies – basically small and low risk ones are preferred.

My prejudice against banks has also worked out well and a preference for smaller well-managed companies with high returns on capital has been successful – Diploma is a classic example.

It’s an article well worth reading. And maybe I should look at Howden and Bunzl to see if they are likely to keep up their performance.

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

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Bango Webinar

I attended the Bango (BGO) webinar on their full year results this morning. One of my long-standing and smaller speculative AIM holdings. Total revenue was up by 62% to $46 million but I asked the following question:  “Revenue growth looks OK but capitalised development costs rose to 17.6 million. Please explain why this is so high and what is being obtained from this high investment?”.

The answer given was not totally clear but it was suggested that this arose from further investment in the Digital Vending Machine (DVM) product. I am very sceptical that this is a full explanation. It’s simply too much for improving an existing product. This company does continue to grow revenue well but costs are not under control.

Compare that company with Intercede (IGP) who published a full-year trading update this morning. Revenue was up 65%, i.e. similar to Bango. The full year financials are not yet available but the half-year results show a very different picture to Bango. Minimal capitalisation of software development and positive overall cash flows. Intercede said: “Tight cost control continues to be a focus for the Group in conjunction with considered project expenditure and new hires to support revenue growth”.

I remain to be convinced that Bango is on the right track.

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

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Alliance Trust and Witan – Why Is One Doing Well But Not the Other?

As a shareholder in Alliance Trust (ATST) I have been reading their Annual Report. They had a very good year last year with a Total Shareholder Return of 20.2%, beating their benchmark MSCI index which only managed 15.3%. Total Return over 10 years was 206.7.

Alliance Trust now use a multi-manager approach to achieve their performance. The investment manager’s report says this which is interesting: “As in previous years, we kept all our so called “factor” positions well balanced relative to the benchmark in 2023 through regular small adjustments to stock picker allocations, allowing stock selection to shine through as the key source of return. However, we did add a Japan specialist, Dalton Investments (‘Dalton’) in July, which was discussed in detail in the Interim Report. Excluding Dalton, the table on page 15 which details stock picker weights at the beginning and end of the year shows little change. But this disguises the fact that, to keep pace with shifting market dynamics, from one factor to another, we regularly take money away from the best performing stock pickers and give it to those who are underperforming. It may seem counterintuitive to trim exposure to “winners” and increase exposure to “losers” but this process helps to keep portfolio exposures balanced across sectors, countries, and styles, thereby avoiding the build-up of excessive concentration risks that can result from leaving allocations unchanged. The idea is to ensure that stock selection based on business fundamentals makes the key difference to returns, not over or underweight sector or country exposures, which can be subject to sentiment-based mood swings. However, this rebalancing process is not automatic. Although we have target weights for each stock picker, changing allocations is ultimately a judgment call. For example, we did not add to Jupiter Asset Management (‘Jupiter’) or Lyrical Asset Management (‘Lyrical’) last year, despite their underperformance, as they often invest in smaller companies that are inherently riskier than the stocks typically chosen by of some of the other stock pickers, such as Veritas Asset Management (‘Veritas’), who tend to focus on large, higher-quality value, companies.”

Coincidentally one of my contacts pointed out that Witan Investment Trust (WTAN) who are another global equity trust with a multi-manager approach seem to have run into problems. They have recently announced a review of “investment management arrangements” and also said this: “In 2004, in a major strategic shift, Witan adopted a multi-manager approach to investing in global equities, at the same time becoming independent of any single investment management group. For much of the subsequent period, the approach proved successful and, although the volatile conditions in recent years have eroded earlier outperformance, Witan’s performance remains in line with its equity benchmark in net asset value total return terms and ahead in share price total return terms since making that strategic shift. However, in more recent years the asset management and investment trust sectors have seen considerable changes in markets, competition, governance and regulation. These pose new investment and communication challenges for independently managed investment trusts to address successfully and cost-effectively. In view of these structural changes, Andrew Bell’s forthcoming retirement after over 14 years as our CEO is an appropriate opportunity for Witan to review proposals for the future management of the Company’s portfolio.”

According to the AIC, Witan’s one year share price total return is 15.1% and only 136.7 over ten years so you can see why shareholders might be getting nervous and it is time to review the management of the portfolios.

If you are a holder or prospective holder of Witan shares there is a webinar organised by ShareSoc at which you can learn more – see https://www.sharesoc.org/events/sharesoc-webinar-with-witan-investment-trust-plc-wtan25-april-2024/

A question to ask might be “why has Alliance Trust made a success of a multi-manager approach but Witan has not?”

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

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Should Unilever Dispose of Ben & Jerrys?

Unilever has announced that as part of its “Growth Action Plan” it plans to “separate” its ice cream business. To quote from the announcement: “The Board believes that Unilever should be increasingly focused on a portfolio of unmissably superior brands with strong positions in highly attractive categories that have complementary operating models. This is where the company can most effectively apply its innovation, marketing and go-to-market capabilities. Ice Cream has a very different operating model, and as a result the Board has decided that the separation of Ice Cream best serves the future growth of both Ice Cream and Unilever. Following separation, Unilever will become a simpler, more focused company, operating four Business Groups across Beauty & Wellbeing, Personal Care, Home Care and Nutrition. These Business Groups have complementary routes to market, and/or R&D, manufacturing and distribution systems, across both developed markets and Unilever’s extensive emerging markets footprint”.

Having recently acquired some shares in Unilever I do have a view on this. To my mind this makes sense as selling ice cream is hardly a good business to be in. There are no barriers to entry and although strong branding can help ultimately it’s a “me too” kind of business.

The history of Ben & Jerrys is interesting. You can read the founders book under the title “Ben and Jerry’s Double-dip: Lead with Your Values and Make Money Too”. They told a good tale of their “social values” but in reality they sold a premium, high fat, ice cream when the competitors were selling bland products. That enabled them to build a niche and a reputation. When Unilever acquired the business in 2000 there were protections put in place that could enable the social mission to continue – for example to block sales to Palestinian territory – which has resulted in hampering Unilever ever since. This was in essence a pretty daft deal as mixing commerce with politics never makes sense but Unilever were so keen to acquire the brand that they went along with this nonsense.

Selling ice cream, premium sector or not, is bound to be a low margin and a very seasonal business so disposal of this problem child by Unilever makes good sense.

Megan Boxall has published an article on Unilever’s ice cream business here: https://www.stockopedia.com/academy/newsletters/a-lesson-from-the-fallout-of-misaligned-acquisitions/ . She argues that sales in the ice cream business have been driven mainly by price rises not volume growth. It is surely true that this is a mature sector and the move to more “healthy” foods is probably limiting growth. Megan is critical of the past acquisitions and the poor allocation of capital.

If Unilever spins off Ben & Jerry’s to become an independent listed business and gives Unilever shareholders shares in the new entity I will be selling those shares.

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

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Fundsmith Shareholder Meeting

I just watched a recording of the Fundsmith Equity Fund Shareholder Meeting – see https://www.fundsmith.co.uk/tv/ . As usual it was a mixture of jokes and serious analysis of Terry Smith’s investment process.

Yet again his prejudices (and to a large extent mine) were made plain – no banks, no insurance companies, no miners, no oil/gas companies, no property companies, etc. But the portfolio companies achieved a Return on Capital Employed of 32%. That’s better than in previous years and almost twice the return of companies in the FTSE-100.

I have no doubt that the Fundsmith Equity Fund will continue to have a decent performance so I am happy to continue holding.

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

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UK ISA Consulation and Investing in ISAs

The Chancellor of the Exchequer said in his budget speech that he was proposing to implement a “UK ISA” into which and additional £5,000 could be subscribed. Only UK companies would qualify for such investments. This is subject to consultation and you can read my response to the consultation here: https://www.roliscon.com/_files/ugd/8ec181_36b8502e9836413492f124ebc3ee9b4c.pdf

If you wish to submit your own response go here for the details and how to respond: https://assets.publishing.service.gov.uk/media/65e734d62f2b3bd5107cd8c5/UK_ISA_Consultation.pdf

My summary comments were as follows: “As relatively few investors probably contribute the maximum amount to ISAs each year I can see little attraction in being able to contribute an additional £5,000 to a UK ISA. Even those who do contribute the maximum amount each year will simply see it as a small increase in their ISA contributions and a complication to their portfolios. In general, I see little benefit in the establishment of a UK ISA and I doubt it will significantly increase funding for UK companies. This will just be an unnecessary complication of the ISA regime.

The AIC have just published an interesting note on the top performing investment trust ISAs over the last 25 years which you can read here:  https://www.theaic.co.uk/aic/news/press-releases/top-performing-investment-trust-isas-over-the-last-25-years . Many have done remarkably well with the best generating more than £250,000 from the maximum permissible investment of £7,000 in 1999. But the best tend to be sector specialists so choosing what to invest in is still important.

There was an interesting discussion between David Stredder and Chris Boxall at the Mello event on Monday. They both bemoaned the lack of good small/mid cap listed shares in which to invest and this has certainly affected trusts and funds of late. AIM listings are declining with few new IPOs. The dross is leaving and new listings are fewer partly because funding from private equity investors is now more readily available. To revive the UK stock market we need more vigorous action than inventing “UK ISAs”. The costs of listing and corporate governance thereafter are too high for smaller companies.

But it is not all doom and gloom. One successful recent listing was Fonix Mobile (FNX) who announced good results yesterday and today we had results from 4Imprint (FOUR) who are doing well in conquering the US market for promotional items. I hold both those companies so the message is that it is still possible to find good UK listed companies.

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

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NVIDIA and ARM – Did I Miss Out?

Last week saw a boom in the shares of chip producers Nvidia and ARM. These have both powered ahead in the hope that they will benefit from the need to support AI systems and their profits have been moving upwards. Nvidia’s share price is up 35% in 2024 so far. ARM’s share price has doubled since it’s IPO last September and there is much anguish over the fact that this UK company chose to list in the USA.

As an investor in technology companies I have missed out on this bonanza as I don’t have direct holdings in either stock. But an interesting article from the AIC entitled “Which investment trusts hold Nvidia” explains how I and others could have benefited from holding technology focused funds – see https://www.theaic.co.uk/aic/news/press-releases/which-investment-trusts-hold-nvidia    

For example, Polar Capital Technology (PCT) and Allianz Technology (ATT) both hold more than 7% of their funds in Nvidia and PCT is one of my biggest holdings. I also hold shares in Scottish Mortgage (SMT) and JPMorgan Global Growth & Income (JGGI) who also have substantial holdings in Nvidia so I have not missed out altogether.

Why hold funds that hold popular shares rather than the shares directly? Because keeping track of US shares is not easy and the fund managers are probably more in contact with US technology developments than I am. Also these trusts are trading at a discount to their holdings so you are getting the component shares on the cheap.

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

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Beware of Greeks Bearing Gifts

“Beware of Greeks bearing gifts” is a saying from Virgil’s Aeneid based on the story of the ruse used by the Athenians to gain access to Troy. It is a saying used ever since to beware of the sharp practices of Greeks or anyone appearing to offer something that is too good to be true. Globo was a company registered in the UK but with Greek management (both the CEO and CFO were Greek nationals). It was listed on AIM in the UK. Globo looked highly profitable but collapsed in 2015 as the cash on the alleged balance sheet was simply not there and revenue was clearly imaginary.

In my last blog post on the subject of Globo (see https://roliscon.blog/2024/02/17/globo-a-final-report/ ) I said “Do not trust the accounts of companies particularly those with Greek associations”. This comment has been attacked by a certain person, who shall remain nameless as I do not wish to promote his intemperate views. He has said “should we tar all Greeks with the same brush?” Despite the fact that he points out other Greek company frauds (InternetQ/Akazoo and Foli Follie) he thinks I have made a slur on an entire nation. But he admits to being a Hellenophile and having a house in Greece.

Let me be more specific as to why you should avoid Greek companies and their management.

Globo and its management should clearly have been pursued by legal criminal actions for fraud in the UK targeting the CEO and CFO but that was impractical because in extradition proceedings, in general Greece does not extradite a person who was a Greek citizen when the offence was committed or is a Greek citizen when the request is made. Neither does Greece accept enforcement of a European Arrest Warrant with some exceptions. See  https://globalinvestigationsreview.com/insight/know-how/extradition/report/greece#:~:text=In%20extradition%20proceedings%2C%20in%20general,when%20the%20request%20is%20made  

So in summary there was little deterrent to stop a Greek national from defrauding investors so long as they stayed in Greece and that is what happened.

In addition Greece is well known to be a country where accounting practices are dubious. To quote: “Creative accounting and profit management practices are well documented in the bibliography (Spathis, 2002; Spathis et al., 2002; Leuz et al., 2003; Baralexis, 2004; Caramanis and Spathis, 2006; Burgstahler et al., 2006). In fact, Leuz et al. (2003) rank Greece (along with Austria), as the country (out of a total of 31) with the highest rank in profit management” – see https://thescipub.com/pdf/ajassp.2019.327.335.pdf

I am sure most investors in the shares of Globo were not aware of these facts and the same problem applies to other Greek companies who might list in the UK. So I think my previous comments were very justified.

But the person who criticised them has been making snide comments about my views on Globo ever since he had to withdraw many of his allegations against me after I pursued a legal claim for libel against him some years ago. This was eventually settled by agreement of both parties but like any bad loser he keeps on raising the subject again and again.

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

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Classic Red Flags According to Hindenburg

A report in the FT on the attack on the accounts of Temenos by Hindenburg Research included this comment: Its probe “uncovered hallmarks of manipulated earnings and major accounting irregularities”, Hindenburg said. “This includes evidence of round-tripped revenue, sham partnerships, rampant pulling forward of contract renewals, backdated contracts, excessive capitalisation of seemingly non-existent R&D investments, and other classic accounting red flags,” it added.

That’s a good summary of what to look for at companies where accounting fraud is suspected and would have been relevant to investors in Globo.

Temenos denied the allegations and said: “The [Hindenburg] report contains factual inaccuracies and analytical errors, together with false and misleading allegations, which are intended to adversely impact the company’s share price”. That did not stop the share price from falling almost a third last week.

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

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