Persimmon Departure, Abcam AGM and Over-boarding

Persimmon (PSN) issued an announcement this morning saying that CEO Jeff Fairburn was stepping down at the request of the company because “the Board believes that the distraction around his remuneration from the 2012 LTIP scheme continues to have a negative impact on the reputation of the business and consequently on Jeff’s ability to continue in his role”. They are undoubtedly right there.

To remind readers, their misconceived and uncapped LTIP potentially would have meant bonus shares being awarded to Mr Fairburn worth well over £100 million, and similar large sums to other managers. Part of the potential award was later given up but even so it was the most disgraceful example of how pay has been ramped up by LTIPs in recent years. Another example at Abcam (ABC) is covered below.

Persimmon also issued a third quarter trading statement today which was generally positive. They clearly have a good forward committed sales pipeline and the extension of the help-to-buy scheme was positive news in the budget. But I am still somewhat nervous that the housebuilding market may suffer as interest rates rise. New houses are becoming unaffordable for many people despite the demand for accommodation and growing population.

Yesterday I attended the Annual General Meeting (AGM) of Abcam. This is a company that sells antibodies and other life science products/services. It is operating in a high growth sector. I first invested in the shares of the company in 2006 and it has delivered a compound total return of over 32% per annum to me since based on Sharescope figures. I am therefore happy with the financial performance of the business as I said to the board at the AGM. That’s even allowing for recent declines in the share price as analyst forecasts were reduced and general market malaise affected high-flying technology stocks. But I am very unhappy about two aspects: 1) failure to answer simple questions at the AGM, which is the second time in a week where this problem has arisen (the previous being Patisserie); and 2) the remuneration scheme and revised LTIP.

What follows is a report on the meeting, summarised and paraphrased for brevity. The meeting was held at the company’s Cambridge offices at 2.00 pm, but not even a cup of tea was offered.

The recently appointed new Chairman, Peter Allen, introduced the board and there was then a very brief presentation from CEO Alan Hirzel. He said there were between £5 billion and £8 billion of opportunities for the company to grow which they were focused on. They had doubled revenue in the last 5 years, at 11.5% CAGR. There were lots of opportunities to continue to grow the business. They are now focused on 4 areas: 1) RUO Antibodies which are still growing; 2) Immunoassays where growth was 25% last year; 3) China for RUO tools (China could be as big a market as the USA in a few years and they now have 300 people there and are putting more investment in); and 4) CP&L (Abcam Inside). He said the company needs to invest in technology and IT to achieve their growth goals.

Questions were then invited. I commented on the absolutely massive expenditure on new IT systems. They have spent at least £33 million on the Oracle implementation with another £16 million to go and the project is clearly way behind schedule. This level of costs has even caused analysts to downgrade future profit forecasts. As the former IT manager of a large public company, this seemed disproportionate to me in relation to the size of the business. However much one recognises that IT is the key to the business, this looks like a typical project that is way out of control. Who is responsible for this, are they still with the company, who are the outside contractors and what is the current state of this project?

The Chairman first responded that any answers to shareholder questions could only relate to information already in the public domain. This is simply legally wrong and I will be writing to him on this subject and the other issues below.

However Alan Hirzel did respond and accepted the IT project was over budget and covered the history of the project. It was essential to replace some of the legacy systems which were unmaintainable. Many had been built in-house (even an email system apparently) and they had multiple different HR systems in different countries. HR was the first project completed (partner Hitachi as systems integrator) followed by a communication system (part CRM perhaps – it was not clear) but finance and supply chain (manufacturing) projects were yet to be done. He said the CIO had been replaced and a new system integration partner appointed. He assured me that the project was under control now.

I asked who the new IT contractor was, at which point the Chairman refused to answer as that was not in the public domain. I complained that this was a breach of company law as questions must be answered unless there are good reasons to do otherwise. For example, answers can be refused if it is confidential information, not in the company’s interests to do so or may affect the good order of the meeting. The relevant Regulation is here: http://www.legislation.gov.uk/uksi/2009/1632/pdfs/uksi_20091632_en.pdf (see Section 12).

I can see no reason why my question could not be answered as I said to the Chairman and to their lawyer, neither of whom seemed to be aware of the Regulations or the common law principle about answering questions at general meetings. The Chairman also suggested that they could not disclose some information because they would have to issue an RNS announcement to cover it. This of course only applies to “price sensitive” information and I don’t see how knowing who their IT contractor is would be price sensitive. Very annoying and feeble excuses were being given in essence from someone who is supposed to be a very experienced company Chairman. This is the second time in a week (the other was at Patisserie) where the law on answering questions was ignored which is exceedingly annoying.

After that debate, which I will be following up including with a complaint to the FCA as it is not acceptable for companies to ignore the law, we moved on to the Remuneration Resolutions.

I said the following: “Remuneration also seems to be out of control. Although the CEO seems to be generally doing a good job, his pay last year was £1.8 million. This is also out of proportion to the revenue and profitability of the business. Not only that but his basic pay has been increased by 22%, and the maximum award under the LTIP increased from 150% to 400% of base salary. This is obscene and totally unnecessary. Such highly geared schemes promote risky behaviour as we saw with bankers in the financial crash of 2008. I always vote against remuneration policies where the maximum award under LTIPs is more than 100% of base salary and I will be doing the same here. I encourage my fellow shareholders to do likewise”.

There was a response from Louise Patten, chair of the Remuneration Committee to the effect that they could be “traduced” for underpaying rather than overpaying (“criticised” I think she meant). A review had shown that the CEO was underpaid in comparison with market rates in the sector. The LTIP was only a temporary measure as a new policy would be adopted in 3 years’ time.

I also asked whether they had received representations on the subject of remuneration from proxy advisory services and fund managers. She indicated there had been but mainly focused on other issues than the LTIP (in fact they got only 67.1% FOR the Remuneration Report, and 86.7% for the Remuneration Policy which are very low numbers). I said I had no objection to an increase in base pay if justified, but the LTIP was an example of how pay is ratcheting up and it sets a very bad precedent that other companies will follow to have a 400% bonus maximum. I have of course argued with Ms Patten before on the remuneration schemes at this company to no effect, so I chose to vote against her and her two colleagues on the Remuneration Committee but she still collected most of the proxy votes. No other shareholders in the meeting, other than my son Alex who holds the shares also, voted against the remuneration resolutions or the directors which rather demonstrates that when shareholders are happy with a company’s financial performance, they will vote for anything.

There were few other questions from shareholders at the meeting, but after the formal part had finished I asked the Chairman why he only managed to achieve 79.6% of votes in support of his appointment. He said this was because of complaints of “over-boarding”, i.e. that he had too many roles. In fact he has 4 other Chairman roles and one other non-executive directorship which I certainly think is too many and is contrary to ShareSoc’s guidelines. He argued that it was no problem and he did not agree with the current attitude of some proxy advisory services. I disagreed. The duties of directors are more onerous than ever, particularly if the job is to be done properly. Even small difficulties at a company can create a lot of extra work. One of course only has to look at Patisserie Holdings and their recent difficulties where Luke Johnson had lots of other commitments and failed to pick up what appears to be a massive fraud executed by the finance director. Peter Allen seems to think that all he has to do is turn up for a few board meetings each year, let the executive directors get on with business and do not much else. But Abcam is becoming a large company where the Chairman’s role is much more significant than that.

I voted against the Chairman anyway because I think Chairman should be familiar with company law and how to handle questions at meetings. Good ones do of course know how to answer questions without giving out sensitive information or avoiding direct answers but it is certainly not good for the Chairmen to start an argument with a shareholder in a meeting on any subject. Some Chairmen need to take a lesson in how to handle awkward folks like me who are not easily ignored.

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

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Arron Banks on Leave.EU, Smithson and Patisserie

The Andrew Marr interview of Arron Banks was all good knock-about stuff but there was no knock-out blow inflicted. Andrew Marr was interviewing Arron Banks about his £8 million funding of the Leave.EU campaign. The Electoral Commission have recently asked the National Crime Agency (NCA) to investigate the matter as they apparently do not believe his story about the source of the funding. The suggestion has been made that the funding came from Russian sources or from a company registered in the Isle of Man (Rock Holdings) which would not have been permitted under electoral law.

You can watch the full interview here: https://order-order.com/2018/11/04/arron-banks-marr-interview-full/

Mr Banks made it clear that the money came from Rock Services Ltd and strenuously denied it came from other sources. Andrew Marr suggested Rock Services was a “shell” company and that neither that company nor Mr Banks had sufficient financial resources to cover the £8 million in funding.

It is of course a simple matter to look at the accounts of Rock Services Ltd at Companies House (it’s free to do so – go here: https://beta.companieshouse.gov.uk/search?q=rock+services+ltd ).

Rock Services Ltd hardly looks like a “shell” company which is normally used to describe a company with no revenue and no assets apart from possibly some cash. Rock Services had Turnover of £50 million for the year ending December 2017 but little in the way of profits or net assets. But it did have fixed assets of over £1 million. This is hardly a “shell” company in the normal usage of the word. The “Strategic Report” says the company’s “principal business activity is that of performing a recharge function for services for the Group and other related parties”. The profit of the company is generated from service charges added to costs and salary recharges.

Aaron Banks has been running motor insurance companies for many years and is involved in a group of companies which includes Rock Services, Rock Holdings and UK registered Eldon Insurance. I vaguely recall he was involved in a company called Brightside I held shares in from 2012/2014 which was publicly listed before being taken over. The accounts of Eldon Insurance can also be read at Companies House and indicate revenue of £77 million and profits of £1.8 million in 2017. Another substantial company in the Group is Southern Rock Insurance which is based in Gibraltar. You can see a complete list of group companies and their transactions through Rock Services Ltd on page 15 of their accounts.

In summary the allegation that Mr Banks or his UK companies did not have the financial resources to make the donation to Leave.EU is not reasonable, and Andrew Marr and his researchers should have looked into the background more before making the allegations he made.

As Mr Banks said in the interview, other donations were made to the remain campaign from subsidiaries of foreign companies. Why were they not being investigated? It certainly looks like a witch-hunt to me. It would seem to be more about politics than election regulation.

Note that Companies House is an invaluable source of information on companies and their directors. All investors should be familiar with it. It can be useful in other ways – for example I recently obtained a bid from a company to provide web site development work. That was done from the email address of a company that was different to that from which they suggested would do the billing. When I looked the former company up at Companies House it had actually changed name a couple of years ago and under its latest name had got appallingly bad references on the internet. Needless to say I decided not to do business with them.

Smithson Investment Trust (SSON) is now trading at a remarkable premium to net asset value of 7.4% according to the AIC after its recent IPO. Bearing in the mind the state of the market and the fact that it can hardly have yet invested the money raised (one might call it a “shell” company), it would seem investors are putting a high premium on the name of Terry Smith and his involvement in this trust. There must be investors out there who are purchasing shares at that premium to maintain this “discount” but that seems very unwise to me when most investment trusts have historically traded at a discount. The reason for this is quite simple – investment trusts incur costs in management and administration which reduces the yield and returns on the underlying shares they hold. Investors can always buy the underlying shares directly to avoid those costs. In the recent bull market and recognition of late of the merits of investment trusts, some have been trading at small premiums but a premium of 7.4% when the company has no track record and will be mainly holding cash seems somewhat unreasonable.

As I said when reviewing the IPO, it may be best to wait and see what transpires for this trust.

Patisserie (CAKE) and the recent General Meeting have been covered in several previous blog posts. I have previously mentioned that I was not happy that Luke Johnson did not answer my questions – he ruled them out along with a lot of others. When can a Chairman refuse to answer questions in a General Meeting? It was always judged to be matter of common law that questions should be answered but that has now actually been put into a Regulation.

I have written to Mr Johnson and my letter includes these paragraphs:

  1. As regards the conduct of the General Meeting, I suggest you not only handled it badly as Chairman but that refusing to answer my questions was a breach of The Companies (Shareholders’ Rights) Regulations 2009. There are valid grounds on which you can refuse to answer questions at General Meetings but the reason you gave for not answering mine (refusal to answer any questions that might prejudice the investigations) was not a valid one.
  2. Holding a meeting a 9.00 am is also not good practice. This note published by ShareSoc (and partly written by me) gives guidance on how to run general meetings, and includes references to the law on the subject: https://www.sharesoc.org/How_To_Run_General_Meetings.pdf

If you study the aforementioned regulations, you will see that the directors can refuse to answer questions that would require disclosure of confidential information or “if it is undesirable in the interests of the company or the good order of the meeting that the question be answered”. That may be quite broad but it hardly covers the questions I posed and the answers to my questions would certainly not have prejudiced any investigations.

I have therefore asked him to answer the questions in my letter. He may have other things on his mind, but all company directors should be aware of the law, or take legal advice when required.

Shareholders should not allow directors to ignore their responsibility to answer reasonable questions.

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

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Earthport Accounts, City of London IT and Patisserie

Earthport (EPO) is the latest AIM company to report that its past accounts are not all they should have been. Following a review by the new CEO and CFO, it seems there have been errors in reporting of forward foreign exchange transactions. This will result in fair value adjustments and a reduction of £6.3 million to £16.6 million in the net assets of the group at June 2017. Likewise adjustments are required to previous years. Reported earnings are also reduced although there is no cash impact.

This is a payments business which has been consistently loss making despite growing revenue. The former Chairman and CEO (who was still on the board as a non-exec director) have departed “with immediate effect”. This is surely yet another case of audit failure. Who were the auditors? Answer: RSM. But it’s worth reading their audit report in the 2017 Annual Report where they highlight some problems in the same area.

I do not currently hold shares in Earthport and this latest news is hardly likely to inspire confidence in the company from investors. After many years, the company has not proved it has a business model that can generate any profits.

Pressure of business meant I missed attending the City of London Investment Trust (CTY) Annual General Meeting on the same day as the Patisserie General Meeting. This is one of my most boring holdings as it’s mainly invested in large cap UK companies. But no problem in not attending the AGM in person because there is a recording of it available here: https://www.janushenderson.com/ukpi/content/trustslive?o_cc=c3926 . That even includes the question/answer session which was omitted in a previous year. If you watched it while it was taking place you could also submit questions. This approach is to be highly commended.

The interesting comment I noted from fund manager Job Curtis was that they had recently put more money into the market and were gearing up. He clearly perceives there are value opportunities in the market after recent declines. Others seem to agree with him because the market is now picking up.

Just one postscript on the Patisserie (CAKE) General Meeting. Lombard in the FT (Matthew Vincent) questioned this morning whether placings were the only option. He suggests the company could have delayed and done a rights issue. This is basically the same issue that was raised at the Meeting by some shareholders. But it’s very unrealistic to suggest that was a viable option. In reality I think the appetite for a rights issue would have been very low because of the lack of financial information on the current position of the company. I certainly would not even have participated in the placing! Undertaking a rights issue when there was great uncertainty about the level of support would hardly have been recommended by any advisors. In addition it would have taken a lot longer to do that than it took to do the first placing. Time is of the essence in the circumstances the company faced and looking for bankers to fill the delay hardly looks realistic to me either.

I suggest Luke Johnson took the only reasonable steps available and he should be thanked for saving the business. Shareholders should be very glad that the company did not get stuffed through a pre-pack administration which is what I rather expected would happen, in which case they would have lost everything.

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

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Patisserie General Meeting – No Excitement But Few Questions Answered Either

I attended the General Meeting of Patisserie Holdings (CAKE) this morning at the ungodly time of 9.00 am – presumably chosen to deter attendance. An announcement earlier from the company will also have deterred attendance as it said no questions on past events would be answered so as not to prejudice investigations by “multiple regulators and authorities”. But there were about 20 shareholders present, including some institutional representatives.

This GM was to approve the second tranche of share placings and I expected it to be voted through which it was on a poll by more than 90% of shareholders. To remind you this company was on the brink of going into administration after the board discovered the accounts were false and the claimed cash on the balance sheet non-existent. In fact it was stated in the meeting that net debt was more like £9.8 million rather than as previously stated. Executive Chairman Luke Johnson kept the company alive by giving it an interest-free loan and arranging an emergency placing. As I said in the meeting, I considered the company had no better alternative to the actions taken having been involved in other similar problem situations before. I think shareholders (including me) are very lucky that Mr Johnson chose to take the steps he did. Mr Johnson reiterated there was no viable alternative several times in the meeting because there was no time to arrange anything else. He indicated later that he had not participated in the placings because he did not want shareholders to think he was acquiring shares cheaply and hence his interest in the company will now be diluted (he’s now down to 28%).

However there were several shareholders who expressed their unhappiness at the turn of events as one might have expected. There was one particularly vociferous shareholder who suggested that shareholders will lose 88% of their value as a result of the placings and that there should have been a rights issue instead. The shareholder said it was immoral, and unfair.

Mr Johnson opened the meeting by thanking shareholders for the messages of support he had received in the recent dark days. The board was doing everything it can to safeguard the company. There was potential fraud and a miss-statement of the accounts. Those errors are likely to have affected previous annual accounts.

He said that regulatory authorities including the SFO were investigating so he could not comment further. He believed it was a business worth saving and he had committed to reduce his other activities (in response to a question later he said he no other roles now).

Chris Boxall from Fundamental Asset Management asked if those supporting the placings had access to more information that others, i.e. other than that publicly disclosed? The answer was no. Comment: they must have faith in Luke Johnson because with so little information available it is very unclear what the future profitability of the business might be and there are big potential liabilities.

In response to other questions he said current trading had not been affected, although two sites had been closed. They are recruiting new staff when asked about management changes.

I tried to ask two questions:

  1. Is it possible the company could become liable to compensate shareholders for the “market abuse” related to the issue of false accounts [on which basis some investors will have purchased shares]? This is surely a similar situation to the case of Tesco where the FCA instructed the company to pay compensation. Shareholders taking up the placing shares might be interested in the answer. Mr Johnson refused to answer the question.
  2. Have you appointed lawyers to pursue claims against the former finance director (Chris Marsh) in respect of the fraud or to recover the value of share bonuses paid to him and the CEO (Paul May) on the basis of the false accounts? Mr Johnson refused to answer that question also.

Note that as this was a General Meeting there was no good reason not to answer those questions as they could not possibly prejudice the investigations by the legal authorities. This is an abuse of company law and I will be making a complaint about it.

What can shareholders do at this point? Not a lot but just await the results of the investigations and possible subsequent actions by the legal authorities. This might take many weeks, months if not years from past experience. The shares will remain suspended for the present. But I suggest shareholders should do the following:

  1. Write to Luke Johnson requesting that the company takes all possible legal steps to recover loses to the company that have resulted from the fraud from those who perpetrated the likely fraud, and in addition take steps to recover the value of shares issued to former and current directors under share option schemes that were based on the false profits that had been declared. In addition the company should examine the role of the auditors as it appears that they may have failed to pick up the accounting errors and failed to check all relevant bank balances and hence there may be a claim against them. Note: it is a lot easier for the company to sue former directors or auditors than it is for shareholders, however much they may wish to forget about it and move on.
  2. Write to the Financial Conduct Authority stating you were induced to invest in the shares of the company based on false accounts and encourage them to pursue legal actions against those at fault accordingly. In addition as this was a case of market abuse (similar to that at Tesco), request that the company be forced to compensate the affected investors accordingly. You should also encourage them and the SFO to move as fast as possible in their investigations as they are not known for speed in such matters.

So that’s a summary of the meeting held on a gloomy wet day in London – which probably matched the mood of the shareholders present. There were members of the press there getting their views no doubt for publication in the media later.

To look on the bright side, as I have an enormously diversified portfolio I found on exiting the meeting that my overall portfolio had risen more that morning than my potential losses on Patisserie simply as the overall market picked up. I may therefore be more sanguine than others. There is a lesson there of sorts for investors, but I also consider myself relatively lucky.

As someone said to me in the meeting, this was a company where there were no warning signs that investors could easily pick up in respect of the accounts. Investors cannot blame themselves for investing in what appeared to be a sound, profitable company from the accounts. Fraudulent accounts can fool even the most experienced investors.

Picture below is of Patisserie café in King’s Cross station take on my way to the General Meeting.

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

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Patisserie Cafe 2018-11-01

Bad News from Crawshaw and ULS, Ideagen AGM, Victoria Doubts and Other News

The real bad news today is that butchers Crawshaw (CRAW) is going into administration, “in order to protect both shareholders and creditors”. They hope the business will be sold as a going concern but it is unusual for shareholders to end up with anything in such circumstances. The shares have been suspended and the last share price was 2p. It actually achieved a share price of 3425p at its peak in 2005. Revenue have been rising of late but losses have been also.

I never invested in the company although I do recall seeing a presentation by the company when it was the hottest stock in the market but I considered it to be a business operating in a market with no barriers to entry and likely to suffer from competition once the supermarkets had woken up to what it was doing. That’s apart from the difficulties all high street retailers have been facing of late. Well that’s one disaster I avoided at least.

Another AIM stock I do hold is ULS Technology (ULS) who operate a conveyance service platform. A trading statement this morning for the first half year said the revenue is expected to be up 3% and underlying profit up 5%, despite a fall of 4% in the number of housing transactions across the UK market. But the sting in the tail was the mention of a slowdown in mortgage approvals which “may well be short lived but is likely to have some impact on the Group’s second half results”. The share price promptly dropped 20% this morning. It’s that kind of market at present – any negative comments promptly cause investors to dump the shares in a thin market.

One piece of good news for the housing market which I failed to mention in my comments on the budget was that the “Help to Buy” scheme is not being curtailed as some expected, but is extended for at least another two years to 2023.

Yesterday I attended the Annual General Meeting of Ideagen (IDEA), another company I hold. It was unexciting with only 4 ordinary shareholders in attendance so I won’t cover it in detail. But boring is certainly good these days.

It was the first AGM chaired by David Hornsby who is now Executive Chairman. One pertinent question from a shareholder was “what keeps the CEO awake at night?”. It transpired that the pound/dollar exchange rate was one of them simply because a lot of their revenue is in dollars (their US market seems to be a high growth area also). I suggested they might want a “hard Brexit” when the pound would collapse and improve their profits greatly. But the board somewhat ducked that issue. Note that this business is moving to a SAAS revenue model from up-front licence fees which may reduce organic growth slightly but increase revenue visibility. The point to bear in mind here is that even on a hard Brexit it is unlikely that trade tariffs would impact software income because there are no “goods” exported on a SAAS model.

Another question asked was about financing new acquisitions which the company does regularly. These are generally purchased for cash, and share placings are done to raise the funds required. Debt target revenue is only one times EBITDA so debt tends to be avoided.

It is worth comparing that with Victoria (VCP) a manufacturer of floor coverings who issued a trading statement on the 29th October which did not impress me or anyone else it seems. Paul Scott did a devasting critique on Stockopedia of the announcement. In summary he questioned the mention of a new debt being raised, although it was said that this would be used to repay existing debt, when there were few other details given. He also questioned the reference to reduction in margins to maintain revenue growth. The share price promptly headed south.

The company issued another RNS this morning in response to the negative speculation to reassure investors about the banking relationships, covenants and credit rating.

I have held a few shares in Victoria since the board bust-up a few years back and attended their last AGM in September when I wrote a report on it here: https://roliscon.blog/2018/09/11/brexit-abcam-victoria-and-the-beaufort-case/ . The share price was already falling due to shorters activities and my report mentioned the high level of debt. The companies target for debt was stated to be “no more than 2.5 to 3 times” at the AGM which is clearly very different to Ideagen’s!

I did have confidence in Geoff Wilding, Executive Chairman, to sort out the original mess in Victoria but the excessive use of debt and a very opaque announcement on the 29th has caused a lot of folks to lose confidence in the company and his leadership. Let us hope he gets through these difficulties. But in the current state of the stock market, the concerns raised are good enough to spook investors. It’s yet another previously high-flying company that has fallen back to earth.

One more company in which I have a miniscule number of shares is Restaurant Group (RTN) which I bought back in 2016 as a value/recovery play. That was a mistake as it’s really gone nowhere since with continuing declines in like-for-like sales. At least I never bought many. Yesterday the company announced the acquisition of the Wagamama restaurant chain, to be financed by a rights issue. The market reacted negatively and the share price fell.

I did sample some of the restaurants in the RTN portfolio but I don’t recall eating in Wagamama’s so it’s difficult to comment on the wisdom of this move. All “casual dining” chains are having difficulties of late as the market changes, although Wagamama is suggested to have more growth potential. The dividend will be rebased and more debt taken on though. With those reservations, the price does not look excessive. However, while they are still trying to get the original business back to strength does it really make much sense to make an acquisition of another chain operating in the same market? Will it not stretch management further? I will await more details but I suspect I may not take up the rights in this case.

One other item of news that slipped through in the budget announcements was the fact that in future Index-linked Saving Certificates from NS&I will be indexed by Consumer Price Index (CPI) rather than the Retail Price Index (RPI). This is likely to reduce the interest paid on them. But it will only affect certificates that come up for renewal as no new issues have been made of late. These certificates are becoming less and less attractive now that deposit interest rates are rising so investors in them should be careful when renewing to consider whether they are still a good buy. I suspect the Chancellor is relying too much on folks inertia.

At least even with the bad news, my portfolio is up significantly today. Is the market about to bounce back? I think it depends on consistent price rises in the USA before the UK market picks up, or a good Brexit deal being announced.

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

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Standard Life UK Smaller Companies AGM, WPP and Tesla

For those folks who invest in smaller companies, it’s always educational to attend the Annual General Meeting of Standard Life UK Smaller Companies (SLS) which I did today. This investment trust has been managed by Harry Nimmo and his team for many years and he has consistently beaten the company’s benchmark (currently Numis Smaller Companies Plus AIM index).

Harry’s presentation highlighted that smaller companies were a “great place to be until the last 4 weeks”. He said that we often see sharp setbacks toward the end of the economic cycle. One tends to see bursts of selling in the high performing stocks with profits being taken (one example being Fevertree he mentioned). There are some concerns in the market about the US prospects, rising interest rates, Brexit and other worries. But he suggested investors need to have a long-term perspective and hold the shares for 6 years or more.

The investment process followed is unchanged. They use a proprietary stock selection process focused on quality, growth and momentum. See pages 12/13 of the Annual Report for details. Valuation is secondary, i.e. they don’t buy “cheap” stocks. New purchases for the portfolio were Gooch & Housego, Alpha Financial Markets, Safestore, Blue Prism and Gym Group (note: I have bought a couple of those recently also). As an aside, Blue Prism still looks relatively expensive to me although it’s down 35% from its peak share price in the recent market crash.

There were a number of questions on the merger with Dunedin Smaller Companies Trust which was recently voted through. I voted against it because I could see the benefit for the Dunedin holders and for the manager but not for SLS shareholders. The benefits were argued to be “reduction in on-going charges” and “enhanced liquidity”, but when I asked what the actual reduction in charges might be, nobody seemed able to supply an answer. I also have doubts about the liquidity argument as Dunedin was substantially smaller than SLS, i.e., the extra assets acquired won’t add a great deal. The disadvantage of a larger trust, particularly in the small cap sector, is that it makes the manager less nimble, i.e. more difficult to get in and out of stocks. I remain to be convinced that this merger made sense for SLS holders but it may not be too damaging.

One somewhat irate shareholder berated the board for paying out too much in dividends (most of the “income” received) when the company is supposed to be focused on capital growth. I supported the board because in fact only a very small proportion of the overall profits are paid out in dividends. The current dividend yield according to the AIC is only 1.6% and many shareholders do like dividends. Trusts that don’t pay any or have very small dividends tend to have larger discounts to NAV.

Another interesting question was on the investment in AIM shares and the risk to AIM from changes to Inheritance Tax Relief (IHT). Harry said the AIM market had improved considerably in the last 6/7 years, from being full of rather “dodgy” companies to being a broad spectrum of growth stocks. He suggested this was important to the UK economy and it both creates wealth and jobs. The Chancellor would likely be careful on withdrawing tax benefits. Comment: I don’t judge that as a big risk and even if IHT relief was withdrawn any substantial decline in AIM share prices might simply draw in other investors to replace those only interested in IHT relief.

I asked Harry Nimmo a couple of questions after the formal meeting finished. How did he avoid investing in Patisserie shares? It seems they did not altogether and mentioned the company met their investment criteria, based on the false accounts. I also asked him about the changes to the Abcam remuneration scheme, a company they hold. It seems their corporate governance team had made representation on the subject to Abcam (see my previous blog post on that subject).

In summary, a useful AGM to attend, as many are. This is a very good trust to hold in my view if you don’t wish to speculate in individual small company shares. But smaller company shares can be more volatile in times of market panics, so SLS is down 18% since late September. That’s certainly not been helped by profit taking in such shares as Fevertree (their biggest holding at the year-end), First Derivatives, Dechra, etc, although the company had often reduced their holdings below their target maximum of 5% of their portfolio before the recent crash.

Bad news today in a trading statement from WPP the advertising agency business. This was brought to my attention by one of the attendees at the above AGM as I don’t hold it. I suggested the likely problem was the advertising world is becoming digital, bypassing the traditional agency model. In addition there were few barriers to entry in the advertising agency world. New businesses could be created by two men and a dog (or two women I should probably have said to be PC). The share price of WPP is down 14% today. This is what I later discovered the company had said: “As previously stated, our industry is facing structural change, not structural decline, but in the past we have been too slow to adapt, become too complicated and have under-invested in core parts of our business. There is much to do and we have taken a number of critical actions to address these legacy issues and improve our performance”. On a prospective p/e of 9 and yield of over 5%, I think following Harry Nimmo’s policy of not buying stocks just because they are cheap is probably good advice.

But let’s talk about good news for a change. Tesla have declared a profit in the third quarter. Cash flow also improved and is expected to be positive in the fourth quarter. So the doomsayers about this company might have to change their stance. There may still be risks associated with this business, particularly the management style of Elon Musk, but they are rapidly changing the auto industry through new technology. Traditional car makers are facing major disruption to their business, or as the FT put it in a headline to a long article yesterday: “German carmakers face their i-Phone moment”. Even Dyson is getting into the electric car business and opening a plant in Singapore to produce them. Technology is changing our world more rapidly than ever, and the pace of creative destruction in business continues to rise. Smaller companies tend to be leaders of such changes, in the advertising world, in car manufacturing (relatively) and in many other fields.

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

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Alliance Trust Savings Sold

Alliance Trust (ATST) has sold its Alliance Trust Savings (ATS) subsidiary to privately-owned company Interactive Investor. The ATS investment platform was always a peculiar business for a traditional investment trust to be holding. It was also consistently loss-making and reported an operating loss of £19.3 million in 2017 after a big write down of intangible assets. The directors valued the ATS business at £38.3 million in the 2017 accounts and Interactive Investor are paying £40 million for it but it looks like they are getting the Dundee offices of ATS valued at £4.9 million in addition.

The ATS business will continue to operate from Dundee as will Alliance Trust itself. But there will presumably be some rationalisation of IT systems in due course so clients of ATS may need to learn new software eventually. Charges might also presumably be harmonised also. Interactive Investor charge a fixed quarterly fee of £22.50 which covers some trading fees. Otherwise trading charges are £10 per trade, or less for frequent traders. This structure means that charges do not rise as your portfolio grows and is particularly well liked by those with larger portfolios.

The disposal of ATS was always on the cards after the revolution and board changes a couple of years ago at Alliance Trust. This looks a good deal for both Alliance Trust and users of the ATS platform. It completes the dismantling of the empire built by former CEO Katherine Garrett-Cox.

It is also another step in the consolidation of the “investment platforms” market which is certainly a trend as a lot of them aren’t making much in the way of profits at present (other than Hargreaves Lansdown covered in the previous blog post).

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

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