Selling Technology, Intercede at Mello, and Sir Frank Whittle

I have just listened to a recording of the Mello event which took place on Monday evening. In the “Bash” section one of the companies presented was Intercede Group (IGP). This company sells security software and is based in Lutterworth, which is in Leicestershire in case you have never been there. Bearing in mind the company’s client list of banks, US Government bodies and companies such as Boeing and Wells Fargo you might think the location a bit odd.

I first purchased the shares in 2010 and I still hold them. But it became clear to me very quickly that this was a typical example of a company with great technology but unable to convert it to profits. The company was founded by Richard Parris who remained Executive Chairman for a very long time – until 2018 in fact when a new CEO took over. Losses have been turned into profits although revenue is still not great (£10 million last year).

I did visit the company’s AGM in Lutterworth a few times and at one meeting I discovered that the company’s operations director was actually Richard’s wife under a different surname. It’s always interesting what you can learn from attending AGMs! The problem was the dominance of the company by someone with a technology background rather than a sales or marketing background. At least that was what I perceived. The culture was I suspect a negative.

Oddly enough there was another company based in Lutterworth which I only recently learned about which had an analogous history. Great technology which became a world beater but where the owners never made much money out of it. This company was Power Jets Ltd which was the baby of Sir Frank Whittle – the inventor of the jet engine.

A recent biography of Whittle is called Jet Man. Its author is Duncan Campbell-Smith and it’s well worth reading. Whittle lost control of the invention and associated patents (being a serving RAF officer did not help) and his company was eventually nationalised. Rolls-Royce acquired some of the technology and it was also given to the USA for nothing. What should have been a great money-spinner for the UK and for Whittle after the war years was lost due to commercial incompetence.

There is apparently a memorial to Frank Whittle and a small museum in Lutterworth if you ever visit Intercede.

Will Intercede ever make real money? It’s a bit early to tell I think but I am certainly more confident in the new management than the old. A slight downside is the recent announcement that they are rewriting the LTIP to reduce the share price targets. I never like to see options rewritten but there may be some justification in this case and certainly the CEO, Klaas van der Leest, has achieved a remarkable turnaround. I’m even finally showing a decent return on my investment in the company.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Scottish Investment Trust Review

This article first appeared on the ShareSoc blog.

One of my contacts has asked me to look at the Scottish Investment Trust (SCIN). This is a self-managed global investment trust which seems to have the same problems that Alliance Trust had before they had a revolution. Namely persistent under-performance. As a result, it is trading at a discount of 10.4% to the net asset value despite doing considerable share buy-backs in the last few months, presumably to try and control the discount. But as we saw at Alliance Trust, which was also self-managed prior to the revolution, share buy-backs rarely solve the discount problem if investors have become disillusioned with the company.

The AIC reported performance figures show a share price total return of -9.2% over one year and -3.1% over 3 years. That compares with global sector returns of +52.2% and +108.4% respectively. Only over 5 and 10 years do they match the sector figures. In other words, recent performance is the issue. This performance is surprising bearing in mind that 34% of their portfolio is in North America which should have been a recipe for success last year.  

What’s their investment strategy? Their last interim report spells it out. They have a “High conviction, global contrarian investment approach”. In more detail they say: “We are contrarian investors. We believe markets are driven by cycles of emotion rather than dispassionate calculation. This creates profitable investment opportunities. We take a different view from the crowd. We seek undervalued, unfashionable companies that are ripe for improvement. We are prepared to be patient. We back our judgement and run a portfolio of our best ideas, selected on a global basis. Our portfolio is unlike any benchmark or index and we fully expect to have differentiated performance. Our approach will not always be in fashion but we believe it delivers above-average returns over the longer term, by which we mean at least five years”.

This kind of comment makes me very skeptical. This looks like a “pick the cheap dogs because the fundamentals will eventually pay off” kind of approach. But I never found that worked. The dogs tend to remain dogs. Being a contrarian in the investment world can be very dangerous.  

Terry Smith of Fundsmith has been attacking the concept of chasing “value stocks”, i.e. those that look cheap on fundamentals. I believe he is quite right. The stocks with a high return on capital, good cash generation and sales growth are the ones that are more successful even when a recession hits.

I have not looked at the SCIN investment portfolio in detail but I would certainly question some of their holdings. I would suggest investors need to tackle the board on this, and ask whether their investment managers are really making good investment decisions. Such substantial underperformance over as long as 3 years certainly raises doubts.

This is what the Chairman said in the last Annual Report: “Global markets continued this year to be dominated by a momentum style of investing which seemingly pays scant regard to valuation, and is an anathema to our value-focused style of investing. To have kept pace with global markets this year, our portfolio would have required a proportionately large exposure to a very small number of companies that we believe are greatly overvalued and a lot less exposure to the names which we consider offer the best potential for long-term gains. This influence, unfortunately, has been a hallmark of markets during the five years since we adopted our contrarian approach and has become greater in more recent years. The result is an extreme divergence between the most and least expensive parts of the market. Such extremes have, historically, proved unsustainable and we believe that a new phase for markets is overdue, one that may favour those who, like us, do not follow the crowd.

Notwithstanding our lack of exposure to what we consider irrationally priced momentum driven investments, there were two particularly advantageous decisions made during the year. The first was our Manager’s decision to take pre-emptive action to preserve capital at the onset of the Covid-19 crisis by selling out of some of the companies we believed would be most impacted. The second was a large exposure to gold miners, which participated strongly in the recovery. Unfortunately, the benefits of these decisions were masked in the second half of the year as markets rewarded stocks deemed impervious to the challenges facing the real economy, such as information technology stocks. In contrast we invested in companies we believed would be less impacted by the travails of the real economy, but were considered dull in the feverish monetary environment created by central bank support, which has fueled momentum investing.

Our contrarian approach explicitly aims to take a different view from other managers and invest without regard to index composition in order to avoid the herding around popular investments that is an inherent trait of active management. We therefore expect our portfolio, and its returns, to be unlike any index”.

It would appear that they adopted the new investment style five years ago which might be identified as when under-performance took off. If an investment strategy does not work, how long should you persist with it? Not many years in my experience. It’s too easy to hold the dogs longer than you should.

Shares magazine have this week published a list of 15 global trusts and gave their 5-year share price total return performance. SCIN came bottom with a total return of 43% whereas the best was Scottish Mortgage at 476%. What a difference! Scottish Mortgage might be exceptional because of their big bets on technology companies, including some unlisted companies but Alliance achieved 106% and Witan 79%. Monks achieved 272% which reminds me that I used to hold it years ago but sold due to consistent poor performance – they had the same investment philosophy as SCIN but they changed it in 2015 after a change in individual fund managers and after I sold the shares. They have been on a roll every since. Does that suggest that patience can eventually be rewarded? No it suggests to me that less patience would have been preferable.

One problem with self-managed funds, even if it does enable a low charging structure, is that it can be difficult to fire the fund managers. A multi-manager approach now followed by Alliance and Witan is I suggest a better option.

The directors got an average of 18% against their re-election at the last AGM so clearly there is a strong demand for some change from investors.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Stockopedia Stockslam Report

I think I am attending too many investment webinars. Last week I fell asleep in one after ten minutes and missed most of the presentation. That can be a particular problem with evening events. But last night’s Stockslam event was lively enough to keep me awake.

These events are run by investment web site Stockopedia and consist of a number of presenters covering their favourite stocks in 3 minutes followed by a few questions. This was the first on-line version and it worked well. I’ll cover the companies presented briefly and add a few comments:

  • Caledonian Mining. A gold miner based in Zimbabwe. All gold miners are very dependent on the price of gold and the other big factor to consider is the political stability of the country in which it operates, which was not mentioned. Looks cheap but needs to be.
  • Unite. Provider of student accommodation. Has been hit by the Covid epidemic, particularly for foreign students. Will students want to return to use such accommodation as most of their education is now done on-line rather than working from home? I think I agree with the presenter that they will as I have a grandson who has just gone to university and is living in such accommodation in Oxford. Might be worthy of further research.
  • RWS. Patent translation and other IP services. I used to hold these shares but I sold after they acquired SDL which I had also held in the past but never seemed to generate real profits. An expensive acquisition perhaps but the Chairman has a good track record.
  • Braemar Shipping. This is a smaller shipping company apparently focused on tanker supply but the financial track record looks very unimpressive – declining or static revenue and profits for some years. Shipping companies are very susceptible to global shipping rates which they have no control over. Looks cheap on fundamentals but needs to be.
  • Renold. Industrial chain supplier. Presenter argued that the management are reviving the business which otherwise looks very mature. I cannot see where growth is coming from although profits are forecast to rise short-term. Big pension deficit was mentioned. It looks like an “old technology” business to me.
  • SDI. Acquirer of small technology businesses. Has been growing profits rapidly and share price has been rising by leaps and bounds as a result, driven by active CEO. As one of the two presenters said “You wouldn’t exactly say it is cheap!” As I hold the shares, I will say no more.
  • Cake Box. A purveyor of personalised “celebration” cakes via a franchise network. An interesting company that is growing rapidly and has a good financial profile. May be worth a closer look if you are not put off any cake retailers by the failure of Patisserie.
  • Gear4Music. On-line music equipment retailer. Looking at the recent share price trend, the epidemic seems to have helped them.
  • Halfords. Car accessories/servicing and bike retailer. Have held this company in the past. Sold at 380p in 2016 – share price now 265p, which tells you a lot. Might have a relatively good year this year from the demand for leisure cycling in the lock-downs but surely otherwise operating in very mature markets. Return on capital has been low in recent years.
  • Atalaya Mining. Copper mining in Spain. Demand for copper is rising due to electric cars etc. Low historic return on capital and lack of dividend mentioned. They are operating in a sector with some very large players, and like any miner are dependent on commodity prices over which they have no influence. Forecasts for next year does make it look cheap.

All the presenters and the host (Damian Cannon) spoke clearly although I think some presenters could have been clearer on the “USP” of their selected companies. For example why buy Atalaya Mining rather than one of the big copper miners?

But an interesting event overall which was oversubscribed and I shall try to attend the next one.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Ideagen Results, Stock Speculation and Verici DX

Ideagen (IDEA), which is one of my long-standing holdings, announced their interim results this morning. There were no surprises in them but it included a note that David Hornsby, Executive Chairman, would be retiring this year. I think I first met David at a Mello event in 2012 and I purchased some shares soon after because I was impressed by how much he knew about selling software. That turned out to be a wise investment as he has grown the business many times subsequently. My shares were originally purchased at about 15p and are now 285p.

A recent conversation with David did give me the impression that it might be time for him to retire. I submitted a written question to the AGM in October, but it was not answered so I took it up later. The question related to the write off of past sales transactions as being uncollectable which were treated as an exceptional item in the accounts. David then calls me and tells me he did not consider the question reasonable (or “somewhat crass” as he later called it). He also suggested if I was not happy, I should sell my shares. This is not the kind of aggressive response I expect from a Chairman to questions that might have been “pointed” but not unreasonable. I also tried to attend the on-line results presentation this morning but for some technical reason it did not allow me to register. Not at all satisfactory. Anyway thanks for the ride David.

Stock Speculation

There is a very good article in the Financial Times today under the headline “Retail investors rush to find the next stock market unicorn” by James Bianco. It reported how investors have piled into technology stocks in recent months. A Goldman Sachs index of non-profitable tech stocks has risen by 400% since March.

It notes three things have dramatically changed retail investor perceptions of investment in small cap stocks: 1) the cutting of broker commissions to zero; 2) the adoption of fractional purchases; and 3) the increase in savings helped by Government assistance payments (which Biden promises to increase further). In effect money is being spent “chasing unicorns”.

If you read my recent review of the book “Boom and Bust” you will realise that these changes (a rise in liquidity from lower trading costs and money being pumped in) are common drivers of speculative bubbles. It is surely time to be wary.

Verici Dx

I am still on the look-out though for interesting small cap stocks. One company I thought I might understand is Verici Dx (VRCI). The company is focused on producing better control of immunosuppression in kidney transplant patients who often suffer from damaging graft rejection. That may not be obvious from current blood tests used to monitor transplants.  As a transplant patient of 20+ years standing I thought I might understand the business.

So I read the prospectus for their IPO on AIM last November. Market cap is now over £100 million but with no revenue or profits. The company is a spin-off from Renalytix AI (RENX) with a similar financial profile and market cap of £640 million but they do expect some sales in 2021.

Both companies have some interesting technology which might certainly be beneficial to kidney disease patients, but the technology is not just unproven but adoption by clinicians might be slow and there are potential competitors.

I consider the valuations way too high for such early-stage businesses even if the potential markets for the technology might be large. A frothy market for such companies puts me off investing until they actually show some revenue. Perhaps these are companies to keep an eye on rather than jump in now.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Mello Meeting Report, Stopping Market Abuse and FRC Fraud Meeting

So far this week I have attended a couple of webinars. These are now getting totally out of hand now that folks have realised they are so easy to set up. I seem to have at least one lined up every day recently and sometimes as many as three. This can get very tedious if they last more than a few minutes each.

The first one I attended on Monday was the Mello meeting and I dropped out after a couple of hours so can only report on the first two sessions. The first one was Keith Ashworth-Lord and a colleague in Sanford DeLand Asset Management talking about their Buffettology Fund. Keith is always worth listening to as his approach to investment very much the same as mine, although I don’t actually hold the fund as I prefer investment trusts. The Buffettology fund has a great performance record, and is of course based on the investment style of Warren Buffett.  

One interesting comment he made was “one day we will stop investing in retail – probably now”. His key tips for investors were “do your research” and “monitor the delta” (i.e. the changes in financial ratios).

It was disappointing that the company did not manage to launch a new small cap investment trust, but they tried to do so when nobody was buying anything in the market. Shares might have been cheap then and have since recovered so it was a missed opportunity.

Of course like all fund managers Keith talked his own book, i.e. promoted the merits of his holdings, some of which I also hold. Keith was of course very careful in what he said – no direct encouragement to buy the shares. But this is a form of market abuse of course, in the same way as the shorting brigade rubbish the holdings where they are short by publishing derogatory articles. It has occurred to me that one way to stop both the approaches is to introduce a simple rule that nobody (person or company, or their associates) can publish articles or talk about companies in which they have an interest. That would surely stop both the positive and negative promotions.

That would of course imply that only independent journalists and media could comment on stocks or funds. Would that be a bad thing?

Some people argue that those who short stocks and publish derogatory articles on companies at the same time are doing a public service in bringing to the attention of the public the issues, and without them the problems might go unreported. But that is not necessarily so – see the reporting by the FT on Wirecard for example.

The second Mello session was a presentation by Sumo Group (SUMO), a video game development company which was new to me. There is a big demand for their services, revenue has been growing rapidly and financially the profits also now look good. It’s worth looking at their web site for examples of some of their work. They are clearly operating in a growth sector.

But I have my concerns. Do they have any IP or barriers to entry? Not apparently so. It also looks a very labour-intensive business, dependent on recruiting skilled developers. At the same time they seem to be mainly sub-contractors to game publishers, rather than owning their own games. Also they appear to have a “project” based business model which I never like. This is the kind of business that does well when demand is strong, but can come a cropper when it fades away.

Yesterday I attended a presentation by the Financial Reporting Council (FRC) on a revision of Audit Standards to assist the detection/prevention of fraud. This was a joint UKSA/ShareSoc promoted event. The main presenter was James Ferris.

The intention is to remove the ambiguity over auditor responsibility to identify fraud, and not just a director responsibility (because as one person pointed out, sometimes the directors are complicit in a fraud as happened at Patisserie and in other companies).

These changes to the relevant audit standard might be helpful but there is also the question of increasing the obligations of directors to identify and prevent fraud – this is an issue the Government is considering.

Mr Ferris said that auditors need to generally develop more fraud awareness which one cannot dispute.

There is a public consultation on this matter which has recently been published and which you may care to respond to – see https://www.frc.org.uk/news/october-2020/consultation-on-revised-auditing-standard-for-the . The first document mentioned there contains useful appendices on how to identify fraud.

I consider most of the proposals therein to be sensible, but of course prevention is better than cure. Auditors are unlikely to detect fraud until they have been running for some time, and the money extracted may have long disappeared. Tougher penalties for corporate fraud and the publishing of false accounts are also needed.

Finally we seem to be heading into the normal pre-Xmas market boom that happens most years. This has been accentuated by many people not being able to spend on shopping, holidays, restaurant meals, etc, so the savings ratio has gone up (less spending, more saving). With deposit interest rates at record lows, a lot of money has clearly gone into the stock market. The hope of a Brexit free trade deal at the eleventh hour is also boosting optimism while the economic impact and high Government borrowing associated with the epidemic and lock-downs is ignored.

I think I’ll stand aside from this market euphoria as I am already fairly fully invested.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Brexit, Ocado Trading and Facebook Law Suit

As I expected Boris Johnson’s visit to Brussels did not produce a positive outcome. A firm deadline of Sunday has been set for concluding discussions. I suspect that will be another deadline passed, and it won’t be the end of talks completely. In the meantime, the EU has unveiled plans to prevent chaos in case of a no-deal Brexit. Specifically planes between the UK and Europe will continue to fly and trucks will be able to continue crossing the Channel. The EU is also proposing temporary measures on fishing rights. These temporary measures could last for many months I suspect.

Good results from Ocado (OCDO) this morning in terms of revenue, driven by the epidemic encouraging internet food shopping. With three new warehouses opening in 2021, which will ultimately give the company 40% more capacity to the business, that is a positive trend as customers have been hampered by limited delivery slots. But they are finding it difficult to sell their technology solutions it seems because of the travel restrictions on which much of the future value of the company depends. The share price has fallen by 6% at the time of writing.

The real big news on the financial scene though is the law suit launched by the US Federal Trade Commission against Facebook. They allege the company has demonstrated anti-competitive behaviour particularly by the acquisition of Instagram and WhatsApp who were potential competitors. But it cites other issues as in addition. They wish to break up the company. The legal action is supported by attorney generals in individual states.

The big problem is that Facebook is a natural monopoly as more people are attracted to the biggest network. So it’s rather like AT&T and the Bell operating companies who used to have a monopoly over US phone traffic and were broken up in the 1970s by an anti-trust law suit.

Also it’s reminiscent of the break-up of Standard Oil even earlier who developed such a dominant control of oil production, refineries and even rail transit lines that they could force competitors out of business. Google (Alphabet) is also facing a big anti-trust lawsuit because of its very dominant position in the search engine market.

Comment:  These lawsuits will probably take years to come to a conclusion but they are clearly a major threat to Facebook and Google. Regrettably it’s probably a case of power going to the heads of the chief executives of these companies where they think they can do no wrong. In the case of Standard Oil and Rockefeller he argued, unsuccessfully, that their monopolistic position was for the good of their customers because it avoided wasteful competition and enabled products to be delivered at the lowest possible prices. No doubt Zuckerberg may use similar arguments which may not get upheld by the courts, but it’s not easy to see how the core Facebook product could be broken up.

The dominant positions of Facebook and Google in internet advertising should be the bigger target though which is what is generating most of their profits. There are surely some solutions to that such as price controls or giving other companies the ability to piggy-back on the companies’ software platforms. Lawyer’s can get very creative on possible solutions.

Note: I hold a few shares in Ocado, but not many because the valuation of the company looks like it is based on future hope that it will be a world beater rather than actual short term financial data. I do not hold Facebook or Alphabet, but no doubt like many readers, do hold them indirectly because of holdings in funds. The threat to their finances may be long-term rather than short-term, particularly bearing in mind how long anti-trust law suits take to run through the courts.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Invinity Open Offer, Ideagen, and AJ Bell Results

I have recently taken a strong interest in those shares that are involved in electrification of the world. It’s not just the UK Prime Minister who wants to save the world from global warming and air pollution with Joe Biden likely to be much more environmentally conscious than Donald Trump. Those companies or trusts that are involved in alternative energy sources such as wind and solar, and systems to manage the fluctuations they impose on the grid, are of particular interest.

One such company is Invinity Energy Systems (IES) who announced a placing and open offer this morning. This was a company that was mentioned at a recent investor discussion group I attended and I did some research into it and bought a very few shares.

It produces vanadium flow batteries which are typically large batteries used in large energy storage projects. They are alternatives to lithium-ion batteries which have limitations and lithium is a relatively rare element that we might run out of or it might become very expensive. Vanadium is the 20th most abundant element in the earth’s crust and is mainly used in steel making at present. Vanadium flow batteries have advantages in that they can be cycled many times, have a 25-year lifetime, with no risk of thermal runaway and are cost competitive. They have been around for many years but not in high volume production mainly because they are bulky and hence only suitable for certain applications – Invinity plan to change that. It’s still a relatively early stage business but it seemed worthy of a punt as their sales prospects, of which details are provided, look promising.

Their placing is at a discount of 8% to the pre-placing market price and dilution is only 16% so I consider that acceptable and the other good aspect is that they are including an “open offer” so existing private shareholders can participate.

For those interested in the environmental sector the following shares may be of interest (Note: I hold some of these): Gore Street Energy Storage Fund (GSF), Greencoat UK Wind (UKW, Gresham House Energy Storage Fund (GRID), Impax Environmental Markets, (IEM), Octopus Renewables Infrastructure Trust (ORIT) and The Renewables Infrastructure Group (TRIG). Some of these are effectively private equity trusts that invest in storage systems, windfarms and solar power installations. Much of their revenue comes from guaranteed prices for power supply and their assets are valued on a discounted cash flow basis. This enables them to pay high dividends with some capital growth but they are currently typically trading at a high premium to net asset value as they have grown in popularity as good reliable dividend payers have disappeared from the market. Whether the assets are fairly valued is anyone’s guess and clearly it depends on what discount rate is used – never an easy thing to determine in DCF calculations.

There is a lot of enthusiasm for these companies in the market at present so readers need to decide whether it is a bandwagon that will fade or grow stronger.

Last night I attended a webinar on Ideagen (IDEA) run by ShareSoc. I have held this company since 2012 and it has been highly profitable but one aspect I am unhappy with is that they regularly do placings, typically to fund acquisitions, but never include open offers, so I have been diluted. As Chairman David Hornsby said last night, they do at least only do placings at near the market price, but I am not convinced that is a good excuse. Market cap of Ideagen is £500 million while that of Invinity is £138 million so if Invinity can include an open offer why cannot Ideagen?

From David’s other comments it seems they are planning a placing to enable them to do more acquisitions to meet their growth plans. That might be why the share price has been drifting down of late as expectations of this have become known.

AJ Bell (AJB) announced their final results this morning (they run the YouInvest platform). Revenue was up 21% and pre-tax profit was up 29% but on a forecast p/e of 48 according to Stockopedia for next year the price is clearly discounting more growth but there must be limits on how much market share they can grab.

One interesting item mentioned in the AJ Bell announcement was that the FCA has delayed implementation of the “Making Transfers Simpler” rules due to the Covid-19 epidemic. The new rules were designed to make transfers between platforms easier so as to encourage a more price-competitive platform market. Let us hope these changes are not abandoned although AJ Bell mention they feel the new rules could be improved and have made alternative suggestions.

As anyone who has moved an ISA or SIPP between platform operators knows, it takes way too long and is too expensive. The FCA’s new rules may have helped in some regards but are not a total solution.

At least AJ Bell have substantially reduced their exit charges in their new price list effective from January. They have made a number of other changes to their prices which overall do not seem unreasonable and they will remain competitive.

Platform operators have generally been edging up their prices as the interest they receive on client cash has disappeared as interest rates have shrunk while regulatory costs have increased. This has also undermined the few “free dealing” platforms that wanted to conquer the UK market like Robinhood have done in the USA with commission free trading. Operators such as Freetrade were potentially a threat to AJ Bell but with the former offering only a limited service that threat seems to be receding.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Wey Education and Silence Therapeutics Webinars

I attended a couple of webinars yesterday – one for a company I already hold shares in (Wey Education) and one I do not (Silence Therapeutics). Both good examples of the genre.

Wey Education (WEY) published some preliminary results for the year on Tuesday. Revenue was up 38% and adjusted profits more than doubled. These figures and what the company said in the announcement impressed me, but the share price dropped almost 20% on the day. Perhaps investors expected more because as a provider of “on-line education” they surely should have benefited from the epidemic, or perhaps the prospect of a good vaccine made them appear less attractive. But with people more used than ever to doing things on-line, this has surely accelerated the demand for on-line education.

Regardless it was a good presentation from CEO Jacque Daniell and Chairman Barrie Whipp. They explained what the company does well and what their USP is. They had an ambition to become the largest UK secondary school and they ticked that box in the first half. They are also developing internationally as they see that as the market opportunity, and have appointed a new Director of Education, a Director of Marketing and a CTO. They are aiming for a world class user experience and are now geared for expansion. They have achieved a CAGR in revenue of 41% since 2016. Comment: they just need to keep that up! 

The concluding outlook statement in the announcement said this: “Wey is going forward into the 2020/21 academic year with mastery, autonomy and a great sense of purpose”. They have an interest in AI and that sounds like a statement written by a robot.

The second company was Silence Therapeutics (SLN). I missed both the start and end of this webinar so this is only a brief report. This company, as its name suggests, is focusing on silencing defective genes. To put it more fully, I quote from their web site: “Silence Therapeutics is developing a new generation of medicines by harnessing the body’s natural mechanism of RNA interference, or RNAi, to inhibit the expression of specific target genes thought to play a role in the pathology of diseases with significant unmet medical need”.

But it’s still an early stage business with minimal revenue but a large market cap (about £370 million). Clearly it’s a typical biotech stock where a lot of the share price depends on hopes for the future.

This is a sector in which many companies are active including some big players who are making profits, with lots of minnows showing losses. Whether this company will be successful in achieving its objectives and developing products that can be practically used and profitable remains to be seen. But the management certainly made a good impression, as they often do in such businesses (they need to be good at doing that to raise the funds they need).

One to wait and see I suggest, as my past forays into this market segment have not been a great success.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Market Musings

The stock market seems to be positively benign at present, if not almost somnambulant. While certain sections of the economy have gone to hell in a handcart, the enthusiasm for technology stocks has not abated. My very diversified portfolio is up today at the time of writing by 0.4% helped by good news from Dotdigital (DOTD) today and a sudden enthusiasm for GB Group (GBG). Optimism about a more general recovery in the economy seems to be still prevalent.

It’s probably a good time to consider overall market trends with a view to adjusting portfolios for the future. It is very clear for example that the UK at least, if not the world, is heading for a “net zero” world, i.e. a world where we are not emitting any carbon which implies a very high reliance on electricity generated from wind, solar and hydroelectric sources.

Whether that can be achieved in reality, and in my lifetime, remains to be seen. Whether it is even rational, or economically justified, is also questionable. But now that the religion of zero carbon has caught on, I do not think it is wise for any individual investor to buck the trend. As with any investment fashion it’s best to jump on the bandwagon and as early as possible. So I hold no oil companies and few interests in coal miners, except where they are part of diversified mining companies who are also mining copper (essential for the new electrification) and steel (not easily replaced). But I have recently invested in “renewable infrastructure” investment companies of which there are several, and in funds that provide battery support and load smoothing systems. Wind farms and solar panels tend to generate intermittent electricity so there is a big demand for emergency sources of power.

There was a very good article by Bearbull in last weeks Investors Chronicle headlined “The Net Zero Perversion” on this subject. He commences by saying “It is surely the new paradigm – that economic recovery from the damage caused by the response to Covid-19 can only be achieved by a fundamental shift towards a zero-emissions future. This is stated as fact – that reducing greenhouse gas emissions to ‘net zero’ by 2035 will be the powerhouse of economic growth – when, of course, it’s just a contention; much like the complementary one that investing in companies that are wonderfully compliant in meeting their economic, social and governance (ESG) commitments will bring excess investment returns”.

He goes on to say, after some other comments that must have enraged the uneducated environmental enthusiasts: “Yet there is plenty of evidence that the pursuit of net zero is brimming with unintended consequences, which is what you might expect from a movement driven by a weird mixture of idealism and greed”. He points out that rewiring our homes and expanding the grid to cope with the new electricity demand might cost £450 billion, i.e. £17,000 per household. Similarly the banning of the sale of new internal combustion powered vehicles from 2035 just causes the pollution generated from the manufacture of electric vehicle power systems and associated mining activities to happen elsewhere in the world. But overall emissions might not fall.

This fog of irrationality and attacks on personal mobility via vehicles using the Covid-19 epidemic as an excuse is now happening in several London boroughs, encouraged by central Government “guidance” and funding. Roads are being closed. In the Borough of Lewisham, adjacent to where I live, road closures have caused increased traffic congestion, more air pollution and gridlock on a regular basis. There is enormous opposition as the elderly and disabled rely on vehicles to a great degree while in the last 75 years we have become totally dependent on vehicles for the provision of services (latterly for our internet deliveries). Councillors in Lewisham think they are saving the world from global warming and air pollution that is dangerous to health when they won’t have any impact on overall CO2 emissions and there is scant evidence of any danger to health – people are living longer and there is no correlation between local borough air pollution and longevity in London. Air pollution from transport has been rapidly falling while other sources (many natural ones) are ignored. Lewisham and other boroughs have partially backed down after a popular revolt but local councillors still believe in their dogma. There is a Parliamentary E-Petition on this subject which is worth signing for those who think that the policy is misguided: https://petition.parliament.uk/petitions/552306

The Bearbull article concludes with this comment which matches my opinion: “All of which means investors should preserve their scepticism. But they should also recall their purpose in investing – to make money, not to go to war with the climate change movement, however ridiculous they may see some of its follies. Sure, as consumers they should see much of the pursuit of net zero for what it is – another charge on their net income. But as investors they should see it as an opportunity to join the momentum and, at the very least, to park some of their capital in a fashionable part of the market”.

When it comes to investment, markets can be irrational for a very long time. That is surely the situation we are currently seeing with stock markets kept buoyant by a flood of cheap money and there being nowhere else to stash it. With traditional industries and businesses in decline, most of the money is going into technology growth stocks or internet shopping driven businesses such as warehousing. That trend surely cannot continue forever. But in the meantime, following market trends is my approach as ever.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

British Smaller Companies VCT AGM

I “attended” the British Smaller Companies VCT Annual General Meeting today via Zoom. This was yet another variant on the practice of virtual AGMs. But there were apparently about 30 people connected which is more than they normally get of shareholders at their AGMs.

It was well managed with no significant technical problems, unlike others recently I have attended. Shareholders could vote for or against the resolutions on the day by using a Zoom Vote facility to give an instant poll result (rather like a “show of hands” vote which is technically what I assume it was although that was not made totally clear). The poll votes were given after each resolution was voted upon. The proxy counts were also displayed at the end. All proxy counts were in favour with the highest opposition being 11% against share buy-backs (probably by ill-informed investors as these are quite essential in my view in VCTs).

The poll figures showed only one or two people voting against a few of the resolutions. I voted against the remuneration resolutions and against the re-election of Chairperson Helen Sinclair – partly because she was first appointed in 2008, and for historic reasons.

Shareholders could submit questions previously or at the meeting by typing them in (but no follow-up possibilities). Not as good as a verbal question/answer model.

David Hall gave a short presentation on the results before questions. They achieved a total IRR of 5.4% last year, depressed by the Covid epidemic as their year end is March. The epidemic had a varied impact on their portfolio holdings, but there has been a bounce back since the year end.

There was a question on dividend policy and the answer was that the current policy will remain in the short term.

The meeting was relatively short with most of it taken up by the voting procedure. But it was certainly better than not allowing any shareholder attendance as other companies have been doing.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.