Oxford Tech VCT3 and other VCTs, and the Coronavirus Bandwagon

One of my shareholdings, Oxford Technology VCT3 (OTT), fell 44% this morning. Am I concerned? No because I have only ever held 10 shares in the company. I cannot even recall why I bought the shares back in 2014 but it was probably to keep an eye on their interest in unlisted Ixaris Group Holdings Ltd. That company was a major part of their portfolio and was still 65% of the net assets at the 29 February. It is also held by other VCTs. To quote from the ITT annual report, issued today, “For OT3 the initial Covid-19 pain has been most strongly felt by Ixaris, a travel payments company as a result of knock on impacts from Thomas Cook’s failure and a decline in Asian travel. Subsequent to our year end the downward pressure has increased on Ixaris with major airline disruption”. It also discloses that Ixaris received an offer during the financial year which would have meant a major exit at an uplifted price, but it collapsed at the last minute.

As a former director of Ixaris, and a very minor shareholder still, I was aware of this bad news. It looks like they are almost back at square one. That is the nature of early stage venture capital. Two steps forward and one step back, or vice versa in this case. I always took a sceptical view of the value put on Ixaris by OTT and other VCTs as I always considered it a highly risky investment.

OTT also wrote down Orthogem as it was sold for a nominal amount. This is what they said about that: “Although Orthogem had made significant technical progress with the launch of its putty product and appointment of international distributors, it was unable to raise sufficient funding to be able to continue to trade.  The OT VCTs were willing to continue supporting the company, especially given we believed the company was very close to commercial success, but the VCT rules governing the age of companies and the use to which any new funds can be applied prevented us from doing so”. VCT rules are now preventing some follow-on investments.

OTT also has a holding in listed Scancell (SCLP) which OTT says has had a moderate uplift after announcing the start of its research programme to develop a Covid-19 vaccine. They also say this: “Scancell is our third largest holding and had a disappointing year of regulatory and clinical delays in its flagship melanoma trial and its share price fell over the course of the year. Its planned Phase 2 combination trial with their initial product SCIB1 ran into difficulties with the US Food and Drug Administration (FDA) due to the delayed approval by the FDA of the upgraded delivery device from 3rd party Ichor. In the event, the trials started in the UK later than expected. Subsequently the required US approvals were received but a year has been lost and results will now be correspondingly delayed. Post period end the UK trial went on hold as a result of Covid-19 risks. Nevertheless good data from these trials could represent a significant value inflection point for Scancell and are eagerly awaited”.

There were big hopes for Scancell a few years ago but that has long since evaporated and revenue has remained at zero. It’s a typical story of early stage drug development companies which I avoid for that reason.

The Net Asset Value of OTT fell by 33% from the previous year-end, and hence the share price drop on what is a very illiquid share, like most VCTs. Normally VCTs are immune to general stock market fluctuations but not in the current recession. Some of my VCT holdings have fallen sharply no doubt because of downward valuations of some of their unlisted holdings but also because of sharp falls in many AIM shares which are a significant proportion of some VCT portfolios. This has also been compounded by the halt to share buy-backs in some VCTs – the result is just a few shareholders selling causing a sharp fall in their share prices.

Are their opportunities in VCT shares appearing, or should I be selling also? Perhaps is the answer, but VCT shares I consider to be very long-term holdings with a lot of the value coming from their tax-free dividends. I only tend to sell when I have lost confidence in the board or the investment manager.

As with the mention above of Scancell, almost all biotechnology companies are now trying to get into the coronavirus space by developing interests in vaccines, antibody tests and diagnostic products. Such an entry does wonders for the share prices. This ranges from the very largest companies such as Astrazeneca and Glaxosmithkline who are both gearing up for vaccine production to the smallest start-ups. One example announced today is that of Renalytix AI (RENX) who announced a joint venture with the Mount Sinai school of medicine to produce Covid-19 antibody test kits. RENX are focused on renal diseases which is why I picked up this news as I have an interest in this area but I do not hold the shares – historically no revenue to date. But RENX will only have a minority interest in the joint venture. I would not get too excited about this, particularly as it is possible that the epidemic will die out and there are lots of people producing test kits. But the company may be of interest otherwise as it does seem to be making some progress in renal diagnostics. There are 40-45,000 premature deaths in the UK every year due to kidney disease so you can see that it is comparable to the coronavirus epidemic and with still no effective treatments.

The coronavirus epidemic is clearly creating a bandwagon for companies to jump on. That can be a minefield for investors. Or to put it another way, an enormous amount of venture capital is being put into research of treatments and diagnostic production. It may produce results sooner or later, but a lot of the investment might produce nothing.

Lastly, it’s worth covering the dire economic gloom. Unemployment has reached record levels and Rolls-Royce (RR.) are making 9,000 employees redundant as new aero engine demand will clearly be non-existent for some time – maybe years.

To quote from the FT: “Rishi Sunak [Chancellor] has warned that the economy may not immediately bounce back from the corona-virus crisis and could suffer permanent scarring, as jobless claims soared at a record rate to more than 2 million. The chancellor struck a sombre note on a day that saw the biggest month-on-month increase in out of work benefits claims since records began in 1971. A further 10 million are now precariously relying on the state to pay their wages. He said ‘We are likely to face a severe recession, the likes of which we haven’t seen, and, of course, that will have an impact on employment’”.

Some of my readers may be facing redundancy or soon will be. Clearly we are living in exceptional times, but on a personal note it’s worth mentioning that I have been out of a job more than once in my past career. Recessions tend to only last a short time so the answer short-term is simply to take any job going. Longer term the answer is to ensure you can never be fired in future is to set up your own business. CEOs rarely fires themselves, and there is the possibility that a new business might make you rich. So that is what I did a few years later.

I don’t come from a family of entrepreneurs but from people who worked in big businesses. But it is easier than ever to start-up from scratch and redundancy pay can give you the initial capital required. Recessions don’t make it harder to start a new business but easier in some ways. As companies lay off full-time staff that gives opportunities for others, and any service or product that saves a company money can be immediately attractive. So redundancy just needs to be faced up to with some energy and initiative.

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

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Covid-19 Economic Impact and Was It All Based on Faulty Analysis?

Readers don’t need to be reminded on the damage being caused to the UK economy as a result of the coronavirus epidemic. Most of the damage has been caused by the “lock-down” that has closed whole swathes of UK business and industry. There can’t be many readers’ stock market portfolios which have not suffered as a result. The lock-down was all done based on the advice of Prof. Ferguson of Imperial College and a computer model that he used.

This is what Steve Baker, M.P. tweeted today: “Today, I read the Imperial College Covid-19 Code: https://github.com/mrc-ide/covid-sim . I then read this for a second time with growing horror: https://thecritic.co.uk/a-series-of-tubes/ . Software critical to the safety and prosperity of tens of millions of people has been hacked out, badly. It is a scandal.”

This is what I wrote yesterday in my diary (which I have kept since the start of the epidemic to make interesting reading for my offspring in future years):

“There has been a lot of controversy of late over the role of Professor Neil Ferguson in the epidemic crisis.  He is professor of mathematical biology at Imperial College London and has been advising on the UK government’s response. His virus modelling led to the current lockdown being put in place. It seems his past forecasts of the impact of epidemics of other diseases have been wildly pessimistic. He has now resigned from the Government advisory body after ignoring the lock-down rules to meet a paramour.

But when people looked at the software code that he has been using to forecast epidemic spread, it seemed to be unreliable. It consisted of 15,000 lines of undocumented and unstructured code that allegedly gave different answers when run more than once. It very much appears to be a rather unprofessional approach to software development that one might expect from a scientist rather than an IT professional”.

I then covered my past career as a programmer and lamented the lack of professionalism in some parts of the world as regards software development, 40 years after I gave up programming. This is a good quotation from the Daily Mail on the latest fiasco: “David Richards, co-founder of British data technology company WANdisco said the model was a ‘buggy mess that looks more like a bowl of angel hair pasta than a finely tuned piece of programming’. He also said: ‘In our commercial reality we would fire anyone for developing code like this and any business that relied on it to produce software for sale would likely go bust’.”

So now you know why we are all stuck at home and in such a financial mess.

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

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Why I Am Optimistic

The UK death count from the Covid-19 virus is now 25,785 and continues to grow, albeit at a slower rate. There is a lot of bad news about the economy still being reported – new car sales have fallen to the level last seen in 1946 and according to the Daily Telegraph the state is now paying more than half of all adults. The same dire economic picture is also seen in the USA and most other countries. But I am still optimistic for the following reasons.

Apart from being a naturally optimistic person, which is a required attribute for any entrepreneur, the medical scene is looking better for several reasons. Below is a chart issued by the Government today which shows the daily number of confirmed Covid-19 cases.

Reported Covid19 Cases 2020-05-05

It is clear that the spread of the disease is falling rapidly and hence the “R” (reproduction) rate is probably less than 1. If the same conditions persist then the disease will gradually die out. Emergency “Nightingale” hospitals are already closing because of a lack of patients. With fewer new cases, the spread of the disease declines. Tracing of infected people and ensuring they are isolated, plus the new phone App to help identify contacts, are two ways the Government hopes will assist in this process. That’s ignoring the potential vaccines or medical treatments on which a lot of money is being expended worldwide at present. It has even been suggested that taking Vitamin D supplements might avoid the worst symptoms of the disease.

But the Government is concerned that if the “lock-down” restrictions are relaxed to enable people to get back to work then the virus may stage a resurgence and we will be back at square one.

Bearing in mind that the current very severe restrictions are causing enormous financial damage to the economy and costing the Government (and by implication, you and me) billions of pounds in paying the wages of furloughed staff and providing loans to companies, the question is how to make a rational decision on when to relax the restrictions and by how much. One way to look at this is how much you value a life. If you know what that value is then you can do some calculations to see what the cost might be and whether it is justified to relax the restrictions.

The Government already has that figure. For example, when calculating the benefit of road safety measures a figure of about £2 million is put on the benefit of saving one life. That is a somewhat optimistic figure though because it not just includes the cost of lost economic contribution and the cost of medical treatment but also what people say they would pay to avoid the loss of life, i.e. it’s a subjective figure to a large extent. However, it is a good starting point.

In the case of Covid-19 deaths, many of the cases are of the elderly or those with existing medical conditions who cost the state money rather than contribute. So the loss might be much less than £2 million from a Covid-19 death. Maintaining the existing strict lock-down might actually be causing some deaths from lack of attention to the early symptoms and treatment of some diseases such as cancer.

You can see therefore that it might make some sense to do some calculations on the impact of relaxing the restrictions to enable the majority of people to get back to work even if it means the deaths might increase. I won’t even attempt to do such a calculation but the Government should.

Those people who are particularly vulnerable could of course choose to continue to self-isolate but there is no reason to have a lot of the economy shut down. It would also be wise to have a phased relaxation of the restrictions so that meetings of people in confined spaces are still banned until the picture is clearer.

There would still be some sectors of the economy that will be severely affected. So restaurants other than those providing take-aways would need to remain closed and hotels be very restricted. Even if they opened they might have few customers. Airlines and trains would also suffer and it’s perhaps no surprise that Warren Buffett has sold all his shares in airlines. He had acquired stakes of about 10% in American Airlines, Southwest Airlines and United Airlines in 2016 which rather surprises me as surely he used to say these were typically bad businesses. I would guess he lost a few billion dollars on that punt. It seems most people don’t expect airlines to recover for at least a couple of years and aircraft leasing companies are in major difficulties as are aircraft and engine producers such as Boeing and Rolls-Royce. Nobody will be buying new planes for a while.

But a lot of the economy can surely get back into action over the next few months if the Government makes some sensible decisions which is surely good news for investors – so long as you are selective about the companies you hold.

In conclusion the panic should be over. We are not all going to die from Covid-19 although a few of us might do so. But in comparison with the normal hazards of living it may not be significant. For example, about 6,000 deaths happen each year from accidents in the home which is many times the figure for accidents on our roads but little attention is paid to the former mainly because the cost of preventing them would be very high and they do not attract much public attention. Average UK deaths from common influenza are 17,000 but it can be as high as 30,000 in some years.

The Government just needs to take some rational economic decisions on lifting the restrictions.

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

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Bad News Rises as Market Does Also

Stock markets continue to rise when the economic news is generally bad. Is the market rise based on relief that it does not look like all our shares our going to become worthless, or relief that we have not yet caught the coronavirus personally? Although I know a few people who have – thankfully all recovering.

But companies continue to issue announcements of the kind that say “too early to tell the full impact” while reporting negative sales trends in the short term. Meanwhile the Bank of England is going to simply print money to finance government spending rather than raising debt in the gilt markets. If that is not a negative sign, I do not know what is.

A couple of companies are worth mentioning: 1) Speedy Hire (SDY), a company who rent out tools and equipment and hence are a good bellwether for the construction and maintenance sectors. They report “reduced activity levels” but they have “retained a substantial proportion of its revenues”. They are cutting costs, it is uncertain whether it will pay a final dividend in August and it “suspends all guidance until the position stabilises”. That does not sound very positive does it?

2) Diageo (DGE) also gave a trading update today. They give very little in the way of specifics about actual sales. They are reducing costs and are still paying the interim dividend this month, but have stopped the share buy-back programme. More information would have been helpful.

Those investors who rely on dividend income are being hard hit as many companies are cutting them out so as to protect their balance sheets due to the uncertainty of the economic impacts of the epidemic. Some of the big insurers are the latest to stop paying dividends and this has a very negative impact on their share prices as institutional investors who run income funds dump them for other shares. Private investors are probably doing the same.

But the really bad news yesterday, although not totally unexpected, was from NMC Health (NMC) who announced they expected to go into administration. The likely outcome for ordinary shareholders is zero. In normal times this would have been a headline story but almost all news is now being swamped by coronavirus stories.

NMC was valued at £2 billion when the shares were suspended but were worth four times that in 2018. So this will be one of the biggest stock market wipe outs in history, probably arising from some kind of financial fraud. I hope those responsible do not escape justice.

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

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Extreme Weather Events – Are They a Problem?

Before the national media became dominated by coronavirus news, the most common news story was about global warming and how it was causing extreme weather events such as fires, heatwaves, tropical storms and floods. Fires in Australia and floods in the UK were the headline stories in the past year.

As investors it is clearly something that you need to be informed about. Such natural catastrophes won’t just affect insurance companies but the economy overall if such events are becoming more common. But are they?  The following note has been recently published by Paul Biggs, an environmental scientist and writer on the subject.

It shows that media coverage of national disasters makes for good news stories but the comments on it by journalists and broadcasters are often inaccurate. We probably have a lot more to fear from global pandemics.

Abbreviations: IPCC: Intergovernmental Panel on Climate Change, SREX: Special Report on Extreme Weather.

Weather Disaster Losses

Peer-reviewed science does not support any claim that disaster losses have been increasing due to climate change, man-made or otherwise (Reference 1).

Hurricanes and Tropical Cyclones

The detection and attribution in trends due to human-caused climate change in Tropical Cyclones, including Hurricanes, has NOT been achieved (1) (2).

Floods

UN IPCC AR5 concludes: “In summary there continues to be a lack of evidence and thus ‘low confidence’ regarding the sign of the trend in the magnitude and/or frequency of floods on a global scale.” IPCC SREX authors helpfully conclude that “the problem of flood losses is mostly about what we do on or to the landscape and that will be the case for decades to come.” (1)

Tornadoes

IPCC SREX: “There is ‘low confidence’ in observed trends in phenomenon such as Tornadoes and Hail…the data are suggestive of an actual decline in Tornado incidence..” (1)

Droughts

IPCC/SREX: “There is ‘low confidence’ in detection and attribution in changes in drought over global land areas since the mid-20th century. (1)

Extreme Temperatures

High temperatures are not a big driver of disaster losses. The IPCC says that there is ‘medium confidence’ that globally the length and frequency of warm spells, including heat waves, has increased since the mid-20th century. The IPCC believes that it is ‘very likely’ that human influence has contributed to these changes, but this relies heavily on climate models that are unable to pin down the exact climate sensitivity to CO2. The extreme 6C model known as RCP8.5 is now generally regarded by more rational scientists as ‘implausible.’ The range is now effectively 1.5C to 3C, with recent published evidence supporting a sensitivity below 2C. (3)

(1) The Rightful Place of Science: Disasters and Climate Change: https://tinyurl.com/yx5kfyos

(2) New WMO Assessment of Tropical Cyclones and Climate Change, Lee et al 2020: https://tinyurl.com/wgqoxm6

(3) Climate sensitivity in the light of the latest energy imbalance evidence: https://tinyurl.com/sawhd28

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

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Excess Optimism and 4imprint Reality

The FTSE-100 is up 3% today at the time of writing and the FTSE-250 up over 6%. That follows a rise of 7% in the S&P 500 in the USA yesterday. This is driven by some expectation that the virus spread is declining in some countries, or has ceased altogether in China. But I suggest this is pure excess optimism as the lock-downs in many sectors have yet to hit the results of companies.

A good indication of how bad it could be was the announcement this morning from 4imprint (FOUR) a supplier of promotional products to companies, mainly in the USA. The share price of this company fell to a low of 1320p on the 19th March after it reported sales were had fallen to 40% of previous levels. It has since bounced back up to 1830p as of last night.

This morning they gave even more bad news. Sales are now running at 20% of last year’s figures and their main distribution centre in Oshkosh has been closed. The message is quite obvious to see. Companies are axing their promotional budgets and aggressively reducing their marketing expenditure. When times get tough, marketing expenditure is a discretionary item that can be easily chopped. You will see how this can ripple through the whole economy and affect any company in the marketing sector.

4imprint may survive but this year’s results are likely to look quite awful even if there is a rapid return to work. But there is no sign of that and it could be months before business returns to normal, or to anywhere near last year’s levels. The last widely published profit forecasts suggest a fall of 10% from previous forecasts made at the start of the year, but still more than last year’s actuals.

Hopelessly optimistic in my view, even if I am still holding some shares in the company.

This seems to be a common feature of the market at present with investors piling into or buying back shares they previously sold. Far be it for me to ignore the wisdom of crowds so I have been buying some shares but only on a selective basis. But excess enthusiasm for some shares such as 4imprint seems rather too common.

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

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What To Do Before You Die, and Avoiding Doing So

Many of the readers of this blog will not be in the springtime of their lives. They therefore might be susceptible to the coronavirus. I thought it was worthwhile therefore to cover how you can prepare for that eventuality. This is not a “bucket list” of things to do before you die but how to ensure your family and executors are prepared for the eventuality. As someone who has had a serious medical condition for many years, this is a subject I have spent some time on so probably have some expertise in the matter.

First make sure you have drawn up a will, and that it has been updated since there have been any changes in your life – for example new partners or offspring. Also check the appointed executors are still able and willing to act. It’s very worthwhile using a solicitor to help you draw up a will or revise one rather than trying to do it yourself. It’s one of the few bits of legal work that are usually low cost.

But there are several other additional documents you need to prepare. A “Letter of Wishes” for how you wish your personal chattels to be disposed of will be helpful to your executors. This can help to ensure that items of particular interest to your partner or children go to the right home. It can also be useful to cover what happens to cash in joint bank or deposit accounts to avoid any doubt.

One problem that is relatively new is what happens to “digital assets” such as internet accounts and associated log-ins. So it’s also helpful to provide a “Letter of Wishes – Digital Assets” that says something like this: “I hereby grant my executors under my will the right to access such digital asset accounts by using the log-ins and passwords mentioned and assigning the rights to use those assets to any person they see fit, or in the case where the accounts contain assets of value they are to be bequeathed under the terms of my will”. Obviously you also need to tell your executors where they can find all the account details and passwords.

A common problem for executors is actually locating all the assets of a deceased. You should therefore also provide a document that covers “What to do when I die” that spells out where they are. For example which brokers/platforms or banks hold the shares and cash or where the share certificates are held. This should also indicate what immediate cash can be accessed if your partner will need that in the short term, and perhaps what should be done with any share holdings, i.e. whether they should be liquidated or who will manage them going forward. In addition it should tell your executors where your will can be found.

The above covers the really bad news, but there are other things you should consider putting in place in case you don’t actually die but are incapacitated for some period of time. A “Lasting Power of Attorney for “Property and Financial Affairs” and for “Health and Welfare” are worth putting in place. These enable a partner or anyone else you appoint to financially administer your affairs and make decisions about personal care if you are unable to do so.

It is also worthwhile putting in place an Advance Medical Directive (Living Will) covering medical treatment. For example it can ensure that where there is little chance of survival or you may end up mentally incapacitated that medical treatment is halted rather than pursued. Tell your partner or offspring where the aforementioned documents can be found. In reality the chance of a Living Will being needed to be considered is relatively low and with the current state of the NHS they may not want to spend a lot of effort on keeping you alive, but you never know.  There are template Advance Medical Directives available on the internet.

Of course, one essential thing to do is to avoid catching coronavirus if you possibly can by self-isolating and avoiding contact with any other humans. One way to avoid meetings is to use conference calling facilities. I attended a discussion group meeting of investors last night using Zoom and it worked quite well. The group were generally rather pessimistic for the economy but they are often are. They had few new investment ideas with a number moving into cash. The difficulty is that it is not at all clear how long the epidemic will last and many businesses have closed down for the duration. The economic impact could be enormous and Government money creation and debt raising is of major concern. It could take some years for the economy to recover, with possibly higher taxes required.

US listed Zoom is just one of many video or telephone conference services, but according to one tweet I saw this morning, its stock market valuation is now 50% more than all listed US airlines! With EasyJet (EZJ) grounding its entire aircraft fleet today, you could probably include UK airlines in that calculation also. A UK competitor for Zoom is LoopUp (LOOP) in which I hold a very few shares. I have not done a detailed technical comparison of the respective products. Zoom certainly seems to be popular and has been growing rapidly as businesses move to video conferencing from telephone conference calls. These are relatively low-cost products but there is also Skype which is free. That works relatively well for one-to-one or small groups but I often find it not easy to use. It has a confusing user interface and is technically unreliable.

In summary, try to stay alive!

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

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