Babcock Price Fall, Segro Placing, TR Property and EKF Diagnostics Virtual AGM

I said in a previous blog post “that I tend to avoid FTSE-100 companies as their share prices are driven by professional analysts’ comments, by geo-political concerns, by general economic trends and by commodity prices. You can buy a FTSE-100 company and soon find it’s going downhill because one influential analyst has decided its prospects are not as they previously thought”.

Indeed that is exactly what happened after I made a recent purchase of Babcock International (BAB). Soon after Shore Capital Markets published a note that said it would be skipping its final dividend. The share price promptly fell by 7% on that day even though they claimed to “retain a buy stance” on the shares.

The last announcement by the company covering the subject of dividends on the 6th April simply said “The Board will consider the final ordinary dividend for this financial year ahead of our full year results announcement [due on the 11th June] taking into account developments over the next two months”. Do Shore Capital have inside information or are they just guessing? Or did they consult the company first? If they were given any relevant steer on this matter, the company should have issued a statement on it. Regardless it’s somewhat annoying even if some moderation of the dividend might make some sense and everyone else is cutting them. I would not be too concerned about the loss of dividend because I never buy shares for dividends alone, but I don’t like to suffer capital losses.

Yesterday property company Segro (SGRO) announced a placing “to take advantage of additional investment opportunities”. There was no open offer but private shareholders could participate via Primary Bid if you were willing to accept the price agreed with institutional holders. The shares issued represented 7% of the existing capital and the placing price turned out to be 820p, a discount of 4.5% to the previous close. I declined to participate, mainly because I have enough of their shares already. One has to ask why they could not have done a proper rights issue as there seemed no great urgency in the matter.

Last night I watched a presentation by Marcus Phayre-Mudge, fund manager for TR Property Investment Trust (TRY), on the internet. This tended to simply confirm my view that this is a well-managed fund which is withstanding the Covid-19 epidemic well. It has avoided many of the property sectors most damaged by the virus. It has a pan-European focus when internet retailing in the rest of Europe is still well behind that in the UK. He said “retailing is in an accelerating structural shift” but he does not “believe the end of the office is nigh”. A very useful and informative presentation via PI World even if he got cut off at the end due to some unknown technical issue. You can see a recording of it here: https://www.piworld.co.uk/

This morning I attended the virtual AGM of EKF Diagnostics (EKF), a medical products manufacturer mainly for diagnostic applications. There were about 12 attendees via a Zoom conference call and it worked quite well. Attendees were asked to register and submit questions in advance, although there was time to ask impromptu questions in the meeting also which were invited at the end.

Voting was done on a poll so the results of that were displayed first. The meeting was chaired by CEO Julian Baines.

I submitted a question about their investment in Renalytix AI (RENX) and its progress, which had been recently listed. I suggested progress was slow but the response was that progress had not been slow at all. However the Covid-19 situation has delayed tests in hospitals in the USA.  Progress on approvals is significant and revenues are expected shortly.

There was a question on the ramp-up of sales in McKesson and the answer was they had slowed significantly. But the company overall was only about 10% down on core products. They had seen business coming back on line in May and June.

Another question related to the Longhorn product which was claimed to be “the world’s safest sample collection product” (very relevant to virus sample collection of course). They are selling millions of these tubes in the USA. There is only one competitor who is allegedly infringing their patents – they are speaking to them “robustly” at present.

There were several other questions and answers of no great significance, but it was certainly a useful meeting and a good example of how any small/medium company could run a virtual AGM very easily. Why do they not do so?

My thanks to EKF for running such an event, which took less than 30 minutes in duration.

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

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Scottish Mortgage Investment Policy and LSE RNS Announcements

The Scottish Mortgage Investment Trust (SMT) have issued their Annual Report and AGM Notice. Readers who hold this trust will not need reminding that it has shown a remarkable performance over the last few months. That’s when the stock market has been decimated by the Covid-19 epidemic and the share prices of many other similar trusts and of the companies they hold have fallen sharply.

Last year SMT achieved a total share price return of 12.7% to the end of March and in the current year it achieved a share price increase of 23% to the 12th May. How has it achieved this return? Primarily by holding “hot” stocks like Tesla, Amazon.com, Illumina, Tencent and Alibaba to name the top five holdings. Over a third of the current holdings are unlisted ones. They claim the flexibility to invest in such companies “has been an important driver of returns over the last decade”. I do not dispute that but they are now proposing to change the “investment policy” of the company to raise the maximum amount that can be invested in such companies from 25% to 30%, based on the proportions when invested (that is why they have managed to already exceed that figure).

Is this a good idea? Should investors support it? Bearing in mind the travails of Neil Woodford where the funds he managed had large numbers of unlisted holdings, is it wise one has to ask?

Personally, I do not think it is and will be voting against. I am not suggesting that Baillie Gifford, nor the individual fund managers they employ, will make the same mistakes as Woodford. Just that valuing unlisted companies is a different matter to that of listed companies where there is always a market price. In addition unlisted holding are very illiquid in nature. Disposing of them can be very difficult. Private equity investment trusts often trade at a considerable discount to their net asset values for those reasons, while SMT currently trades at a premium of 2%.

Retaining the existing limit would prevent more unlisted investments being made, unless some of the unlisted holdings are disposed of, but that may be no bad thing given the current market enthusiasm for them.

I also note that Prof. John Kay is retiring from the board after serving since 2008. Much as I admire the wisdom of Prof Kay, I welcome this change. I hate to see directors of trusts serving more than 9 years and ignoring the UK Corporate Governance Code, as they so often do.

LSE RNS Announcements. I use the London Stock Exchanges free service to deliver RNS announcements via email. This morning it suddenly changed to a new format without prior notice. The first such notice I received was not in the best format in several ways. Wasted space in a right-hand margin, and no way to print just the announcement text and not the excess.

The second announcement I received just led me into an incomprehensible dialogue. I have sent them a couple of complaints.

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

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Recent Annual Reports and Trust Discounts

After the news over the weekend, it’s clearly going to be another very bad day on stock markets. One rare riser initially was Ten Entertainment Group (TEG) despite the fact that they announced this morning that all their bowling venues had been closed but they made some positive comments about their cash balances and Government support which might have helped.

As per guidance issued by the Financial Conduct Authority (FCA) it has delayed publication of its Preliminary Financial Results for two weeks as many other companies will be doing. This seems unfortunate to me as a company could just give only a limited outlook statement in there and issue separate trading statements as the crisis developments. But there is no reason to delay the historic figures for the last year.

The AIM Regulator (the LSE) has also announced that in response to the epidemic it is making the rules around suspension of listings more flexible. It is also permitting Nomads not to do site visits to new clients. See https://www.londonstockexchange.com/companies-and-advisors/aim/advisers/inside-aim-newsletter/inside-aim-coronavirus.pdf for details.

Clearly all companies affected by the closure of all public entertainment venues such as pubs, bowling alleys and cinemas are going to suffer greatly. Although they might get some financial relief from the Government, a close examination of their balance sheets and debt will be essential. Some might request suspension of their shares until their financial position becomes clearer. Property companies seem to have been badly hit simply because independent valuers are having difficulty valuing commercial properties as the market is frozen. Retailers with physical stores are also closing them, apart from supermarkets who are doing well due to panic buying and the shift from eating out to eating in as restaurants close. But they seem to be having difficulties adapting their supply chains and coping with the new demands for on-line ordering.

With preliminary announcements being delayed, the AGM season might be delayed also. Companies might have difficulty holding physical meetings and venues might become unavailable, particularly in London. We might see companies holding small meetings in their own offices instead as they won’t expect many people to turn up – I certainly won’t be attending as I am one of those people being told to stay at home for 12 weeks. Some larger companies may try and provide a live on-line stream of the meeting such as Alliance Trust (ATST) who just issued their Annual Report which I would certainly encourage them to do, preferably with some way to submit questions.

It is interesting to look at the discounts to NAV of the share price of that trust and other similar large trusts. According to the AIC, their discount was 17.5% at the weekend, and others were Brunner on 17.5%, F&C on 19.3%, Monks on 12.6% and Witan on 15.6%. These are much higher discounts than such trusts have traded on of late. When private investors have lost faith in the stock market, the discounts tend to rise, although some of the discount can be accounted for by the delay in reporting.  There may be some bargains in investment trusts in due course as private investor sentiment tends to lag financial news.

One company that just distributed their Annual Report and which I hold is property company Segro (SGRO). They had a good year last year although the share price is down 28% from its peak in February due to the general malaise in the property sector as open-end funds close to redemptions and run out of cash. I won’t  be attending their AGM but I will certainly be submitting a proxy vote which all shareholders should do anyway. I will be voting against their remuneration report simply because the total pay of executive directors is too high. The remuneration report consists of 27 pages of justification and explanation, which is way too long and is a good example of how both pay and pay reporting has got out of hand of late.

With bonuses, LTIPs and pension benefits, the total pay of the 4 executive directors (“single figure” report) was £20.4 million. They also wish to change the Articles of the company to raise the limit on the total pay of non-executive directors to £1 million so I will be voting against that also. I would encourage shareholders to do the same.

Lastly for a bit of light relief as it looks like we might have a major recession this year, I mentioned the book “Caught Short!” by comedian Eddie Cantor on the 1929 Wall Street crash in a previous blog post. Now Private Eye have repeated one of his comments in October 1929 after John D. Rockefeller (probably the richest person in the world at the time) said “during the past week, my son and I have for some days been purchasing sound common stocks”. This was seen as an attempt to calm the market in a world where a few very wealthy investors could influence financial markets. Eddie Cantor’s response was “Sure, who else has any money left”. I hope readers do not feel the same.

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

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Edinburgh IT Fires Manager and Grant Thornton Fined

The Edinburgh Investment Trust (EDIN) has fired fund manager Invesco. This company is an equity income trust focused primarily on the UK, although it also has an objective to increase the Net Asset Value per share in excess of the growth in the FTSE All-Share Index. But in the last few years it has signally failed to achieve that objective. According to the AIC it has fallen behind the sector average in growth in net asset value per share in all of the last year, the last 3 years and the last five years. In the last year alone the total return was 7.0% versus 15.6% for the sector. In other words, it’s a pretty abysmal record.

The company is appointing Majedie Asset Management as the new manager. This is what the company had to say about the reason for the change: “As detailed in the Interim Results announcement also published today, the Company has experienced another period of weak investment performance. This extends the period of underperformance relative to the Company’s benchmark to over three years and is a major disappointment for the Board as well as our shareholders. The Board understands that all good conviction fund managers experience periods of underperformance and a focus on long-term results requires shareholders sometimes to bear bouts of relative weakness especially during times when the fund manager’s style is out of favour. However, your portfolio has suffered from a number of stock specific issues: that is to say large falls in prices of stocks held in the portfolio, the cause of which is specific to each stock rather than resulting from broad market movements. Collectively these stocks have been a significant contributor to the weak performance of the Company and increasingly has led the Board to question the effectiveness of the investment process”.

These are the top ten holdings in the trust: BP, British American Tobacco, Legal & General, Next, Shell, Tesco, BAE Systems, Roche, British Land and Derwent London.

Comment: Firing an investment manager does not happen very often, but certainly the board of the company seems to have given the manager quite long enough to show that improvement was taking place. Shareholders will question whether they allowed the underperformance to go on way too long.

Grant Thornton has been fined £650,000 by the Financial Reporting Council (FRC) after identifying various failures in an audit on an unnamed company in 2016. They refuse to disclose which company was involved.

Grant Thornton has been involved in a number of poor or defective audits, such as at Patisserie Holdings, Vimto, Globo and Salford University. The FRC claims that “We promote transparency and integrity in business” on its web site so why should we not be told the company concerned? It is surely not in the public interest to conceal the name of the company. They clearly still have a “cultural” problem about how they handle investigations.

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

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Technology and Media Leads the Way, and the Renew Party

The Association of Investment Companies (AIC) have just issued an interesting press release. It gives the top performing investment companies and sectors for the year to date under the headline “Technology and Media Leads the Way”.

The Technology and Media Sector was up 34%, compared with an overall average of 14% for all investment companies (excluding VCTs) in share price total return. The top performing company was Blackrock Throgmorton Trust (THRG) which is a UK smaller and mid-cap companies focused trust. It is up 49%. A quick review of how they achieved their stellar performance indicates derivatives although several other smaller company trusts were listed in the top ten.  The Blackrock web site says this: “Derivatives may be used substantially for complex investment strategies. These include the creation of short positions where the Investment Manager artificially sells an investment it does not physically own. Derivatives can also be used to generate exposure to investments greater than the net asset value of the fund / investment trust. Investment Managers refer to this practice as obtaining market leverage or gearing”.

Dan Whitestone, Manager of BlackRock Throgmorton Trust, is quoted in the AIC press release as saying: “As we have long argued, stock and industry specific outcomes can triumph over the volatility created by macro, political and economic events. This certainly held true in 2019, which has been a strong year for the trust in absolute and relative terms, aided by positive contributions from both long and short positions. The management teams of the companies the trust invests in have played a key part in helping deliver value and wealth creation for shareholders, not just this year but over the course of many years.

The premium for genuine secular growth is high, as we remain within an era of low inflation, low interest rates and weaker growth. However, we see many companies with solid business models, that have enormous growth potential, are all too often dismissed by the market as expensive. Conversely, many so-called value shares are under significant pressure from the structural changes wrought by technological disruption, resulting in fundamental changes in distribution, manufacturing and customer behaviour.

Throgmorton aims to identify and own, for the long term, the exciting, fast-growing companies that we believe are truly differentiated and disruptive and taking full advantage of the structural changes reshaping industries. Our belief is that the stock market persistently undervalues these companies, which have strong balance sheets, and have been able to heavily invest ahead of their peers. Combined with solid management teams, dominant market positions, and a compelling product offering, investing in these companies can lead to years of dramatic compound growth, regardless of the wider political or economic environment.”

I can probably agree with most of what he says, but am not sure about the use of derivatives. I’m happier with the three other UK smaller companies trusts in the top ten list who all achieved more than 40% share price total return, one of which I hold. Does the cleverness of Throgmorton result in better long-term performance? It might do so if you look at the 10-year performance figures in the UK smaller companies AIC sector where it is beaten by only one other company – the Rights & Issues Investment Trust (RIII), although they seem to have a more variable performance. I may have a closer look at Throgmorton. This is definitely one where a read of their Annual Report will be essential (all 114 pages of it).

You can read the full AIC press release here: https://www.theaic.co.uk/aic/news/press-releases/top-performing-investment-company-sectors-over-2019

Investing in UK smaller companies rather than the rest of the world probably requires you to have confidence in the UK economy after Brexit. Which brings me onto the subject of politics.

The Renew Party

I was interested to receive a flyer through my door just now for the Renew Party. Bromley & Chislehurst is one of only four constituencies where they are putting up candidates. The Renew Party have an interesting manifesto including political reform.

This is what it says on their web site:  “Our system of politics rewards adversaries, not collaboration. These systems need radical reform to get the best, in candidates and in MPs. Whilst vigorous debate is critical to the evolution of our society, it does not need to become personal, crude and nasty…….. We support electoral reform to make representation in parliament proportional to the number of votes cast for each party. This means the abolition of the first-past-the-post voting system”.

That’s something I would vote for, but unfortunately their General Election platform also supports staying in the EU, which may be arguable, and delivering a “People’s Vote”, i.e. another referendum which is a profoundly daft idea. So they are not going to gain my vote this time.

Neither are the Labour Party who delivered a leaflet that referred to “Tory cuts” to the NHS. It’s simply not true – the real expenditure on the NHS has gone up. Indeed the service from the NHS has improved enormously over the 25 years I have been an active user of it. See https://fullfact.org/health/spending-english-nhs/ for the facts. I sent their candidate a complaint about her grossly misleading leaflet but she did not respond. Regrettably there seems no way to easily get such gross distortions by politicians stopped.

Other candidates are from the Christian People’s Alliance, the Green Party, the Liberal Democrats and the Conservative Party (no Brexit Party runner). It may not be a difficult choice.

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

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Mindless Investment Wins Out?

Last week on-line investment news site Citywire published a report headlined “Tracker fund sales smash records as UK investors pile into passives”. I was the first to add a comment which was “Mindless investment wins out. But at least folks are wising up to open-ended property funds and highly dubious ‘absolute return’ funds”. That generated a number of other comments, mainly from people defending tracker funds.

For example, a couple were: 1) Retail investors, with enough sense to be aware of their limited knowledge of macro-economics & its uncertain effect upon investments, stick to more understandable passives; and 2) Sensible folk realise that indexes will always outperform stockpicker funds in the medium to long-term, give thanks for Samuelson and Jack Bogle and ignore sneers from knowalls.

Let’s take some of those claims. It is certainly true that as the market comprises the whole universe of investors, a general stock market index must reflect the gains and losses of all investors. In other words, if all investors were “active” investors then there would be as many winners as losers. So you cannot achieve outperformance just by deciding to be an active rather than passive investor.

The other problem with active investment is that fund management charges are typically higher than for an index tracking fund. Charges are a major influence over long term returns so an active fund manager has to outperform the index substantially just to offset the higher charges. The flip-side of this is that as index tracking funds do have some charges, plus you may be paying a “platform” charge to hold or invest in them, your investment is bound to underperform the index.

But there are some active investors who do appear to consistently outperform their indices. For example Warren Buffett has done so. The latest example I was reminded of in an email that I received yesterday was the CFP SDL UK Buffettology Fund run by Keith Ashworth-Lord. Below is a chart from their Factsheet dated December 2019 showing the performance of the fund since April 2011 versus a UK All Companies Index and the cumulative performance figures. There appears to be clear outperformance shown.

Buffetology Fund 2019-12-01

Keith has been a promoter of “Business Perspective Investing” for a number of years. I recall reading the Analyst magazine with which he was involved and which alas ceased publication many years ago. That publication influenced my own investment approach. Since 2011 he has run the Buffettology Fund which aims to replicate the principles or Warren Buftett and Charlie Munger. In essence he looks at the business first before attempting to value it and is looking for quality businesses with high barriers to entry. Such companies frequently have superior operating margins, superior returns on capital and superior cash generation.

Now readers will not be surprised to hear that I have been following the same principles also and have recently published a book called “Business Perspective Investing” (see https://www.roliscon.com/business-perspective-investing.html ). I thought it would be interesting to see how the performance of my portfolio since 2011 compared to the Buffettology Fund. The chart below gives you the comparison against the All-Share Index:

Lawson Portfolio 2019-12-01

It looks very similar does it not! Both are nearing a 300% return over the period. The only possible difference is that the chart of my portfolio does not include dividends (i.e. it’s capital only, not total return). Both are focused on UK public company shares but I probably have more smaller companies in the portfolio – and I also have more holdings (85 versus 35 in the Buffettology Fund). But that includes some Venture Capital Trusts (VCTs) that provide minimal capital gains but a lot of tax-free dividends which are not included in the data.

Perhaps you think that otherwise I have the same holdings as Ashworth-Lord in my portfolio? That’s only true to a very limited extent. I only hold 3 of his top ten holdings. So the similarity of performance may relate to holding similar types of companies but not to holding the same companies.

The key point is that both I and Keith Ashworth-Lord have done a lot better than we would have done by simply investing in a FTSE index – about 300% gain instead of 30% in capital terms since 2011.

Have we just been lucky, i.e. is the outperformance likely to continue? It’s very difficult to be certain. John Bogle, whose books are well worth reading, claims there is little evidence of persistent out-performance by fund managers. Managers tend to revert to the mean. This may be because successful managers tend to grow their portfolios as new investors pile in, and the bigger the fund the worse it performs. There are only so many good ideas to pursue.

The other reason why performance tends not to persist is that successful investment strategies can be copied by other investors, thus eroding returns. For example, recently technology-based growth stocks have been seen as the way to make money. Will business perspective investing be replicated by others in future and become too crowded a field? Perhaps but it is not a simple strategy to follow and requires both knowledge and experience.

There have been a number of fund managers with a good track record who have not managed to sustain it. The most recent example is probably Neil Woodford but that is an example of a manager changing his investment strategy. Moving from undervalued medium/large businesses to a ragbag of special situations and early stage companies, some of which were not even listed.

Outperformance does require considerable effort though in analysing companies in depth rather than doing a trivial review of their financial numbers. Understanding the strengths and weaknesses of a business is essential, and keeping a close eye on it after investing is essential.

For a private investor if you don’t wish to do the work of researching individual companies the answer is to invest in a fund or investment trust where the manager follows similar principles and has a long-term track record. Avoid “closet” index trackers, i.e. active funds or trusts whose composition is very similar to their benchmark however much they try to convince you they are pure stock-pickers. You also need to avoid funds/trusts with high management and other overhead charges. You then have a chance of outperforming the relevant index.

If you consider that too risky, and active funds can underperform their index over short periods of time, then a tracker fund or ETF may be the answer for you. You will also avoid the real dogs such as the Woodford Equity Income Fund and some “absolute return” funds. But you certainly need to be aware that investors are currently piling into tracker funds at a record-breaking pace and they accounted for two thirds of fund sales in October. To my mind this is potentially dangerous as people are buying units in these funds without any analysis of the holdings therein, i.e. they are just thoughtlessly buying the index. My original comment on the Citywire article (“Mindless Investment Wins Out”) only refers to the success of fund managers in selling the different types of fund, not to their fund performance!

What has been happening in the last few years is that long-term investment has moved to short-term speculation. When John Bogle started promoting index-tracking and founded the very successful Vanguard business, and for many years after, index tracking was a minority interest among investors. Index tracking funds would have little influence on the index. But is that still the case? There is little evidence to suggest this is so but the return on many large cap shares, which dominate the indices, does seem to be falling. You have to bear in mind that index-tracking funds rarely hold all the shares that make up the index. They can replicate the index by just holding a few of the largest components. So there is a strong herd instinct to invest in the large cap stocks, or disinvest in them.

But large cap stocks, for example those in the FTSE-100, are typically very mature business with low growth prospects and often declining returns on capital.

The length of time that investors hold mutual funds and ETFs has now shortened so the average holding period of a stock ETF is now less than 150 days. They have become tools for short-term traders rather than long-term investors. This has magnified the swings in the market to the benefit of the fund managers and other intermediaries who gain from the higher volumes.

Playing in the large fish pools can therefore be tricky while at the other extreme investing in small or micro-cap stocks can be a triumph of hope over experience. For those reasons, business perspective investing probably works best in mid-cap companies that might be less driven by market trends and share price momentum driven by index trackers.

In conclusion, beware of mindless investment strategies and those who promote them. There are no free lunches in the investment world.

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

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Mello Event, ProVen and ShareSoc Seminars and Lots More News

It’s been a busy last two days for me with several events attended. The first was on Tuesday when I attended the Mello London event in Chiswick. It was clearly a popular event with attendance up on the previous year. I spoke on Business Perspective Investing and my talk was well attended with an interesting discussion on Burford Capital which I used as an example of a company that fails a lot of my check list rules and hence I have never invested in it. But clearly there are still some fans and defenders of its accounting treatment. It’s always good to get some debate at such presentations.

On Wednesday morning I attended a ProVen VCT shareholder event which turned out to be more interesting than I expected. ProVen manages two VCTs (PVN and PGOO), both of which I hold. It was reported that a lot of investment is going into Adtech, Edtech, Fintech, Cybersecurity and Sustainability driven by large private equity funding. Public markets are declining in terms of the number of listed companies. The ProVen VCTs have achieved returns over 5 years similar to other generalist VCTs but returns have been falling of late. This was attributed to the high investment costs (i.e. deal valuations have been rising for early stage companies) in comparison with a few years back. Basically it was suggested that there is too much VC funding available. Some companies seem to be raising funds just to get them to the next funding round rather than to reach profitability. ProVen prefers to invest in companies focused on the latter. Even from my limited experience in looking at some business angel investment propositions recently, the valuations being suggested for very early stage businesses seem way too high.

This does not bode well for future returns in VCTs of course. In addition the problem is compounded by the new VCT rules which are much tougher such as the fact that they need to be 80% invested and only companies that are less than 7 years old qualify – although there are some exceptions for follow-on investment. Asset backed investments and MBOs are no longer permitted. The changes will mean that VCTs are investing in more risky, small and early stage businesses – often technology focused ones. I suspect this will lean to larger portfolios of many smaller holdings, with more follow-on funding of the successful ones. I am getting wary of putting more money into VCTs until we see how all this works out despite the generous tax reliefs but ProVen might be more experienced than others in the new scenario.

There were very interesting presentations from three of their investee companies – Fnatic (esports business), Picasso Labs (video/image campaign analysis) and Festicket (festival ticketing and business support). All very interesting businesses with CEOs who presented well, but as usual rather short of financial information.

There was also a session on the VCT tax rules for investors which are always worth getting a refresher on as they are so complex. One point that was mentioned which may catch some unawares is that normally when you die all capital gains or losses on VCTs are ignored as they are capital gains tax exempt, and any past income tax reliefs are retained (i.e. the five-year rule for retention does not apply). If you pass the VCT holdings onto your spouse they can continue to receive the dividends tax free but only up to £200,000 worth of VCT holdings transferred as they are considered to be new investments in the tax year of receipt. I hope that I have explained that correctly, but VCTs are certainly an area where expert tax advice is quite essential if you have substantial holdings in them.

One of the speakers at this event criticised Woodford for the naming of the Woodford Equity Income Fund in the same way I have done. It was a very unusual profile of holdings for an equity income fund. Stockopedia have recently published a good analysis of the past holdings in the fund. The latest news from the fund liquidator is that investors in the fund are likely to lose 32% of the remaining value, and it could be as high as 42% in the worst scenario. Investors should call for an inquiry into how this debacle was allowed to happen with recommendations to ensure it does not happen again to unsuspecting and unsophisticated investors.

Later on Wednesday I attended a ShareSoc company presentation seminar with four companies presenting which I will cover very briefly:

Caledonia Mining (CMCL) – profitable gold mining operations in Zimbabwe with expansion plans. Gold mining is always a risky business in my experience and political risks particularly re foreign exchange controls in Zimbabwe make an investment only for the brave in my view. Incidentally big mining company BHP (BHP) announced on Tuesday the appointment of a new CEO, Mike Henry. His pay package is disclosed in detail – it’s a base salary of US$1.7 million, a cash and deferred share bonus (CDP) of up to 120% of base and an LTIP of up to 200% of base, i.e. an overall maximum which I calculate to be over $7 million plus pension. It’s this kind of package that horrifies the low paid and causes many to vote for socialist political parties. I find it quite unjustifiable also, but as I now hold shares in BHP I will be able to give the company my views directly on such over-generous bonus schemes.

Ilika (IKA) – a company now focused on developing solid state batteries. Such batteries have better characteristics than the commonly used Lithium-Ion batteries in many products. Ilika are now developing larger capacity batteries but it may be 2025 before they are price competitive. I have seen this company present before. Interesting technology but whether and when they can get to volumes sufficient to generate profits is anybody’s guess.

Fusion Antibodies (FAB) – a developer of antibodies for large pharma companies and diagnostic applications. This is a rapidly growing sector of the biotechnology industry and for medical applications supplying many new diagnostic and treatment options. I already hold Abcam (ABC) and Bioventix (BVXP) and even got treated recently with a monoclonal antibody (Prolia from Amgen) for osteopenia. One injection that lasts for six months which apparently adjusts a critical protein – or in longer terms “an antibody directed against the receptor activator of the nuclear factor–kappa B ligand (RANKL), which is a key mediator of the resorptive phase of bone remodeling. It decreases bone resorption by inhibiting osteoclast activity”. I am sure readers will understand that! Yes a lot of the science in this area does go over my head.

As regards Fusion Antibodies I did not like their historic focus on project related income and I am not clear what their “USP” is.

As I said in my talk on Tuesday, Abcam has been one of my more successful investments returning a compound total return per annum of 31% Per Annum since 2006. It’s those high consistent returns over many years that generates the high total returns and makes them the ten-baggers, and more. But you did not need to understand the science of antibodies to see why it would be a good investment. But I would need a lot longer than the 30 minutes allowed for my presentation on Tuesday to explain the reasons for my original investment in Abcam and other successful companies. I think I could talk for a whole day on Business Perspective Investing.

Abcam actually held their AGM yesterday so I missed it. But an RNS announcement suggests that although all resolutions were passed, there were significant votes against the re-election of Chairman Peter Allen. Exactly how many I have been unable to find out as their investor relations phone number is not being answered so I have sent them an email. The company suggests the vote was because of concerns about Allen’s other board time commitments but they don’t plan to do anything about it. I also voted against him though for not knowing his responsibility to answer questions from shareholders (see previous blog reports).

The last company presenting at the ShareSoc event was Supermarket Income REIT (SUPR). This is a property investment trust that invests in long leases (average 18 years) and generates a dividend yield of 5% with some capital growth. Typically the leases have RPI linked rent reviews which is fine so long as the Government does not redefine what RPI means. They convinced me that the supermarket sector is not quite such bad news as most retail property businesses as there is still some growth in the sector. Although internet ordering and home delivery is becoming more popular, they are mainly being serviced from existing local sites and nobody is making money from such deliveries (£15 cost). The Ocado business model of using a few large automated sites was suggested to be not viable except in big cities. SUPR may merit a bit more research (I don’t currently hold it).

Other news in the last couple of days of interest was:

It was announced that a Chinese firm was buying British Steel which the Government has been propping up since it went into administration. There is a good editorial in the Financial Times today headlined under “the UK needs to decide if British Steel is strategic”. This news may enable the Government to save the embarrassment of killing off the business with the loss of 4,000 direct jobs and many others indirectly. But we have yet to see what “sweeteners” have been offered to the buyer and there may be “state-aid” issues to be faced. This business has been consistently unprofitable and this comment from the BBC was amusing: “Some industry watchers are suggesting that Scunthorpe, and British Steel’s plant in Hayange in France would allow Jingye to import raw steel from China, finish it into higher value products and stick a “Made in UK” or “Made in France” badge on it”. Is this business really strategic? It is suggested that the ability to make railway track for Network Rail is important but is that not a low-tech rather than high-tech product? I am never happy to see strategically challenged business bailed out when other countries are both better placed to provide the products cheaper and are willing to subsidise the companies doing so.

Another example of the too prevalent problem of defective accounts was reported in the FT today – this time in Halfords (HFD) which I will add to an ever longer list of accounts one cannot trust. The FT reported that the company “has adjusted its accounts to remove £11.7 million of inventory costs from its balance sheet” after a review of its half-year figures by new auditor BDO. KPMG were the previous auditor and it is suggested there has been a “misapplication” of accounting rules where operational costs such as warehousing were treated as inventory. In essence another quite basic mistake not picked up by auditors!

That pro-Brexit supporter Tim Martin, CEO of JD Wetherspoon (JDW) has been pontificating on the iniquities of the UK Corporate Governance Code (or “guaranteed eventual destruction” as he renames it) in the company’s latest Trading Statement as the AGM is coming up soon. For example he says “There can be little doubt that the current system has directly led to the failure or chronic underperformance of many businesses, including banks, supermarkets, and pubs” and “It has also led to the creation of long and almost unreadable annual reports, full of jargon, clichés and platitudes – which confuse more than they enlighten”. I agree with him on the latter point but not about the limit on the length of service of non-executive directors which he opposes. I have seen too many non-execs who have “gone native”, fail to challenge the executives and should have been pensioned off earlier (not that non-execs get paid pensions normally of course. But Tim’s diatribe is well worth reading as he does make some good points – see here: https://tinyurl.com/yz3mso9d .

He has also come under attack for allowing pro-Brexit material to be printed on beer mats in his pubs when the shareholders have not authorised political donations. But that seems to me a very minor issue when so many FTSE CEOs were publicly criticising Brexit, i.e. interfering in politics and using groundless scare stories such as supermarkets running out of fresh produce. I do not hold JDW but it should make for an interesting AGM. A report from anyone who attends it would be welcomed.

Another company I mentioned in my talk on Tuesday was Accesso (ACSO). The business was put up for sale, but offers seemed to be insufficient to get board and shareholder support. The latest news issued by the company says there are “refreshed indications of interest” so discussions are continuing. I still hold a few shares but I think I’ll just wait and see what the outcome is. Trading on news is a good idea in general but trading on the vagaries of guesses, rumours or speculative share price movements, and as to what might happen, is not wise in my view.

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

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Woodford Fund and Trust News

The good news for investors in the Woodford Patient Capital Trust (WPCT) is that Schroders are taking over management of the portfolio.  The share price promptly jumped upwards on the news (up about 29% at the time of writing), but speculators need to be wary. Although the trust is still at a large discount to the Net Asset Value, I looked at the portfolio yesterday and was not impressed.

These are the top ten holdings by value: Rutherford Health, Benevolent AI, Atom Bank, Oxford Nanopore, Industrial Heat, Immunocore A Pref, Kymab B Pref, Mission Therapeutics, Ratesetter and Autolus. There may be some value in there but actually judging it, or confirming it, is far from easy.

One issue not raised in the recent BBC Panorama programme on Woodford was that of the naming of the Woodford Equity Income Fund. Such funds typically focus on paying high dividends to investors and to do so they invest in high dividend paying companies. They therefore tend to hold boring large cap companies. But the Woodford fund, which is now being wound up, was very different. It did have some high dividend paying holdings in the fund but not necessarily large cap ones and it also had a number of early stage companies that were unlisted. This was not a typical “Equity Income” fund. Investors might feel they were misled in that regard by the name.

For a more typical “equity income” fund, look at City of London Investment Trust (CTY) who are holding their Annual General Meeting today at 2.30 pm. You may be able to watch the AGM on-line, or see a recording later, by going to https://www.janushenderson.com/en-gb/investor/ . Their top ten holdings at the year end were: Shell, HSBC, Diageo, BP, Unilever, Prudential, Lloyds Bank, RELX, BAT and Rio Tinto.

But these were the top ten holdings in the Woodford Equity Income Fund: Barratt Developments, Burford Capital, Taylor Wimpey, Benevolent Ai, Provident Financial, Theravance Biopharma, Countryside Properties, Oxford Nanopore, Ip Group and Raven Property Convertible Pref 6.5%. That’s a very different kind of portfolio.

The AIC definition of an equity income fund primarily says that typically the company will have a yield on the underlying portfolio ranging between 110% and 175% of that of an All-Share Index (World or UK). It says nothing about the riskiness of the companies being invested in nor their size when income investors are typically looking for security of income. Surely the definition of an equity income fund needs revisiting and more information provided to investors. The latter is of course now taking place as new direct investors have to confirm they have read the KID on the fund when doing so on-line but do they read them and understand them?

Postscript: The broadcast on-line video of the City of London IT AGM as definitely promised in the notice of the meeting could not be found when required and after contacting Janus Henderson I am still awaiting a call back 24 hours later to tell me where a recording might be. This is really not good enough.

Postscript 2 (4 days later): A recording of the presentation by Job Curtis at the City of London AGM and the business of the meeting is present here: https://www.janushenderson.com/en-gb/investor/investment-trusts-live/ .

As regards Woodford Patient Capital Trust, it has been pointed out to me that one aspect I did not mention and which might affect an investors view of the valuation was the high level of debt in the company. The gearing has grown as some equity holdings were disposed of and this may be another problem for Schroders.

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

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Panorama on Woodford – Expletives Deleted?

Panorama covered the Woodford debacle last night and the issue of conflicts of interest in fund managers. They tried door-stepping Neil Woodford to ask him some questions, but he just walked past them. I think the questions would have been rhetorical anyway, such as “why did he make so many duff bets on companies” and “why should he have made millions while investors in his funds lost money”?

The Financial Conduct Authority (FCA) came in for a lot of criticism for not intervening sooner and allegedly not enforcing the rules concerning the liquidity of holdings in open-ended funds.

My old sparring partner T** W** was interviewed in his new home in Wales – looks like he has a renovation project on his hands. I don’t like to mention his name in case it attracts readers to follow him when they might find his use of language somewhat offensive. But in this interview there were no expletives which is unusual for him – perhaps the BBC deleted them.  They also interviewed some investors in the Woodford funds and one of them definitely had her expletives deleted.

The programme also covered the issue of the conflicts of interest in fund managers such as the fact that as their fees are based on the value of funds under management, there are strong incentives to grow the assets and also an incentive to manipulate the share prices. For example, without suggesting that Woodford specifically did these things, if a fund manager buys more of a listed stock in the market then that can raise the price, particularly when the stock is a small cap one and relatively illiquid. In the case of unlisted stocks, investing at a higher price than any previous trades causes the whole company to be revalued upwards (see BVCA valuation rules). There is clearly the possibility of perverse incentives here.

The programme also mentioned the case of Mark Denning an investment manager for Capital Group who allegedly had been trading in stocks on his personal account that were also held by the fund he managed. He denies it, but clearly such activity could enable “front-running” of trades and other abuses. The Panorama programme argued that there was in essence very little oversight of fund managers.

In summary the BBC programme was a good overview of the issues and T** W** made a useful contribution. The FCA should certainly be tightening up on the oversight of open-ended funds and their managers, and should be reviewing the liquidity rules even if they are bound by the EU Directives in that regard at present.

As the FCA never acts quickly, which is of course part of the problem, in the meantime investors might like to consider what I said in my recent book in the chapter on Trusts and Funds. I repeat some excerpts here:

“A key measure of the merit of a fund is its long-term performance against similar funds or its benchmark”. [Woodford’s funds, after he set up his new management company. never demonstrated that].

“One issue to examine is whether a fund manager has a consistent and effective process for selecting investments if they are an active manager. It is important that they are not simply making ad-hoc decisions about investments however experienced they are”. [See my comments on City of London Investment Group in a previous blog post for an example].

“To judge whether a fund manager is competent it helps to look at the underlying companies in which they invest. Are they investing in companies that show a high return on capital while being on relatively low P/Es and with significant growth in earnings or are they investing in shares that appear to be simply cheap? Are they picking companies that are of high quality – in other words displaying the characteristics covered in the first few chapters of this book?” [Anyone looking at the holdings of the Woodford Equity Income Fund or Patient Capital Trust would have realised that many of the holdings were speculative].

One issue not raised in the BBC programme was that of the naming of the Woodford Equity Income Fund. Such funds typically focus on paying high dividends to investors and to do so they invest in high dividend paying companies. They therefore tend to hold boring large cap companies. But the Woodford fund was very different. It did have some high dividend paying holdings in the fund but not necessarily large cap ones and it also had a number of early stage companies that were unlisted. This was not a typical “Equity Income” fund. Investors might feel they were misled in that regard by the name.

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

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Woodford and Hargreaves Lansdown, Rosslyn Data AGM and Brexit

To follow up on my previous blog post over the collapse of Woodford Investment Management and how to avoid dud managers, the focus has now turned in the national media upon Hargreaves Lansdown (HL.). Investors who have lost a lot of money, and now won’t be able to get their cash out for some time, are looking for who to blame. Neil Woodford is one of course, but what about investment platforms such HL?

The Woodford Equity Income Fund was on the HL “best buy” list for a long time – indeed long after its poor performance was evident. They claimed at a Treasury Committee that Woodford had displayed similar underperformance in the past and had bounced back. But that was when he had a very different investment strategy so far as one can deduce.

The big issue though that the Financial Conduct Authority (FCA) should be looking at is the issue of platforms favouring funds that give financial incentives – in this case via providing a discount to investors and hence possibly generating more revenue when better performing funds such as Fundsmith refused to do so. HL have not recommended Fundsmith in the past, despite it being one of the top performing funds.

It is surely not sensible for fund platforms to be recommending funds unless they have no financial interest in the matter whatsoever. Indeed I would suggest the simple solution is for platforms to be banned from recommending any funds or trusts, thus forcing the investor to both get educated and make up their own minds. Such a rule might spawn a new group of independent retail investor advisors which would be surely to the good.

Today I attended the Annual General Meeting of Rosslyn  Data Technologies (RDT). This is an IT company that I bought a few shares in a couple of years ago as an EIS investment. It was loss-making then, and still is but is getting near break-even.

There were only about half a dozen shareholders present, but they had lots of questions. I only cover the important ones here. New Chairman James Appleby chaired the meeting reasonably well, but left most of the question answering to others.

Why did company founder Charles Clark step down (as announced today)? Reason given was that he had set up another company where there was  a potential conflict of interest.

I asked about the Landon acquisition that was announced in September. How much revenue would this add?  They are not sure but maybe £0.5 million. Bearing in mind they only paid £48,750 for the assets and client list from the administrator, that seems to be me a remarkably good deal. But it later transpired that they have outstanding contracts (pre-paid) which they have to finish so that might be another £250,000 of costs. However, that’s still cheap and by rationalising some of the costs they should quickly turn Langdon profitable. It was suggested that Langdon had been mismanaged with over-expansion and too many staff which is why it went bust – only a few of the staff have been taken on. Note that the impact of this acquisition is not yet in broker’s forecasts.

It was noted that RDT is currently broadly on track for analysts forecasts but it has been a slow start to the year. Deals are slipping into the second half. Decision timescales in major corporates seem to be stretching out at present.

One shareholder, who said “I am talking too much – a daft old man”, which it is difficult to disagree with as he asked numerous questions, some not very intelligent, asked whether they were charging enough for their services. There was a long debate on that issue, but it was explained that competitors were charging less.

There were also concerns about the slow rate of revenue growth (only 8.3% last year). Comment: this company is clearly not operating in a hot, high-growth sector of the market. But it does seem to be competently managed and if they can do acquisitions like Langdon that are complementary then profits should grow.

Altogether a useful AGM.

Brexit has of course made many UK companies nervous about new projects. At the time of writing the latest position appears to be that the EU and Boris have agreed a deal. Most Conservatives like it, but the DUP does not and Labour, LibDems and SNP will all seem likey to vote against it in Parliament. The last group all seem to be playing politics to get what they individually want, but not a general election which on current opinion polls might result in a big Conservative majority. Most people are very frustrated that this group are blocking support of Brexit so we can close down the issue and move on when there seems to be no overall public support for another referendum or cancelling Brexit altogether.

But even given this messy situation, I am hopeful that it will be resolved in one way or the other soon. But then I am the perpetual optimist. I am investing accordingly.

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

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