City of London IT, Equals Interims, Paypoint CEO, Downing One VCT and Parliamentary Pandemonium

Having been away on holiday in the North of England last week, this is a catch up on news that impacted my portfolio.

I received the Annual Report for City of London Investment Trust (CTY) which is one of my most boring holdings. This is large cap equity growth/income trust managed for many years by Job Curtis and I have held since 2011 – it seems longer. Total return last year was 2.7% which beat most of the comparable indices. But a look at the overall return (including dividends) on my holdings in Sharescope shows an annual return of 15.0% which is very pleasing. It has reduced its management overheads to a cost of 0.39% (the “on-going” charge).

It is particularly worthy of note that the Chairman, Philip Remnant, says this in the Annual Report: “In February 2019 the AIC published an updated Code of Governance which largely mirrors the provisions of the UK Corporate Governance Code issued by the FRC save that the strict nine year cap on the Chairman’s tenure contained in the FRC’s code has been disapplied by the AIC. I see no reason why the rules which apply to the length of time which the chairman of an investment company can server should be more relaxed than those that apply to other listed companies, and so I will be stepping down as Chairman during 2020”.

I completely agree with Mr Remnant and have raised this point at AGMs of a number of trusts where directors are permitted to hang on for much too long. The AIC should not pretend that investment trusts are exempt from the UK Corporate Governance Code.

Equals (EQLS), formerly called FairFX, issued their interim results on the 26th September. Revenue was up by 21.4% and Adjusted EBITDA up by 78% but EPS was down. The share price fell, although the Chairman bought some shares soon afterwards.

However as reported on at the AGM (see https://tinyurl.com/y5j58dd6 ) there is a large amount of software development work being capitalised at this company and as expected, it went up in the half year. Another £4.8 million to be exact. That is a very large amount of development work and suggests either a very large team or an expensive one. It does raise doubts in my mind, and possibly others, about the accounts.

Paypoint (PAY) reported a “temporary leadership change” on the 26th September. CEO Patrick Headon is taking a leave of absence to receive treatment for a medical condition and he is expected to be absent for 3 months. The share price barely moved during the week but these kinds of reports which give no details can often conceal worse news. I recall the recent events at Wey Education where Executive Chairman David Massie received some open-heart surgery and subsequently died. Shareholders were not informed of this problem until he resigned and this was a significant problem for the company. I suggest there should be some clear rules developed on when medical incapacity needs to be reported to shareholders, and what level of detail is provided so that investors can judge the risks and possible impacts.

Downing One VCT (DDV1) issued a circular concerning the raising of up to £40 million in additional equity. This is justified so as to increase the size of the company to better cover the fixed running costs and to enable the company to make new investments and diversify its portfolio.

It always surprises me how Venture Capital Trusts can often raise more money even when they have a very patchy performance record. According to the AIC, this VCT achieved a NAV total return of 9.4% over the last 5 years. I won’t be increasing my holding in this company therefore by subscribing for it. However, how should I vote on the fund raising? Should I support it on the basis of pulling in more suckers to support the overhead costs? Or oppose it on the basis that giving more cash to the manager will hardly improve performance in the short term and simply give more fees to a poorly performing fund manager?

They are also proposing to introduce a Performance Incentive Fee – 20% of gains subject to a hurdle rate. But performance fees do not improve performance so I always oppose them. I hope other shareholders will do the same.

It was of course difficult to get away from events in Parliament and Brexit issues while on holiday. But I did manage to read a book in the hotel library – The History of the Decline and Fall of the Roman Empire by Edward Gibbon – just a part of it of course as it’s a multi-volume book. Gibbon was a Member of Parliament in the 1770s but disliked the place which he called “Pandemonium”. Nothing changes it seems.

As regards the decision of the Supreme Court over Prorogation, having read the full Judgement of the Court, I do not find it particularly surprising. People do tend to jump to conclusions about court judgements, often declaring they are biased, when a full reading often shows that the judges are not so perverse as imagined. I fear the advice of the Attorney General on prorogation was defective in that it cannot be purely at the whim of the prime minister to suspend Parliament for a long period of time and without good reason.

It was also unnecessary as Boris Johnson has other options to ensure that Brexit takes place on the 31st October as he wishes. Most investors are surely now of the same view of many of the public that we need to get this matter settled. Delaying resolution by a further extension of the Brexit date or by another referendum would simply cause more uncertainty and difficulty for businesses and for investors. Businesses cannot plan adequately and the value of the pound is dropping while investors are nervous. None of these things are helpful to investment returns.

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

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AB Dynamics Placing, and Metro Bank Troubles

AB Dynamics (ABDP) announced a placing to raise £5 million this morning. The money will be used to finance potential acquisitions, add production capacity and meet working capital requirements. This company provides vehicle testing systems and has been rapidly expanding recently. The share price has also been rising like a rocket in the last few weeks and on fundamentals the company is now very highly rated – prospective p/e for the current year is 47. So perhaps the company just saw this as a good opportunity to raise some money.

The new shares are being placed at 2200p though which is a discount of 13% to the share price last Friday. However although this is being done via a placing to institutional investors there is also an “open offer” for those such as private shareholders who cannot participate in the placing. This is the way to do such things and as a holder of the shares I will probably take up the open offer just so as to avoid dilution, although I don’t consider the price as particularly attractive. The share price dipped first thing this morning on the news but has subsequently recovered most of that fall.

Metro Bank (MTRO) has been in trouble since the start of the year when it disclosed it had wrongly risk-weighted some of its loans which meant its capital ratio was wrong. Metro is one of the so-called “challenger banks” that aim to tackle the dominance of the big high-street banks in the UK. The company did a placing to raise another £350 million last week to shore up its balance sheet.

But depositors have been spooked by the news and apparently there were queues of customers withdrawing money from branches in West London recently. Is this another run on a bank, as happened at Northern Rock? Where a falling share price and collapsing confidence in the bank caused depositors to panic? The FT ran an editorial saying it was not similar but it looks very much so to me. Although the Financial Services Compensation Scheme (FSCS) now protects deposits up to £85,000 that will not help many retail customers and the delays in obtaining compensation will encourage depositors to move all of part of their funds elsewhere and promptly. Corporate clients have no such protection anyway. When confidence in a bank is lost, even if it is technically solvent, depositors don’t hang around.

Here’s a good quote from eminent Victorian author Walter Bagehot: “Every banker knows that if he has to prove he is worthy of credit…in fact his credit has gone” (in another letter in the FT today).

From my experience of trying to open an account with Metro Bank recently, I have doubts about the quality of this business anyway. I gave up in the end. Needless to say I don’t hold shares in Metro. But all banks are becoming exceedingly difficult to deal with. My long-standing (over 50 years) bank recently made me visit a branch to prove who I was. There was a letter complaining about the service from banks in the FT on the 15th May. It suggested that “something has gone badly wrong” with frontline bank service. I had similar problems with a business account at HSBC who proved impossible to talk to other than by visiting one of their branches – and even then they were unable to resolve difficulties. It is extremely annoying that banks are becoming paranoid about KYC and security checks so that they won’t even talk to you on the telephone about simple queries.

If any readers can recommend a bank who acts more reasonably and sensibly, let me know.

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

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