Austin Review of Capital Raising and Dematerialisation

It’s the mid-summer doldrums in the stock market and with investors having more time on their hands, what better time to issue a 265 page document entitled “UK Secondary Capital Raising Review” (see link below). This document covers a number of very important issues to investors after a review by Mark Austin as Chair of a committee that has looked at the way the UK stock market operates in certain areas. I will only cover some of the key points below because it is a long and complex technical document but Mr Austin has done a fine job in bringing out the key issues in his report to the Chancellor:

  • He spells it out early on in these sentences: “…….we as a market need to be bold and brave in our thinking. We need to look at our existing rules and practices with a fresh set of eyes and a blank sheet of paper, and ask ourselves with a bottom-up rather than top-down approach – what is the right regime for us as a market for the next decade and beyond? …….That requires bold thinking and potentially addressing vested interests that have organically (and understandably) grown up in the past couple of decades due to how the system currently operates – and that may have made our capital markets fit for purpose in the past couple of decades but will not necessarily make it fit for purpose in the coming two decades”.
  • Secondary capital raising is one area he looks at in detail. He says: “There are many – sometimes competing and overlapping – structures, views and guidelines that create a complex architecture. Practice has built up over many years. It is, for want of a better phrase, an area that is very ‘whack-a-mole’ in nature, in that when one issue is addressed, it often causes another that needs to be addressed to pop out elsewhere – usually for a different set of stakeholders”. Retail investors are ill-served by existing practices and have been missing out on placings for example. Mr Ausin says, and quite rightly, that “As much of a company’s existing shareholder register as possible – including, importantly, retail investors – should be able to participate in any capital raising in a timely way, whatever its structure. Again, technology and digitisation have a key role to play here”.
  • Pre-emption rights are important to shareholders to avoid dilution but the rules on what is allowable are not defined in law but are promoted by a “Pre-emption Group” – in essence a club of city grandees. The Austin Review suggests it should be put on a more formal basis which is surely sound policy. The Review also covers the use of “Cash Box” transactions to get around the current legal limits on share issuance which should surely be outlawed and is one option suggested in the Review.
  • One matter discussed is the complexity and delays that occur when a rights issue or open offer is chosen as the fund-raising method. This discourages their use and the reliance instead on placings to expedite matters and reduce costs which prejudice private shareholders and smaller institutions. The key problem is the lack of a complete digital register of shareholders (including beneficial owners who hold shares in nominee accounts). That frustrates rapid communication with investors. Where a general meeting to vote on a proposal is required this currently requires 14 or 21 days notice to shareholders but the proposal is to reduce that to 7 days – an impractical objective unless electronic communication is possible. That will certainly assist rapid fund raisings which are sometimes required but it might also obstruct the ability of shareholders to communicate their concerns to other shareholders in time to oppose a vote. I suggest this requires more consideration.
  • The Review spells out the key priority in this sentence: “Raise the priority of an ambitious ‘drive to digitisation’ to facilitate innovation, stewardship and improved market infrastructure, which is actioned by a Digitisation Task Force with an independent chair and a clear set of principles to be followed”.
  • That will include “the eradication of paper share certificates and that “– it should seek to ensure that rights attaching to shares flow to end investors quickly and clearly and that investors are able to exercise those rights efficiently”. That is currently obstructed by the prevalent nominee system and the obstruction of some nominee operators (stockbrokers and platforms).
  • I have of course written extensively on the issue of dematerialisation and the use of nominees extensively in the past – in fact for more than 15 years with little action on the issue being decided. It is well overdue! ShareSoc has run a campaign on this issue where you can see the issues explained – see https://www.sharesoc.org/campaigns/shareholder-rights-campaign/ . There needs to be a “bottom-up” reform of the ways share are held and transactions recorded as the Review suggests. The current system is way too complicated and needs reform to improve shareholder democracy and market efficiency. Dematerialisation of all shares in public companies is a given requirement and all shareholders should be on the share register so that issuers (public companies) know who their investors are and can communicate with them quickly and easily. That is also a requirement for improved shareholder democracy.  

In conclusion, the Austin Review is a well-researched report and is essential reading to anyone who invests in the stock market. It includes detail reviews of how other international markets such as Australia operate. Let us hope that its recommendations are followed through with some urgency.  For retail investors the proposals should be welcomed not feared.

Austin Review: https://www.gov.uk/government/publications/uk-secondary-capital-raising-review

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

Techinvest Comments on Technology Stocks

The latest edition of the Techinvest newsletter has just been issued. This is a newsletter that comments on smaller cap UK technology stocks and is always worth reading for those who hold such shares as I do. The latest editorial is particularly worth reading in my opinion. I quote from some of it below.

“Between 1994 and 2000. the gain on the Nasdaq index was circa 590%. It subsequently lost around 76% of its peak value in the tech stock crash that played out over the next three years.

As we have commented before, however, we doubt that the bear market this time will follow the path taken during the unwinding of the dot.com bubble. For one thing, current tech stock valuations are not as stretched as they were back then. Also, tech is a much more established part of the economy today, benefiting from developments such as digitisation, automation, and cloud services upon which modern enterprises are increasingly reliant. The dot.com crash was driven primarily by realisation among investors that a speculative bubble had formed in tech stock prices. By comparison, tech stocks are selling off today in response to concerns about events in the real world, chiefly supply chain shortages and rising inflation. Fears of a looming recession in particular has dented risk appetite and made investors cautious about backing growth stocks at a time when the outlook for the economy is turning down. Investors are also showing preference for safe haven blue-chip stocks at the expense of the smaller cap sector. Unfortunately, most tech companies with a London-listing are small cap and have suffered accordingly due to their perceived lack of defensive qualities relative to larger cap brethren in old economy sectors.

Given that most tech operators continue to report strong results and appear to be absorbing the impact of supply shortages and rising operating costs reasonably well, the current sell-off may seem irrational. But markets look ahead and try to discount events that appear likely to occur in the medium term. A worsening economic situation later this year and into 2023 does seem likely and therefore needs to be discounted in current stock prices. Whether this justifies the heavy falls seen in tech stock prices, however, is questionable. After all, tech would seem to have the wherewithal to come through a downturn in better shape than many other parts of the economy. Balance sheets are generally strong in the tech sector and many operators have good cash generation and high levels of reliable recurring revenue. Secular growth trends, such as automation and digitisation, also provide a strong underpinning for tech demand even if IT budgets become more constrained in a downturn. While we recognise some justification on economic grounds for the sharp de-rating of tech stocks since last year, we also feel there is an element of overreaction driven by fear and short- termism. Good stocks have been pulled down alongside ones that have weaker fundamentals, creating some attractive buying opportunities”.

Comment: As the editor points out private equity investors are pouncing on good opportunities in the UK – EMIS and Ideagen are examples of recent bids at very substantial premiums. If a recession does come, those technology businesses with high recurring revenue and good balance sheets may not suffer much. Once a customer has become reliant on technology they will rarely ditch it or change suppliers. So they can be very defensive stocks to own. The ones to avoid are those with no profits, poor cash flow and reliance on future fund raisings which may not be forthcoming in a recession.

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

After IDEAGEN and EMIS, What to Buy? VIP Perhaps?

With bids for Ideagen (IDEA) and EMIS (EMIS), two of my larger and longer-standing holdings, I need to look for new small/mid cap technology stocks in which to invest. I may be willing to hold the realised cash for a short while but with inflation at 10% it’s going to be costly to hold much cash for very long.

I note AB Dynamics (ABDP) has been tipped in both Techinvest and Small Company ShareWatch last week but I already hold that and it does not look particularly cheap to me as yet.

Techinvest reported on their New Year Tips last week. With 12 stocks recommended the average fall is 17.7% to date which just shows how out of favour small tech stocks have been of late. Only one of the 12, Ingenta, rose with all the rest falling. I won’t mention the rest because none look greatly attractive to me.

What I am looking for is companies with good intellectual property, which can provide barriers to competition, in growing market sectors, with good returns on capital, high levels of recurring revenue, positive cash flow and with rising revenue (Ingenta has a poor track record in that regard and has low return on capital).

Readers should add your suggestions for companies to look at by leaving a comment (see left hand column of this blog).

One alternative to investing in tech stocks is property companies and I read the Annual Report of Value and Indexed Property Income Trust (VIP) over the weekend. Property companies are a good hedge against inflation, particularly as VIP has a focus on holdings with index linked rent reviews. Their comments on future prospects make for interesting reading.  To quote:

“Total returns will be lower but still satisfactory over 2022 as a whole. They may be around 12% overall with returns for industrials, retail and the alternative sectors all in the early teens but offices only around 5% with capital values flat, rents under pressure and voids through the roof. Property’s real returns will be far lower, with the RPI already up 9% year on year. It will stay higher for far longer than the Bank or England or the market expects. Stagflation is here to stay for at least as long as the war in Ukraine drags on”.

That’s a good summary of my own view and investors might be happy with a 3% real return this year as world economies go into recession.

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

Keynes Biography and Engines That Move Markets 

 As I am still in hospital I have had the opportunity to continue with my reading. The first book I tackled was a biography of John Maynard Keynes a very famous economist and stock market investor. He helped to found the IMF and the current international banking system. The book was highly recommended by Barton Biggs as I mentioned in a previous blog post and was written by Robert Skidelsky, It’s a biography of a famous person that nobody has ever heard of to quote my wife. But he really was important in influencing government financial policy after the Second World War.

At 1020 pages it’s quite a heavyweight and that’s just the “abridged” version. But I gave up on it after 200 pages. It’s way too long and too tedious. Not recommended.

The next book I am reading is “Engines that move markets” by Alasdair Nairn. This is no lightweight tome either at 545 pages. It’s a historic review of technology investing from railroads to the internet. The authors object is to teach us when to get in and out of tech stocks and how to avoid ones that are likely to fail after the typical market euphoria for a new technology,

It makes for an interesting read but is too long and could have done with some aggressive editing. But it may be of interest to tech investors.

I shall persevere with it as I have time on my hands.

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

You can “follow” this blog by entering your email address in the box below when you will be notified of new posts.

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

Barton Biggs and Hedge Hogging, plus NHS Dysfunction

I managed to finish reading the book Hedge Hogging last week during my 7 days in hospital. Here is a longer review.

The author Barton Biggs spent 30 years at Morgan Stanley building up their investment management business. In 2003 he formed his own hedge fund named Traxis Partners which was wound up after his death in 2012. But this is no out of date history of past financial events as much of what it covers is topical and relevant to today’s stock markets.

It’s partly a journal of events in his life but with extensive diversions into the big issues most investors face particularly the psychological difficulties that you can face. Topics such as short-selling, private equity, emerging markets, market bubbles and investment cycles are covered – we certainly seem to be in a down cycle at present rather than a temporary correction. As an investment strategist over 30 years he obviously experienced a variety of market conditions. He covers the two main investment approaches – based on growth and value but in essence was agnostic.

He has some interesting comments on Ronald Reagan and Margaret Thatcher – the latter he met more than once. He explains the success of the Yale Endowment Fund under David Swensen and explains to an audience of tech stock fanatics that “the human emotions of fear and greed that drive the stock market to excess have not changed over the course of human history and remain as valid today as in the past. Busts are busts, booms are still booms, and bubbles always burst, but this was boring stuff, and the crowd stirred restlessly. The glitterati understandably had no interest in hearing about busts or bursting bubbles. On to the next IPO and salacious stock idea”.

A good paragraph that gives you an impression of his writing style is the following: “If you hang around the investment business long enough eventually you experience some mysterious, almost supernatural events because the stock market is a capricious beast, almost a force of nature like the sea or the arctic. It can be bountiful and loving in its embrace but also hard and cruel and sadistic. Making your living from the stock market is a strange, hazardous, yet beguiling occupation. It’s a little like being a ship’s captain back in the time of wind and sail. As the master of a whaler out of Nantucket in those days of yore, in good fair, you blissfully rode the ocean’s friendly currents. Then suddenly without warning, the sea would turn and you would find yourself driven helplessly toward some distant rocky shore by one of its fierce, irrational storms. Men and women who live at the mercy of the whims of the sea and weather are a superstitious lot”.

He ends with a review of the biography of John Maynard Keynes by Robert Skidelsky which I have lined up as my next book to read. In all Hedge Hogging is a fascinating look at the world of hedge funds but there are many lessons to be learned from it for ordinary investors.

Lastly let me say about a few words about my stay in an NHS hospital, which was not for the first time. The popularity of the NHS is falling and quite rightly. It is a dysfunctional organisation that does not compare well with the systems in other countries (bar the USA).

I cannot complain about the treatment I had but the big problem is the culture. Treating patients as children to be organised and disciplined, not as people. It was also very wasteful, keeping me in bed when I was only “walking wounded” as the army might say when I could have been treated at home for most of the time at less cost. How do you reform the culture of an organisation? With great difficulty is the answer. Easier to start from scratch.

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

FT Article on the NHS

There is a very good article in the Financial Times today concerned with the panic over privatising the NHS. I added this comment on-line: ” I write this from my NHS hospital bed. There can be wonderful service from the NHS but it can also be very bad – waiting lists for surgery or cancer treatments are examples. I would hate to have to rely on the NHS solely for medical treatment as most people do. Over 30 years I have learned that the NHS is slow to reform and adopt new technology. It’s a bureaucracy and not run like a business with customers. The NHS still treats you in what they consider is best and most efficient for them. There is little response to customer demands or views. That is what needs changing with more financial incentives”.

It looks like I may be here some time but I expect they will keep me alive as they have done for the last 30 years (I am a kidney transplant patient). It does enable me to finish reading Barton Biggs book Hedge Hogging which I mentioned in a previous blog post. This is a really good book that everyone involved in the financial world should read. I’ll try to do a more expansive review at a later date as it’s not easy to use a laptop in bed. It’s not just relevant to hedge fund managers!

Glad to see the market is in soporific mode with no big movements in my holdings. Trading from your sick bed is never a good idea as treatments can affect your brain or your emotions.

Roger Lawson

Hedge Funds Scale Back Big Bets

An interesting article published over the weekend was one in the Financial Times headlined “Hedge funds scale back big bets”. It said “Hedge funds focused on US equities are pulling back sharply on their bets after the longest stretch of sustained selling in more than a decade left many managers nursing stiff losses”. It also reported that “Long-short equity funds, which pitch themselves on the ability to protect client money in down markets, have lost 18.3 per cent for the year up to and including Wednesday, according to Goldman Sachs estimates”.

The opaque and murky world of hedge funds is well described in a book I am currently reading entitled “Hedge Hogging”. This is by Barton Biggs a former hedge fund manager and contains lots of interesting stories about his experiences. For example, he covers going short on oil stocks based on fundamental analysis when the market started going in the other direction and he was in danger of clients taking their money out of the fund.

But it’s a book that any investor can learn from. Just looking at some of the chapter titles gives you some flavour of the content: The Odyssey of Starting a Hedge Fund: A Desperate Frantic Adventure; The Violence of Secular Market Cycles; Nature’s Mysticism and Groupthink Stinks; The Internet Bubble; Great Investment Managers are Intense, Disciplined Maniacs; Three Investment Religions – Growth, Value and Agnostic; Bubbles and the True Believer; Divine Intervention or Inside Information – a Tale That Will Make Your Blood Run Cold.

It makes it clear that the hedge funds world shows the natural survival of the fittest in the extreme. Those who make big bets and win are the survivors but those who make big bets and lose disappear and are soon forgotten as investors move their money elsewhere. Whether there is clear out performance in the long term by anyone is not clear but the high fees charged mean it can be very lucrative for the fund managers who can stay in business.

In summary it covers a wide range of topics including the dangers of shorting stocks if anyone has an urge to dabble in that as the market falls.

Ideal summer reading on your holidays.

FT article is here: https://www.ft.com/content/8495545c-74e1-4150-8207-4855c66c9750

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

Stock Market Musings – Are You an Ostrich or a Trend Follower?

It’s Friday morning after another week of stock market volatility on top of a persistent trend downwards. In such an environment the investment community tends to fall into two camps – the value investors who hold on to stocks regardless (the ostriches of the market who allegedly bury their heads in the sand in the face of danger); and the momentum traders or trend followers.

The former say that if you have purchased a sound company based on good fundamentals you should stick with it, i.e. you should ignore the noise created by the frantic crowd. The latter say that that you need to sell to avoid worse losses or to retain what unrealised profits do exist in your portfolio.

I suggested in a previous blog post that this might be a good year to sell in May and go away. That was simply because I suspect this is not a short-term market correction from excessive exuberance but a realisation that the economic prospects are in fundamental decline. Higher inflation and higher interest rates to try and bring it under control are never good for the economy.

Technology stocks listed on Nasdaq have been particularly hard hit. The Nasdaq index is down by 17% in the last month with stocks such as Tesla, Amazon, Apple, Alphabet, Facebook and Netflix down substantially. This probably reflects the fact many new investors were pulled into the market in the last couple of years when it seemed impossible to lose money on such stocks. They are now pulling out and liquidating to protect their profits.

The short-term speculators are being hit hard and this is particularly obvious in the cryptocurrency markets which are down substantially as holders panic. It’s like a run on a bank where panic feeds on mania as holders choose to take their money and run. There was a good article in the Telegraph yesterday on that subject.

Should stock market investors choose to hold and ignore the panics or bail out? It is a dangerous approach in my view to take one extreme or the other – and particularly to switch from one to the other midway during a bust. If you choose to sell out completely on the premise that one can buy stocks back at the bottom you are likely to have two difficulties. One is that it’s impossible to identify where the bottom is and secondly the bounce back can be so rapid that one can miss out and incur high trading costs. That’s apart from the psychological difficulty of going back into a stock on which you have lost money.

But following the trend downwards does protect your portfolio from a massacre and will ensure you will never go totally bust. The trend does tell you what other investors think about the attractiveness of stocks in the stock market beauty parade, i.e. tells you the views of other investors who hold the stock.

It’s best to look at individual stocks when managing a portfolio and not to move in and out in a wholesale fashion. Sometimes the valuations put on individual stocks by Mr Market can appear irrational and in that case it can be better to hold them rather than sell. That particularly applies to small cap stocks where illiquidity can magnify panics. But it’s important to manage your overall exposure to the market and not to ignore major trends.

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

Ideagen Offer and Inspiration Healthcare Webinar

I mentioned a possible offer for Ideagen (IDEA) in a previous blog post (see https://roliscon.blog/2022/04/15/possible-offer-for-ideagen/ ). Today one was announced – a cash offer of 350p per share from HG which is a massive premium to the last listed price of 243p. The directors are recommending it so at such a premium I think it is likely to be a done deal. I will be accepting for my shares.

That should at least offset the losses today from the rest of my portfolio as the market heads south. We are surely in a bear market now. Perhaps folks read my previous blog post which suggested it was a good idea to sell in May and go away.

This morning I attended a preliminary results webinar by Inspiration Healthcare (IHC) in which I have a very small holding. The company sells neonatal products for premature babies. The share price has been drifting down like many technology companies. But revenue and EBITDA were up. Margins were also up as they concentrated more on their “own brand” products which is something I always like to hear. Distributing products from other companies is never very profitable in the long run.

The company has been investing in facilities, R&D and IT systems. But there have been logistic challenges as many other companies are facing. With purchased items increasing in cost also and they are changing suppliers in some cases.

Only 4% of revenues are from the Americas so there is big potential there if they can get regulatory approval and develop their marketing.

The company is cash generative and has no borrowing.

Project Wave is aimed a developing a new product and was delayed by the Covid pandemic but is now progressing – it’s now in clinical trial with possible commercialisation next year.

There was interesting discussion of ESG initiatives and staff support. Some 40% of staff are now working from home and one third of staff on a 4 day week (4 days at 8.00 to 6.00). They are using the Charities Aid Foundation (CAF) to distribute donations to charities – an organisation I seem to be coming across more frequently of late and worth knowing about if you make charitable donations.

There were a couple of questions from the audience. One on the increased costs of EU regulation for medical products. The second question was on a possible share buy-back. The answer was that it was not a benefit and “not on the cards”. It was suggested that it is important to maintain a strong balance sheet and to invest the capital. I cannot but agree as I almost always vote against them except in investment companies.

This webinar was on the Investor Meet Company platform and it was a helpful one. I recommend you watch the recording if you have an interest in small tech companies.

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

Sell In May and Go Away?

Rhododendron Odee Wright now in flower

An old saying in the stock market is “Sell in May and Go Away”. This is because historically the market tends to fall during the summer months for reasons that are not altogether clear. Bearing in mind the transaction and tax costs involved in selling shares and buying them back later in the year, and the fact that like all supposedly reliable investment rules, it tends to be traded away by the anticipation of knowledgeable investors, I do not normally take any notice of this theory.

But I feel this year it might be a good idea to follow. Inflation is forecast to rise to over 10% and GDP forecasts are falling so we might even enter a recession later his year. There is doom and gloom all around with the war in Ukraine not helping and commodity prices rapidly rising impacting both businesses and consumers.

A good example of the concerns of many companies was evident in the announcement by 4imprint Group (FOUR) this morning. Their trading statement said: “The Board is conscious that only four months of the year have elapsed and that current geo-political and broad economic factors may well affect the Group’s performance during the balance of the year. In particular, we are cognisant of potential issues relating to possible further COVID variants, supply chain disruption, inventory availability, increasing cost of product, availability and cost of labour, the effect of inflation on our customers’ budgets and the general threat of economic recession”. They are talking about the USA which is their major market but they could just as well have been discussing the UK.

Despite the fact that revenue so far this year has been up 27% over the last normal year of 2019, the company is clearly worried about the future. There have been similar statements from many other companies.

Another good example of the problems faced by many companies was a comment by Up Global Sourcing (UPGS) in a webinar yesterday. Everybody might be back in the office but the impact of higher shipping costs is having an adverse impact of 4% on their gross margin. They are looking for automation to reduce man hours and hence other costs.

We might currently have full employment but that is not going to last I suggest.

I think this might be one year to exit stock market holdings which will at least enable you to avoid monitoring your market holdings while you are on your summer holidays. Or at least move to holding shares that may be less volatile or less impacted by current economic trends.  

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.