More on Year End Review and Impact of Population Fall

After writing a review of my portfolio performance for last year (see https://roliscon.blog/2021/01/04/year-end-review-better-than-expected/ ), which I only considered as “satisfactory” being well ahead of my FTSE-AllShare benchmark, I have noticed quite a number of investors on Twitter claiming to achieve 40%, 50% or even higher returns. How did they achieve that? Or was it a case of only those who achieved good returns reporting them?

By comparison Citywire ran an article that compared the performance of professional fund managers which suggested a balanced growth portfolio might have returned 5% – see  https://citywire.co.uk/funds-insider/news/how-did-your-portfolios-performance-in-2020-compare-to-the-pros/a1447576?  

First it’s worth bearing in mind that my portfolio is very diversified across FTSE-100, FTSE-250 and smaller company (e.g. AIM) shares listed in the UK. I also hold a number of UK investment trusts which gives me exposure to overseas markets, and some Venture Capital Trusts (VCTs). Although I have some emphasis on AIM shares, they are not the very speculative ones.

It’s interesting to look at the Annual Reports of two VCTs which were recently issued – Unicorn AIM VCT (UAV) and Baronsmead Second Venture Trust (BMD) and which I hold. Unicorn reported a total return of plus 20.3% to the end of September when historically they have been somewhat pedestrian and seem to buy any AIM shares on offer with the result that they have a very large portfolio and probably track the AIM index.

The FTSE AIM 100 Index total return was 20.6% over last year, massively outperforming the FTSE 100. It is very clear that unlike in most years, when AIM VCTs tended to be outperformed by private equity VCTs, last year was very different. AIM market shares, which often have a focus on technology, clearly benefited greatly in comparison with FTSE shares which includes many retailers, property companies, banks and oil companies.

BMD own a mixed portfolio of unlisted and AIM shares and this is what the Chairperson had to say on their performance: “The recovery of the public portfolio emphasises the benefits of having a mixture of private and publicly listed companies in the portfolio. Over the long-term, the return profiles of the quoted and unquoted portfolios have proved to be complementary with both asset classes delivering robust performance”.

It is very clear that the way to achieve great portfolio performance in the last year was to run a very concentrated portfolio of a few AIM shares and ignore the FTSE-250 companies (down about 5 % over the last year at the time of writing) and the FTSE-100 companies (down about 12%). But such a portfolio would be very risky of course and require very active monitoring and trading. It might also be great in any one year but perhaps not so consistently good over several.

This is the time of year when tip sheets publish their reviews of last year’s recommendations and their tips of the new year. Techinvest have a good track record in that regard but their 2020 tips only delivered an average gain of 9.8% so I am not feeling too unhappy about my own portfolio performance. Am glad to see I already own a number of their 2021 tips.

What are my expectations for the coming year? I rather expected the stock market to fall in the new year after the “Santa Rally” and some stocks have but it still seems to be remarkably buoyant. Is this because all those wealthy octogenarians who own shares have booked their Covid-19 vaccinations and so are in a positive frame of mind? Perhaps so and it has certainly improved my morale having just got a date booked for one despite me being only 75.

The other very good news was an article in the Daily Telegraph today that reported that the UK population is “in the biggest fall since the Second World War”. The over-population of our crowded island, particularly in London and the South-East, has been one of my major concerns for some years. This has led to congested transport systems and a major shortage of homes.

The population reduction is not because of deaths from Covid-19 which have only risen slightly above the normal levels but an “unprecedented exodus of foreign-born workers” resulting in a fall of 1.3 million in 2020. The largest fall was in London where it may have been 700,000. The article also suggests there is likely to be a “baby bust” as couples delay starting a family which might push the birth rate to its lowest on record according to estimates from PWC.

Such a reduction in the population will have negative consequences for the economy in general and particularly for the finances of Transport for London which are already in a dire state after people have been avoiding public transport.

The euphoria over the fact we might survive the epidemic surely needs to be tempered by the gloomy prognostications for the UK economy.

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

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Year End Review – Better than Expected

As I have published in previous years, here is a review of my own stock market portfolio performance in the calendar year 2020. I’ll repeat what I said last year to warn readers that I write this is for the education of those new to investing because I have no doubt that some experienced investors will have done a lot better than me, while some may have done worse.

One feels wary of publishing such data because when you have a good year you appear to be a clever dick with an inflated ego, while in a bad year you look a fool. Consistency is not applauded on social media. But here’s a summary of my portfolio performance which turned out to be a lot better than expected earlier in the year.  Total return including dividends was up 10.7% which I consider a very good result bearing in mind that the FTSE All-Share was down 12.5% which I use as my benchmark (the latter figure does not include dividends though). It was helped by having significant US holdings and technology company holdings via investment trusts and funds. Dividends received were down by about 17% as many companies reduced their dividends or cut them altogether.

It was partly a good year because I had no bad failures but when you have a large number of holdings, as I do, then there are always one or two disappointments. The worst loss was on trading in the shares of 4Imprint (FOUR). This is an AIM listed seller of promotional products, mainly in the USA. In March I was reducing my stock market holdings, particularly in those companies that were being badly affected by the pandemic or seemed likely to be. The share price of FOUR was 3480p at the start of the year and I sold a large proportion of my holding at about 1390p (i.e. near its bottom). The share price has since recovered to 2565p so that’s a good example of the volatility of small cap stocks when everyone wants to get out, or how it is foolish to exit prematurely when the news appears bad. I chose not to buy back into the shares of FOUR but instead chose other companies, particularly investment trusts that had moved to high discounts. That partly compensated but not altogether.

My holdings in investment trusts focused on technology or US markets did particularly well such as Polar Capital Technology (PCT) – share price up 43% during the year, Scottish Mortgage (SMT) – share price up 107%, or Fundsmith Equity Fund – share price up 19%.

I avoided big FTSE-100 companies such as banks, insurance companies, pharmaceuticals and retailers which was all to the good, although I did make money on miners BHP Group (BHP) and Rio Tinto (RIO). Only minor aberration was a punt on AstraZeneca (AZN) which I rapidly exited.

My portfolio also includes some Venture Capital Trusts (VCTs) which would have generated a less good overall return because they tend to be vehicles for turning capital into tax free dividends. As usual they mainly showed small capital losses although two VCTs focused on AIM stocks (Amati and Unicorn) did relatively well for the second year running so the overall result was a small capital profit. My own AIM portfolio holdings were a very mixed bunch with technology companies showing a good profit but others showing losses as small caps generally fell out of favour. I analyse in detail the profits and losses on all my individual holdings during the year so as to try to learn from my mistakes. But last year was dominated by a rush to safe havens and into stocks that might benefit from the epidemic so it undermined my previous choices and required some rapid portfolio re-allocations during the year.

What will happen in the coming year for stock markets? I have no idea and simply prefer to buy good companies and hold them for as long as it makes sense to do so. But certainly the discounts, or premiums, on investment trusts in popular sectors seem to suggest some optimism for the future when surely western economies are going to be severely damaged. Meanwhile Governments are borrowing in a very big way to keep their economies afloat (or printing money to do so) while taxes are surely to rise to cover the cost of the pandemic. The stock market has become detached apparently from the real-world economy which cannot bode well for the future. But that’s not necessarily a basis for making decisions about stock market investment where investors have longer time horizons and still expect the epidemic to be under control this year.

But some things may permanently change as we have become used to doing more on-line shopping, working from home, travelling less and getting our education on-line. Those are the trends that one should follow I suggest. Plus of course the movement to improve the environment and halt global warming which is requiring substantial changes to the UK and other economies. But one has to be very careful about enthusiasm for “hot” market sectors – they often turn out to be flashes in the pan.

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

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Stock Market Rally and Improving Market Regulation

The free trade deal with the EU has finally been settled. It just needs passing in the UK Parliament and ratification by the EU which is expected to occur without difficulty. Boris Johnson has good reason to celebrate because he has achieved almost all his objectives and got a deal that many thought would be impossible. From the 1st January, when the EU exit “transition period” ends, we will no longer be subject to EU laws.

This is a very satisfactory outcome so far as I am concerned as we will escape the horrible bureaucracy of the EU and once again be a truly independent nation. EU laws will not automatically be translated into UK law. We will maintain alignment on some matters such as labour rights, but we will have the ability to diverge to some extent. And there is an agreement on a new framework for the joint management of fish stocks which was being argued about until the last minute apparently.

For the UK, it gives us potential opportunities such as trade deals with other countries that we could not do as part of the EU. This is truly a historic moment in history and should reinvigorate UK politics. 

All we need now is to get the Covid-19 pandemic under control. To quote Judy Garland from the film “Meet Me in St. Louis” which I watched yet again over Xmas: “Have yourself a merry little Christmas, next year all our troubles will be out of sight…”. Let us hope so.

The AstraZeneca vaccine has been approved by the UK regulator so a massive expansion of vaccinations is now expected to commence. It is hoped this will control the epidemic by the spring. The stock market continues to rise based on the positive Brexit free trade deal, the vaccine news and a massive stimulus to the US economy by the Government sending cheques to everyone. My portfolio is now ahead of where it was at the start of the year which is somewhat surprising after such a turbulent year – more analysis may follow when I have done my full end of year analysis which takes me some time. Some shares were so buoyant of late, particularly investment trusts where discounts have narrowed, that I sold a few shares this morning. (P.S. – only from ISAs where no tax on the gains will be payable. Trading investment trust shares on short term horizons is rarely a good idea).

On the issue of stock market regulation, there was an article in this week’s Investors Chronicle by James Deal, the COO or Primary Bid. That company aims to enable private shareholders to take part in share placings from which they are normally excluded. As such placings are often at substantial discounts to the market share price, private investors miss out. They also get diluted.

The article mentions the £8 million cap on “undocumented” deals (i.e. ones without a prospectus) imposed by the EU’s Prospectus rules. The writer says “Brexit affords policy makers an opportunity to revisit this cap”. That’s one of many EU Directives that have been translated into UK law in the last few years. The Shareholder Rights Directive is another one that has been poorly thought through in terms of applicability to UK investors.

EU Directives are frequently excessively complicated as a result of trying to meet the needs of 27 EU countries all with different financial traditions. Let us hope that Brexit enables the UK to look again at many aspects of stock market regulation and the rights of individual shareholders.

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

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Boom and Bust Book Review

Avoiding buying into the peak of booms and selling at the bottom of a bust is one of key skills of any investor. But what causes them? The recently published book entitled “Boom and Bust” by academics William Quinn and John D. Turner attempts to answer that question by a close analysis of historical market manias.

I found it a rather slow read to begin with but it proved to be a very thorough and interesting review of the subject. It covers bubbles through the ages such as the Mississippi and South Sea schemes back in the seventeen hundreds, through the railway and cycle manias plus Australian land boom of Victorian times to those in more living memory. That includes the Wall Street boom and 1929 crash, the Dot.com bubble of the 1990s and the sub-prime mortgage crisis in 2007/8.

The latter resulted in a world-wide financial crisis with particularly damaging effects in the USA and UK. Banks had to be bailed out and bank shareholders lost their lifetime savings. But the dot.com bubble had relatively minor impacts on the general economy.

I managed to sell a business and retire as a result of the dot.com bubble at the age of 50 because it was obvious that IT companies in general had become very highly valued. Software and internet businesses with no profits, even no sales, had valuations put on them that bore no relation to conventional valuations of businesses and forecasts of future profits were generally pie in the sky. One of the things the authors point out is that insiders generally benefit from booms while inexperienced retail investors and unwise speculators with little knowledge of an industry are often the losers.

How are bubbles caused? The authors identify three big factors which they call the “bubble triangle” – speculation, money/credit and marketability. The latter is very important. For example, houses owned by occupiers tend to be part of markets that are sluggish and not prone to volatility as buying and selling houses is a slow process. But when sub-prime mortgages were created a whole new market was brought into being where mortgages could be easily traded. At the same time, the finance for mortgages was made easier to obtain.

The latter was by driven by political decisions to encourage home ownership by easier credit and by the relaxation of regulations. Indeed it is obvious from reading the book that politicians are one of the major sources of booms. Governments can easily create booms, but they then have difficulty in controlling the excesses and managing the subsequent busts.

The Dot.com boom was partly driven by technological innovation that attracted the imagination of the public and investors. It might have contributed positively to the development of new technologies, new services and hence to the economy, but most companies launched in that era subsequently failed or proved to be poor investments in terms of return on capital invested. Amazon is one of the few success stories. As the book points out, market bubbles tend to disprove the theory that markets are efficient. It is clear that sometimes they become irrational.

There are particularly good chapters in the book on the Japanese land bubble in the 1980s and the development of China’s stock markets which may not be familiar to many readers.

The authors tackle the issue of whether bubbles can be predicted and to some extent they can. But a good understanding of all the factors that can contribute is essential for doing so. Media comments can contribute to the formation of bubbles by promoting companies or technologies but can also suppress bubbles if they make informed comments. But this is what the authors say on the Bitcoin bubble and the impact of social media and blogs: “The average investor was much more likely to encounter cranks, uninformed journalists repeating the misinformation of cranks, bitcoin holders trying to attract new investors to increase its price and advertisements for bitcoin trading platforms”. They also say: “Increasingly the nature of the news media is shifting in a direction that makes it very difficult for informed voices to be heard above the noise”.

Incidentally it’s worth reading an article by Phil Oakley in the latest issue of Investors Chronicle entitled “Tech companies still look good”. He tackles the issue of whether we are in another Dot.com era where technology companies are becoming over-valued. His conclusions are mixed. Some big established companies such as the FANGs have growing sales and profits and their share prices are not necessarily excessive. But some recent IPOs such as Airbnb look questionable. Tesla’s share price has rocketed up this year but one surely needs to ask an experienced motor industry professional whether the valuation makes sense or not.

The authors suggest that buying technology shares can be like a casino. Most of the bets will be losing ones but you may hit a jackpot. I would suggest you need to pay close attention to the business and its fundamentals when purchasing shares in such companies.

In conclusion the book “Boom and Bust” is well worth reading by investors, and essential reading for central bankers and politicians!

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

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Companies House Changes – 3 Consultations, and Banning Short Selling

The Government has issued three public consultations covering these subjects:

  1. Improving the quality and value of financial information on the UK companies register.
  2. Enhancing the powers of the registrar.
  3. Implementing the ban on corporate directors.

These follow on from a previous consultation entitled “Corporate Transparency and Register Reform” which contained proposals to reduce fraud and improve transparency, and which I reported on here: https://roliscon.blog/2019/05/11/changes-proposed-at-companies-house/ and you can see my response to that consultation here: https://www.roliscon.com/Corporate-Transparency-and-Register-Reform.pdf

The latest consultations can be found here: https://www.gov.uk/government/news/government-launches-consultations-to-crack-down-on-company-fraud-and-improve-corporate-transparency

These proposed changes will certainly improve the quality of information on the Companies House Register and in general should be welcomed, but they will impose more obligations on smaller companies. The consultations may be of particular interest to company directors and those who file information with Companies House such as accountants and company secretaries. But they ask a lot of questions, so perhaps best to review and respond to these consultations over Xmas. There are easy on-line questionnaires to which you can respond.  

Banning Short Selling

There was an interesting article in the Financial Times on short selling yesterday. It reported that South Korea is to attack those who bet against companies by short selling and is threatening jail and hefty fines. They are particularly concerned about “naked” short selling where stock is sold when not owned (e.g. rather than by borrowing it first), but they have also extended a ban on all short selling. Similar bans are in place in Malaysia and Indonesia.

The intention appears to be to halt speculative trading. Is it wise to do so? My view is that short selling as such can assist markets to identify a realistic price on stocks, but the problem is that it can also be associated with abusive practices where those doing so do not just keep their opinions to themselves but broadcast negative comments on a stock. Those comments can be sometimes fair and accurate but at other times they are not. It is very difficult for companies to respond to such comments and get them corrected or removed.

Of course one can argue that this sometimes happens in reverse, i.e. stocks are promoted by puffs or ramping to drive the price higher. Company directors themselves can be the source of such activity. The real issue is about media regulation where in the modern world both positive and negative commentary can be widely promoted on the internet without any regulation whatsoever.

That is the problem that needs tackling in essence, and banning short selling is at best a temporary measure that does not attack the underlying issue and in particular the excessive speculation that can take place in stock markets.  

Naked short selling might reasonably be banned though on the principle that nobody should be trading shares in which they do not have a financial interest. At least if they have a long holding, they may take the interest of the company into account. But if they have a short holding, their interest may be solely in damaging the company.

It is a long-standing principle of insurance that you cannot insure something in which you do not have an interest – for example someone else’s life unless you might suffer financial loss as a result of their death. Why? Because it is widely acknowledged it could lead to abuse, or in the case of life insurance that death might be hastened! You have to have an insurable interest to obtain insurance. That I suggest is a good principle to follow on share trading.

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

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Invinity Open Offer, Ideagen, and AJ Bell Results

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Epidemic Over? Unable to Trade and Chrysalis VCT Wind-Up

The news that the Pfizer vaccine for Covid-19 appears to work (at least 90% of the time) and has no negative side effects gave stock markets a good dose of euphoria yesterday. It suggests that we might be able to return to a normal life in future, but exactly when is far from clear. Actually producing and distributing the vaccine is going to be a mammoth task and it is very clear that it will only be given to certain people in the short term – the elderly and medically vulnerable. Some people might not accept the vaccine and transmission of the virus may still take place. It is clearly going to be many months before we can cease social distancing and wearing face masks – at least that is the situation if people follow sensible guidance which they may not. Some countries may not be able to afford to immunize everybody so how this good news translates into reality is not clear. In summary, the epidemic is not over.

But the good news did propel big changes in some stocks such as airlines, aerospace industry companies and the hospitality sector which have been severely damaged by the epidemic. Rolls-Royce (RR.) share price was up 44% yesterday for example, although I wouldn’t be buying it until it can show it can make a profit which it has not done for years. In the opposite direction went all the highly rated Covid-19 diagnostic stocks such as Novacyt (NCYT) which I hold. There have probably been way too extreme movements both up and down in the affected stocks as sentiment was only one way.

The big problem faced by many investors though was that platforms such as Hargreaves Lansdown and AJ Bell Youinvest actually ceased to function. It is reported that their customers were unable to log in and trade. But this is not a new problem. See this report in December 2019 when there was a previous bout of euphoria that affected the same two brokers: https://roliscon.blog/2019/12/16/euphoria-all-around-but-platforms-not-keeping-up/ .

They clearly did not learn their lesson and should have done better “load testing”. Perhaps the moral is don’t put all your eggs in one basket by relying on one broker (I use 5 different ones and spread my holdings over them).

For those with an interest in Venture Capital Trusts (VCTs) it has been pointed out to me that Chrysalis VCT (CYS) is putting proposals to wind up the company to its shareholders. I used to hold the company, but sold out in 2018 at prices ranging from 62p to 66p – the current share price is 35p. I had big concerns then about the shrinking size of the company (NAV now only £14.9 million) as cash was returned to investors. The other major concern was the holdings in the company, particularly that in media company Coolabi and the valuation thereof (last filed accounts were to March 2019 and showed a loss of over £7 million).

VCTs that shrink too much, even if they are good at returning cash to shareholders, can get themselves into an unviable position as costs of running the VCTs sooner or later get out of proportion. As the announcement by the company makes clear, in such a situation a VCT has the following options: a) merge with another VCT; b) change the manager and raise new funds; c) sell the company or its portfolio; or d) wind it up.

But raising new funds under the tougher VCT rules that now apply might not be easy, while mergers with another company might be difficult. Who would want to acquire a portfolio where 29% of the current valuation is that of Coolabi – even if you believe that valuation!

The directors give numerous reasons why a wind-up is the best option after they got themselves into this difficult situation. They correctly point out that some investors will be prejudiced by this move as some original investors will have claimed capital gains roll-over relief. They will get their tax liability rolled back in after the wind-up and the ultimate cash cost might be more than what they obtain from the wind-up. Ouch is the word for that. But the directors are going to ignore those investors on the basis that a wind-up “best serves shareholders as a whole”.

The other problem is that a wind-up of a company with holdings of private equity stakes takes a long time and there is no certainty that the value they are held at in the accounts can actually be obtained. Investors in Woodford funds will have become well aware of that issue! Who would actually want to buy Coolabi for example, or some of the other holdings?

Another VCT I held in the past that got into the situation of returning cash to shareholders while finding no good new investments and not raising funds was Rensburg AIM VCT. They managed to escape from it after a lot of pushing from me by merging with Unicorn AIM VCT. But I fear Chrysalis VCT have left it too late and hence the choice of the worst option.

But if I still held the shares, I might vote against the wind-up and encourage the directors to take another path. It is possible to run VCTs on a shoestring if a big focus on costs in taken. In addition, the directors say that they did have some discussions about fund raising, possible mergers or the acquisition of the company but have rejected those for various reasons. But I think they need to look again, after a more realistic view of the values of the existing portfolio holdings has been obtained.

One change that should certainly be made if the company chooses not to wind-up is a change in the directors and fund managers who allowed the company to get itself into this unenviable situation. Regrettably there often appears to be a tendency for directors and fund managers to want to keep their jobs and their salaries long past when tough decisions should have been made.

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

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Portfolios for Ageing Brains and Value Hell

There were a couple of good articles in last week’s Investors Chronicle – one of which I totally agreed with and one which I did not.

The first was by Chris Dillow who reported on academic studies of aged Americans. It was suggested that investment skill declines with age and those who were unaware of their cognitive decline were substantially poorer than others who were aware of it who hadn’t suffered such a decline. Now as someone who is about to reach the age of 75, this is not solely an academic issue.

The article suggested that older people might have acquired some wisdom over the years, and tend to acquire better rules of thumb, but their stock picking ability does decline. Mr Dillow suggests that one answer to this problem is to delegate our wealth management to others. But he does point out that this leaves you still with the problem of picking a good fund manager when your ability to do that might also decline. His other solution is to simplify your portfolio so you just hold equity and bond trackers plus cash.

I am not convinced by this at all. Clearly some people suffer sharp mental degradation with age and should delegate portfolio management to others, or buy managed funds of various kinds. But others do not.

Has the performance of Warren Buffett (Aged 90), or his partner Charlie Munger (Aged 96) or George Soros (Aged 90) declined in recent years? It’s not obvious at all.  My own portfolio performance last calendar year was double that of the FTSE All-Share and almost double that of the MSCI WMA Balanced Private Investor Index. So I don’t think I’ll give up managing my own portfolio just yet.

The other interesting IC article was entitled “Welcome to Value Hell” by Algy Hall. It reported on the performance of a “Value” based screen over the last year and said “the performance over the last 12 months has been extraordinarily bad”. The top 50 picks did worse than the FTSE All-share and the top 5 were a disastrous -69%. Even over the last three years, it returned minus 19.3% total return compared with plus 10.7% from the FTSE.

Looking down the list of shares recommended last year, they are a very mixed bunch but gaming companies did well (Plus500, Flutter, William Hill, IG Group and GVC). The “Zeus” screen used is based on how much the earnings have diverged from historic means, i.e. it is based on the principle that they might “bounce back”.

I think the lesson is that looking at past profits tells you little about the future and that stocks that look cheap at a glance are to be avoided. They often need a re-rating which can be crystalised by specific events. But in the depression of a pandemic, that is unlikely to occur and even in the good times other companies will do better.

One can only conclude that these “cheap” stocks needed to be even cheaper than they were to make reasonable investments. In effect the market was not reflecting the bad news about the stocks and investors were holding them longer than they should in the hope of recovery.

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

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Market Musings

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

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

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

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

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

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

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

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

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

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FRC Report on AGMs and Defensive Tech Stocks

 The Financial Report Council (FRC) have recently published a report on AGMs with a subtitle of “An opportunity for change”. The report covers how Annual General Meetings have functioned during the Covid-19 epidemic.  With restrictions on physical meetings, companies have adopted different approaches. Some have provided only the legal minimal which means ordinary shareholders have not been able to attend or ask questions. Other companies have provided virtual AGMs, with questions needed to be asked in advance, while others have provided a more comprehensive solution with questions capable of being asked and answered on the day, and votes capable of being submitted on the day.

I have commented on these different approaches and on the general issue of how to operate hybrid AGMs in future on this blog – just use the search function to search for “AGM” to see the articles.

The FRC report is a very good analysis in general of this subject (see below). It’s not too long or tedious for the casual reader but there are a few points worth noting:

They suggest that all shareholders be encouraged to use electronic communication and that they should provide an email address when purchasing shares.  It would certainly be good to have an email address on the share register which I have long argued for. It would assist communication from companies to their investors, and enable other shareholders to communicate with their fellow shareholders (a basic prerequisite for shareholder democracy). But the need to have the same information on the register for those in nominee accounts is also required.

Some share registrars already maintain a record of email addresses of shareholders and have electronic systems for recording voting but these can be complex and waste shareholders’ time. They also claim that these records are not part of the official “share register” which is dubious.

However, there are practical issues here that are not mentioned. I don’t mind receiving some information from companies via email but maintaining a record of which companies have my email address (and which one from multiple email accounts, particularly after I have changed them) would not be easy. We really do need a secure central register of all public company shareholders that the shareholders can maintain themselves as regards names, postal addresses, bank accounts (for dividend payments) and email addresses. Also there is the problem that I don’t like trying to read Annual Reports that can be several hundred pages long, on-line. Much better to receive a paper Annual Report.

For the above reasons, I gave up opting in for on-line communication and have all my reports on paper.

It is important for shareholders to be able not just to ask questions at AGMs but to “speak” on anything relevant to the business of the company. Some companies have adopted Articles providing for virtual AGMs that limit this. They also need to be able to ask “follow-up” questions.

The FRC suggests splitting the AGM into two meetings – an initial one for presentations and questions/answers with a formal meeting for voting later. That seems a good approach.

The FRC Report is present here:  https://www.frc.org.uk/getattachment/48c4ee08-b7be-4b7c-8f19-bcaf3d44e441/Corporate-Governance-AGM.pdf

The FRC is proposing to bring together a “stakeholder group” to consider the need for legislative changes or propose alternative means to achieve the required flexibility.

Defensive Tech Stocks

On another subject, why have technology stocks proved to be such good defensive holdings during the pandemic?  The editor of Techinvest spelled it out in these words in a recent edition:

“Driving the high demand for FAANG stocks since the start of the Covid-19 crisis has been the flight to safety after markets sold off heavily in early March. While it may seem counterintuitive, big tech has been attracting buyers-this-year because if its perceived defensive qualities. At a time when many other industries are being adversely affected by the Covid-19 disruption, tech appears to be emerging in a stronger position, with demand increasing in areas such as online shopping, remote working, and digital connectivity. According to research by McKinsey, the speed of digital adoption has been so quick in response to the pandemic that five years’ worth of progress has been made in just a few weeks. Big tech, in particular, is seen as a major beneficiary of the accelerated demand for digitalisation and investors have been backing this theme”.

Yes the world is changing rapidly and investors need to take note of that.

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

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