Category: Stock market

LSE Consultation on Market Structure and Trading Hours

Thanks to ShareSoc for pointing out to me that the London Stock Exchange (LSE) are undertaking a public consultation on such matters as trading hours and auction activity.

On the issue of trading hours, these are basically 08.00 to 16.30 at present although there is an opening auction at 7.50, a closing auction at 16.30 and a midday auction at 12.00 for SETS companies. These are longer hours than most international exchanges but do of course provide some overlap with US and Far East exchanges.

Reducing the hours might however improve liquidity and price discovery as the same number of trades would be concentrated into a shorter period of time.

For private investors, it might encourage more direct investment in shares. At present those who wish to keep up with company news have to get up quite early because RNS announcements are generally issued at 7.00 am so the news has to be digested along with breakfast before the market opens. It might also help stockbrokers and investment managers who have to get in the office early and have a very long day in reality thus restricting the kind of people who can do the job. Or as the consultation puts it: “Help encourage staff diversity” and make a “Positive impact on mental wellbeing of staff”.

Personally I would be quite happy with a 9.00 am opening time and a 4.00 pm close time, and I will be submitting a response accordingly.

Note that some commentators on Twitter suggested RNS announcements should be done after market close time to allow private investors to digest the information before trading in the morning – this might help those who are employed during the day.  The LSE consultation is not about that – RNS announcements can be done at any time and it is only convention, so far as I am aware, that most are done early in the morning. I would not personally be in favour of such a change and I doubt issuers would be either. It might mean more work in the evening when I already spend time reviewing the days trading and significant share price movements ahead of any trading the following day.  The other downside is that it might encourage trading on alternative venues overnight by big investors to the prejudice of private investors – the latter being unable to trade until the next morning.

The LSE is also proposing to reduce the number of auctions for SETSqx stocks (those AIM stocks and small cap stocks). The proposal is to reduce the auctions from 5 to 3 per day which may improve price discovery and trading sizes. I can see no problem with doing so.

There are some other rather technical questions in the consultation which you can read about here: https://tinyurl.com/qntpxlq . You can make a response directly or you can simply advise ShareSoc of your views who will be submitting a response on behalf of private investors. Go here for how to do that: https://tinyurl.com/yx4e6d79

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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Santa Rally and Maven VCT Merger

After a very strong upward run in my overall portfolio valuation over the last three weeks, it’s down by 1% today. Does that mean the traditional “santa rally” is over? I do get the impression that the rally happens earlier every year. Are folks wising up to the phenomenon or perhaps they are simply getting paid their Christmas bonuses earlier?

Certainly the racy technology stocks were particularly bouyant of late, leading me to sell a few shares in some of my holdings (“top slicing” to keep them not too large a proportion of my overall portfolio). But selling one’s winners is a very dangerous game to play.

Or perhaps the market has been depressed by other bad news such as the fact that your life expectancy has just been cut by up to 3 years by the Office of National Statistics (ONS). It seems their previous estimates that 34% of newborn boys would reach 100, and 40% of newborn girls would reach that age were wildly optimistic. Or was it some other bad news that caused markets to fall? Both the S&P500 and the FTSE-100 are both down 0.8% at the time of writing so my portfolio is just mirroring national trends it seems. Perhaps the US/China trade battle is hotting up? Sometimes stock markets are just volatile for no great reason other than investors following other investors.

I received notice of a proposed merger between Maven Income & Growth VCT 4 (MAV4) and Maven Income & Growth VCT 6 (MIG6) today. I hold the former but not the latter.

I am usually in favour of VCT mergers as combining them usually means the overhead costs can be reduced as a percentage of the asset value. Administration and management costs are often high in VCTs so combining portfolios can spread the fixed costs over a bigger portfolio and the costs of a merger can be recovered in a few years. The costs of this merger are high at approximately £408,000 but they expect to recover that in 32 months.

MIG6 was previously named Talisman VCT and so far as I recall had a pretty dismal track record. It was effectively bailed out by Maven when they took over management I believe. It’s difficult to see the performance of it since then because it is not a subscriber to the AIC service.

The document received says that “both companies have investments in predominantly the same unlisted private companies (with only 2 exceptions as at the date of this document)….”. But looking at the individual holdings in the two companies in their last annual reports gives me some doubts. They have different year end dates and there is clearly some overlap but they don’t appear to be identical.

I can see why the merger might be in the interests of Maven as the manager, and in the interests of investors in MIG6, but I see little benefit for MAV4 shareholders so I will probably vote against it. But if other investors have any views on this merger, please let me know.

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

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The Political Manifestos and their Impacts on Investors

Here are some comments on the manifestos of the major political parties, now that they are all available. I cover specifically how they might affect investors, the impact of tax changes and the general economic impacts. However most readers will probably have already realised that political manifestos are about bribes to the electorate, or to put it more politely, attempts to meet their concerns and aspirations. However in this particular election, spending commitments certainly seem to be some of the most aggressive ever seen.

Labour Party: I won’t spend a lot of time on this one as most readers of this blog will have already realised that financially it is very negative for the UK economy and for investors. It’s introduced with the headline “It’s time for real change”, but that actually seems to be more a change to revert to 1960s socialism than changes to improve society as a whole. It includes extensive renationalisation of water/energy utility companies and Royal Mail, part nationalisation of BT Group and confiscating 10% of public company shares to give to employees. It also commits to wholesale intervention in the economy by creating a £400 billion “National Transformation Fund”. That appears to include a commitment to revive declining industries, i.e. bail-outs of steel making companies one presumes.  It includes promises to invest in three new electric battery gigafactories and four metal reprocessing plants for steel and a new plastics remanufacturing industry “thus creating thousands of jobs”. This is very much old school socialism which expected that direct intervention in the economy could create new industries and new jobs, but it never really worked as Governments are inept at identifying where money should best be invested. Companies can do that because they have a keen interest in the return that will be made while civil servants do not.

The best comment on the BT proposals was in a letter to the FT by the former head of regulator OFTEL Sir Bryan Carsberg. He said his memory was clear about the shortcomings of BT before privatisation even if many other people do not remember. The lack of competition meant that the company had no incentive to improve efficiency or take advantage of new technological developments. Monopolies are always poor performers in essence.

Trade union law will have the clock turned back with a new Ministry of Employment Rights established. Incredibly there is a commitment to “introducing a legal right to collective consultation on the implementation of new technology in workplaces”. Clearly there are some Luddites in the Labour Party. The more one reads their manifesto, the more it reminds you of years gone by. This writer is old enough to remember the Harold Wilson speech on the “white heat of a scientific revolution” by which he intended to revitalise the UK economy. It only partly happened and at enormous cost. In the same speech he also said that there was “no room for Luddites in the Socialist Party” but that has changed apparently. The manifesto includes a very clear commitment to “rewrite the rules of the economy”. A rise in the minimum wage might also damage companies.

The cost of financing all the commitments is truly enormous, and that is not even taking account of the £58 billion just promised to restore pension commitments lost to some women due to rises in their pension age which is not in the manifesto. Taxes will need to rise substantially to finance all the commitments – that means increases in corporation tax which may damage business, and rises in capital gains tax to equalise it with income tax plus higher rates of income tax for high earners.

But the real damage to UK investors will be the wholesale intervention in the economy in the attempt to create a socialist paradise. And I have not even covered the confusion and contradictions in Labour’s Brexit policy which is downplayed in their manifesto.

Conservative Party: The other main parties are all focusing on Brexit so the Conservative’s title headline in their manifesto is “Get Brexit Done – Unleash Britain’s Potential”.  In comparison with the other parties it is relatively fiscally conservative with no major changes to taxation but some commitments on spending.

Many of their commitments, such as on longer-term social care funding, are subject to consultation but there are some short term increases in that, and for education, for the Police and for the NHS.

Immigration will be restricted by introducing an Australian-style points-based system. This might impose extra costs on some sectors of the economy, but may result in more investment in education/training and more capital investment. This might well increase productivity which is a major problem in the UK.

There is a commitment to invest £100 billion in additional infrastructure such as roads and rail. That includes £28.8 billion on strategic and local roads and £1 billion on a fast-charging network for electric vehicles. Compare that though with the cost of £81 billion now forecast in the manifesto for HS2 a decision on which is left to the Oakervee review.

It is proposed to “review and reform” entrepreneurs tax relief as it is not apparently meeting objectives. There will be further clampdowns on tax evasion and implementation of a Digital Services Tax already planned for 2020.

Reforms are planned to insolvency rules and the audit regime which must be welcomed, but details of what is planned are minimal. They also plan to “improve incentives to attack the problem of excessive executive pay and rewards for failure”. It will be interesting to see how that is going to be done in reality.

There is a plan to create a new independent “Office for Environmental Protection” which will introduce legal targets including for air pollution. This could be very expensive for both companies and individuals. The Government has already committed to a “net zero” carbon target by 2050 but Cambridge Professor Michael Kelly has said that the cost of decarbonising the economy has been grossly underestimated. He has suggested the cost should run into trillions of pounds. But again there are few details in the manifesto on how these commitments will be implemented in practice. Nobody really knows what is the real cost of such a policy.

There are though firm commitments to review the Fixed Term Parliament Act, to retain the “first past the post” voting system, to improve voter identification and reduce fraud, and to avoid Judicial Reviews being used to undermine political democracy. They also commit to review the workings of Parliament – this might lead to a written constitution which this writer thinks is sorely needed to avoid a repeat of recent events which led to gridlock in Parliament and allegedly partisan decisions by both the Speaker and the Supreme Court.

With promises not to increase income tax, VAT or National Insurance (a “triple-tax lock” in addition to the expensive triple lock on pensions which will be retained) this is generally a positive manifesto for most investors and apart from the issues mentioned above should be positive for the economy. A Conservative Government might also restore confidence in overseas investors which may well account for the recent pick-up in the stock market indices as the Conservatives look like they are heading for a significant majority. Such an outcome will also remove some of the uncertainty, if not all, over Brexit which will give more confidence to UK businesses to invest in the future.

In summary the Conservative manifesto is likely to please many and displease few (apart from those opposed to Brexit) so it could be seen as a “safe bet” to avoid any last-minute popularity reversal as happened at the last general election.

The minority parties are losing votes in the polls as they always do when a general election looms and the public realise that there are only two likely candidates for Prime Minister – in this case Jeremy Corbyn and Boris Johnson. Is that a question of whom the public trusts? This was an issue raised in one of the recent panel debates but I think nobody trusts any politicians nowadays. It is more a question of whom the voters personally like as regrettably hardly anyone reads the manifestos.

But here’s a brief view of the minority parties’ platforms:

Brexit Party: Their manifesto (or “Contract with the People” as they prefer to call it), is definitely sketchy in comparison with the two main parties and is many fewer pages in length. They want, unsurprisingly, a “clean-break Brexit”, and they want a “political revolution” to reform the voting system.

They would raise £200 billion to invest in regional regeneration, the support of key sectors of the economy, the young, the High Street and families. Note the traditionally socialist commitment to support “strategic industries”. The £200 billion would be raised by scrapping HS2, saving the EU contribution, recovering money from the EIB and cutting the foreign aid budget, although I am not sure that adds up to £200 billion.

They would scrap Inheritance Tax and scrap interest on student loans and cut VAT on domestic fuel which will all be quite significant costs. They also promise more investment in the NHS but so do all the other parties – at least there is a consensus on that point.

The Liberal Democrat Party:  They have clearly decided their vote winning approach will be a commitment to stop Brexit, i.e. revoke Article 50. They have a strong endorsement of “green” policies and propose a new tax on “frequent-flyers”. That might include Jo Swinson herself it seems as she has taken 77 flights in 18 months according to the Daily Mail.

Two unusual commitments are to legalise cannabis and freeze all train fares (rather like the freeze in London on bus and Underground fares which has resulted in a £1 billion deficit in TfL finances, but even more expensive no doubt).

Corporation Tax would revert to 20% and Capital Gains tax will be unified with income tax with no separate allowances so private investors would certainly be hit.

The Scottish Nationalist Party (SNP) are focusing on another referendum for an independent Scotland as usual, an unrealistic proposition as no other party is supporting that and it would be make Scotland much poorer, plus a ragbag of populist commitments. They clearly oppose Brexit.  As most readers will not find an SNP candidate standing in their local constituency I shall say no more on the subject. You can also go and read their manifesto on the web where it is easy to find all the party manifestos. Likewise for the Welsh and Irish leaning parties.

In summary, this election is somewhat of a no-brainer for investors unless they feel that the Boris Johnson version of Brexit is going to be very damaging for the UK economy, in which case they have a simple choice – vote LibDem or SNP as Labour’s position is too confusing. Alternatively they can play at “tactical voting” to get the party they want info power. There is more than one tactical voting web site to advise you which is the best alternative option but be wary – they seem to be run by organisations with a preconceived preference.

If readers consider I have missed out anything important from this analysis, please let me know.

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

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Fevertree Fall, Trading Times and More on HBOS/Lloyds

Last week when I spoke at the Mello event I talked about my investment winners over the past few years. One of them was Fevertree (FEVR) but I was asked why I no longer held the shares. I gave a brief explanation at the time but there is good exposition of the issues by Phil Oakley in this week’s Investors Chronicle.

Fevertree’s share price peaked at 3200p in May 2019 but it’s now about 1900p. It has declined so much in the last few months that I considered buying it back but it has also perked up in the last few days so it did not reach my target price. Phil’s article is headed “Fevertree may fall further”. This is what he has to say about the business: “The high selling price of its products make for high profit margins. Combine this with an asset-light balance sheet and you have a recipe for an outstanding business with high returns on investment and lots of free cash”. But he is wary of their reliance on sales of tonic and on the UK market.

Will they manage to continue to achieve high growth rates? One concern I have is that every luxury hotel or good restaurant I have visited in the last two years has served Fevertree in my gin and tonic. Growth in the UK must surely be becoming limited. So future growth surely depends on them making a success of the US market. In their interim results in July the company talked about “encouraging momentum in the US” but we have heard nothing more since. Phil Oakley also points out that their competitors have reacted to the success of Fevertree with their own “premium” mixer offerings. Future growth is still well discounted in the current share price in my view so I am not rushing to jump back in until the picture becomes clearer.

Fevertree is a great branding and marketing story but I fear that there are ultimately no barriers to entry in their market. Others can surely copy their business model relatively easily.

Another article in this week’s Investors Chronicle was on changing market trading times. Would shorter hours improve markets is the question they ask? The UK LSE has some of the longest trading hours in the world. It opens at 8.00 am and closes at 4.30 pm but there are opening and closing auctions before and after those times.

RNS announcements are issued starting at 7.00 am so anyone who wishes to be on top of the news has to get up early. Many older private investors like me would prefer a later market start time. Although I tend to make most of my trades in the early morning as I review investments in the evening and make decisions on what to do the next day, it seems much of the market trading volume takes place in the last hour of the trading day. A more concentrated trading day might actually improve liquidity and avoid the volatility one sees in small cap stocks. In summary I am all in favour of a shorter trading day – 10.00 to 4.00 pm would be fine and even a break for lunch as they have in Japan would not be amiss.

Lastly, as a follow up to my previous blog story on the failure of the HBOS/Lloyds legal claim, I would like to point out that the judge made it clear in his judgement that there were significant omissions from the prospectus that was issued at the time.

Specifically he says in his Executive Summary: “But I consider that the Circular should have disclosed the existence of the ELA facility, not in terms such as would excite damaging speculation but in terms which indicated its existence”; and “Likewise, I consider that the board ought to have disclosed the Lloyds Repo. The board assumed that because at the time of its grant it had been treated by the authorities as “ordinary course” business that provided an answer to all subsequent questions. But whether it should be disclosed in the Circular as material to an informed decision was a separate question. The Court must answer that question on an objective basis. The size of the facility, the fact that it was extended in tight markets, the fact that it was linked to the Acquisition and was part of a systemic rescue package showed that this was a special contract which ought to have been disclosed”  (see paragraphs 46/47 of the Executive Summary which can be obtained from here:  https://www.judiciary.uk/judgments/sharp-others-v-blank-others-hbos-judgment/

There were also possible other omissions from the disclosures which the judge did not consider but the above does provide prima facie evidence of a breach of the Prospectus Rules.  The directors of the company (Sir Victor Blank and others) would certainly have been aware of this funding and hence they might be considered to be negligent.

Investors in Lloyds TSB (I was one of them) were misled by these omissions and the subsequent outcome was financially very damaging to those investors.

I have written to the Financial Conduct Authority (FCA) suggesting that it needs to investigate these matters as a breach of the Prospectus Rules surely is a matter that makes the transgressors liable to sanctions under the Rules and there is no statute of limitation in regard to these matters. I suggest other investors in Lloyds TSB should do likewise and I have suggested ShareSoc should also take up this issue.

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

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Pound Jumps Up on Brexit Party News and Portfolio Impact

The pound has risen by about 1% against the US Dollar and Euro today with suggestions that it is the news from Nigel Farage’s Brexit Party that prompted it. He won’t be putting up candidates in seats where the Conservatives won the vote last time when he was previously threatening to have candidates stand in all constituencies. This makes some sense because even if they have good candidates willing to stand, building a local campaigning organisation from scratch to get the vote out is not easy. It strengthens the probability of a Conservative win although there is still some risk because in marginal seats which the Conservatives hoped to win but lost last time there could still be a split vote.

The result has been quite significant on my portfolio with companies with large overseas revenues and profits falling while UK dominated businesses rose. That was particularly so with Greggs (GRG) who are up 16% on the day after a trading statement that indicated overall sales were up 12.4% for the last 6 weeks and year end figures should be even better than expected.  Sales growth continues to be driven by increased customer visits apparently but as many of their outlets are now not on the High Street I suggest that should not be seen as a revival for other retail businesses. But Greggs certainly seem to have a winning formula of late as they consistently report positive news.

I tend not to react to short term changes in exchange rates because the impact can be more complex that first appears. I will not therefore be taking any steps as a result. In any case my overall portfolio is up 0.5% on the day so this might just reflect more confidence that the political log-jam will finally be resolved in a few weeks’ time. Investor confidence has a big influence on markets of course.

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

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A Question Answered on Winners and Losers

When I tweeted a mention of my forthcoming presentation on Business Perspective Investing, Andrew responded that he would be interested in a list of my winners and losers over the years and lessons learnt. So here’s some of them.

Health warning: this is not a recommendation to buy, sell or otherwise speculate in these companies. Some of the companies have been sold, or been delisted due to takeovers or other reasons. The notes are only a very trivial analysis of the reasons I purchased them. I will not be advising of future changes to my shareholdings and I have not included relatively new purchases for the same reason.

I give the company name, the year first purchased and the compound annual return (including dividends) reported by Sharescope up to the current date, or when sold. Note that I rarely purchase large holdings at once, but tend to buy more over time if the performance is good. If the performance is poor they are sold so the losses are minimised.

Most of the winning companies show consistent growth in revenue, operate in growing markets, have a high return on capital, positive cash flow, some intellectual property (IP) and competent management. Many of the companies have exploited the internet to provider a quicker or lower cost service.

Some of the Winners:

4Imprint (2016: 31.0%). A simple business distributing promotional merchandise, sold over the internet.

AB Dynamics (2015: 74.6%). Automotive technology gaining from the need for improved testing requirements and automated vehicle needs.

Abcam (2006: 31.1%). Distributor and producer of antibodies and proteins used in medical research, sold over the internet.

Accesso (2012: 32.0%). Visitor attraction software and services. Consolidator in a diverse sector.

Bioventix (2014: 39.3%). Producer of antibodies for medical diagnostics.

Boohoo (2014: 108.8%). On-line clothes retailer. Benefiting from changing shopping habits.

Delcam (2003: 26.3%). Computer aided design software for manufacturing.

Diploma (2015: 28.6%). Specialised technical products in life sciences, seals and controls.

DotDigital (2011: 33.2%). Email and other business marketing services.

Fevertree (2017: 89.4%). Producer/distributor of drinks and mixers. Great marketing and strong branding with outsourced manufacturing.

GB Group (2003: 31.6%). Identity checking internet services, benefiting from the need for quicker ID checks.

Ideagen (2012: 36.0%). Software for GRC applications. Driven by both organic growth and acquisitions, higher regulatory demands and strong sales management.

Judges Scientific (2010: 25.6%). Producer of scientific instruments. Organic and acquisition growth and emphasis on buying small companies that are cheap that can deliver a high return on capital.

Moneysupermarket (2011: 19.6%). Internet price comparison services.

Rightmove (2012: 21.2%). On-line estate agency portal. Benefiting from network effects and being the market leader.

Safestore (2018: 29.5%). Self-storage property company. Growing need to store personal and business items.

Segro (2016: 26.1%). Property company specialising in warehousing. A growing sector from internet distribution need.

Tracsis (2013: 17.1%). Software for rail operators.

Victoria (2012: 74.8%). Floor covering manufacturer led by charismatic manager.

Some of the Losers:

Blancco Technology (2016: -34.1%). IT product erasure and diagnostics. Dubious and inaccurate accounts.

Patisserie Holdings (2017: -100%). Totally fraudulent accounts led by Executive Chairman who failed to watch the detail I suggest.

As you can see, the industries in which the successful companies operate are quite varied but there is a strong focus on “newer technology” companies providing internet services or software. Although technology has been a hot sector in recent years, that has been so for most of my investing life and I expect it to continue. Note how my prejudices against certain sectors are reflected in the above list. Although I have invested in a few mining and oil producers over the years, they were generally not successful investments. Likewise financial businesses with minor exceptions.

The per annum returns may not appear spectacular but it is the high returns over many years that makes them an outstanding investment (or “ten baggers” as some are – for example Abcam has compounded at over 30% per annum for thirteen years). It may be unable to continue to do so but the company still has ambitious growth plans.

The high performing companies listed tend to be smaller ones but my portfolio does hold some larger FTSE-100 and FTSE-250 companies. The more successful ones of those don’t achieve such high returns as the companies listed above but typically more in the 10% to 20% per annum range. I also hold a number of investment trusts and funds which have similar returns. But the lower returns on those are compensated for by the lower risks associated with them.

Some of the companies have changing performance over time. For example Accesso was a strong performer until recently. I tend to top-slice companies when they become over-rated by the market or there are significant changes in the business, and try to buy when they are still cheap.

Andrew also asked “if people didn’t put as much time into it as you, do you think they can make it work?” Effort in any game is rewarded. Likewise the more experience you have the better you get. That usually means some time commitment is required. But whether you spend a lot of time or little, the key is to use the time effectively and not try to research everything in absolute detail. There is more information available than you can hope to handle in the modern world. Experience tells you what is important of course and what can be ignored. My book “Business Perspective Investing” just suggests what is important to look at, and what is not.

Note that I will be giving some overall portfolio performance information at my presentation next Tuesday (the 12th November at the Mello London event).

Incidentally ShareSoc/UKSA have published their joint submission to the consultation on “Intermediated Investments” from the Law Commission. It is very similar in content to my own but even more detailed on the problems of nominee accounts and how they should be fixed. It’s well worth reading. See here:

https://www.sharesoc.org/sharesoc-news/sharesoc-uksa-response-law-commission-review-of-intermediated-securities-call-for-evidence/

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

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The Vultures are Circling – Woodford, Carpetright et al

With the demise of the Neil Woodford’s empire and the winding up of the Woodford Equity Income Fund, investors are looking for whom to blame – other than themselves of course for investing in his funds. One target is Hargreaves Lansdown (HL.) and other fund platforms who had it on their recommended or “best buy” lists, including long after the fund’s problems were apparent. Now lawyers are only too glad to help in such circumstances and at least two firms have suggested they can assist.

One is Slater & Gordon. They say they are investigating possible claims against HL. and that “We’re concerned to establish if there was any actionable wrongdoing or conflict of interest by Hargreaves Lansdown in continuing to include Woodford funds on their ‘Best Buy’ Lists if it had concerns as to their underlying investments. We’ll also be looking at the price achieved when buying and selling instruments, such as ordinary shares, on the Hargraves Lansdown platform and whether or not this represents Best Execution”. You can register your interest here: https://tinyurl.com/yyrhbfb3

Another legal firm looking at such a claim is Leigh Day who say they already have 500 investors interested in pursuing a case. See https://tinyurl.com/y6r2buav for more information.

Having been involved in a number of similar legal cases in the past, my advice is that there is no harm in registering an interest but do not pay money up front and certainly not until the basis of any legal claim is clear. In addition bear in mind that it would be very expensive to pursue such a claim and lawyers may be willing to do so simply in anticipation of high fees when there is no certainty of winning a case. How is the case to be financed is one question to ask? Funding such cases by private investors alone (the majority of HL. clients) is likely to be difficult so “litigation funding” is likely to be required which can be expensive and erode likely returns. Insurance to cover the risk of losing the case is also needed and expensive.

Yesterday saw news announcements from three companies I have held in the past but all sold some time ago. The most significant was from Carpetright (CPR) which I last sold in 2010 at about 800p. It’s been downhill ever since. The Daily Telegraph ran an article today suggesting that this was a zombie company and that it was a good time of year for zombie slaying. After the announcement of a trading update and possible bid yesterday the share price is now 5p.

The Board of Directors “believes that Carpetright is performing well….” and “the prolonged sales decline appears to be bottoming out….”, but the company has too much debt and needs refinancing. One of its major lenders and shareholders is Meditor who have proposed to make a cash offer of 5p per share for the company. The share price promptly halved to that level because it is likely that the offer will be accepted by enough shareholders to be approved. So it looks like we will have a company with revenues of £380 million (but no profits), sold for £15 million. Founder Lord Harris, who is long departed, must be crying over this turn of events. But it demonstrates that when a company is in hock to its bankers and dominant shareholders, minority investors should steer clear.

Another announcement was from Proactis Holdings (PHD) which I sold fortuitously in mid-2018. They announced Final Results yesterday. Revenues increased by 4% but a large loss of £26 million was reported due to a large impairment charge against its US operations. The business has undertaken an operational review and restructuring is in progress. It has also been put up for sale but there is little news on potential “expressions of interest”. Just too many uncertainties and debt way too high (now equal to market cap) in my opinion.

The third announcement was from Smartspace Software (SMRT) which I sold earlier this year at more than the current share price as progress seemed to be slow and I wanted to tidy up my over-large portfolio. It reported interim results where revenue was up 57% but there was a large loss reported (more than revenue). There were some positive noises from the CEO so the share price only fell 0.7%. The company has some interesting products for managing office space but it’s a typical “story” stock where the potential seems high but it has yet to prove it can run a profitable business.

I have also noticed lately that the fizz has gone out of the share price of Fevertree (FEVR). It’s been falling for some time. I sold it in 2018 at a much higher level. It still looks quite expensive on a prospective p/e basis. Overall revenue is still growing rapidly but the USA is still the big potential market yet to be proven. I like the business model and the management even if I don’t personally like the main product. But perhaps one to keep an eye on. But generally buying back into past investments can be a mistake.

Given my track record on the above, perhaps my next investment book should not be on choosing new investments but on choosing when to sell existing ones?

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

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Brexit Bounce, Green Accreditation, Security Issues and Hargreaves Lansdown AGM

The FTSE and my portfolio jumped up this morning on the hope of a Brexit Agreement after all. RBS is up 16% which seems to be a function of euphoria. I think I’ll wait and see the progress of discussions in the next few days before plunging in to buy some more stocks. But if an Agreement is reached then the market is likely to power ahead so keep that cash handy.

The London Stock Exchange (LSE) announced today a new “Green Accreditation” scheme which will recognize companies and funds that derive 50% or more of their revenues from products or services that contribute to the global green economy. One company that has promptly announced accreditation is Blancco Technology (BLTG) in which I hold a very few shares after a disappointing track record. How do they qualify for this award? They do so because they provided data erasure services thereby helping people to recycle and reuse hardware rather than scrap it. No doubt there will be other “virtue signalers” claiming this award but I doubt it will make a lot of difference to my investment choices.

The takeover of Cobham (COB) has run into a lot of criticism about the threat to national security. The founding family have raised concerns and the Government has decided to intervene. On a personal note should I be worried that our new home security system based on Hikvision technology leaves us open to being hacked? Not only that but I also have a Huawei smartwatch. Both companies have been banned by the US due to their links to the Chinese Government. Hikvision have 1.3 million cameras installed in the UK, often in NHS facilities. This is surely an issue where the Government should be providing some advice. Why do we now have cameras all around our house? Not because of worries that my views on Brexit might stimulate some demonstrators but because the home of two Asian families in our street were recently burgled. Apparently such families are particularly at threat of such attacks because they often keep gold at home. Readers can be assured that there are no gold bars in our house. The burglaries that did take place were to houses with non-functioning alarm systems but my wife was somewhat concerned.

There was an interesting report in the Financial Times on the Hargreaves Lansdown (HL.) Annual General Meeting (I do not hold the shares). It sounds like it was a lively affair. Apparently some shareholders were not happy with the reaction of HL to the Woodford Equity Income Fund suspension after HL had promoted the fund. One shareholder said the reopening of the fund “has been postponed more often than Brexit” and suggested that HL should push for Woodford to liquidate the fund immediately. Comment: liquidating the fund abruptly would be easier said than done due to the nature of its holdings, but I agree that more vigorous action could have been taken. The fact that Neil Woodford is still running the fund when it will clearly be every unlikely to recover rapidly if at all is far from ideal.

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

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Dunelm Trading, Abrupt Share Price Moves and Volatility

It’s a good job I am not an emotional person. This morning Dunelm (DNLM) issued what I considered a very positive trading statement for the last quarter. The share price promptly dropped 6% after the market opened.

Total group sales were up 5.8%, with like-for-like sales up 6.4%. In addition this is a company that is clearly making a successful transition from being a retail store business to a hybrid on-line/store model. On-line business was up 34.7% while store business was still up 2.9%. On a prospective p/e of less than 15 and a yield of over 4% this is starting to look attractive. The company says year-end expectations remain unchanged as it continues to win market share. The only slight negative was that “September trading was mixed in part reflecting a softer homewares market”. But should a retailer be judged on one month’s trading alone?

This is the third of my holdings to suffer abrupt falls in the last couple of days. The others were 4Imprint (FOUR) and Telecom Plus (TEP), neither for any very obvious reason although there were some large trades put through on the former. But the UK market has been falling driven by the nervousness over resolution of the Brexit situation no doubt. That looks even more problematic at present with it being clear that the EU thinks they can force Brexit to be cancelled by sitting on their hands and dictating another referendum or general election before they will negotiate a withdrawal agreement. Conspiring with Speaker John Bercow is the latest attack on the democratic constitution of the UK by the EU in furtherance of this objective. What’s the motivation for the position of the EU Commission on all of this? I would suggest as usual it’s about money which always drives politics and the actions of individuals. The departure of the UK from the EU will leave a massive hole in the EU budget which they have not even attempted to solve as yet.

These events mean of course that foreign investors, who hold the majority of UK listed companies, are spooked and the risk of a future Labour Government rises as the leavers vote is split between Conservatives and Brexit party supporters. The only positive aspect is that the falling pound, driven by the same emotions, is improving the potential profits of many of my holdings which have large overseas revenues. 4Imprint comes into that category of course so the recent falls are difficult to explain except on the basis of recent past irrational exuberance. Smaller cap stocks are particularly vulnerable because just a few trades can move the share price substantially.

When markets and investors get nervous, volatility does increase and sharp share price falls can happen for no great reason. This is the time to pick up some bargains perhaps?

Postscript: Commentators on the Dunelm results after the share price fell further focused on the threat to margins from a falling pound, but the company announcement indicated that they expect gross margin for the full year to be consistent with last year despite currency headwinds towards the end of the year.

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

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