Too Much Cash, Wey Education and Patisserie Accounts

Are you stacked up with cash in your ISAs, SIPPs, and direct portfolios? As a dedicated follower of fashion (if the markets are falling as investors sell, then so do I) it is of some concern that the cash is not earning any interest. There was some relatively good news yesterday from soon to be listed A.J.Bell Youinvest. They are increasing the interest they pay on cash held in portfolios. Previously you got 0.05% on balances more than £50,000. It will now be 0.10% above £10,000, 0.15% above £50,000 and 0.25% above £100,000 on SIPPs and similar increases on ISAs and dealing accounts.

But that is still really quite paltry and still not good enough when you can get over 0.2% on even High Street bank deposit accounts and Goldman Sach’s Marcus account is offering 1.5%. Youinvest and other platforms must try harder I suggest to offer fair interest rates. In the meantime, the only option for investors is to take the cash out and deposit it elsewhere or spend it. But moving cash out of ISAs and SIPPs can make it difficult to put back in. The rules on such accounts should surely be changed to permit that more generally because at present it is “anti-competitive”. One option is to transfer your ISA or SIPP to another provider who does provide a better rate of interest on cash holdings, but that is such a tortuous and expensive process at present that it’s not really very practical to do so – at least the FCA is looking at that issue.

Why are investors selling? Apart from panics in certain stocks and sectors, such as the FAANG technology stocks in the USA, the political uncertainty in the UK is surely simply causing investors to take their money off the table. Folks are getting nervous. Reducing exposure to stocks likely to be hit by a hard Brexit or by the risk of a General Election and Labour taking power is a completely rational move. Private investors can do this quite easily while institutional investors apart from hedge funds can be more limited in their ability to do so. Investors in funds don’t like their funds to be holding large amounts of cash and the manager cannot easily move in and out of holdings in size without finding prices move against them.

Wey Education (WEY) is an AIM listed provider of on-line education. It has big ambitions but this morning the company announced that Executive Chairman David Massie has resigned with immediate effect. The cause is continuing health problems after major heart surgery. They also reported trading as “strong” but this will clearly be a major disruption in the short term as Mr Massie was undoubtedly the driving force behind the business of late. It rather highlights the danger of having an Executive Chairman in a company rather than a more conventional board structure. The share price is down 11% at the time of writing. This was one of my “experimental” small holdings where the picture has simply not developed as I hoped – that’s apart from the latest news. One concern here is that the company did not announce the fact that Mr Massie was only working part-time because of his health problems recently – surely this is “price-sensitive” information that should have been issued?

The Financial Reporting Council (FRC) have announced an investigation into the audit of the last 3 years accounts of Patisserie Holdings (CAKE) by Grant Thornton. They are also looking into the preparation of the financial statements by the former CFO. With the Serious Fraud Office (SFO) and the FCA also involved, the management of the company are going to be spending a lot of time talking to investigators. Let us hope that does not detract too much from putting the company back on a sound basis.

Patisserie has also been accused of failing to declare LTIP share awards to executives including the former CFO. Will there be action on that matter? I wrote a previous blog article on how they do things differently in the USA after the conviction of a former Autonomy executive for fraud – see https://roliscon.blog/2018/05/02/they-do-things-differently-in-the-usa/ . They also do things differently in Japan where Carlos Ghosn, Chairman of Nissan, has been arrested for misreporting his pay. Allegedly he actually received over $88 million over the last five years but only half was reported in their accounts. It is surely true that the UK is really quite “soft” on corporate misdemeanors of all kinds when it should be a lot tougher.

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

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Alliance Trust Savings Sold

Alliance Trust (ATST) has sold its Alliance Trust Savings (ATS) subsidiary to privately-owned company Interactive Investor. The ATS investment platform was always a peculiar business for a traditional investment trust to be holding. It was also consistently loss-making and reported an operating loss of £19.3 million in 2017 after a big write down of intangible assets. The directors valued the ATS business at £38.3 million in the 2017 accounts and Interactive Investor are paying £40 million for it but it looks like they are getting the Dundee offices of ATS valued at £4.9 million in addition.

The ATS business will continue to operate from Dundee as will Alliance Trust itself. But there will presumably be some rationalisation of IT systems in due course so clients of ATS may need to learn new software eventually. Charges might also presumably be harmonised also. Interactive Investor charge a fixed quarterly fee of £22.50 which covers some trading fees. Otherwise trading charges are £10 per trade, or less for frequent traders. This structure means that charges do not rise as your portfolio grows and is particularly well liked by those with larger portfolios.

The disposal of ATS was always on the cards after the revolution and board changes a couple of years ago at Alliance Trust. This looks a good deal for both Alliance Trust and users of the ATS platform. It completes the dismantling of the empire built by former CEO Katherine Garrett-Cox.

It is also another step in the consolidation of the “investment platforms” market which is certainly a trend as a lot of them aren’t making much in the way of profits at present (other than Hargreaves Lansdown covered in the previous blog post).

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

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IPOs, Platforms, Growth Stocks and Shareholder Rights

I agreed with FT writer Neil Collins in a previous article when discussing the prospective IPO of Aston Martin (AML) – “never buy a share in an initial public offering” he suggested because those who are selling know more about the stock than you do. We were certainly right about that company because the share price is now 24% below the IPO price.

Smithson Investment Trust (SSON) did rather better on its first day of trading on Friday, moving to a 2% premium. That’s barely enough to have made it worth stagging the issue though. But I think it will be unlikely to outperform its benchmark in the first year simply because as the largest ever investment trust launch it might have great difficulty investing all the cash quickly enough. On the other hand, if the market continues to decline, holding mainly cash might be an advantage.

One company that is lining up for a prospective IPO is AJ Bell who operate the Youinvest investment platform. They reported positive numbers for the year ending September recently but I suspect the IPO may be delayed given recent stock market conditions. One symptom of this is perhaps their rather surprising recent missive to their clients that discouraged some people from investing in the stock market. This is what it said: “In this year’s annual survey we had a small number of customers who identified themselves as ‘security seekers’, which means, ‘I am an inexperienced investor and I do not like the idea of risking my money and would prefer to invest in cash deposits’. If this description sounds like you, please consider whether an AJ Bell Youinvest account is right for you. If in doubt, you should consult a suitably qualified financial adviser”. It rather suggests that a number of people have moved into stock market investment after a long bull run and have not considered the risks of short-term declines in the market.

An interesting article was published on another platform operator, Hargreaves Lansdown (HL.), in this week’s Investors Chronicle. Phil Oakley took apart the business and showed where it was generating most of its profits – and it is undoubtedly highly profitable. Apart from the competitive advantage of scale and good IT systems it enjoys, it also benefits from promoting investment in funds, and running its own funds in addition. The charging structure of funds that it offers means it makes large amounts of money from clients who invest mainly in funds – for example £3,000 per annum on a £1 million SIPP portfolio. Other platforms have similar charging structures, but on Youinvest Mr Oakley suggested the charges on such a portfolio might be half.

His very revealing comment was this: “It is not difficult to see how this is not a particularly good deal for customers. It’s the main reason why I don’t own funds at all”. That goes for me also in terms of investing in open-ended funds via platforms.

Hargreaves Lansdown has been one of those typical growth stocks that do well in bull markets. But with the recent market malaise it has fallen 20% in the past month. Even so it is still on a prospective p/e of over 30. I have never invested in the stock because I was not convinced that it had real barriers to competition and always seemed rather expensive. Stockbroking platforms don’t seem greatly differentiated to me and most give a competent and reliable service from my experience. Price competition should be a lot fiercer in this market than it currently appears to be.

Almost all growth stocks in my portfolio have suffered in the last few weeks as investors have moved into cash, or more defensive stocks such as property. One favourite of private investors has been Renishaw (RSW) but that has fallen 35% since July with another jerk down last week. The company issued a trading statement last week that reported revenue growth of 8% but a decline in profits for the first quarter due to heavy short-term investment in “people and infrastructure”. According to a report in the FT Stifel downgraded the company to a “sell” based on signs that demand from Asian electronics and robotics makers has weakened. But has the growth story at this company really changed? On a prospective p/e now of about 20, it’s not looking nearly as expensive as it has done of late. The same applies to many other growth companies I hold and I still think investing in companies with growing revenues and profits in growing markets makes a lot more sense than investing in old economy businesses.

Shareholder rights have been a long-standing interest of mine. It is good to see that the Daily Mail has launched a campaign on that subject – see https://www.dailymail.co.uk/money/markets/article-6295877/We-launch-campaign-savers-shares-online-fair-say-company-votes.html .

They are concentrating on the issue of giving shareholders in nominee accounts a vote after the recent furore over the vote at Unilever. But nominee account users lose other rights as well because they are not “members” of the company and on the share register. In reality “shareholders” in nominee accounts are not legally shareholders and that is a very dubious position to be in – for example if your stockbroker goes out of business. In addition it means other shareholders cannot communicate with you to express their concerns about the activities of the company which you own. The only proper solution is to reform the whole system of share registration so all shareholders are on the share register of the company. Nominee accounts only became widespread when it was necessary to support on-line broking platforms. But there are many better ways to do that. We just need a modern, electronic (i.e. dematerialised) share registration system.

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

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Time to Consider your Cash Holdings?

It was obvious from a recent FCA review of “platforms” (i.e. stockbrokers), that many retail investors held large amounts of cash in their portfolios. When folks are feeling the stock market has had a rather long bull run, perhaps they feel it is wise to keep a high level of cash. Or perhaps it’s because they simply can’t be bothered to move it when their high-street bank is offering such trivial rates as 0.2% per annum on deposit accounts. Needless to point out perhaps that unlike in the good old days, most stockbrokers do not pay interest on cash holdings.

But interest rates are rising and new entrants to the savings market are starting to pay decent rates – still not as good as inflation but a lot better than zero. For example, Goldman Sachs have just launched an account named Marcus (after one of their founders). It will be paying 1.5% AER although that includes a bonus rate of 0.15% for the first year only. That probably makes it the top paying “easy access” savings account at present.

It’s an on-line only account and you can only put in up to £250,000. Otherwise it looks to be fairly straightforward apart from the usual complexities of opening a bank account and proving who you, that you are not money-laundering or a suspicious person.

This is definitely a useful initiative and if they get enough customers it might prod the high street banks and stockbrokers to think again.

See https://www.marcus.co.uk/uk/en for more information.

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

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AIC Calls for KIDs to be Suspended

The Association of Investment Companies (AIC) have called for KIDs to be suspended. KIDs are those documents devised by the EU that were aimed at giving basic information on investment funds – and that includes investment trusts which the AIC represents.

It was a typical piece of badly implemented EU regulation even if the motive was worthy. But KIDs give a very misleading view of likely returns from investment funds. Whoever designed the performance rating system clearly had little experience of financial markets, and neither did they try it out to see what the results would be in practice. Similarly, if they had bothered to consult the AIC or other bodies representing collective funds, or experienced investors as represented by ShareSoc, they would have realised how misleading the results might be.

It also imposes costs on investment managers and on brokers who have to ensure their clients have read the KID before investing – even if they are already holding the fund/shares or have invested in it previously. This means for on-line brokers we now get a tick box that we have to click on which is simply tedious. I just click on them automatically because if I intend to buy an investment trust there is a great deal of information available elsewhere in the UK and the KID does not add anything of use in my opinion.

I think KIDs should be scrapped rather than just suspended. They serve little useful purpose and just add a costly bureaucratic overhead. This is the kind of nonsense that Brexit supporters are keen to get rid off when we do finally get out of the EU monster. But will we if Mrs May gets her way?

The AIC press release is here if you want more information: https://www.theaic.co.uk/aic/news/press-releases/aic-calls-for-kids-to-be-suspended

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

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Charles Stanley Direct Increase Platform Charges

Stockbroker Charles Stanley Direct are increasing their platform charges. Their platform fee will rise from 0.25% per annum to 0.35% per annum. That might sound a large increase but in practice many clients will not pay any more. The overall annual cap of £240 per annum remains on those holding shares rather than funds and even that disappears if you trade once per month. On funds the charge of 0.35% reduces on larger portfolios to as low as zero on those over £2 million. Transaction charges remain at £11.50 per trade on shares and zero on funds.

That’s a brief summary of the new charges, but as with any platform you need to work out exactly what you will pay based on the composition of your investments, the size of your portfolio and the frequency you trade.

It would appear that these changes will mainly impact the smaller investor and Charles Stanley put the reason for the change down to the need to maintain investment in the platform when they face complex and evolving changes. Mention is made of the need for more cyber security but all brokers have been hit by increasing regulation and the requirement to change their systems as a result.

As we saw from the results from The Share Centre last week, who reported a statutory loss of £280k for the half year, it’s not easy to make money in the “platform” business at present. Charles Stanley Direct lost money in the last full year also, although the rest of Charles Stanley made a profit. Only Hargreaves Lansdown, the gorilla in the market place, seem to be making real profits on their capital invested although it will be interesting to see the financial figures from A.J.Bell Youinvest if they go public soon as forecast.

Part of the problem is the exceptionally low interest rates brokers obtain on their holdings of client cash from which historically stockbrokers made a large proportion of their profits. Bank of England base rate increases will assist but they have been waiting a long time for that to improve and rates are not rising rapidly.

As I said before in my comments on the recent FRC Report on the Platforms Market, “informed investors can no doubt finesse their way through the complexities of the pricing structure and service levels of different platform operators. I can only encourage you to do so and if an operator increases their charges to your disadvantage then MOVE!”.

Incidentally my submission to the FRC on their Report is now present on my web site here: https://www.roliscon.com/Investment-Platforms-Market-Study.pdf

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

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Shareholder Voting and Financial Times Generosity

Anyone using an on-line investment platform will be aware that your shares are normally held in a nominee account (i.e. you do not own them, your broker does – you are only the “beneficial owner”). ShareSoc has long campaigned for reform of this system because it usually results in you not being able to vote your shares at General Meetings, and you are unlikely to be sent information such as Annual Reports. You are effectively disenfranchised and the lack of voting by private shareholders undermines good corporate governance. Platforms can enable you to vote by submitting proxy votes on your behalf, but many do not offer this facility.

Last week the Association of Investment Companies (AIC) published some information that helps you to get a vote. They showed which platforms provide such voting facilities. See https://www.theaic.co.uk/aic/news/press-releases/aic-releases-information-to-help-shareholders-vote-on-platforms for the details. Note though that some may permit it but often without providing an easy to use system of voting.

Ian Sayers of the AIC had this to say: “We need all platforms to offer a simple, online solution that means that shareholders get the information they need on resolutions affecting the company and can exercise their democratic rights at a click of a button. In the meantime, investors should consider whether and how they can vote their shares as part of their decision over which platform to use.”

One can only agree with his sentiment on this. The solution is to reform the laws and regulations in this area, and ideally have all shareholders on the share register of companies. But in the meantime, it’s worth reviewing the AIC list when choosing a platform to use.

Another item of news last week was a report from Reuters that a group of Financial Times journalists have complained about the pay of their CEO John Ridding. He earned £2.55 million pounds in 2017. The group led by an NUJ representative have written to their colleagues around the world saying the pay was absurdly high and that he should give some of it back to lowly paid staff.

Comment: Pay is escalating all over in the business world and this is just another example of outrageous pay inflation among senior management. The journalists’ initiative is to be applauded. As a daily reader of the Financial Times, I also have concerns that the CEO is not doing a great job either than might justify these gazillions. In the last couple of years, since the acquisition of the FT by Nikkei, the content of the paper has substantially changed.

It still publishes very good in-depth analyses of financial issues – for example, the review of accounting and audit standards headlined “Setting Flawed Standards” on Thursday which is well worth reading. But it has taken a very pro-EU and pro-Remainer political stance with numerous articles and published letters with a highly political slant. At the weekends we have to suffer from ex-sports journalist Simon Kuper’s views on that subject. He may know a lot about football but his views on UK politics and those who support Brexit seem very ill-informed.

Coverage of hard news on companies is also now very patchy, with more on the politics of foreign nations and on social issues. The FT needs to get back to reporting on financial matters and cut back on the political polemics.

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

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