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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BT Nationalisation and Promises, Promises

We are clearly in a run up to a General Election when politicians promise all kinds of “free” gifts to the electorate. The latest promise, even before the manifestos have been published, is the Labour Party’s commitment to give everyone in the UK free broadband. This would be achieved by simply nationalising BT Group (BT.A) apparently.

I just had a quick look at the cost of this commitment. BT actually receives over £15 billion annually according to the last accounts from Consumers and from Openreach. There is some profit margin on that of less than 20% which might be discounted, but there are many households who do not yet have a fibre connection so that would be an additional cost to be covered by the Government.

In addition there would probably be some cost of nationalising BT Group and paying compensation to shareholders. The current market cap of the company is about £19 billion. They might get away with paying £10 billion up front but the annual cost of at least £12 billion to maintain the network would be an enormous burden on the state. They might be able to raise that by taxing multinationals or others but it still makes no sense.

I am not a BT shareholder currently although I am one of their customers. I also remember how dreadful the service from BT was before it was nationalised. It may not be perfect now in comparison with some of their competitors but nationalised industries such as telecoms, the railways, the motor industry, the coal industry, shipbuilding, the gas/electric/water utilities and about 40 others were all abject failures. They typically lost money and provided diabolical service.  The young who are voting socialist may not remember but Jeremy Corbyn should do so.

The fact that the share price of BT only dropped by 1% today (at the time of writing) just shows you how much credibility investors attach to this promise. It also surely shows how desperate the Labour Party is to win some more votes as they are now trailing well behind in the opinion polls.

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

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Mello Event, ProVen and ShareSoc Seminars and Lots More News

It’s been a busy last two days for me with several events attended. The first was on Tuesday when I attended the Mello London event in Chiswick. It was clearly a popular event with attendance up on the previous year. I spoke on Business Perspective Investing and my talk was well attended with an interesting discussion on Burford Capital which I used as an example of a company that fails a lot of my check list rules and hence I have never invested in it. But clearly there are still some fans and defenders of its accounting treatment. It’s always good to get some debate at such presentations.

On Wednesday morning I attended a ProVen VCT shareholder event which turned out to be more interesting than I expected. ProVen manages two VCTs (PVN and PGOO), both of which I hold. It was reported that a lot of investment is going into Adtech, Edtech, Fintech, Cybersecurity and Sustainability driven by large private equity funding. Public markets are declining in terms of the number of listed companies. The ProVen VCTs have achieved returns over 5 years similar to other generalist VCTs but returns have been falling of late. This was attributed to the high investment costs (i.e. deal valuations have been rising for early stage companies) in comparison with a few years back. Basically it was suggested that there is too much VC funding available. Some companies seem to be raising funds just to get them to the next funding round rather than to reach profitability. ProVen prefers to invest in companies focused on the latter. Even from my limited experience in looking at some business angel investment propositions recently, the valuations being suggested for very early stage businesses seem way too high.

This does not bode well for future returns in VCTs of course. In addition the problem is compounded by the new VCT rules which are much tougher such as the fact that they need to be 80% invested and only companies that are less than 7 years old qualify – although there are some exceptions for follow-on investment. Asset backed investments and MBOs are no longer permitted. The changes will mean that VCTs are investing in more risky, small and early stage businesses – often technology focused ones. I suspect this will lean to larger portfolios of many smaller holdings, with more follow-on funding of the successful ones. I am getting wary of putting more money into VCTs until we see how all this works out despite the generous tax reliefs but ProVen might be more experienced than others in the new scenario.

There were very interesting presentations from three of their investee companies – Fnatic (esports business), Picasso Labs (video/image campaign analysis) and Festicket (festival ticketing and business support). All very interesting businesses with CEOs who presented well, but as usual rather short of financial information.

There was also a session on the VCT tax rules for investors which are always worth getting a refresher on as they are so complex. One point that was mentioned which may catch some unawares is that normally when you die all capital gains or losses on VCTs are ignored as they are capital gains tax exempt, and any past income tax reliefs are retained (i.e. the five-year rule for retention does not apply). If you pass the VCT holdings onto your spouse they can continue to receive the dividends tax free but only up to £200,000 worth of VCT holdings transferred as they are considered to be new investments in the tax year of receipt. I hope that I have explained that correctly, but VCTs are certainly an area where expert tax advice is quite essential if you have substantial holdings in them.

One of the speakers at this event criticised Woodford for the naming of the Woodford Equity Income Fund in the same way I have done. It was a very unusual profile of holdings for an equity income fund. Stockopedia have recently published a good analysis of the past holdings in the fund. The latest news from the fund liquidator is that investors in the fund are likely to lose 32% of the remaining value, and it could be as high as 42% in the worst scenario. Investors should call for an inquiry into how this debacle was allowed to happen with recommendations to ensure it does not happen again to unsuspecting and unsophisticated investors.

Later on Wednesday I attended a ShareSoc company presentation seminar with four companies presenting which I will cover very briefly:

Caledonia Mining (CMCL) – profitable gold mining operations in Zimbabwe with expansion plans. Gold mining is always a risky business in my experience and political risks particularly re foreign exchange controls in Zimbabwe make an investment only for the brave in my view. Incidentally big mining company BHP (BHP) announced on Tuesday the appointment of a new CEO, Mike Henry. His pay package is disclosed in detail – it’s a base salary of US$1.7 million, a cash and deferred share bonus (CDP) of up to 120% of base and an LTIP of up to 200% of base, i.e. an overall maximum which I calculate to be over $7 million plus pension. It’s this kind of package that horrifies the low paid and causes many to vote for socialist political parties. I find it quite unjustifiable also, but as I now hold shares in BHP I will be able to give the company my views directly on such over-generous bonus schemes.

Ilika (IKA) – a company now focused on developing solid state batteries. Such batteries have better characteristics than the commonly used Lithium-Ion batteries in many products. Ilika are now developing larger capacity batteries but it may be 2025 before they are price competitive. I have seen this company present before. Interesting technology but whether and when they can get to volumes sufficient to generate profits is anybody’s guess.

Fusion Antibodies (FAB) – a developer of antibodies for large pharma companies and diagnostic applications. This is a rapidly growing sector of the biotechnology industry and for medical applications supplying many new diagnostic and treatment options. I already hold Abcam (ABC) and Bioventix (BVXP) and even got treated recently with a monoclonal antibody (Prolia from Amgen) for osteopenia. One injection that lasts for six months which apparently adjusts a critical protein – or in longer terms “an antibody directed against the receptor activator of the nuclear factor–kappa B ligand (RANKL), which is a key mediator of the resorptive phase of bone remodeling. It decreases bone resorption by inhibiting osteoclast activity”. I am sure readers will understand that! Yes a lot of the science in this area does go over my head.

As regards Fusion Antibodies I did not like their historic focus on project related income and I am not clear what their “USP” is.

As I said in my talk on Tuesday, Abcam has been one of my more successful investments returning a compound total return per annum of 31% Per Annum since 2006. It’s those high consistent returns over many years that generates the high total returns and makes them the ten-baggers, and more. But you did not need to understand the science of antibodies to see why it would be a good investment. But I would need a lot longer than the 30 minutes allowed for my presentation on Tuesday to explain the reasons for my original investment in Abcam and other successful companies. I think I could talk for a whole day on Business Perspective Investing.

Abcam actually held their AGM yesterday so I missed it. But an RNS announcement suggests that although all resolutions were passed, there were significant votes against the re-election of Chairman Peter Allen. Exactly how many I have been unable to find out as their investor relations phone number is not being answered so I have sent them an email. The company suggests the vote was because of concerns about Allen’s other board time commitments but they don’t plan to do anything about it. I also voted against him though for not knowing his responsibility to answer questions from shareholders (see previous blog reports).

The last company presenting at the ShareSoc event was Supermarket Income REIT (SUPR). This is a property investment trust that invests in long leases (average 18 years) and generates a dividend yield of 5% with some capital growth. Typically the leases have RPI linked rent reviews which is fine so long as the Government does not redefine what RPI means. They convinced me that the supermarket sector is not quite such bad news as most retail property businesses as there is still some growth in the sector. Although internet ordering and home delivery is becoming more popular, they are mainly being serviced from existing local sites and nobody is making money from such deliveries (£15 cost). The Ocado business model of using a few large automated sites was suggested to be not viable except in big cities. SUPR may merit a bit more research (I don’t currently hold it).

Other news in the last couple of days of interest was:

It was announced that a Chinese firm was buying British Steel which the Government has been propping up since it went into administration. There is a good editorial in the Financial Times today headlined under “the UK needs to decide if British Steel is strategic”. This news may enable the Government to save the embarrassment of killing off the business with the loss of 4,000 direct jobs and many others indirectly. But we have yet to see what “sweeteners” have been offered to the buyer and there may be “state-aid” issues to be faced. This business has been consistently unprofitable and this comment from the BBC was amusing: “Some industry watchers are suggesting that Scunthorpe, and British Steel’s plant in Hayange in France would allow Jingye to import raw steel from China, finish it into higher value products and stick a “Made in UK” or “Made in France” badge on it”. Is this business really strategic? It is suggested that the ability to make railway track for Network Rail is important but is that not a low-tech rather than high-tech product? I am never happy to see strategically challenged business bailed out when other countries are both better placed to provide the products cheaper and are willing to subsidise the companies doing so.

Another example of the too prevalent problem of defective accounts was reported in the FT today – this time in Halfords (HFD) which I will add to an ever longer list of accounts one cannot trust. The FT reported that the company “has adjusted its accounts to remove £11.7 million of inventory costs from its balance sheet” after a review of its half-year figures by new auditor BDO. KPMG were the previous auditor and it is suggested there has been a “misapplication” of accounting rules where operational costs such as warehousing were treated as inventory. In essence another quite basic mistake not picked up by auditors!

That pro-Brexit supporter Tim Martin, CEO of JD Wetherspoon (JDW) has been pontificating on the iniquities of the UK Corporate Governance Code (or “guaranteed eventual destruction” as he renames it) in the company’s latest Trading Statement as the AGM is coming up soon. For example he says “There can be little doubt that the current system has directly led to the failure or chronic underperformance of many businesses, including banks, supermarkets, and pubs” and “It has also led to the creation of long and almost unreadable annual reports, full of jargon, clichés and platitudes – which confuse more than they enlighten”. I agree with him on the latter point but not about the limit on the length of service of non-executive directors which he opposes. I have seen too many non-execs who have “gone native”, fail to challenge the executives and should have been pensioned off earlier (not that non-execs get paid pensions normally of course. But Tim’s diatribe is well worth reading as he does make some good points – see here: https://tinyurl.com/yz3mso9d .

He has also come under attack for allowing pro-Brexit material to be printed on beer mats in his pubs when the shareholders have not authorised political donations. But that seems to me a very minor issue when so many FTSE CEOs were publicly criticising Brexit, i.e. interfering in politics and using groundless scare stories such as supermarkets running out of fresh produce. I do not hold JDW but it should make for an interesting AGM. A report from anyone who attends it would be welcomed.

Another company I mentioned in my talk on Tuesday was Accesso (ACSO). The business was put up for sale, but offers seemed to be insufficient to get board and shareholder support. The latest news issued by the company says there are “refreshed indications of interest” so discussions are continuing. I still hold a few shares but I think I’ll just wait and see what the outcome is. Trading on news is a good idea in general but trading on the vagaries of guesses, rumours or speculative share price movements, and as to what might happen, is not wise in my view.

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

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What Were the Real Returns from VCTs over 24 Years?

I wrote a previous blog article on the merits of Venture Capital Trusts (VCTs) but I thought it worthwhile to actually do some analysis of the capital and dividend returns from some of my historic holdings of such companies. This is not at all easy because most VCTs have been through restructuring or mergers over the years and actually identifying all the dividends received was not easy because I only started using Sharescope after some years which automatically records the dividends and gives the overall returns. But Stockopedia does provide historic dividends for all prior years and all past capital events and dividends were taken into account.

Due to this complexity and effort involved I have only managed to analyse Northern Venture Trust (NVT) which I first purchased in 1995 and British Smaller Companies VCT (BSV) first purchased in 1997. Note that there were later additions of shares in those companies also.

But it is interesting to note that the overall returns, including dividends, on those companies were 3.6% per annum and 2.6% per annum. That’s ignoring the zero tax on the dividend income and the initial income tax relief (and capital gains roll-over relief originally available but no longer). More on this later.

How have these companies performed in capital terms? Both quite badly, managing to both generate a capital loss of 28% and 26% respectively over the years. You can see from these numbers that the capital is effectively turned into dividends and that without the tax reliefs they would not have been good investments, particularly after taking account of inflation over the many years they were held.

However the capital losses are effectively wiped out by the income tax reliefs available. Assuming that was 30% (it was both higher and lower historically), the per annum total return increases to 5.5% for NVT and 3.9% for BSV. Those returns were less than that achieved by investing in the FTSE-100. The compound annual return of the FTSE 100 over the last 25 years was 6.4% with dividends reinvested. Again most of those returns came from dividends rather than capital appreciation.

But the VCT returns (which are mainly obtained via dividends) ignore the fact that the dividends for those are tax free whereas those from the FTSE-100 would be taxed at high rates. Currently that is 32.5% for Higher Rate taxpayers but the rates have varied in the last 25 years so it’s difficult to work out the exact impact. But one can estimate that the benefit of the VCT dividends being tax free probably raises the total return to be similar if not greater than that from investing in the FTSE-100.

Note that I have ignored the capital gains roll-over relief on VCTs that was available on my early investments. It was only a roll-over relief so it can come back and hit you later anyway.

These calculations show how important the tax reliefs on VCTs are to investors. Without the up-front income tax relief and the dividend tax relief, they would not be good investments. That is particularly so bearing in mind the risks of VCT investment – although they have diversified portfolios of smaller companies, some have performed quite badly in the past. The VCTs mentioned happen to be two of the more successful ones. Future Chancellors please note.

VCTs have been very successful at stimulating investment in smaller companies which has contributed to the vibrancy of the UK company in recent years so any withdrawal of reliefs would be very negative.

VCTs are a tricky area for investors in that corporate governance is not always good and management costs are high, particularly due to excessive performance fees. I feel the managers often do better than the investors in such trusts. But VCTs, at least the better ones, do have a place in the portfolios of higher rate taxpayers.

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

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Watch Your SIPP REIT Dividends, RPI Change and Brexit

Many shareholders hold Real Estate Investment Trusts (REITs) as they provide a high level of dividends, partly because they have an obligation to distribute most of their income to shareholders as Property Income Dividends (PIDs). These are taxed in a different way to other dividends. They incur a tax charge of 20% which is like a withholding tax. But if you hold the shares in a SIPP then the SIPP can reclaim the 20% tax from HMRC.

I hold two SIPPs. One operator routinely refunds the REIT tax but the other one (operated by Curtis Banks) appears to have no system to do so. I have had to chase them more than once about outstanding refunds going back several years. Currently they are saying that they have to wait until the year end before they can submit a reclaim because they cannot submit claims of less than £5,000 during the year.

Shareholders who have REITs in their SIPP portfolios need to keep an eye on such refunds otherwise you could be losing hundreds if not thousands of pounds in missing tax claims.

Yesterday, among other activity by the Chancellor of the Exchequer, he issued a letter indicating that despite demands to revise the calculation of the Retail Price Index (RPI) he is putting off consent for any change until at least 2025 with consultation on when it might be implemented. See the letter here: https://tinyurl.com/y3muwr3g

There is of course strong opposition from some people to any change in the calculation of RPI. For example it might impact the returns on Index Linked Gilts that use it as it is generally seen as giving slightly higher figures than other inflation indices. But other people would welcome a change because it affects the cost of rail fares for example. It does appear wise to me to have extensive consultation on such a change before it is implemented, particularly where it affects people who have purchased investments such as index linked gilts or national savings certificates on the basis of the current formula.

The Chancellor, Savid Javid, did of course deliver a Spending Round review document to the Commons yesterday – you may have missed it among all the Brexit debates. In summary it commits to higher expenditure on schools, the NHS, the police, on social care, on defence and on other crowd-pleasing measures – a total of £13.8 billion. This should help to boost the economy, and might be seen as a typical pre-election attempt to win votes.

I watched the debates in Parliament yesterday and am baffled by what MPs have decided to do. One Bill (the European Union (Withdrawal) (No.6) Bill if you wish to read it) which seems likely to be approved demands that the Prime Minister sends a letter to the European Council requesting a further extension past October for Brexit. The proposed letter is specifically worded.

But under the UK’s, albeit unwritten, constitution the Prime Minister’s powers include: “Relationships with other heads of government” – see https://tinyurl.com/y3wneo9s for more on the Prime Minister’s powers. In effect MPs seem to want to take over executive powers in our relationship with foreign powers such as the EU. But the Prime Minister can surely contradict any such letter or undermine it in other ways because he alone has the powers to negotiate with the EU (as Mrs May negotiated the proposed Withdrawal Agreement”). This just gets us into a constitutional and political crisis.

The second decision by MPs was not to support the Prime Minister’s request for a General Election which would be one way out of the impasse. That leaves the Prime Minister and his Government in an impossible situation, particularly as now the Government has no overall majority in Parliament. In effect they may find it impossible to get any business through. This can surely not continue for long.

Whether you are a Brexiteer or a Remainer, surely you should be concerned by this turn of events which seems to be driven more by emotions about Brexit and opinions on the merits of the Prime Minister than any rational consideration of the constitutional crisis that is being created and the overall wishes of the electorate.

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

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Removing Directors, Ventus VCTs, Rent Controls and HS2

Replacing the directors of companies by shareholders can be enormously difficult. Although I have been instrumental in the past in helping that process in several companies, it takes enormous effort and a lengthy timescale to achieve it. ShareSoc director Cliff Weight has published a very perceptive article on the problems of doing so at the Ventus VCTs.

Problems faced by shareholders who are unhappy with the directors of a company are a) communicating with all other shareholders now that many are in nominee accounts and the costly process of writing to shareholders on the register via post (and processing the register into usable format for mailing); b) the existing directors of a company using the resources of the company (i.e. shareholders funds) to campaign actively against any change including the use of expensive proxy advisors to contact shareholders via telephone; c) the role of IFAs who advise their clients or who manage their portfolios and who can influence the shareholder voting; and d) the inertia of institutional investors (or to quote someone from the FT today: about 60% of company investors are passive shareholders and ‘don’t care’).

In the case of the Ventus VCTs, some shareholders are unhappy with the management fees as no new investments are being made by the company and are unhappy with the actions of the directors. They have tabled requisitions for the Annual General Meetings at Ventus VCT and Ventus 2 VCT on the 8th August to remove all the directors and appoint new ones. Of particular concern is the current two-year termination notice on the management agreement which is now being proposed to extend further. It is never a good idea for investment trusts to have long termination periods in contracts with the manager.

You can read Cliff Weight’s blog article here: https://tinyurl.com/y2de9vaa . There is also an article covering this topic in this weeks Investor’s Chronicle under the title “Limits of Influence”. It’s well worth reading.

How to solve these problems? I suggest the following: a) a reform to put all shareholders (including beneficial owners) on the register of companies; b) put shareholders email addresses on the register so that communicating with them can be done at reasonable cost – it’s surely unreasonable in the modern age to only have postal addresses which adds to costs enormously; c) limit how much can be spent on proxy advisors to oppose shareholder requisitions; and d) exclude passive institutional investors who have no interest as owners from voting.

Rent Controls

The Mayor of London, Sadiq Khan, is intending to develop proposals for rent controls in London so as to “stabilise” or reduce property rents in London (or make them “more affordable” as he puts it). That’s despite the fact that he has no legal powers to do so and a Conservative government would likely block such proposals. But Jeremy Corbyn supports the idea. The Mayor clearly sees this as a vote winner for his re-election campaign next year as he claims 68% of Londoner’s support rent controls!

Some of my readers probably invest in buy-to-let properties so such proposals will worry them considerably. On the other hand, those who rent houses or flats in London are undoubtedly concerned about the cost of renting and the rapid rise in rents in London. Some are being forced out of London or have to move to smaller properties.

But rent controls never work and create all kinds of negative side-effects, or unintended consequences. When I moved to London in the 1960s, rent controls were in place and had been since 1945 in various forms (there is good coverage of the history of rent controls in London on Wikipedia). In the 1960s, unfurnished properties were almost impossible to find or were horribly expensive as landlords had withdrawn from the market. Rachmanism to force tenants out of rent controlled properties was also rife and what property there was available for rent on the market was often in very poor condition because landlords simply could not justify spending money on maintenance. We definitely do not want to return to the 1960s despite Jeremy Corbyn’s desire to put us there!

Rent controls are not the answer, as many studies of such schemes has shown. The Mayor needs to do more to tackle the housing problem in London by ensuring more home are built, encouraging movement of people out of London, and discouraging new immigration into the capital from elsewhere. But you can read the Mayor’s press release here if you wish to learn more about his plans: https://www.london.gov.uk/press-releases/mayoral/to-tackle-affordability-crisis

HS2 and Brexit

The latest report that HS2 may cost an extra £30bn, meaning it could cost as much as £85bn in total, surely makes it even less justifiable. Enabling a very few people to save a few minutes on the train journey time from London to Birmingham at that cost makes no sense, although there might be more justification for expanding capacity and speed on routes in the North of England. However, it would surely be much better to spend that kind of money on an improved road network where the benefits are much greater. The Alliance of British Drivers has just published an analysis of road expenditure versus taxation which includes a comparison of road versus rail expenditure. It’s well worth reading – see here: https://www.abd.org.uk/road-investment-and-road-user-taxation-the-truth/ .

Now the Office of Budget Responsibility (OBR) have recently suggested that a “no-deal” Brexit would blow a £30bn hole in the public finances. Even if you accept that is true, and many do not, there appears to be a simple solution therefore. Cancel HS2 just to be on the safe side.

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

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Woodford Changes, FT Political Comment, and Digital Services Tax

Apparently Neil Woodford is losing some of his senior staff. Perhaps he needs to cut costs as the funds being managed by his firm have shrunk as investors have walked and holdings in the funds have shrunk in value. But the Equity Income Fund is still closed to redemptions with no certain date when it will reopen, and there is no sign of the vigorous action I suggested. I put forward these alternatives on June 5th, but Neil Woodford is clearly not rushing into action:

1) That Neil Woodford appoint someone else to manage the fund – either an external fund management firm or a new fund management team and leader. Neil Woodford needs to withdraw from acting as fund manager and preferably remove his name from the fund; 2) Alternatively that a fund wind-up is announced in a planned manner; 3) Or a takeover/merger with another fund be organised – but that would not be easy as the current portfolio is not one that anyone else would want.

Once a reputation is lost, resignations should follow, with new leadership put in place. Which brings me onto the subject of the comments in the Financial Times over the last two days over the position of our ambassador to the USA and Brexit.

Yesterday I sent these comments to the FT’s political editor about his views on the position of Sir Kim Darroch which were headlined “Darroch pays price for would-be PM’s craven and shameful conduct”:

“Dear Mr Shrimsley,

I found your article in today’s FT on the US Ambassador and Boris Johnson most objectionable. Mr Johnson’s comments on Sir Kim Darroch’s position were restrained and not unreasonable. President Trump has indicated he will not work with our ambassador which surely makes his position untenable. There is no point in the UK defending or retaining him in post. He has subsequently resigned – and quite rightly.

Sir Kim clearly made some injudicious comments which unfortunately have leaked out even though foreign embassies have very secure communications facilities. Was this in a private communication by him? If so it was unwise in the extreme. But if there is to be any witch hunt it should be focussed on that issue alone.

This has nothing to do with Brexit and it should have nothing to do with your newspaper’s dislike of Trump or support for Brexit. So I suggest your article was misconceived as was the accompanying FT article printed on the same page about the relationship between the Civil Service and Government Ministers. The fact that Boris Johnson failed to defend or back Darroch while Jeremy Hunt rushed injudiciously to do so surely shows which politician is wiser.”

Today we have another article in the FT so extreme as to be comic by Martin Wolf which is headlined “Brexit means goodbye to Britain as we know it”. It suggests the UK will lose its reputation for being stable, pragmatic and respected. It describes Boris Johnson as a serial fantasist and concludes that the UK is no longer a “serious country”.

But the FT did cover well the publication of draft legislation on a new Digital Services Tax – see https://www.gov.uk/government/publications/introduction-of-the-new-digital-services-tax . This will impose a tax on companies that operate social media platforms, search engines or online marketplaces to UK users. This is aimed to collect tax on revenues in such companies that are currently avoided by the fact they frequently operate from low tax jurisdictions. The focus is clearly on companies such as Alphabet (Google) and Facebook who generate large revenues from the UK but pay relatively little tax.

However there are some UK companies that are potentially liable such as Rightmove or Just Eat but they are likely not to have to pay because a group’s worldwide revenues from these digital activities needs to be more than £500m with more than £25m of these revenues derived from UK users.

The USA is crying foul over a similar French tax and surely quite rightly. The size exclusion means only the big US firms are going to be liable, and there is the issue of double taxation – they will be taxed on both revenue in the UK and potentially profits also. I suggest the USA has a justifiable complaint. It should surely be a tax on all such companies other than very small ones, with a deduction from Corporation Tax allowed to offset the double taxation issue.

There is one thing for certain. Such measures from the UK and France may threaten retaliation by the USA and might certainly jeopardize any new trade agreement between the UK and USA post-Brexit.

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

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