Exchange Market Size in Stockopedia and BHP plus RIO

I noticed that the share prices of BHP Group (BHP) and Rio Tinto (RIO) jumped this morning – at least for these behemoths of the FTSE-100 they moved substantially at 2.8% and 3.4% respectively. I only noticed because I recently purchased some of the shares in each company.

These are of course very large mining companies so they are dependent on the price of metals and metal ore, particularly iron ore. The last time I looked at these companies was two or three years ago when they were laden down with debt and had poor returns on capital. But they have certainly had a change of heart since then and seem to be more focused on generating real profits and cash flow rather than building ever bigger holes in the ground. Debt has been cut substantially in both companies.

With the profits mainly coming from overseas, they are a good hedge against any form of Brexit, and yields are high for those who like dividends. I am not a great fan of commodity-based businesses where predicting future prices of the products is not easy and they typically go through boom and bust cycles as such companies all invest in new production capacity at the same time as prices go up. Soon after when all the new capacity comes on stream there is a bust of course. But I made a small exception in this case.

But why the share price jump this morning? Are investors moving from growth to value as other commentators have suggested? Have value shares such as BHP and RIO suddenly started to look attractive, as they did to me? Or has Nigel Farage’s impossible demands for a deal with the Conservatives to ensure Brexit over the weekend suddenly encouraged investors to look for Brexit hedges?

Stockopedia have released an updated version of their “New” software. It now includes the Exchange Market Size (EMS) which is a useful parameter to look at when trading in company shares, particularly smaller ones. Note that Exchange Market Size was previously called Normal Market Size.  It is the maximum size in terms of share trade volume at which a market maker is obligated to adhere to their quoted share prices. It is a very good indicator of the liquidity in the shares and how easy they will be to trade. When trading electronically on most retail platforms, this is a useful number to know as it will affect whether you can trade automatically, have to set a limit order or get a dealer to trade for you. In addition, any trade bigger than the EMS might be done at prices higher or lower than you expect.

This number can be very small for some AIM stocks. For example on Bango (BGO) which I hold it is currently only 3,000 shares (less than £4,000 in value) when the EMS for BHP and RIO is more equivalent to £20,000 in value.

The new Stockopedia software version has other improvements although I still seem to be having problems with the Stock Alerts feature that I use every day. Perhaps there are still some issues that have yet to be fixed but you can still revert to the old version.

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

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Law Commission Error on Segregated Accounts

In a previous blog post on the Law Commission’s consultation on Intermediated Securities I queried their claim that all investors in nominee accounts had the option to use a segregated account (i.e. a “designated account” where your name is on the share register, not just the nominee operator’s). They claim this is mandated by an EU regulation. This is extremely important because a simple “pooled” nominee account that most stockbrokers use does not give you clear ownership of the shares. If the broker goes bust and has not properly recorded who owns what (as is often the case), you may have difficulty recovering your shares. It also means that the company you own shares in cannot communicate with you and neither can anyone else.

HAVING YOUR NAME AND CONTACT DETAILS ON THE SHARE REGISTER IS EXTREMELY IMPORTANT!

I have now actually looked into the true position with three different stockbrokers I use for ISA and SIPP accounts. This is what they said (in summary, edited for brevity):

  1. We are planning to offer segregated accounts and we expect this to be available mid-next year.
  2. We are working on implementing this with the expectation it will be an option for account holders next year, but it will be considerably more expensive than our current fees.
  3. These requirements come into effect as soon as the CSD, in our case Euroclear, receives its authorisation from the regulator Bank of England as a CSD – this is expected to be Q1-2020. We will offer segregated accounts when obliged to do so. Charges will be materially higher than for a pooled nominee account given the additional processing and operational costs involved.

In summary therefore, they concede it is legally required but they are not rushing to implement it and they will be deterring people from using that option by high and unjustified charges. In essence this is disgraceful.

I will be making this plain to the Law Commission.

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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Company Refs Acquired

Slater Investments and Stockopedia have issued a press release saying they have acquired the Company Refs financial analysis service. Company Refs was devised by Jim Slater, the father of the current Slater Investments Chairman and was originally published in paper form as a summary of all the key financial information on public companies on one page. It was later digitised but active marketing of the service has not taken place in recent years. But it was a truly innovative solution to help both professional and private investors when first devised.

Stockopedia provides a very similar service and the press release suggests that current REFS subscribers will be integrated into the Stockopedia service while Slater will use the financial database and intellectual property for internal research purposes.

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

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Edge Performance VCT Sorted

The Edge Performance VCT (EDGH and EDGI) I have long considered to be a basket case of the first order. VCTs are typically owned only by private shareholders but I am always astonished by how those shareholders put up with dire performance and excessive management costs over many years. But in the case of Edge they have finally taken action – namely removed all but one of the directors at the AGM and voted down other resolutions. It was not even apparently necessary to call a poll as the resolutions were defeated on a show of hands vote according to the RNS announcement of the result, but the proxy votes were clearly of the same mind.

The sole remaining director is now apparently considering what to do next. See this report by ShareSoc on the meeting: https://www.sharesoc.org/blog/vcts/edge-another-vct-problem-case/

I would suggest the answer is simple: ask for volunteers with relevant experience from the shareholders to serve as directors before deciding on any future plans.

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

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Burford, Channel Island Registrations and Brexit

Firstly lets talk about Burford Capital (BUR). Tom Winnifrith, who has been complaining about the accounts and other issues at that company for a long time, sent a letter of complaint to the FCA and FRC (the Financial Reporting Council) asking them to investigate the allegations of Muddy Waters. The FRC have responded with this comment: “Burford Capital is incorporated under the Companies (Guernsey) Law 2008 and is accordingly not subject to the requirements of the Companies Act 2006”. They also said that the shares are traded on AIM which is not a regulated market. The FRC’s Corporate Reporting Review Team therefore does not have powers to make enquiries about the matters raised.

In summary, although the FCA and the FRC have some powers relating to the company’s directors and its auditor, Mr Winnifrith will have to complain to the Guernsey Financial Services Commission who are the regulatory authority.

As I said in my recently published book, company domicile does matter and is definitely worth checking before investing in a company. I specifically said: “In general for UK listed companies, any domicile outside the UK adds to the risk of investing in a company. Domicile in the Channel Islands or Isle of Man is also not ideal [see Chapter 7]”. So that’s yet another reason why I would not have invested in Burford, apart from my doubts about the prudence of their accounting.

Brexit

At the risk of offending half (approximately) of my readers, here are a few comments on the latest political situation and the prorogation of Parliament. Speaker John Bercow has said that “shutting down parliament would be an offence against the democratic process and the rights of parliamentarians….” while there was an editorial in the Financial Times today that said “it was an affront to democracy” and that Mr Johnson had “detonated a bomb under the constitutional apparatus of the United Kingdom”. But I tend to side with Leader of the House Jacob Rees-Mogg who called it “completely constitutional and proper”. Suspension after a near record long parliamentary session to allow the Government to put forward its programme in a new Queen’s Speech is entirely appropriate and not unusual. There is also time before the suspension, and after, for Parliament to debate whatever they want before Brexit date on October 31st. Also Parliament is often closed down in September for the party conferences so this is not unusual.

It’s simply a case of sour grapes from remainers who realise they may not be able to stop Brexit or cause further trouble in resolving the impasse in Parliament. John Bercow is particularly to be criticised because he is supposed to be independent and should not be making such comments on a well-established procedure supported by precedent.

Parliament has been debating Brexit for many months and it is time to draw such debates to a conclusion because it gives the false hope to the EU that the UK will change its mind over leaving. The UK voted to leave and we should get on it with, preferably with some kind of Withdrawal Agreement, or otherwise none. Business is damaged by the on-going uncertainty which is why the pound has been falling. Boris Johnson is simply forcing the pace which is quite right.

If the opposition parties or remainers in the Conservative party do not like what is happening they can call for a vote of no confidence. It that was passed then a general election would no doubt be called, which the Conservatives might actually win, or the election might take place after the Brexit date which would put the remainers in a very difficult position. That is why they are so clamorous. They simply don’t like the position they find themselves in which has actually been caused by those in Parliament who have wanted to debate the matter endlessly without coming to a conclusion.

There are some possible legal challenges but should, or will, the judiciary interfere in what is happening in Parliament? I don’t think they should and I doubt they will. Are Scottish judges, where one challenge is being heard, really going to attempt to rule on a matter of UK wide importance? This seems unlikely in the extreme.

In summary, I think everyone should calm down and let the matter take its course. Those who are not happy with the turn of events can challenge it in Parliament via their elected representatives if they wish. But Brexit needs to be resolved on Oct 31st, one way or another. Not delayed yet again. There are so many other issues that Parliament needs to deal with that more debate on the matter is simply unacceptable.

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

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Burford Governance Changes

Burford Capital (BUR) have announced a number of changes to their board to meet the concerns of investors about corporate governance at the company. It includes the CFO (wife of the CEO) moving to another role, and refreshing the board in due course.

This is what Chairman Sir Peter Middleton had to say: “Companies are owned by their shareholders, and when the shareholders speak, it is the role of boards and management to listen.  While we may take a different view on some of these points, shareholders have clearly spoken and we have listened, just as Burford has throughout its existence.  We trust that these governance enhancements operate to bolster investor confidence in Burford as it enters its next era of growth and success.”

I hope the directors of the Ventus VCTs (see previous blog post) are listening also.

Burford is also looking for a US listing (on the NYSE or Nasdaq) as investors have made it clear they do not support Burford being solely listed on AIM.

These changes will help to make the company more of a sound investment proposition but the question remains over whether their financial accounting is prudent, and has been historically accurate. Muddy Waters clearly suggested otherwise. The key question for investors is whether a new CFO will take a different approach to their accounting and decide it should be done differently.

Unfortunately the new CFO, Jim Kilman, was the former investment banker at Morgan Stanley for the company and has been acting as an advisor to the company since 2016. It hardly looks like they undertook a formal recruitment process but have just appointed someone they already know, and who knows them, to the position as a stop-gap measure. That is not the best way to reassure investors on financial prudence.

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

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