Unicorn AIM VCT Annual General Meeting and APC Technology

Yesterday I attended the AGM of Unicorn AIM VCT (UAV) which is of course a Venture Capital Trust. I am generally not wildly keen on AIM VCTs from past experience – they tend to buy shares in companies from IPOs and Placings when the prospects for the company are being puffed up by promoters, and then they have no ability to intervene when problems arise as do VCTs who invest in unlisted shares and with onerous shareholder agreements. Neither can they get out easily because selling large blocks of shares in the market of such companies is not easy. You can see this from the portfolio of shares they hold – 75 “qualifying” shares including what I consider to be such dogs as Crawshaw and Grafenia. Lots of “zombies” in there – walking dead companies going nowhere fast.

From the presentation it transpired that UAV cannot even now fund such companies further if they get into difficulties because of the new VCT rules which emphasize investment in younger, growing companies. Indeed a presentation from one of the investee companies later in the meeting (from APC Technology) was a great example of the risks and problems of investing in early stage businesses (original cost £3.1 million, now valued at £226,000!)

However AIM VCTs have been doing better of later as the AIM market total return was 24.4% last year (some of the really hot stocks would not be VCT qualifying though). In comparison UAV achieved a total return of 7.4% last year which is not brilliant, and was much less than that from another AIM VCT I hold.

The meeting commenced with the formal business. One director absent with flu. All resolutions passed by large majority of votes and little opposition on the “show of hands”.

I did raise the question of the two directors on the board who have served for more than 9 years (Chairman Peter Dicks, aged 75, who is not the most loved of VCT directors from the events at Foresight VCTs) and Jocelin Harris, and the impact of the proposed new UK Corporate Governance Code which is tougher in this area. The answer I got was they were looking at board succession, but the Company Secretary claimed they can ignore the UK Corporate Governance Code because they follow the AIC Code. I disputed that they could do this and I spoke at length with him on the subject later. VCTs are fully listed companies and hence in my view need to adhere to the UK Corporate Governance Code. Their claim to be able to refer solely to the AIC Code, based on an ambiguous letter from the FRC Chairman who probably did not have the power to amend the rules for investment companies, is dubious in the extreme. I did say to him that in my view all directors of VCTs should be “independent” and although I have no reason to question any impropriety in this company, retirement after 9 years is a good principle.

Note that apparently only 6.8% of shareholders submitted proxy votes (there were over 50 in the meeting). I am not surprised the turnout is so low when I had great difficulty in voting myself. No paper notice of AGM, proxy voting form or Annual Report sent even though I am on the register, just a simple letter sent via email saying I could vote on-line. Bearing in mind I have never authorised them to use my email address for that purpose, I complained to Link (formerly known as Capita) about this. They are amending their records. Could I have voted on-line? Perhaps but having had numerous past difficulties with the Capita system for that I did not even attempt to try.

After the formal business, we had a presentation from APC Technology by CEO Richard Hodgson. He covered the history of the company. It ran into difficulties before he took over when it had a problem with high debt and aggressive actions by their bankers HSBC. The business used to be in fire and pest control but is now focused on distribution of electronic components. They tried a failed diversification but then decided to “stop doing the stupid stuff” and are now profitable. He mentioned they are into “smart buildings” which I have an interest in, but they are not sure who is going to pay for it – tenant or landlord. They also seem to like to make acquisitions of niche businesses where the owners wish to retire (a bit like the Judges Scientific model but smaller).

The last financial figures for APC are revenue £15.6m, profit before tax £0.2m (to August 2017). Is this an exciting business going somewhere? I doubt it on the cursory information provided and it’s in a sector which I have found tricky in the past and hence one I generally avoid.

We then had a presentation from fund manager Chris Hutchinson. He admitted total return was not the greatest this year and other VCTs had done better. But they did raise £48 million in new capital of which £12m had already been invested in 6 new investments. (Note: it is wrong to judge any investment company by its performance over one year – you need to look at the long term track record). As other VCTs have warned, under the new rules new investments are likely to be in earlier stage companies and returns might therefore be more volatile and lumpy.

I won’t cover his talk in depth nor the questions that arose, apart from the fact that one shareholder raised the issue of IDOX – one of the VCTs larger holdings (and one I hold directly). Chris said his view was that it was not “holed below the water” but there may be more negative adjustments to come. Sounds like they will be holding for a recovery, but then one gets the impression that they hold onto companies through thick and thin. I would prefer that they got rid of some of the dogs and had a more focused portfolio – 75 qualifying companies plus some non-qualifying is a large portfolio when small companies need a lot of monitoring.

In summary a useful meeting if unexciting.

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

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Wey Seminar – The Future of Education?

Yesterday I attended a presentation by Wey Education (WEY). This is a small AIM-listed company in which I hold a very few shares. This is one of those “hot” AIM companies where the valuation discounts a lot of anticipated future growth in revenue and profits. Last year (year ending August 2017), revenue was £2.4 million (up 60%) and post-tax profits all of £17,000, albeit a big improvement on the previous year. Broker WH Ireland forecast growth this year partly because of a recent acquisition and from anticipated investment in marketing – they raised £5m in a placing for the acquisition of Academy 21 but will have lots of cash left over from that for other purposes.

I won’t say much more about the financials because the seminar of over 2 hours barely mentioned them but concentrated on operations, business model, marketing etc. I understand there were a lot of questions asked about the financials in the mornings AGM particularly on “related party transactions” from speaking to the Executive Chairman David Massie before the meeting started. He also mentioned some of the history of the company which seemed somewhat “fraught” with a legal suit against the former CEO that they won (see “exceptionals” in the accounts).

Wey focuses on on-line education and have four primary brands – InterHigh which provides iGCSEs and A-levels on a non-selective basis, Wey ecademy which sells similar courses but on a B2B basis to education providers, Infinity Education which is a selective premium fee paying online school now mainly focused on international markets and a new venture named Quoralexis which provides courses in English as a Foreign Language (EFL).

The business has been around a long time with the founders still involved, but it is not regulated as a “school” for technical reasons but it does qualify as an “examination centre”. Seventy percent of pupils are based in the UK and there are 5,000 pupils with about 1,000 “live” lessons per week. All the teachers are employees, although some are part time.

The above is taken from the first presentation session from David Massie. As he said “Education is the last great unreformed business” where the vast majority of provision is conventional classroom education. The latest innovation has been moving from blackboards to whiteboards! Comment: you only have to look at the national education budget to see that a very high proportion of the expense is in teachers’ salaries and their productivity has not changed since Victorian times.

Apart from that aspect there are a number of pupils who need on-line education. For example, offspring of ex-patriots in remote locations, those suffering from medical conditions, those subject to bullying at school, those wanting a better education than local schools can provide, or waiting for school places, and for several other reasons. Pupils can interact via speech, text or private messages with the teacher and the lessons are taught in real-time like a conventional school – they are not self-paced downloaded videos.

InterHigh is ramping up marketing expenditure, recruiting a finance director and after that probably an HR director. Marketing will include a series of video advertisements in Waterloo station. They see that as a location with high footfall of folks likely to have children and an income to cover the cost. No cost for that advertising was mentioned but I can imagine that as being expensive. I asked Jacque Daniell who looks after marketing later about whether they had tried direct mail (off or online), but it seems they only use that in promoting Wey Academy.

They do have some internet marketing – for example have a tie up with Mumsnet, but their level of search engine awareness is low. Type “online gcse courses” into Google and they are nowhere, with lots of competitors offering lower cost with different course provision models.

The InterHigh web site does not look great in marketing terms – lots of talk about “features” and what they offer, but no great focus on benefits, on the home page. However there are some good “customer stories” on other pages.

Comment: I do not think they have cracked the marketing model as yet to really get business ramping up quickly. I am not convinced that advertising to every man/woman and their dogs on train station platforms will be cost effective. There are surely lots of ways they could spend more on internet marketing which might be more cost effective because you can focus more specifically on the likely target markets.

Jacque spent a lot of time explaining their interest in AI (Artificial Intelligence). When I asked how that would be beneficial when it seemed to me that they had a good product and it just needed to be more actively marketed (i.e. AI might be a management and funds diversion), she said it would help to “engage” pupils. Presumably she meant recruit pupils because retention seemed to be of lesser interest (they have a high “drop-out” rate but that is probably to be expected from the kind of pupils they attract).

Comment: As a former IT professional, I find the current focus on AI to be as over-hyped as it was back in the 1980s. I was involved in a natural language database inquiry project at the time, and that area has certainly moved ahead since – for example Google on my smartwatch gave a sensible answer to the verbal question “does a fruit fly like bananas” which can be one of those tricky questions for such systems. When I asked it “does time fly like an arrow” it correctly identified I was trying a well known semantic trick question. A bit of “ad-hoc” programming in there I suspect. But how will AI, which is a very broad field, really help the sales revenue or operations of Wey? I am not clear at all.

These are a couple of questions that were not answered in the seminar (and not enough time left for questions when the whole event was too long):

  • What are the main competitors? (mainly conventional schools I would guess).
  • What percentage of the on-line education market do they have?

I am also not clear why they are investing money in Quoralexis – EFL courses seem to be a very crowded area although David Massie said the current providers are “rubbish”. It would seem to be a diversion to me.

Incidentally when I am looking at early stage companies I like to check they have the basics right – like registering their brand names as trademarks. I could not find a UK registration for “Quoralexis”. Nor could I find anywhere on their web sites some basic legal terms/conditions of use, claims for trademarks, nor any site search function to help either.

In conclusion, this looks to be like a lot of AIM companies. The management tell a good story about the prospects for what they are offering, and the broker has great projections for future revenue and profits, but there is a lot still to prove I feel. The marketing seems somewhat amateurish and they need to spend a lot more on that to really drive awareness and take-up (they only spent £160k last year on marketing which is about 6% of revenue – not nearly enough). That does of course assume that the market is there to be developed to a decent size.

The current market cap is about £41 million. The “story” being promoted by David Massie sounds attractive but I’d like to see more evidence of success in getting a return on marketing expenditure and ramp up in sales before punting a large sum on this company. But that is of course only my personal opinion and no recommendation to trade in the shares of this company one way or another. Perhaps one to keep “under observation”.

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

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KIDS – Who Is Kidding Who?

There was an interesting article published by Citywire yesterday on the subject of Hargreaves Lansdown removing 96 investment trusts from its trading platform. Such trusts as Dunedin Enterprise, Blue Planet and Oryx International Growth have been suspended. The reason is because they have not yet made available a “KID” (Key Investment Document) which is required by the new PRIIPS regulation and mandated by the FCA/EU from the start of this year (see https://www.fca.org.uk/firms/priips-disclosure-key-information-documents for more information).

At present investment trusts are mainly affected. Unit trusts and OEICs that are UCITS have another two years to comply.

The Citywire article quoted Annabel Brodie-Smith and Ian Sayers of the AIC (trade body for investment companies) as saying it was only a transitional problem but that the mandatory performance figures in the KID “will in some cases, be suggesting too favourable a view of likely future performance” and the “single-figure risk indicator will potentially be understating the risks”. Mr Sayers has also criticised the fact that open-ended funds will not need to disclose underlying transaction costs when investment companies will need to do so, thus making comparisons difficult.

Investment Trusts are of course a peculiarly British investment platform whereas most of Europe use open-ended funds, and hence the legislation was focused more on the needs of the rest of Eurupe rather than the UK. The UK already had quite extensive disclosure of fund information, particularly for investment trusts which was published in such documents as a “Monthly Factsheet” with performance date readily available from the AIC web site, Trustnet and other sources.

I posted a comment on the Citywire article which said: “The regulations impacting investment trusts are a typical example of EU laws written by folks who do not understand the UK market environment, and are also generally ignorant of the financial world. The sooner we depart the better. Expensive and incompetent bureaucracy in more ways than one.”

That immediately prompted the usual abusive comments from EU lovers – anonymously of course. A vigorous debate then followed. So what is the truth? Are KIDs going to be useful? Were some trusts deficient in being up to speed on making KIDs available? Is the additional expense of producing a KID worthwhile?

Now it is undoubtedly the case that some investment trusts might have been tardy in meeting the regulations (although I believe Dunedin Enterprise Trust is winding down so they might have not put a high priority on it). But as it will prevent purchases but not sales, this needs to be rectified as soon as possible otherwise prices might be distorted.

But are KIDs useful? You can see one for JPMorgan Euro Smaller Companies Trust (a trust I hold) here: https://documents.financialexpress.net/Literature/83197092.pdf ). The risk rating is simplistic and the “performance scenarios” are likewise. It shows that over 5 years a holding in this trust might generate a negative return of 18.62% per annum, but in a “favourable scenario” you might make 36% per year. Does that help you? Not a lot.

That is particularly so as those figures are forecasts, not the real historic data. In comparison the information on the AIC web site or the company’s web site, including in the company “Factsheet” is much more comprehensive and more helpful. For example, it tells you about the historic price performance versus the net asset value performance (and over several time periods), the discount levels, the performance against a benchmark and lots more data.

The KID does have some useful information on costs, as it includes transaction costs. As a result it gives the “Impact on Return” due to costs of 2.81% per year whereas the AIC reports an “On-going” charge of 1.13% for this company because they don’t include transaction costs. This is a company that does not have a performance fee though which would complicate reporting on other trusts.

The objective of the KID to standardise the reporting of basic information on investment funds, and provide consistent and accurate “all-in” cost data was laudatory. But the implementation is a dog’s breakfast with the result that investors are hardly likely to spend a long time looking at these documents even if they are forced to do so.

On the latter point, the Share Centre now require you to tick a box to say you have read the KID before buying the shares, but other platforms such as AJ Bell YouInvest don’t seem to require that. I suspect folks will soon learn to tick the box regardless simply because most investors will have done some research on the fund, or already hold it (perhaps on another platform).

In summary, KIDs are designed to meet the needs of unsophisticated pan-European investors where little information might have been available to them previously. Whereas in the UK we are awash with information on trusts and open-ended funds to the point that a lot of investors are suffering from information overload. The KID just adds to it.

The information provided in the KID can be grossly misleading about the risks and returns that investors might expect. The document is the end result of the complex bureaucratic processes in the EU for devising new financial regulations, where those developing them seem to have little understanding of financial markets or investment and the end result is often a compromise between different national interests. The process is also heavily influenced by the large financial institutions such as banks that dominate the retail investment scene in much of Europe.

Financial regulation in the UK is not perfect of course, and we have the same difficulties that they are often written not for the benefit of investors but for market operators and intermediaries. We might just be able to do better. But we also need to push for improvements to the content of KIDs because we may still need to produce them to enable trading of investment trusts and funds across Europe.

It is though unfortunate that the cost of producing a KID will be significant and will be passed on to investors. Likewise the MIFID regulations brought in on the same date have resulted in major costs for stockbrokers. More regulation costs money and investors do not always benefit from it. One particularly disadvantage is that it deters new entrants into the investment world, i.e. protects the interests of the big boys from more competition. Financial regulations when devised need to be simple and low cost to implement and enforce. That is a long way from being the case at present. The PRIIPS regulations are a good example of how not to do it.

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

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Year End Review, the Future, RBS Requisition and New Year’s Honours

This time of the year is when all private investors who invest directly in the market should be reviewing their investment performance over the past year. If you can’t do better than the professionals (after costs) then you might as well let them manage your portfolio. So when it comes to the year end I work out the data and look at where I made and lost money (as a learning exercise).

Let me first explain that I have a very diversified portfolio and I simply aim to beat the FTSE-AllShare as a benchmark. It is diversified both in size of company and market sectors. This was the breakdown of my holdings recently:

AIM Shares: 37%
FTSE-100: 5%
FTSE-250: 24%
FTSE Small Cap: 4%
Funds/Trusts: 15%
Property Trusts: 6%
Unlisted shares: 1%
VCTs: 8%
Bonds 0%

 

The result was a Total Return of 22% for 2017, which compares with the FTSE-100 increase of about 7%, FTSE-250 of 14%, FTSE-AllShare of 9% and FTSE-AIM of 33%. Clearly I would have done even better to have invested solely in AIM shares but that would have meant an overall portfolio very concentrated on smaller companies (particularly bearing in mind that some of the Funds/Trusts and all the VCTs invest in smaller companies).

The overall portfolio dividend yield was 3.9%. The reason why this is so high is partly because the Venture Capital Trusts (VCTs) paid out large dividends, but these actually showed capital losses during the year – apart from a couple of AIM VCTs. That just shows how the market drove up AIM shares last year, because AIM VCTs are often tricky investments because of their propensity to take up IPOs. Other VCTs showed a preference to turn capital into tax free dividend income because of the rules they have to adhere to that stops them retaining cash and a desire to “recycle” capital so investors get more tax reliefs.

National Grid also used the “consolidation” trick to turn capital into dividends following a major disposal which affected the numbers slightly, but otherwise also lost value no doubt because of investors’ worries about the threat of nationalisation or more Government interference if Corbyn gets into power.

Lots of my big winners during the year were the most popular AIM shares – technology and internet stocks – I won’t name them for fear you’ll all be piling into them even more as seemed to happen in the last few days of 2017, and at risk of talking about my own “book” which will lead to recriminations when one or more come unstuck. But there were a few larger winners – Persimmon and Greggs for example – which were both big losers in the previous year. I sold Berkeley Homes at the start of the year which was a mistake although that was partly offset by investing in Telford Homes (an AIM stock of course). Apart from McColls (a convenience store chain), retail shares were out of favour so Dunelm was a big loser. Property companies did surprisingly well so my holdings in Segro, Tritax and TR Property Trust did better than everyone was forecasting for the year. I did invest in some investment trusts with large international exposure which helped the portfolio performance because of the fall in the pound.

Needless to say, it may be wrong to change one’s investment approach simply based on the results of one year, particularly when the market seems to be so buoyant in certain sectors. Is the market going to crash in the near future as some have predicted? Who knows – not me. Should I pile into more AIM shares that have been driven up by momentum traders? You can do that but I won’t because the chance of getting out at a decent price if a crash did occur in small cap shares is small. I still look at the fundamentals of companies and I have been limiting my exposure to some of the AIM shares in my portfolio because revenue growth can only be worth so much. Cash flow and profits are also important. I only try to hold AIM shares where the business has quality and a longer-term future. That way you can ignore short term fluctuations in the share price, and avoid big tax bills unless you trade only within an ISA or SIPP.

Some shares and sectors certainly look overvalued at the moment, but that is always the case. US stock markets are probably of more concern in terms of valuations than UK ones, but if the US crashed then so would the UK and other markets soon after – they are now globally synchronised. So I am holding a moderate amount of cash at present which probably reduced my portfolio performance last year to some extent. I’m just waiting for those buying opportunities, but they may not come any time soon. It’s a “bottom up” strategy rather than “top down” so if shares at attractive valuations appear, I’ll buy them.

One of the biggest news items in the last few days was the submission of a requisition for the appointment of a Shareholder Committee by ShareSoc and UKSA at the Royal Bank of Scotland (RBS) – a photo of ShareSoc director Cliff Weight outside the RBS offices is shown below.

RBS - Cliff Weight

This is of course the second year that such a resolution has been submitted for the RBS AGM. Last year it was rejected by them on what I consider spurious grounds. Let us hope they accept it this year because the ability to add resolutions to meetings (or requisition General Meetings as per the recent event at the London Stock Exchange, the LSE) is a fundamental element of shareholder democracy in public companies. If that part of the Companies Act is ignored it means directors can do what they want. The LSE had the good sense to accept the demand for a vote on the Chairman, let us hope that RBS do likewise.

Incidentally, the LSE directors and Mr Rolet, who they accused of being other than a team player, would do well to read a book I reread over Xmas – “How to Win Friends and Influence People” by Dale Carnegie. I read it first many years ago but had forgotten what it says (when my wife noticed I was reading it she said I should have read it 30 years ago and I had to admit I had done so). The first lesson in there is “Don’t criticise, condemn or complain”. But it’s a good read anyway, both amusing and well written, particularly if you are looking for some self-improvement.

To get back to the events at RBS, if Cliff manages to persuade RBS to accept the resolution, and can then persuade the Government to support the resolution (they have enough votes to swing the outcome) this will be a major achievement. It takes a lot of effort to pursue such campaigns as I know myself. I would suggest we should nominate him for an “Honour” if he achieves his goals – just go here for how to do it: https://www.gov.uk/honours

That thought came to mind when I was reading the New Years Honours List in the FT (not that I am in the habit of perusing the list but there was not much else to read over the Xmas holiday). One surprise was the award of an OBE to Suranga Chandratillake, for “services to engineering and technology”. He was a former director and founder of controversial company Blinkx (since renamed RhythmOne) – or as the FT said – a company whose market value has been volatile since its IPO in 2007. Mr Chandratillake remains on the board as a non-executive director having stepped down from being CEO some time before the furore over possible misleading stats reported by internet advertising companies blew up. Still public Honours may not be awards for success – just consider the award to Nick Clegg. I had better not say anymore otherwise I will be unlearning the lessons from the above book.

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

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New Corporate Governance Code – It Could Be Improved

I commented briefly earlier on the public consultation on a new UK Corporate Governance Code (see here: https://roliscon.blog/2017/12/05/new-corporate-governance-code/ ). I have now submitted a detailed response to the public consultation which you can read here: http://www.roliscon.com/Roliscon-Response-Corporate-Governance-Code.pdf

The main points I made therein are:

  1. I supported the inclusion of Chairmen in the 9-year rule after which they are no longer considered independent. But I think that period should also apply to tenure to avoid directors sticking around for too long.
  2. I am concerned about the wording that promotes diversity of gender, social and economic backgrounds in new board appointments. It appears to conflict with the requirement in law not to show any bias in selection (and quite rightly). Positive discrimination is as just as illegal as negative discrimination.
  3. I doubt that appointing a non-executive director to engage with the workface would be nearly as effective as the other two suggested methods of improving engagement.
  4. I question the approach to executive remuneration. It still does not discourage aggressive bonus schemes such as LTIPs and the ability of boards to retrospectively review awards (e.g. when the pay-outs turn out to be excessive) I consider to be quite unlikely to be effective in practice. The changes in this area are unlikely to stop the ramping up of pay levels to excessive levels.
  5. It perpetuates the myth that when companies need to engage with shareholders they can simply contact a “few major shareholders” to get their views. This does not work in most public companies nowadays because of the very diverse shareholder base, and also ignores all the private shareholders who could be the largest bloc. It should have proposed a more formal process such as a Shareholder Committee and disclosure on who has been consulted.
  6. It does not introduce restrictions on the appointment of directors with no knowledge of the sector in which the company operates. It perpetuates the English preference for “amateurs” versus “professionals”, i.e. assumes those who know less might be wiser.
  7. Likewise, it does not impose restrictions on the number of roles that directors should have.

In summary there are some improvements in the new Code, but more could have been done to improve the Governance of companies and toughen up the Code. Although I do not object to the principle of “comply or explain”, as there are always exceptions that justify some anomalies, I suggest there should be a requirement to provide more specific justifications for such exceptions. The excuses we get at present are often way too weak.

Readers are welcome to submit their own responses to the consultation. The more they receive from individual shareholders, the better. Feel free to “copy and paste” from my own submission.

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

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A Christmas Parable and Productivity

No this is not an examination of how Santa Claus gets around the whole world in one night. But as my last post before Christmas, let me explain how I have automated the sending of Christmas cards over the last thirty years. I am by nature a lazy person, so handwriting and addressing the family’s Christmas cards was a task I chose to tackle with some automation many years ago. The first step was to put friends, family and business contacts into a contact management software product. This enabled me to reuse the same list every year, maintain it with changes easily, and once per year print self-adhesive mailing labels. More latterly I have used an email delivery service to distribute many of my Xmas “cards” electronically which included short newsletters in some years. Only a few cards now get posted to the favoured few or those not on email, thus saving postage costs.

So productivity before Christmas in terms of use of my time has improved enormously, and I can now send out hundreds of “cards” for less expense than the tens sent previously.

The Government is very concerned about the poor productivity of the economy in the UK. It has not been improving, and hence wages are unlikely to rise. The above parable shows it is necessary to do three key things to improve productivity: 1) Invest in new technology (in the above case, several software products); 2) adopt new ways of doing things (i.e. there needs to be cultural changes) and 3) invest time in learning how to use the new technology (education).

Obviously in business terms, such investment tends not to take place when labour is cheap or free (the equivalent of asking your spouse to hand address the cards). But even then there are still benefits from automation such as reducing postage costs, and reducing the environmentally damaging costs of transporting millions of cards around the country.

There was an interesting letter in the Financial Times recently from Andrew Smithers. He said “In the real world investment decisions are made in the interests of management [not of shareholders as in the classic economic model]. As a result of the change in the way managements are paid (that is the bonus culture) they are encouraged to prefer buy-backs to investment. This is the root cause of poor productivity.”

That is indeed one of the key problems. Typical bonus schemes such as LTIPs pay out based on earnings per share which are enhanced by share buy-backs. Just a few years ago for a company to buy its own shares was illegal. Perhaps we should revert to that situation? Alternatively outlaw such bonus schemes.

Another reason why productivity is not improving is that the incentives for the chief executives of public companies to invest for the long term is minimal. Their length of tenure before they retire or move to another company is so short that they would be mad to take risks in adopting new techniques or changing business processes. Indeed their pay is now so high that they don’t need to stick around for more than a few years before they have made enough money to feel secure in a comfortable retirement.

These are the issues the Government needs to tackle if UK productivity is to improve.

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

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South African Politics, Pan African Resources and Mondi

The election of Cyril Ramaphosa as the President of the ANC suggests that the country may be taking a positive step forwards. Under Jacob Zuma South Africa has become riddled with corruption and “state capture” where assets are sold off to favoured parties. Whether Cyril Ramaphosa can become President of the country in due course remains to be seen but it is worth looking at his background.

He has a legal qualification and became a trade union activist. After being active in politics, including helping to develop the “Black Economic Empowerment” policy that affects any company operating in the country, he became a businessman. Indeed he was for a time Chairman of gold miner Pan African Resources (PAF) which I held shares in for a while. This is a company registered in the UK and they hold their AGMs in London, although I don’t recall Mr Ramaphosa ever turning up for one. But with this and his other business interests he should have learned something about business to offset his left-wing sympathies.

There are of course other businesses operating in South Africa that are registered in the UK and the risk of political interference is always at the back of investors minds. One I currently hold is Mondi which is actually dual-listed on both the London and Johannesburg stock exchanges. This means it is subject to regulation in both the UK and South Africa (the South African financial regulations are actually very good), but one disadvantage is that a withholding tax is payable on dividends. It holds its AGMs in London.

Mondi (MNDI) is a paper and packaging producer with interests in many countries. Its share price does seem to be affected to some extent by political events in South Africa and one gets the impression that the valuation if slightly lower than other packaging companies for that reason (e.g. a somewhat lower prospective p/e than D.S. Smith). Goldman Sachs recently upgraded Mondi to a “buy” with a 2200 price target.

So apart from wishing Mr Ramaphosa well, investors do need to take into account the political risks of investing in South Africa. But my experience has been positive to date with the ANC seeming to take care not to damage large businesses overtly. However, the general economic trends in South Africa under Zuma have not been good even though the per capita wealth of the country at $11,300 is still the highest in Africa (excepting Mauritius).

A sound economy, rational economic policies and the rule of law are the key to generating wealth. Compare the wealth of South Africans with that of Zimbabwe where it is estimated to be as little as $200!

Perhaps the moral is that politics does matter!

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

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