Record Fund Raising for VCTs

The AIC have published a note that says that a record amount of money was raised by Venture Capital Trust (VCTs) in the last tax year. It passed the £1 billion mark for the first time.

This may not be surprising given that investors may have realised gains from stock market investment in last year and VCTs have been looking attractive because of good reported profits and the available tax benefits. But one issue that has yet to become clear is the impact on the long-term performance of VCTs under the new investment rules. The investment rules for VCTs changed so they now have to invest in early-stage companies rather than asset-backed companies or management buy-outs of mature businesses. This has meant that they are now investing mainly in immature technology businesses whose valuation is often problematic. And the valuations often depend on the last fund raising round rather than on the profits of the business.

The problem is that the valuations of juvenile technology businesses have been rising and you can see that from the comments of fund managers who have been finding the valuations of such businesses have been rising. They have been competing harder for new investments. If they are paying more for companies this might affect their long-term returns in due course.

More money piling into VCTs actually makes the situation worse as the cash has to be invested rapidly.

In the meantime, the reported profits of VCTs often depend on unrealised gains rather than realised ones based on fund raising rounds and comparable companies. They have been able to achieve a few good realisations which enables them to pay good dividends but that simply reflects the enthusiasm for technology businesses in the last couple of years.

I am not saying that VCTs are necessarily a bad investment at this point in time – I did purchase a few more VCT shares last year. They do provide some diversification in a portfolio and have good tax benefits even if there is a risk that the Government might reduce the latter in future. But investors do need to consider them as long-term investment vehicles and do need to be wary of the above issues.   

The AIC Press Release is here:

Roger Lawson (Twitter:  )

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Elon Musk and Twitter

Elon Musk has offered $43 billion to buy Twitter but the Twitter board have responded by announcing a “shareholder rights plan”. This should rather be called a “management rights plan” because it’s what is called a “poison pill” defence which allows the board of the company to defend against any hostile bid by permitting them to issue so many new shares at a big discount that the bidder is diluted and unable to gain control.

This is in my view unethical and unprincipled. Irrespective of your views on Twitter or on Elon Musk, the adoption of a poison pill is effectively a frustration of shareholder democracy.

There is a hint that Mr Musk would limit the amount of censorship that Twitter applies to posts. For example Donald Trump has been permanently suspended from Twitter for comments that Twitter judged to be an incentive to violence. You can read their judgement here: . It hardly appears to be a fair and unbiased view.

It’s not just Donald Trump that faces the wrath of the Twitter censors. For example news aggregator Politics For All (PFA) was banned for “distorting stories by focusing on specifics that would go viral”. Is that not what all news media do?

Free speech is an important constitutional right in the USA and when such a dominant medium such as Twitter chooses to interfere in politics or for commercial reasons then it needs to be censured. So Elon Musk might just be a better owner that the existing Twitter management.

The other issue is that the board of Twitter may simply be defending their well-paid jobs by trying to block a takeover. I hope they lose this battle.

Poison pill defences are of course not permitted in the UK under Takeover Panel rules. It is unfortunate that they are not outlawed in the USA.

Roger Lawson (Twitter:  )

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Possible Offer for Ideagen

Yesterday, after the market closed, there was an announcement that Cinven are considering an offer for Ideagen (IDEA). They note the recent speculation but say there is no certainty an offer will be made and no approach has been made to the directors.

I first purchased shares in this company in 2012 and they are still a significant proportion of my portfolios so this potential offer is worthy of some comment. The share price at closing on Thursday was 253p which according to Stockopedia means that the prospective normalised p/e is 35. The market cap is 11 times sales revenue.

Even if the share price has fallen from a peak of 325p in the last year as with many technology stocks, this does not make it outstandingly cheap in my view that would warrant a very high bid premium.

But there are many good qualities in this company such as high recurring revenue although the financial picture is clouded by numerous acquisitions and disposals resulting in a lot of adjustments in the accounts. A bidder might find it attractive though simply because it operates in the high growth market sector of audit, risk and compliance software so anyone wanting to move into that sector might be willing to pay a high premium for a well managed company.

I will await the outcome but if there is a sharp jump in the share price next week I might hedge my bets and sell a few shares.

Roger Lawson (Twitter:  )

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Strategic Investment Review

As it is a new Tax Year when one can put another £20,000 in one’s ISA I have reviewed my investment portfolio and tax position. To become an ISA millionaire and maximise the tax advantages of saving via ISAs you need to put the maximum in each year if possible and the sooner during the year the better.

One thing that has occurred to me is that with my portfolio showing good returns in the last few years I need to increase the amount in my will that I give to charity so as to reduce my IHT bill. The rate of Inheritance Tax is reduced by 10% — from 40% to 36% — where at least 10% of the net estate is left to charity. So I shall add a codicil to my will to amend the figure I give to Leicester University who are doing some good work on kidney disease.

In the short term we are also donating to the DEC Ukraine Humanitarian Appeal – see . I recommend it because it looks like the war will continue for some time and the need for basic support such as food and shelter is urgent.

As regards investment strategy, with inflation rising I think property companies are good bets. They often have indexed linked rent reviews and some sectors of the commercial property market such as warehouses and self-storage companies have been doing well. I expect those trends will continue and property is a defensive investment in the current uncertain financial environment. But I will avoid retail property investments unlike my local Bromley Council who I have just discovered are overweight in them in an investment fund. It seems like other Councils they saw investment in property as a way to increase income at little risk – Croydon came seriously unstuck with this strategy and effectively went bankrupt as a result eighteen months ago.

Another area which is surely worth adding to is the renewable energy sector following the publication of the Government’s energy strategy. The AIC have published an interesting note on this subject which gives the performance of Alternative Energy Trusts over the last few years. Most have done well over the last 5 years and have good yields. I own several of the companies listed in the AIC note and am likely to increase my holdings in them.

The comments of some of the fund managers on nuclear energy are unfortunate. It is a relatively safe technology and one of the few alternatives that can supply a good base load while wind and solar are so intermittent which batteries can only help with to a degree. But the Government is moving much too slowly in building new nuclear plants.

The AIC press release is here:

Am I giving up on technology stocks? No because many of them have pricing power that can protect their profits against inflation. Software companies for example are not affected by inflation in commodity prices and should have no supply chain difficulties although staff costs can rise. I will simply be selective about new investments in technology companies.

A good example of the defensive quality of some technology companies was given by a trading statement from Diploma (DPLM) this morning. They said “The Group’s trading performance so far this year has been strong, with double digit underlying growth in Q2 (consistent with Q1) driven by our organic revenue initiatives, market share gains and robust demand”. The share price is up over 10% at the time of writing and there is a positive “outlook statement”. But the share price is still less than it was last year when technology stocks were all the rage.

Having lived through the 1970s I do not fear inflation. But it’s clear that it is best to invest in assets even by borrowing to do so as inflation will wipe out your debts. But I won’t be borrowing to invest in the stock market which can be called “gambling with other people’s money”. This is not the time to gear up a portfolio in my view. Maybe I should buy a new car?  Average rates on car loans are still low.

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Rio Tinto AGM and Tracsis Results Webinar

I attended two webinars today. The first was the Rio Tinto (RIO) Annual General Meeting. This was a hybrid meeting run via the LUMI platform for on-line attendees (including on-line voting) although there were clearly a few shareholders in physical attendance. It was well organised.

There were good speeches from the Chairman and CEO who reported this was there third year with no fatalities – quite an achievement for a large mining company. This company is of course one of the largest mining companies in the world with a focus on copper, iron ore, nickel and lithium. There were record profits last year based on higher commodity prices and they paid out the biggest dividend ever of $16.8 billion.

It was stated that “respect for people and land is at the heart of our community” and there were multiple references to first nation people.

When it came to questions, one shareholder commented on the excessive length of the Annual Report (now 420 pages) which reinforces my comments in a previous blog post on this issue. He also requested that text be in b/w and not in multi-column format – to assist on-line reading no doubt. A good point.

Most of the questions were on environmental concerns about projects in Madagascar, Arizona, etc, so after 2 hours I switched to watching a webinar from Tracsis. There really needs to be some way to stop AGMs being dominated by environmental groups who are unable to keep their questions short and to the point. A time limit per question would be one way. And most of them would be better answered by written responses and by meetings with the CEO, for which they had apparently been given an opportunity.

The company is clearly paying a lot of attention to ESG issues anyway.

Tracsis (TRCS) is a rail technology company in which I hold a few shares. They reported interim results yesterday which were good – revenue up 31%, adjusted EBITDA up 14%, and dividend up. This was a PI World event which was well organised.

It was stated their objective is to increase recurring revenue which is something I always like in a business. There was discussion of the US rail market and the recent acquisition of Railcomm which gives them a good base from which to expand in what appears to be a very fragmented market for similar technology solutions. They are clearly intending to pursue M&A opportunities there.

I did not learn a great deal more but the CEO spoke fluently and the company clearly has growth ambitions. It was less impacted by the Covid pandemic than one might have expected last year when there was a significant reduction in rail passenger volumes and events were cancelled.

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EMIS Group – How Not to Organise an AGM

Today I had cause to send the following note to the Company Secretary of EMIS Group (EMIS):


Dear Ms Benson,

I today received the attached letter that refers to my shareholding in EMIS. Two points:

I have not opted in for web site publication. Please send me a hard copy of the Annual Report and Notice of Meeting, plus preferably a proxy voting form also although I can produce my own one of those if necessary. Please also note that I require hard copies in future.

I note that your letter refers me to the Notice of Meeting on your web site at . But that does not contain a full Notice of Meeting.

In addition I am very disappointed that you choose to set a date/time of 9.00 am in Leeds for the AGM which would be difficult to make for anyone living in the South of England.

In addition, as an IT company I would expect you would be capable of holding an on-line or hybrid AGM to avoid us travelling at all and risking catching Covid in a physical meeting.

I am most disappointed that you seem unable to get the basics of organizing an AGM right and hope you will organize matters better in future.

Your sincerely, Roger Lawson


Is it not disgraceful that a company makes it so difficult for shareholders to obtain a full Notice of the Meeting and vote our shares, plus makes it difficult for shareholders to attend the meeting!

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Gresham House Energy Storage Results and Webinar

I attended the results webinar for Gresham House Energy Storage Fund (GRID) this morning as I hold a few shares in the company. This is in fact not a fund in the normal sense but an investment company (i.e. an investment trust). It invests in a portfolio of utility-scale operational battery energy storage systems (BESS) via operating companies, mainly in the UK.

The accounts of this company are tricky for the same reason that I explained in a previous blog post about TRIG – see . The valuation of its assets depends on an estimate of future cash flows and the discount rate that is used. It was noted that the discount rate has not been changed as a result of the recent rise in inflation and interest rates.

However at face value the results for the year announced today were very good. Net Asset Value per share was up 13.5% and Share Price Total Return was 23%. The shares now trade at a premium to NAV and were up another 5% today at the time of writing.

The company’s batteries, which typically provide for 2 hours of service, enables the National Grid to manage the demands on their network and maintain the frequency. This is getting more difficult as more renewable energy services are being added which are unreliable. Base load provision from nuclear, coal and gas is falling due to Government pressure to decarbonise the economy with older nuclear stations also being shut down.

The batteries used are mainly lithium-ion ones which prompted a question from the audience about the impact of rising battery prices. They are rising because lithium mining capacity has not grown with demand but it could also be a speculative cycle and the consistent downtrend in prices is still expected to continue. It was noted that battery degradation was at 97.5%, i.e. very low.

The company clearly intends to scale up with new projects to increase capacity including possibly in overseas markets.

The investment manager currently expects NAV per share to be in the range of 140-145p by the 30th June 2022. The board has a target dividend of 7p per share for 2022 and in response to a question it was said that dividends will be raised as the cover goes up.

It is clear that the move to electrify everything while supply from generating operations becomes uncertain will raise demand for managing network frequency and other services so the future looks bright.

But note that the Government is planning to take over the grid management operations currently provided by National Grid Plc, i.e. nationalise them. See the article in today’s FT for more on that. It might affect the future of Gresham House Energy Storage.

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Is Information Overload Getting Worse?

It’s that time of year when one is deluged with Annual Reports. Is it just me or have the size of Annual Reports got substantially larger in the last few years? The latest report received is for Spirent Communications (SPT) which is only a mid-sized company (profits last year of £106 million) but the Annual Report spreads to 210 pages – Cover Photo is above. That includes 29 pages for the Remuneration Report alone! Are we really expected to read all of this? When one has a large portfolio such as I have, the volume of reading required is more than can be justified.

Annual Reports are likely to get even longer in future with more ESG reporting being mandated. Some of the detail is important but a lot of it is simple “boiler-plate” stuff. For example the Independent Auditors Report of 10 pages mainly consists of statements such as “We have nothing to report in respect of these matters”. Why do we need telling that?

No doubt auditors love all the work required to put these statements together but the company management must also waste time on putting together such extended Annual Reports – including 4 pages on “stakeholder engagement” in the case of Spirent.

It surely is time to take an axe to these over-voluminous Annual Reports. This could be done by having reporting only on exceptions, or by off-loading non-essential detail to an on-line page. The objective should be to get all Annual Reports down to under 100 pages in size, even for FTSE-100 companies, with small companies as low as 50 pages.

Too much information clouds the picture for any reader and enables important detail to be lost in the welter of trivia.

Roger Lawson (Twitter:  )

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Persimmon, the Cost of Houses, and Why I Don’t Invest in Banks

As I mentioned in a previous blog post, I made the mistake of buying some shares in housebuilder Persimmon (PSN) last October. I am pondering what to with them after reading the Annual Report which I received over the weekend. It’s full of glowing references to future prospects but the share price is way down on my purchase price meaning the shares are now on a prospective p/e of 8.2 and a yield of 11.4%.

Clearly the price of shares in housebuilders have been falling due to worries about higher interest rates, which could make mortgages much less affordable, while the Government threatens them about the rectification costs of high-rise buildings. The latter may be less of an issue than the former, particularly for Persimmon, but will some increase in the cost of mortgages really put off people from buying houses? I doubt it. There is such an unsatisfied demand for more houses to get people off high rental prices and for bigger houses to cope with Working from Home that price will be a relatively small factor in my view. In any case so long as house price inflation is greater than mortgage interest rates, it is a simple argument that you should buy a house if mortgages are available.  

We bought our first house in 1976 for about £10,000 with a cheap mortgage from the local council when the interest rate was way below inflation. A bit of a no-brainer at the time. Inflation can be good if you are borrowing money rather than lending it! Our sons have managed to buy houses with small contributions from us but we now have grandsons who will no doubt need some assistance soon. Clearly we are moving back into the era of the 1970s in terms of financial planning.

I voted my shareholding in Persimmon electronically as Computershare provide an easy voting system for registered shares, but I voted against the Remuneration Report. Pay is still too generous at this company – the CEO earned in total £2.6 million last year. For 2022, fixed salary will be £746,000 plus 9% for a pension, plus up to 200% of salary for the annual bonus plus up to 200% for the LTIP. Real world economics have not yet sunk in so far as the Remuneration Committee is concerned it seems.  

The fact that Persimmon performed well last year and prospects are claimed to be good does not excuse this generosity.

Why I Don’t Invest in Banks

Reading the FT today reminds me why I don’t invest in banks. Barclays (BARC) have apparently managed to lose £450 million due to a technical error in their structured products unit. It will have to compensate customers after issuing $15.2 billion more Exchange Traded Notes than were registered for sale. The loss will affect Barclays share buy-backs and the share price was down 4% at the time of writing.

Another FT article reported on how National Westminster (formerly the Royal Bank of Scotland) has reduced the Government stake to less than 50%. The Government has of course lost many billions of pounds on its investment in RBS after it thought it could turn a profit by forcing RBS to give it an equity stake in the 2008/9 financial crisis. They were following the Swedish model which was successful in that country’s previous banking crisis. But HM Treasury was no better at understanding the accounts of banks and their risk profile than any other investors.

Paying for Share Tips

I see one of my former sparring partners is complaining about share tipsters who are paid to puff companies – apparently by being issued shares in the companies they talk about. It’s certainly a disreputable practice. Let it be stated now that I am not paid by anyone to talk about the companies I mention. I am not paid and never have been since I started commenting on financial matters!

This blog is not just free to readers, it also does not pay contributors.                                                                                                                                         

Roger Lawson (Twitter:  )

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Is the Investment World Changing?

With the war in Ukraine continuing and inflation hitting over 6% (and likely to go higher), it seems a good time to review one’s investment strategy. My thoughts on this were prompted by watching the panel discussion at the Mello Trusts and Funds webinar on Tuesday. Some members argued that now is the time to move into commodities and out of the high growth technology stocks that have been such winners in the last few years. Is growth going to go out of fashion?

It’s certainly very clear that high inflation in basic commodities such as food (likely affected by the war in Ukraine who are a major producer) and oil/gas (also affected by the war and the associated sanctions on Russia) will have a big impact on consumers in the UK in the coming year. We are already seeing this in the shops and in on-line stores from my brief shopping experience yesterday.

As the Chancellor’s Spring Statement indicated yesterday, the UK is facing its biggest drop in living standards on record as wages fail to keep pace with rising prices. His measures to relieve this by raising the National Insurance threshold and cutting fuel duty will help a few people but not the retired or those not in work. The basic rate of income tax will fall slightly in 2024 in time for the next general election but the country will remain a high tax environment. Perhaps the Chancellor has decided he cannot protect people from the world economy which is undoubtedly true so he has just made a few gestures.

Economies might grow less rapidly or recessions hit as a result of these adverse economic winds, or we might see the dreaded “stagflation” return to the UK. But does this mean I should change focus on the types of companies I invest in?

I don’t think so and I shall repeat what Investment Manager of Smithson Investment Trust (SSON) said in their Annual Report which I was reading today: “One might then ask, if interest rates are so obviously on the rise, and this so obviously creates a more favourable environment for value companies rather than quality or growth companies, shouldn’t we adapt our strategy to buy the companies which stand to benefit? Well, no. Owning high quality companies with sustainable growth is a winning strategy over the long term, has been shown to work through several economic cycles, and is one which we know we can execute successfully. Whilst other managers may be able to run a value strategy, we believe it is inherently more difficult, as you cannot hold value companies for the long term if all you are doing is owning a poor quality company at a low price, which you hope will re-rate in the future. If this does happen (there is no guarantee), you then have to sell the company to find another such investment, and so on. This means that unlike our strategy, time is not your friend, because the longer you are holding the company and waiting for it to re-rate, the lower your annualised returns become, and if you’re particularly unlucky, the worse the company becomes. On the other hand, it matters less if it takes more time for the market to appreciate the value of the type of companies we hold in our strategy, because the highest quality companies are constantly getting better, or at the very least bigger, owing to their growth. So, once we have found the right companies, all we have to do is wait. We think that patience is one of our competitive advantages, because with the strategy we employ, it tends to pay off”.

Commodity companies go in an out of popularity as their profits depend on the commodity demand and prices. But the production of most commodities responds to price changes so in a year or two the boom is over and the bust follows as over-capacity has been created. Chasing these rotations requires a large amount of time and effort when I prefer to purchase companies that one can stick with for many years.  

The impact of high inflation does mean that one has to be careful in selecting companies with high margins and pricing power, i.e. the ability to raise selling prices when their costs rise. But that is a truism in all economic circumstances. Those are two factors that differentiate quality companies from the pedestrian ones.

Companies that have index-linked contracts with their customers might be worth looking at now that inflation is heading to 10%. That applies to many infrastructure investment companies for example and another sector is property companies who often have inflation linked rent reviews. I hold a few shares in Value and Indexed Property Income Trust (VIP) which is one such company.

Incidentally Smithson noted they had sold their holding in Abcam (ABC) which I also commented on negatively recently. They are concerned about the uncertain paybacks on the investments being made which I completely agree with.

Changing my investment strategy which has developed over the last twenty years and has made me an ISA millionaire does not seem to be wise. There was an interesting article published today in the Daily Telegraph on ISA millionaires of which there are apparently over 2000 in the country now according to HMRC. There may be more than that as Hargreaves Lansdown alone claim to have 973. See article here:

The average age of ISA millionaires is apparently 71 and the article reports that the top three stocks favoured by these investors are pharmaceutical company AstraZeneca, insurer Aviva and oil giant BP. Popular funds include Artemis Income, Fidelity Global Special Situations and Fundsmith Equity. That tells you that you don’t need to be a speculator to become an ISA millionaire. You just have to invest the maximum possible every year in a diverse portfolio and stick with it.

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