General Meeting Requisition at Edge Performance VCT

I am glad to see that ShareSoc is supporting a General Meeting at Edge Performance VCT to remove three existing directors and appoint a new one.

I have never held shares in this company or the multiple funds it has managed but as it regularly came up in conversations at ShareSoc I have watched from the side-lines. I considered it to be a basket case of the first order from what I learned some years ago – particularly the large investment in Coolabi and the valuation of that holding plus the general standard of corporate governance and management of the company. The performance of the funds has generally been the exact opposite of what the company name was intended to suggest.

In such situations I generally consider it best to aim for a revolution including a complete change of the board and a change of manager. But it’s never too late to start anew as I have learned from other VCT problem cases in the past. Although Robin Goodfellow was appointed to the board last year to bring a fresh voice it remains dominated by others. This needs to change so I hope readers who hold the shares will support the proposed changes.  

Incidentally there is a good article on VCTs entitled “VCT lessons I have learnt” by Paul Jackson in the latest edition of Investors’ Chronicle. It covers some of the wrinkles of investing in VCTs which is certainly a complex subject.

VCTs are complicated enough without the complex structure of multiple share classes embodied in the Edge Performance VCT.

For more details see https://www.sharesoc.org/sharesoc-news/edge-shareholders-requisition-general-meeting-to-remove-3-directors-and-appoint-richard-roth-as-a-director/ . It is good that ShareSoc is actively encouraging and supporting action in such cases.

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

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Open Letter re New FCA Chairman

An open letter to Rishi Sunak, Chancellor, has been created by the Transparency Task Force concerning the appointment of a new Chairman of the Financial Conduct Authority (FCA). That body has clearly been ineffective in recent years in protecting retail investors from fraud and scams. The letter calls on any new appointment to be not another City insider but someone with true independence.

You can read the letter here: https://www.transparencytaskforce.org/wp-content/uploads/2021/11/Open-Letter-regarding-regarding-replacement-to-the-Chair-of-the-FCA-3.pdf

I ask you to support the letter by adding your name to it as I have done. Just send an email to the contact person at the foot of the letter confirming your support.

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

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Alliance Trust Resets Dividend

An announcement this morning from Alliance Trust (ATST) says that the board has concluded that an increased dividend “will benefit existing shareholders and enhance the attractiveness of the Company’s shares”. They expect the overall annual dividend to increase by 32.5% over the 2020 dividend. The proposed increase will be well covered by distributable reserves and income it is suggested although no doubt some of the extra dividend cost will come from capital.

ATST had a reported yield of 1.43% last year according to the AIC which is the figure a lot of private investors look at when identifying good investments, when they should be looking at total return and overall performance. So far as the tax position of most private investors are concerned, turning capital growth into dividend income is a mistake as they will end up paying more tax. If they need more cash income they could simply sell some shares.

As with City of London Investment Trust I recently commented upon, and as very evident at their AGM, the emphasis on dividends paid by the trust, and growth in them, is apparently aimed at pleasing investors when investors are being fooled by the cash they see coming in when total return including capital growth is what they should really be paying attention to.

There are some interesting comments on Alliance Trust by Mark Northway in the latest ShareSoc Informer newsletter published today. He points out that the change to a “best ideas” portfolio approach managed by Willis Towers Watson since 2017 has not returned significantly above average performance after costs as anticipated. A huge amount of effort has been put in with little benefit he suggests. But perhaps that just shows how difficult it is to beat index benchmarks consistently particularly when the trust’s portfolio is so diversified. At least the trust’s performance is no worse than its benchmark as used to be the case before the revolution and appointment of a new manager.

As part of my “barbell” portfolio I am happy with the performance of Alliance Trust but I would have preferred them not to increase the dividend. I barely need to the cash as household expenditure is sharply down in the last year due to self-isolation from Covid. I’ll end up reinvesting the dividend cash after paying tax on it, when Alliance could do that for me tax free!   

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

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Two Unsatisfactory AGMs

This week I attended two Annual General Meetings – or at least attempted to do so. The first was of Ideagen (IDEA) an AIM company.

This was an “electronic” AGM with no physical attendance, held on the Lumiagm platform. I tried to log in with the Shareholder Reference Number given on my dividend certificates (I am on the share register) but it rejected it. Apparently the prefix needed to be ignored.

I contacted the support email address but by the time I got an answer the meeting was over – it seemed to last all of 5 minutes. They clearly should have provided clearer instructions. The company did send me a recording of the meeting but there seemed to be no shareholder questions which explains why the meeting was over in record time.

But the next day the votes cast at the meeting were reported and they received 63% of votes cast against the remuneration resolution with this comment added: “With respect to Resolution 4, the Company is aware that these votes against are in relation to the Company’s Long Term Incentive Plan (“LTIP”). The Company believes that the structure of the LTIP is in the best interests of all stakeholders and is fully aligned with shareholders’ interests”.

The directors would have been aware of the proxy counts before the meeting so it would have been helpful to have commented on this issue at the event. As it stands, a bland rebuttal of the obvious concerns of a large proportion of shareholders I do not find acceptable.

The second AGM I attended was that of City of London Investment Trust (CTY). I commented on this company when they published their Annual Report earlier this month. My view on the company has not changed from attending the AGM. Too much emphasis on maintaining the dividend record by investing in high dividend paying companies rather than looking at total return.

This was a hybrid AGM with attendees both present in person and electronically. I attended electronically via Zoom.

The initial words of the Chairman could not be heard and when it came to questions from the physically present attendees, he did not repeat the questions so I could not hear them – only his answers. So this was another unsatisfactory meeting in terms of electronic attendance.

Not all hybrid or electronic meetings are defective but a high proportion are in one way or another. Companies clearly have a lot to learn about how to run such meetings properly.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

Two Unsatisfactory AGMs

This week I attended two Annual General Meetings – or at least attempted to do so. The first was of Ideagen (IDEA) an AIM company.

This was an “electronic” AGM with no physical attendance, held on the Lumiagm platform. I tried to log in with the Shareholder Reference Number given on my dividend certificates (I am on the share register) but it rejected it. Apparently the prefix needed to be ignored.

I contacted the support email address but by the time I got an answer the meeting was over – it seemed to last all of 5 minutes. They clearly should have provided clearer instructions. The company did send me a recording of the meeting but there seemed to be no shareholder questions which explains why the meeting was over in record time.

But the next day the votes cast at the meeting were reported and they received 63% of votes cast against the remuneration resolution with this comment added: “With respect to Resolution 4, the Company is aware that these votes against are in relation to the Company’s Long Term Incentive Plan (“LTIP”). The Company believes that the structure of the LTIP is in the best interests of all stakeholders and is fully aligned with shareholders’ interests”.

The directors would have been aware of the proxy counts before the meeting so it would have been helpful to have commented on this issue at the event. As it stands, a bland rebuttal of the obvious concerns of a large proportion of shareholders I do not find acceptable.

The second AGM I attended was that of City of London Investment Trust (CTY). I commented on this company when they published their Annual Report earlier this month. My view on the company has not changed from attending the AGM. Too much emphasis on maintaining the dividend record by investing in high dividend paying companies rather than looking at total return.

This was a hybrid AGM with attendees both present in person and electronically. I attended electronically via Zoom.

The initial words of the Chairman could not be heard and when it came to questions from the physically present attendees, he did not repeat the questions so I could not hear them – only his answers. So this was another unsatisfactory meeting in terms of electronic attendance.

Not all hybrid or electronic meetings are defective but a high proportion are in one way or another. Companies clearly have a lot to learn about how to run such meetings properly.

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

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It’s a Champagne Budget

It’s a champagne budget – or at least one to celebrate for investors as there are no really negative changes in it that were widely rumoured. At least that is apart from the rise in dividend taxes and freezing of allowances previously announced.

Here’s a list of the key points:

  • The National Living Wage is being increased.
  • The Government is substantially increasing funding for R&D.
  • The bank corporation tax surcharge is being reduced.
  • There will be some relief for business rates.
  • R&D tax relief will be focussed on domestic expenditure.
  • There will be more investment in tech skills and in schools.
  • Alcohol duties will be reformed and simplified with lower rates on lower alcohol products – champagne and beer will be cheaper.
  • Proposed rises in fuel duty are cancelled.
  • There will be minor changes to the taxation of REITs (details not yet clear but probably positive for investors) and there will be a levy on property developers to finance a fund to remove dangerous cladding.
  • The economy is now expected to grow by 6.5% this year (up from 4%) hence the generally positive tone of Rishi Sunak’s speech and new spending commitments.
  • Borrowing as a percentage of GDP is forecast to fall from 7.9% this year to 3.3% next, then 2.4%, 1.7%, 1.7% and 1.5% in the following years.

Comments:

This is generally a sensible budget with no abrupt changes in taxation, which are always to be deplored.

The emphasis on more education spending is surely wise, and on the NHS of course although whether the extra money will be wisely used remains to be seen.

Cancelling the rise in fuel duty may please some car drivers but it does not seem consistent with the aim to reduce carbon emissions and certainly will not help reduce congestion on our roads. Is this a two fingered gesture to Insulate Britain protestors who were active again this morning? But more prisons are being build to hold them if the courts put them away for a stretch.

It does not look like there will be any big impacts on particular sectors. The share prices of REITs have risen this afternoon so the changes may be positive but the rise in the National Living Wage will hit large employers such as retail store chains. There may be some benefits to large banks in the reduction in the bank surcharge on corporation tax but that will be offset by the general rise in corporation tax previously announced.

The changes in alcohol duties are a welcome simplification and may be of some benefit to pubs while encouraging healthier drinking. But it might negatively impact wine and spirits producers.

The UK stock market has not reacted significantly to these announcements although gilt prices rose on anticipated reductions in Government borrowing.   

More details are present in this document: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1028813/Budget_AB2021_Print.pdf

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

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The Importance of Back-Up Power Supplies and the Net Zero Promise

The importance of having an alternative power supply came home to us last week when contractors laying a new electricity supply down our street cut through our gas supply pipe. But we were prepared for that kind of event as gas boilers frequently go wrong so we have a couple of electric fan heaters.

If they had cut through our electric supply or our internet/telephone connection we were prepared for that also. But this does demonstrate the folly of the Government wanting us to install electric heat pumps to replace gas boilers. With no electricity there would be no light nor heating. I would advise anyone who installs an electric heat pump boiler to ensure they have a traditional fireplace on which they can throw some logs in an emergency.

One of the big problems at present is that the Government has not taken reasonable steps to ensure that the country has alternative power supply sources whether it be coal, gas, nuclear, wind power, hydroelectric or from other sources. Clearly we have become over-reliant on natural gas from sources that have recently become very expensive. The potential for producing our own natural gas from fracking has also been missed due to political unwillingness to face up to the objectors.

The Government now seems committed to pushing ahead with a big new nuclear power station at Sizewell C and possibly other smaller nuclear reactors at other sites. See the recently published Government paper on its Net Zero Strategy (see reference 1 below).

That document is full of fine words but is the objective to totally decarbonise our economy really practical? Building nuclear power stations to generate electricity might enable the replacement of natural gas for heating and for the replacement of internal combustion engines in cars and vans, but will it actually be carbon free? It occurred to me that building a nuclear power station takes enormous amounts of concrete and steel, both of which currently require carbon-based energy sources to produce them.

A quick search of the internet produced a very good paper on this subject by the Ecologist (see reference 2 below). The author’s conclusion was that nuclear power is not low carbon if you take into account the “whole of life” emissions including those in the mining of uranium fuel and end of life remediation and storage.

In fact no alternative power sources are carbon free. Hydropower is one of the best but still generates 10 gCO2/kWh while solar PV and wind power might be considerably higher. There is no major power source that is carbon free so any objective to be “net zero” by 2050 is nonsense.

The projections also assume that future technology yet to be proven or even developed can produce steel and concrete with zero emissions and planes and HGVs can be powered by alternative sources.

Carbon emissions can be reduced to some extent no doubt by the use of selected generation systems with a focus on electrification and the planting of a lot more trees but nobody should be fooled that net zero is achievable by 2050. There is little discussion of the cost of rebuilding the economy in the way suggested and a lot of it will fall on the general public.

They have only just come to realise that the Government’s plans to stop the sale of gas boilers in new homes by 2025 and altogether by 2035 will mean massive costs to install electric pump boilers.

Of course 2050, or even 2035, are long in the future so promises and commitments can be made that are truly castles in the sky. But reality will sink in sooner or later.

As I have said before, the best and only truly effective way to cut carbon emissions is to reduce the number of people on this planet. At present the growth in world population and the industrialisation of lesser developed countries easily offsets the savings that might be made in carbon emissions by the UK or other western economies.

Reference 1: Government’s Net Zero Paper: https://www.gov.uk/government/publications/net-zero-strategy

Reference 2: Ecologist paper on Nuclear Power: https://theecologist.org/2015/feb/05/false-solution-nuclear-power-not-low-carbon

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

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Good Articles in Investors’ Chronicle

There were several good articles in this week’s Investors’ Chronicle. I cover them briefly below.

The Editor, Rosie Carr, reported on feedback on readers’ views on taxation. Should the wealthy readers of the IC pay more was one question previously posed and the consensus answer seemed to be Yes. For pensioners it was suggested that they should pay National Insurance on their income and that there should be harmonisation of income and capital gains tax rates. It was also suggested that property taxes should be raised and Inheritance Tax raised.

I would support most of those suggestions but not the last. Inheritance Tax is typically a tax on created wealth which has already been taxed in one way or another. Double taxation on the same assets should be avoided in my view although perhaps some loopholes should be closed.

There was a good article by Chris Dillow on the problems created by the “decades-long attempts to cut inventories”. He points out that the adoption of “just-in-time” production methods had a positive impact as inventory is expensive. That is particularly so when debt is expensive and interest rates high. This of course is the result of MBAs like me being taught at business schools that cutting inventory was always a good thing. Now we find that the smallest hiccup in the supply chain such as transport delays proves to be very expensive.

There is a good analysis of the audit issues at Patisserie Valerie by Steve Clapham. He concludes that the sanctions imposed by the FRC “are woefully inadequate” which I also suggested in a previous blog post. I said Grant Thornton was “fined a trivial amount”.

The article does however suggest that there were some warning signs such as very high margins in comparison with other sector players, and high inventories in relation to the revenue. But there were reasonable explanations for the differences. One would have had to do a lot of research to figure out if there was really a problem or not. Clearly the auditors did not do that and most investors do not have the time nor resources to do such research. That’s why we rely on the audited accounts!

It is unfortunately the case that outright frauds can often be easily concealed but the audit in this case was clearly very defective and the published accounts of the company were grossly misleading.

But I do admit to failing to take my own prescription for avoiding problem companies – namely investing in a company with an Executive Chairman with too many jobs!

There is also a good article on “The flattery industry”, i.e. how management improve their reported profits by using “alternative” or “adjusted” measures. The FRC has published a report on this issue.

It is very clear that companies are addicted to alternative performance measures and that applies just as much to large companies as small ones. One company and its “adjustments” mentioned negatively in the article is GlaxoSmithKline (GSK). I sold a holding in GSK back in 2014 for that very reason – way too many adjustments in the accounts. The price of the shares then was about 1480p. It’s now 1407p. Clearly a good decision. Stockopedia currently says it qualifies for the Altman Z-Score Screen (Short Selling). Enough said I think.

But this is surely yet another example of where the FRC is falling down on its job. There should be regulation of what can be published as adjusted figures and there should be rules about how they are published. There should be consistency and not excessive emphasis on adjusted figures. At present we have a quagmire of data with no easy way to compare different companies.

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

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Online Abuse Back in the News

I covered the subject of online abuse at some length in 2017 – see https://roliscon.blog/2017/08/22/hate-crime-fake-news-and-market-abuse/ .

Nothing much has changed since but the subject has again come to public attention by the death of an M.P. and the comments by other M.P.s that they regularly get death threats and other forms of abuse that is making their lives intolerable.

The Home Secretary, Priti Patel, has suggested that a ban on anonymity on the internet might be considered. I would certainly be in favour of that.

Anonymity makes policing of the internet impossible, and encourages people to post outrageous comments because they know that they will never be held responsible for them. It is not just abusive comments aimed at politicians, particularly female ones apparently, but at anyone the culprits do not like or do not agree with.

The standard of public debate of all kinds on Twitter, Facebook and other social media is a disgrace and removing anonymity would be a simple way to tackle most of the problems. If the perpetrators knew that they could be easily traced and hence subject to laws on harassment and libel, they would be a lot more careful about what they say. Indeed I would suggest that libel be made a criminal offence not just a civil one.

Stopping anonymity would not be that difficult in practice. The identity of most people can now be checked in a few seconds by such companies as GB Group. It would simply need to be made a legal requirement that people must use their own name when registering for on-line services.

It is surely time to consider such legislation.

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

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Mello Event and Crimson Tide  Presentation  

 

I attended the Mello event yesterday where I reviewed Terry Smith’s book entitled “Investing for Growth” and Andrew Latto reviewed my book entitled “Business Perspective Investing”. He gave it a very positive review and made some suggestions for a second edition such as adding some case studies. I will ponder whether to work on another edition.

Another interesting session was a presentation by Crimson Tide (TIDE). This is a very small company even though it’s been around for a number of years – market cap only £19 million. It sells a software product called MPRO5 which claims to be a “leading mobile workforce management platform and service” on their web site. I own a very few shares in the company.

The presentation was by Luke Jeffrey, CEO, and he clearly has a technical background. He somewhat disappointed me by saying the product is a “toolkit”. It’s obviously a technology platform not an application solution. It has to be configured to meet application needs of which there seem to be a wide variety, i.e. there is no very strong focus on any business sector.

My experience of the software industry has taught me that people are looking for solutions not toolkits. Not surprisingly, he mentioned when asked about competitors that they often come up against “point solutions”.

They also seem to be extending their technology to cover IOT applications and also developing a “micro business” version. I find the idea of marketing software products to businesses such as plumbers to be a quite horrific business proposition. Selling low-cost software solutions to small businesses is rarely economic because it takes as much time and effort to sell to a small business as it does a large one while the price you can charge never reflects that. Sales, marketing and distribution in that sector is a major problem.

In summary I am not convinced that they can turn their interesting technology into a big business unless substantial changes are made. The presentation actually discouraged me from buying more shares in the company which is no doubt the opposite of what the speaker was aiming for.

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

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Mello Event

I am doing a review of Terry Smith’s book this afternoon at the Mello event and Andrew Latto is reviewing my book – should be an interesting free session: https://melloevents.com/melloresultsroundup/ . It starts at 1.00 pm and is a full afternoon of sessions of interest to investors. That includes a number of interesting companies presenting results.

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

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