John Plender and John Rosier Articles and Technology Update

John Plender published a good article in the FT on Friday. He covered what he had learned from five decades in the investment world. This was a period when the “cult of the equity” took over from investment in fixed income bonds. With inflation racing ahead of interest available, bonds such as Government gilts were a big loss-making investment. They may have been nominally “safe” but only equities offer some protection against inflation caused by Government policies. This cycle has been repeated more recently.

There is much to learn from this article and he concludes with this wise comment: “After a lifetime spent watching the markets, I am struck how, with each new cycle in which central banks act as lenders of last resort, debt mounts inexorably. We continue to muddle through. But a great debt denouement is inevitable because debt cannot rise faster than incomes for ever”.

See https://www.ft.com/content/52f06fb9-ef15-498f-9a98-39673c960de4 for the full article.

Another good article was published on Friday in the Investors Chronicle by John Rosier, who managed to achieve an even worse portfolio performance than mine in 2023. He had this to say:

“Lessons from 2023. It was a poor year for me and while it is tempting to beat myself up, 12-year record of 12.4 per cent per year is good. However, as a matter of good housekeeping, I should examine what lessons I should learn from 2023. In last month’s outlook, I pondered whether I had been guilty of focusing too much on macro factors and not enough on bottom-up stockpicking. The conclusion must be yes. My exposure to commodity stocks, although helpful in 2022, was hugely detrimental in 2023. I had too much exposure to this theme. I allowed my belief in the positive drivers to influence my portfolio construction. I was also too obstinate to change course – perhaps because I had invested too much emotional capital in such a significant exposure. I intend to shift the balance back towards bottom-up stockpicking – in truth, I already have with purchases of stocks such as PayPoint, highlighted earlier……In what is a perennial problem for me and many, if not most, investors, I must get better at cutting losses earlier”.

His comments could just as well apply to my own portfolio management although not to such an extreme. I may from experience have avoided the worst mistakes but am still not cutting losses early enough.

One thing I have done this week is update my technology usage. My 10 year-old Lenovo Thinkpad Carbon X1 was a great business laptop PC running Windows with a touchscreen but battery life had dropped to about 2 hours so it was time to replace it. I have purchased a Samsung Galaxy Tab S8+ tablet to replace it. With more than 8 hours battery life it can last for a dialysis session where I like to watch old movies. These are readily available from YouTube so I watched a film called Greenwich Village last week. It included a memorable dance routine from William Bendix who usually played “heavies” in the 1940s. To quote from one biography: “character actor William Bendix’s burly physique and New York accent were equally suited to playing genial lugs and vicious thugs”.

I am still running a Windows 10 desktop PC for my main business applications which should last another couple of years.

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

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Impossible to Vote!

I have just spent many minutes trying to vote my shares in the Baronsmead VCTs. I received letters giving me a web address for proxy voting and a CIN and “access code” but for some of my multiple holdings on the register the access code is blank. Even when supplied access is rejected in one case.

It’s getting more and more difficult to vote my shareholdings. Similar technical problems arose recently when trying to vote my shares in AJ Bell in the Signal Shares App.

I am generally most diligent in voting all my shareholdings but complexity and technical problems are frustrating doing so. It’s most annoying that companies no longer send out simple proxy voting forms.

Note these are holdings on the share register, either certificated ones or personal crest holdings, so these problems are inexcusable.

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

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Fundsmith Annual Report

Terry Smith has published his Annual Report for holders of the Fundsmith Equity Fund (I am a holder). Total Return last year was 12.4% which I consider a good result but was less than the MSCI World Index of 16.8% probably because of being underweight in large US tech stocks where mania continued unabated.

Terry emphasises the long-term track record of the fund and puts that down to the superior return on capital of the fund holdings in comparison with those of the S&P 500 and FTSE 100 (32% last year versus 18% and 17%). He says “….. if you own shares in companies during a period of inflation it is better to own those with high returns and gross margins” and “Consistently high returns on capital are one sign we look for when seeking companies to invest in”. I completely agree with him on that.

He also argues the fashion for investing in bonds is misplaced as equities have provided better returns since 1928 which includes such periods as the Great Depression, World War Two, the 1987 market crash, Dotcom meltdown, 2008-9 financial crisis and the Covid pandemic.

He also makes some prescient comments on the enthusiasm for AI products and points out it will be difficult to predict the winners in that market.

The newsletter is worth reading for the wisdom of Terry Smith. See Fundsmith Annual Report: https://www.fundsmith.co.uk/media/31plodnq/2023-fef-annual-letter-to-shareholders.pdf

I see no reason to change my holding in Fundsmith.

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

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Year End Review of 2023

As I have published in previous years, here is a review of my own stock market portfolio performance in the calendar year 2023. I’ll repeat what I said last year to warn readers that I write this is for the education of those new to investing because I have no doubt that some experienced investors will have done a lot better than me, while some may have done worse.

It’s worth bearing in mind that my portfolio is very diversified across FTSE-100, FTSE-250 and smaller company (e.g. AIM) shares listed in the UK. I also hold a number of UK investment trusts which gives me exposure to overseas markets, and some Venture Capital Trusts (VCTs). Although I have some emphasis on AIM shares, they are not the very speculative ones.

One feels wary of publishing such data because when you have a good year you appear to be a clever dick with an inflated ego, while in a bad year you look a fool. Consistency is not applauded on social media. But here’s a summary of my portfolio. Total return including dividends was up 2.9% while the FTSE All-Share was up 3.8% which I use as my benchmark (the latter figure does not include dividends though). So in summary a disappointing year although much better than the previous year.

Some explanations are as follows:

Holdings in small and mid-cap stocks, particularly tech ones, had another bad year. Both my and my wife’s ISAs showed significantly losses mainly because I tend to purchase any new speculations in those portfolios as costs are lower there. Losses were therefore incurred on Paypoint, SDI, EKF, Spirent, Telecom Plus, Keywords, Learning Tech, RWS etc.

Property REITs failed to recovery from the impact of higher debt costs on property companies until late in the year.  

Values of alternative energy investment companies fell towards the end of the year resulting in losses on Greencoat UK Wind, Renewables Infrastructure Group, Gore Street Energy Storage, Gresham House Energy Storage etc and those holdings were sold. Clearly there was excessive enthusiasm by the market and me for environmentally friendly investment funds while it became clear that future profits from these companies were difficult to predict.

My investment trust and fund holdings generally did well often because they have substantial US holdings. I failed to beat Terry Smith’s performance at Fundsmith for yet another year but Scottish Mortgage and Polar Capital Technology recovered substantially, particularly the latter.

Venture Capital Trusts almost all lost value as their holdings in smaller companies were revalued downwards to reflect AIM market valuation falls (the AIM market was down about 8% in the year). But their dividends held up well.

Holdings in big oil and mining companies which I had moved into did reasonably well but not good enough to offset the negative impact of losses on small/mid-cap investments. Overall dividend income was down slightly due to moving more into cash in the previous period and I still have a relatively defensive overall portfolio position with substantial cash holdings in ISAs and SIPPs. But at least brokers are now paying reasonable levels of interest on cash holdings.

Due to my poor health at present, at age 78 I need to have shorter time horizons for investments with less time spent on researching new investments and managing my portfolios.

What does the future hold? I find it impossible to predict what will happen in markets and I therefore tend to just follow the trends. US markets are now highly valued but betting against the vibrancy of US technology markets could be very tricky.

The political environment is still negative with wars in Europe and the Middle East while it seems likely that the Labour Party will have a good chance of winning a general election later in the year. None can be good for stock market investment and taxes are currently too high to stimulate investment in the UK even if inflation is now being brought under control.

I am therefore feeling somewhat negative about future investment prospects but simply continue to focus on investing in good companies that are generating real cash profits or on well managed investment trusts and funds.

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

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Horizon Debacle and the Lesson to be Learnt

Last night I watched the ITV drama documentary on the Post Office Horizon scandal. It was a rather long-winded presentation of the miscarriage of justice that arose from a defective computer system installed in sub-post offices. People were convicted and sent to prison on false evidence that they had stolen money. Many lost their livelihoods, were made bankrupt and lost their homes. Post Office management avoided accepting responsibility or failed to disclose all the facts until a legal case led by Alan Bates (see the Justice For Sub-postmasters Alliance web site) enabled full disclosure.

The IT system was developed by Fujitsu and I ought to now declare that I was on the payroll of ICL Fujitsu in the 1970s for work on the VAT system, a more successful contract, but I never had any contact with the Horizon project.

One of the key revelations was that although sub-postmasters were responsible under their contracts for any losses, Post Office staff could manually “correct” transactions without the knowledge of the sub-postmasters by remotely accessing the branch records.

What are the lessons to be learned from this case? There are several:

  1. Never sign a contract without reading the small print and understanding it fully. Clearly many postmasters did and the contracts they signed were in essence one-sided and unfair.
  2. Never trust big organisations to treat you fairly. The Post Office was so keen to protect their brand reputation that management hid all the bad news.
  3. The English legal system may ultimately provide justice but at enormous expense. The legal fight went on for years and is still on-going with litigation funding being used to finance the case. Justice was poorly served in essence and the legal battles were quite one-sided in terms of funding. The Post Office, despite being Government owned, used every tactic to defeat the complaints of those wrongly targeted as a result of a defective computer system. The legal system needs reform to reduce costs and enable justice to be pursued without needing someone like Alan Bates to dedicate his life to it.  

The Post Office should have admitted the problems with the Horizon system much earlier and compensation should be comprehensive. It was a gross miscarriage of justice and also reflected poorly on the professionalism of the IT world that such a defective computer system could be developed without adequate testing and controls.

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

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Xmas Reading and New Year Greetings

brown and black bokeh photography with white text
Photo by Lena Khrupina on Pexels.com

It’s that time of year when one has some spare time. Time enough to read a book or two. I have purchased a 14-book set of the original James Bond books by Ian Fleming and am already half way through them – they are a quick read!

I probably read some of them 50 years ago but they are well written with good evocations of the time and locations they are set in. I have also purchased a recently published biography of Ian Fleming by Nicholas Shakespeare – subtitled “the complete man”. It received good reviews so even at 860 pages I am hopeful that it will keep me awake.

I have not read many books on investment lately that I could recommend, although there are some published on the life of Charlie Munger who recently died that might be of interest. It’s unclear which are particularly worthy of consideration so if readers have any suggestions, please let me know.

The early James Bond films are reasonably faithful to the books although there is more sadomasochism in the books. The books are good for filling time at my hospital appointments where I am averaging several per week lately. I am supposed to be on kidney dialysis but it’s not working as planned.

My thoughts go to Tory MP Craig Mackinlay who has had “extreme surgery” after sepsis. He says “Treatment by the NHS has been exemplary and I’m extremely lucky to be alive”. My feelings too a few years back when I suffered from sepsis. The Sepsis Trust is a good location for any Xmas donations.

My stock market portfolio has been perking up but I suspect this is just another of the usual Santa rallies so I am not rushing back into the market. The economic and political outlook is still depressing so I’ll just follow the trend so long as it continues.

Small cap stocks may look good value but there is still a lot of dross on AIM. Too many companies where hope springs eternal but they tell a good story.

It remains to wish my readers a Happy Christmas and a prosperous New Year.

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

FCA Challenges Cash Interest Charges

The Financial Conduct Authority (FCA) has published a letter sent to platform operators that manage ISA and SIPP funds. They say: “The amount of interest earned by some firms has increased as rates have risen. The FCA recently surveyed 42 firms and found the majority retain some of the interest earned on these cash balances, which may not reasonably reflect the cost to firms of managing the cash. Many also charge a fee to customers for the cash they hold, known as “double dipping”.

As both a customer of a well-known SIPP manager (AJ Bell) and a shareholder in the company that is hardly news to me. Interest on client cash holdings has been a major positive contributor to the profits of investment platforms as they typically pay less interest to the clients than they can obtain from depositing the cash in a bank.

At least that may be true now but a year or two back they were getting minimal interest on deposits and paying little or nothing to clients on their cash holdings.

The FCA seem to be saying that this source of profit is unreasonable and should not be used to cover more than basic operating costs but I am not sure that is entirely sensible. There are a lot of costs involved in operating an investment platform which have to be covered somehow. If not from the “cash margin” then what from?

The key issue is whether the charges applied are fair and apparent to customers, i.e. are they transparent and easily comparable across platforms? They certainly are not at present.

See the FCA announcement here:  https://www.fca.org.uk/news/press-releases/fca-writes-firms-about-treatment-retained-interest-customers-cash-balances

The AJ Bell share price has fallen by over 8% today at the time of writing.

Postscript: No doubt in response to the FCA announcement but probably under consideration for some time, AJ Bell have announced a reduction in charges and higher interest on cash deposits. See https://www.londonstockexchange.com/news-article/AJB/statement-re-pricing-changes/16249079

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

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Schroder REIT Change of Investment Policy

I am a shareholder in the Schroder REIT (SREI) and have therefore received the notice of a General Meeting to revised the investment policy of the company.

Their proposal is mainly focussed on a new emphasis on “sustainability” for their property investments. The manager will be required to focus on an ESG scorecard in future and the board believes this will make the company more attractive to investors.

At least that seems to be the gist of their argument for change to the investment policy. But it will complicate the investment policy very considerably.

I will be voting against the change as I consider it an unnecessary complication and to focus on one aspect of investment policy alone is wrong. I suggest other shareholders should do the same.

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

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Deaths Crowding In

It’s a day to mourn the passing of several people who have made history. The latest is that of Lord Alistair Darling, former Chancellor, at the young age of 70 from cancer. As a leader in the Labour Party in the fight against the financial crisis in 2008, he effectively nationalised Northern Rock and Bradford & Bingley and took control of the Royal Bank of Scotland (now Nat West).

These actions effectively made UK banks uninvestable to the international investment world. Could he have acted differently? I believe so. The Government has yet to get rid of its holding in Nat West and Darling’s attempt to take control of the major UK banks in the socialist paradise of Gordon Brown was an abject failure.

Another death was that of Henry Kissinger at the age of 100. He had a major influence on international politics in the 1960s under more than one US President.

Two days previously the death of Charlie Munger was also announced. He was Warren Buffett’s partner in Berkshire Hathaway from which he became very rich but he was also a witty writer. For example, he said “I think you would understand any presentation using the word Ebitda if every time you saw that word you just substituted the phrase ‘bullshit earnings’”. You can certainly learn a lot from him if you wish to be an intelligent investor.

Munger died at the age of 99 while Buffett is still going strong at a few years younger. Clearly age is no barrier to investment success.

Me I am still trying to stay alive at the age of 77 having just commenced on kidney dialysis as the transplanted kidney I got from my brother is now over 25 years old and failing as expected. I am apparently not fit enough for another transplant at this time which is disappointing so no need to offer one!

I will continue to put comments on investment and the financial world on this blog so long as I can. But the financial world is certainly not helped by Andrew Bailey, Bank Governor, talking down the prospects for the UK in his recent comments. Bankers need to instil confidence in the economy not pretend we are headed for doom.

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

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More Comments on the Autumn Statement

Here are some more comments on the Chancellor’s statement to add to those previously made.

The cuts to National Insurance are substantial. As someone who retired from paid employment over 25 years ago, I won’t get any benefit from that but maintaining the “triple-lock” on state pensions will offset that and mean a rise of 8.5% next year. I think reducing employment taxes was a sensible way of distributing the largesse available to the Chancellor. But personal taxes are still too high overall mainly due to fiscal drag from reduced indexing of allowances.

Retaining 100% capital allowances for businesses will please many companies but I am not sure investors will be that impressed. It might simply mean capital is wasted on projects with a poor return.

  • On ISAs it was argued by some that simplification should take place to make them more attractive. But the Chancellor has ignored that and made them more complicated. For example by permitting ‘certain fractional share contracts’ as eligible ISA investments. This is a recipe for encouraging speculation by unsophisticated investors rather than long-term investment and is simply unnecessary.
  • The Chancellor is proposing a retail offer to dispose of its remaining holding in National Westminster – the remains of its former holding in Royal Bank of Scotland. Investors should take a very jaundiced view of such an offer. Investing in bank shares is always tricky due to lack of transparency in their accounts (for example on cash flows) so I am personally unlikely to take up such an offer. But it’s certainly good for the Government to exit its holding if it can do so.
  • It has been confirmed that the lifetime allowance will be scrapped from pension rules from April next year, as previously announced by the Chancellor. This will make it more difficult for any future government to re-introduce the lifetime pension cap as Labour has pledged it would do if elected.
  • Other welcome news is on the treatment of pensions on death. Under current rules, if you die before age 75 your beneficiaries can inherit your defined contribution (DC) pension completely tax-free if it is under your lifetime allowance. HMRC has announced that, contrary to previous plans, this situation will continue.
  • The Government is to consult on allowing any house that can be converted made into 2 flats provided the exterior remains unaffected. This could get a lot of opposition in Chislehurst where I live. It would increase population density and traffic/parking problems with inadequate public infrastructure such as schools and medical facilities. Instead of tackling the underlying problem of excessive population growth this is a “sticking plaster” solution to housing shortages.
  • There will be £1.3 billion spent on helping 700,000 people with health conditions find jobs. Does that mean that I will be asked to take up some part-time job working from home or lose my attendance allowance? There are certainly too many people of working age and with minor health problems that are living on state benefits at present. I can foresee a lot of resistance to this proposal but it is a problem that needed tackling. Too many people are reliant on the social security system and the cost is one reason why we have high taxes.

Will the tax and other changes help the Conservatives to win elections? I doubt it. They are simply not revolutionary enough.

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

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