Boris Johnson Not Backing Down and the Technology Stocks Bubble

Today I received an email from the Conservative Party signed by Boris Johnson and entitled “I will not back down”. The first few sentences said:

“We are now entering the final phase of our negotiations with the EU. The EU have been very clear about the timetable. I am too. There needs to be an agreement with our European friends by the time of the European Council on 15 October. If we can’t agree by then, then I do not see that there will be a free trade agreement between us, and we should both accept that and move on. We’ll then have a trading arrangement with the EU like Australia’s. I want to be absolutely clear that, as we have said right from the start, that would be a good outcome for the UK”.

But he says the Government is still working on an agreement to conclude a trade agreement in September. However the Financial Times reported that there are problems appearing because the “UK government’s internal market bill — set to be published on Wednesday — will eliminate the legal force of parts of the politically sensitive protocol on Northern Ireland that was thrashed out by Mr Johnson and the EU in the closing stages of last year’s Brexit talks”. It is suggested that the EU is worried that the Withdrawal Agreement is being undermined. But reporting by the FT tends to be anti-Brexit so perhaps they cannot be relied upon to give a balanced commentary on the issues at present.  

Of course this could all just be grandstanding and posturing by both the UK Government and the EU to try and conclude a deal in their favour at the last minute. But we will have to wait and see what transpires.

Well at least it looks like Brexit news will dominate the media soon rather than the depressing epidemic stories.

Technology Stocks Bubble

Investors seem to have been spooked last week by the falls in the share prices of large technology stocks such as Apple and Tesla (the FAANGs as the group are called). This resulted in overall market falls as the contagion spread to many parts of the market, particularly as such stocks now represent a major part of the overall indices. I am glad to see my portfolio perked up this morning after substantial falls in my holdings of Polar Capital Technology Trust (PCT) and Scottish Mortgage Investment Trust (SMT) both of whom have big holdings in technology growth stocks although they are not index trackers.

I’ll give you my view on the outlook for the sector. Technology focused companies should be better bets in the long-term than traditional businesses such as oil companies, miners and manufacturing ones. There are strong market trends that support that as Ben Rogoff well explained in his AGM presentation for PCT which I mentioned in a previous blog post.

But in the short term, some of the valuations seem somewhat irrational. For example I consider Tesla to be overvalued because although it has some great technology it is still in essence a car manufacturer and others are catching up fast. Buying Tesla shares is basically a bet on whether it can conquer the world and I don’t like to take those kinds of bets because the answer is unpredictable with any certainty. I would neither buy the shares nor short them for that reason at this time. But Tesla is not the whole technology sector.

Some technology share valuations may be irrational at present, but shares and markets can stay irrational for a very long time as different investors take different views and have different risk acceptance. In summary I would simply wait to see if there is any certain trend before deciding to buy or sell such shares or the shares of investment trusts or funds focused on the sector.

Investment trusts are particularly tricky when markets are volatile as they often have relatively low liquidity and if stocks go out of favour, discounts can abruptly widen. Trading in and out of those kinds of shares can be very expensive and should be avoided in my view.

I don’t think we are in a technology stocks bubble like in the dot.com era and which I survived when anyone could sell any half-baked technology business for oodles of money to unsophisticated investors. But it is worth keeping an eye on the trends and the valuations of such businesses. Very high prospective/adjusted p/e ratios or very high price/sales ratios are still to be avoided. And companies that are not making any profits or not generating any free cash flow are ones of which to be particularly wary (Ocado is an example – a food delivery company aiming to revolutionize the market using technology). Even if the valuations are high, if a company is achieving high revenue growth, as Ocado is, then it might be able to grow into the valuation in due course but sometimes it just takes too long for them to do so. They risk being overtaken by even newer technologies or financially stronger competitors with better marketing.

Investors, particularly institutional ones, often feel they have to invest in the big growth companies because they cannot risk standing back from the action and need to hold those firms in the sector that are the big players. Index hugging also contributes to this dynamic as “herding” psychology prevails. But private investors can of course be more choosy.

This is where backing investment trust or fund managers who have demonstrable long-term record of backing the winners rather than you buying individual stocks can be wise. Keeping track of the factors that might affect the profits of Apple or Tesla for an individual investor can be very difficult. Industry insiders will know a lot more and professional analysts can spend a lot more time on researching them than can private investors. It is probably better for private investors to look at smaller companies if they want to buy individual stocks, i.e. ones that are less researched and are somewhat simpler businesses.

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

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Polar Capital Technology Trust AGM Report

Today I “attended” the Annual General Meeting of Polar Capital Technology Trust (PCT). This was a very good example of how to run a “virtual” AGM, unlike some I have attended recently. It included the ability to vote within the meeting and ask questions. It used the Lumi platform.

The meeting was chaired by Sarah Bates, and all the directors were in attendance and introduced themselves. Sarah “dropped out” at one point but another director immediately took over. Voting was done on a poll and only the two unusual resolutions were described (the continuation vote and remuneration policy).

The main part of the meeting was taken up with a presentation by fund manager Ben Rogoff which appeared to be pre-recorded and hence lacked spontaneity. But he is always worth listening to as he covers the trends in the technology world very well. I won’t cover it in detail as the recording is available on the company’s web site and much of it is in the Annual Report.

The NAV per share value was up 18.6% on the year and has continued to rise since the year end. Large cap stocks have been the drivers. Ben stated that the aim was to beat their benchmark by 2% and he covered some examples of major holdings.

There were only a few questions answered in the meeting. One was about the concentration of the portfolio in large cap stocks. The answer in essence was that reflects the market trend and hence has been a successful strategy. Another question was on portfolio turnover which was 87%. This apparently rose during the recent market turmoil. Only one question was on the formal business which related to whether repurchased shares were ever issued at a discount. The answer was no.

This is one of the few companies I hold where I can vote “for” to all the resolutions.

In all, a very well organised and run meeting that lasted only 50 minutes. I sometimes find at some of these events I can be doing something else such as checking emails at the same time as I have two screens on my desk, but not this one. Ben Rogoff speaks so fast and without any frippery you have to pay attention.

I would just like to highlight a couple of comments by the fund manager in the company’s annual report to give some insight into the world economy. To quote from it:

  1. “Our own outlook is broadly in-line with the current consensus which (we believe) assumes a limited lockdown period (2–3 months) that is followed by a recovery hampered by social distancing restrictions ahead of a vaccine in 2021 beyond which things ‘normalise’. During this time, policymakers are likely to do whatever is required to preserve the financial system. Their efforts thus far have been nothing short of spectacular. Interest rates have been slashed to zero in nearly all developed economies, while central banks have already expanded their collective balance sheet by an estimated $4trn, led by $2.4tr from the Federal Reserve (Fed). By the end of 2021, the G4 plus China are expected to have increased their balance sheets by $13tr with the Fed and the ECB balance sheets exceeding 50% of GDP. Unlimited QE from the Fed, the world’s lender of last resort, has effectively taken on private sector credit risk. Fiscal stimulus has also been ‘eye popping’ with US efforts estimated at $2.6trn, close to double anything seen in over a century with its flagship Coronavirus Aid, Relief and Economic Security (CARES) Act worth c.9% of GDP and double the size of the intervention following the financial crash in 2008. While different countries have adopted varied approaches, total worldwide stimulus has been estimated at $15tr to date, equivalent to c.17% of the global economy last year.

2. COVID-19 represents one of those generational moments when normality is suspended. Usually, these are deeply personal moments when the passage of time is interrupted by news of serious illness or an unexpected development that changes everything. Once life restarts, for some it simply snaps back to its earlier state. But for many, the timeout allows them to recalibrate and focus on what really matters to them. Our sense is that COVID-19 will result in societal recalibration – permanent changes that persist long after the pandemic – many of which will seem obvious in the fullness of time. The success of work from home (WFH) together with challenges to mass transit systems posed by social distancing means that many of us are unlikely to work as we did previously. This may have a profound and lasting impact on demand for commercial property, coffee shops (as a ‘third space’), business travel and even the role of cities. Rather than trying to move people at high speed in and out of business hubs (with HS2 expected to cost more than £106bn) perhaps infrastructure spending should be redirected to providing nationwide high-speed Internet. If we came to dominate the world because sapiens were the only animal able to assemble and cooperate flexibly in large numbers, then in a socially distanced world the case for universal internet access has never looked stronger”.

I totally agree with the last comment. Building railways which are certainly “old technology” at great expense seems somewhat perverse.

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

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Modernisation of Stamp Duty

HMRC have announced a “Call for Evidence” on the “Modernisation of Stamp Taxes on Shares Framework”. If you deal mainly in the shares of public companies you may not know much about this subject – I certainly don’t. But the consultation document is very enlightening – see link below. That’s if you can understand it because this tax seems to be like capital gains tax – horribly complicated as it has been built up over many years and with a large number of exceptions.

It is of course called “stamp duty” because back in time the transfers of title actually had to have a postage stamp affixed to the document as evidence that tax had been paid, or be otherwise “embossed”. Wikipedia has a good account of the history of stamp taxes. In the past it was even applied to patent medicines, gold and silver plate, hats, gloves, solicitors licences, pawnbrokers licences, hair powder, perfumes and cosmetics. Perhaps we should thank that it is only applied to shares and property/land at present.

Here’s what I thought I knew about it before reading (other readers can correct me if I have anything wrong):

Public company shares are almost all cleared through Crest and subject to Stamp Duty Reserve Tax (SDRT) which is collected by the transacting stockbroker from the purchaser at the current rate of 0.5%. But if you are arranging the transfer of certificated shares directly from an existing holder (for example if you are acting as executor for someone who has died holding such shares) then until recently you had to physically visit the Stamp Office or post the transfer document to them so they could physically “stamp” it. The share registrar would not accept the transfer form without it being stamped first. Needless to say, with the Covid-19 epidemic rampaging, HMRC now accept emailed documents and electronic signatures instead which just about gets them into the twenty-first century.

Transfers of private company shares (or public company shares not in Crest – I recall there are a few), have to go through the same process. In the past this meant large deals could be delayed from completion while awaiting stamping.

But some shares are exempt from stamp duty. You don’t pay stamp duty on shares where the company is registered in a foreign country (outside the UK). But Wikipedia says this: “A unique feature of SDRT, compared to other purely domestic taxes in the United Kingdom, is that more than 40% of the annual intake is collected from outside the UK, thus creating an annual inflow of approx. £1.5 billion from foreign investors to the UK government”. This appears to relate to transfers of offshore (i.e. non-UK) investors, primarily US fund managers who operate depositary receipt or clearing schemes on which a higher rate of SDRT is paid.

The UK may be the only country that penalizes its investors for buying British companies – buying in a market outside of the UK isn’t subject to a charge, and neither are investments in bonds issued by corporations or the government.

However shares in AIM listed companies are also not subject to stamp duty as it was abolished in 2014 – with one exception – those of AIM companies that are “dual listed”, i.e. also listed on another recongized public exchange.

Certificated shares are also exempt in the following circumstances:

  1. shares that you receive as a gift and that you do not pay anything for (either money or some other consideration)
  2. shares that your spouse or civil partner transfers to you when you marry or enter into a civil partnership
  3. shares held in trust that are transferred from one trustee to another
  4. transfers that a liquidator makes as settlement to shareholders when a business is wound up
  5. shares held as security for a loan that are transferred back to you when you repay the loan
  6. transfer to the beneficiaries of a trust when the trust is being wound up
  7. shares that someone leaves to you in their will
  8. shares transferred to you when you get divorced, or when your civil partnership is dissolved
  9. certain types of loan capital
  10. shares valued at less than £1,000.

Such transfers still need “stamping” but with exemption claimed.

To quote from the consultation document: “Some of the most common Stamp Duty reliefs which customers claim relate to companies: intra-group relief; acquisition relief and reconstruction relief. Because the reliefs exist only in Stamp Duty and not in SDRT, anyone subject to SDRT who wants to claim those reliefs has to convert the share certificate into paper form from electronic form and submit that instrument for stamping under Stamp Duty. This creates administrative costs for both the customer and HMRC”; or complex work-arounds.

Note that Stamp Duty and SDRT are two separate taxes with slightly different rules. This undoubtedly creates confusion. HMRC does not have powers to enforce collection of stamp duty (but it does for SDRT) and there is nothing in legislation to say who is liable to pay it. However an unstamped instrument cannot be used as legal evidence.

There is another very big exemption from stamp duty and that is for “intermediaries” such as market makers. To quote from a 2015 paper by Prof. Avinash Persaud which is definitely worth reading (see link below):

“Comparing tax revenues and turnover suggests that a little more than a third of total turnover in UK equities; 37% is subject to the tax, and 63% of turnover is between tax-exempt parties. The principal exemption or relief from stamp duties on share transactions is a share purchase by an intermediary. The intention of this relief is that entities that provide liquidity to financial markets, by standing ready to buy or sell securities from others and accepting an obligation to trade when requested during the trading day, should be tax exempt. The intention of market makers is not to hold on to the security or make money from doing so but rather to facilitate trade; hence the payment of stamp duty is deemed inappropriate. Turnover between genuine market makers is significant, but it is a far cry from 63% of turnover. Prior to the advent of High Frequency Trading (HFT), approximately 20% of turnover used to be driven by market makers.

It is clear that in the UK, the intermediary exemption from stamp duty is being abused. It has become stretched to include activity that was not strictly intended by the law. The balance of the turnover of exempt parties, which is not genuine market making, is largely made up of High Frequency Trading (HFT) and the non-market making activities of intermediaries. Most significant is the turnover generated by intermediaries hedging in the share markets their end-customers’ activity in Contracts for Differences (CfDs), Financial Spread Bets (FSBs) or other derivative instruments. This is certainly not market making”.

A way for private investors to avoid stamp duty on share transactions is to use Contracts for Difference (CFDs) or Spread Bets. These are considered to be “derivatives” but why should they be exempt?

This raises the whole question as to why some transactions are exempt while others not. Why should professional investors not incur the tax while private investors do so? And why should derivatives such as CFDs be exempt? And why should high frequency traders be exempt? What is the logic behind these rules as they tend to encourage speculation as opposed to long-term investment.

But it seems that HMRC are not of a mind to consider the principles of these taxes, just some of the administrative issues.

For more information, see https://www.gov.uk/government/consultations/call-for-evidence-modernisation-of-the-stamp-taxes-on-shares-framework ; and

Persaud Paper: http://www.stampoutpoverty.org/live2019/wp-content/uploads/2015/04/Closing-the-loophole.pdf

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

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Northern 2 VCT AGM – A Totally Undemocratic Affair

I attended the Northern 2 VCT Annual General Meeting yesterday via Zoom. This was a most disappointing event.

There were three directors physically present and Tim Levett gave an overview of the company’s new investments and the top ten holdings. But when it came to the formal business they took a show of hands vote which is totally meaningless when only the directors were permitted to be present.

They did show the proxy counts, so they may have won a poll vote anyway but that is not the point. It should have been a poll vote.

The Chairman did suggest they would answer questions submitted prior to the event, but they did not specifically respond to the comments I submitted in advance. These were:

A – There are too many directors on the board who have served for more for more than 9 years. Too long! [in fact there are three out of five with more than 9 years which is contrary to the UK Corporate Governance Code unless reasons are given.  They did refer to the AIC Code but I do not accept that this should be used and it is simply not good enough for other directors to simply say they consider them independent. Is length of service a problem? I certainly think so. One only has to consider the recent case of Wirecard where the 75-year-old Mr Matthias had been Chairman for more than a decade until recently. Would such a massive fraud have taken place if the board had been regularly revived? In investment trusts it is particularly problematic as the directors can build very close and inappropriate relationships with the fund managers].

B – There is no clear statement of total return for the year in the Annual Report, and percentage change over the prior year). [There was no reference to this at all by the directors, but on my calculation it was -3.9% last year. That’s actually better than some other VCTs. Many VCTs had to mark down the valuations of some of their early stage businesses, but as the results were only to the end of March, there may be worse news to come].

Despite the use of Zoom, there was no interaction with the audience whatsoever with no opportunity to ask supplementary questions. I have no idea even how many shareholders attended.

A quite disappointing event and not how to run an AGM even bearing in mind the current restrictions.  

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

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Victoria and Downing One VCT Annual Reports, and Rio Tinto Mea Culpa

With it being all quiet on the financial front, with a lot of people on holiday, I had the time to read a couple of Annual Reports over the weekend. First came Victoria (VCP), a producer of flooring products (carpets and tiles) in which I have a relatively small holding. Chairman Geoff Wilding always has some interesting things to say and their Annual Report is an exemplary model of shareholder enlightenment.

He commences with this statement: “There is an old Yiddish adage which, loosely translated, says “If you want to make God laugh, tell him your plans”. It is safe to say that when Victoria developed its business plan for 2020/21 at the start of this year, we did not factor in the complete economic shutdown in most of the various countries in which we operate”. He does briefly cover the latest business position but the Annual Report covers the year to the end of March so it is mainly historic data.

It was interesting to read this section: “A core element of our UK growth strategy, made possible due to the scale of our business, is our logistics operation, Alliance Flooring Distribution. 18 months ago, we made the decision to invest heavily in logistics, accepting the consequential temporary loss of some margin, in the belief that our customers – flooring retailers – would highly value reliable on-time delivery of carpet, cut precisely to size for a specific consumer order. This has meant that they can hold less inventory, freeing up cash from their working capital, and devote more space in their stores to point of sale rather than using it to warehouse product, and reduce waste, improving their margins. (Carpet is produced in rolls 25m long. However, houses rarely need exactly a full roll and retailers would invariably be left with a typical leftover 2-3m “short end”, which would be thrown away. In contrast, given our high volume of orders and sophisticated cutting planning software, our wastage is much lower). And this is exactly how it has turned out”.

Going back into history, in 1980 I developed a similar system for Harris Carpets to establish a computer system to optimise their central carpet cutting operations and minimise “remnants” or “short-ends”. This proved to be one of their key competitive advantages. Similar systems have been used by other big carpet retailers and distributors since, but the carpet market is still dominated by smallish local operations so you can see the advantages that Victoria might gain.

The second annual report I read was that of Downing One VCT (DDV1). Apart from a very poor financial performance for the second year running, the report fails to cover several important items.

Firstly there is no information on the length of service of the directors, nor their ages. It is now convention not to report the ages of directors which I consider unfortunate but they should at least state when they joined the board so we can see their length of service. Ages can of course be easily looked up at Companies House – they are 60, 71 and 75 years for the three directors.  Are ages and length of service important? I think they are simply from my experience of boards and their performance.

But the really big omission is that the substantial loss reported of £23.8 million partly included a “Provision for doubtful income” under Other Expenses of £2.1 million in Note 5 to the Accounts. What is that? I cannot spot any explanation in the report. I have sent a request for more information to the company.

Rio Tinto (RIO) published an abject apology this morning for their destruction of a cultural heritage site in Juukan Gorge in Australia. They say “The board review concluded that while Rio Tinto had obtained legal authority to impact the Juukan rockshelters, it fell short of the Standards and internal guidance that Rio Tinto sets for itself, over and above its legal obligations. The review found no single root cause or error that directly resulted in the destruction of the rockshelters. It was the result of a series of decisions, actions and omissions over an extended period of time, underpinned by flaws in systems, data sharing, engagement within the company and with the PKKP, and poor decision-making”. They propose a number of improvements to avoid the problems in future. In the meantime they are knocking off £2.7 million from the possible bonuses under the STIP and LTIP schemes available to CEO J-S Jacques and large amounts from two other senior executives. That should hurt enough I think. 

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

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Big Miners, Moneysupermarket and Winning Against the Odds

Looks like we are back to a normal English summer – rain every other day and cool. But there are a few things to talk about.

Yesterday BHP Group (BHP) published their results to the end of June yesterday. Revenue and earnings were slightly below forecasts and the dividend was reduced by 10% as profits were down. But hey, when so many companies are cutting out their dividends altogether this is surely not going to worry many people. They still managed to achieve a return on capital of 17% and underlying eps was up. The shares fell only slightly as a result.

Today Rio Tinto (RIO) reported that production of refined copper in 2020 is now forecast to be lower by about 30% due to delays in restarting a smelter after planned maintenance. The share price is actually up today slightly at the time of writing, perhaps because copper is a relatively small part of their portfolio.

Both companies are very reliant on consumption of commodities such as iron ore in China, and China is still forecast to have economic growth this year despite the Covid-19 epidemic, unlike many other countries. Both companies are working hard to improve their ESG credentials after some recent mis-steps. Ignoring that, these companies still look good value to me (I hold both).

I used to be a holder of Moneysupermarket (MONY) shares but sold most of them in March when I was cutting my exposure to the stock market and weeding out the underperformers in the epidemic rout. Recently my house insurance came up for renewal and the broker I had used for many years gave a renewal quotation that was up 12% on last year. So I thought I would look for a cheaper quote on Moneysupermarket. They produced three quotations only one of which was cheaper and they insisted we replaced our newly installed alarm system for reasons I could not understand. So I then looked at other alternatives and got a quote from LV (Liverpool Victoria as was) that was less than 50% of all the other quotations. The moral is that it can be cheaper to go to direct providers. Is this why Moneysupermarket has not been growing earnings of late? Perhaps they are not producing competitive quotations?

Another good book for summer holiday reading is “Winning Against the Odds”, the recently published autobiography of Stuart Wheeler. He died in July and had a very interesting career.  He was a big gambler and founded IG Index which developed into a major spread-betting company from which he made many millions of pounds eventually.

One section of the book talks about his visits to Las Vegas where he made money by using a card counting technique on Blackjack. But he clearly liked to bet on almost anything.

I visited Las Vegas several times for computer software conferences. But I avoided the gaming tables and slot machines.  I did have some interest when a teenager in betting but not after the age of 18. To win at card games, betting on horses or sports results requires a great deal of hard work to be successful. I think there are easier ways to make money such as betting on stock market shares.

One of Stuart Wheeler’s friends was the late Jim Slater, financier and author of books on stock market investment. One of his sons is Mark Slater who runs a fund called the Slater Growth Fund, and others. I don’t hold them because I prefer investment trusts to open-ended funds but he is certainly a good “active” manager. They sent me the latest update on the Growth Fund today and it’s good to see that their fund asset chart over the last few months appears to match my portfolio. At least I am keeping up with the professionals.

The latter part of Wheeler’s book covers his involvement with politics although he seemed to have no great adherence to any political stance, apart from his belief in capitalism and his desire to depart from the EU. He did donate £5 million to the Conservative Party which was the biggest donation at the time to them. But they later expelled him from the party after he started to support UKIP.

Politically the last few years have been some of the most exciting in my lifetime. Politics used to be a very boring subject but now it has captured the imagination of the public with everyone forming opinions on the parties, their leaders and their policies. Rational analysis often gets lost in the fierce debates. Brexit alone was and is a very divisive subject. 

The leaders have been a very mixed bunch indeed and Wheeler sticks the knife into both Jeremy Corbyn and Theresa May. But he was careful not to say a lot about Boris Johnson. I think he might have preferred Michael Gove as Conservative Party leader but I do not see him as being very electable.

In summary, it’s an interesting book and an easy read.

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

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Cash Held by Brokers, and Low Traffic Neighbourhoods

The Daily Telegraph ran an interesting article today on the amount of client cash held by stockbrokers and what they earn from it. Most brokers pay no interest on cash held in broking accounts, but get significant interest on it that they retain for themselves. They singled out Hargreaves Lansdown who apparently received £91 million in the last 12 months (to June) for some criticism. They obtained a margin of 0.75% on the cash held.

Many investors moved out of the stock market during the March epidemic rout but left the cash in their broking accounts rather than move it out, mainly because it’s takes effort and can be tricky to do so with ISAs and even more so with SIPPs.

But you can take cash out of an ISA and put it back in later, just so long as you put it back in within the same tax year. In fact I took quite a lot of cash out of our ISAs and with the market recovering strongly I am moving some back in. I did not expect the recovery to take place until much later in the calendar year. It’s quite difficult to understand why the market is recovering so quickly. Perhaps investors are looking further ahead than the short term poor economic numbers, or are betting on a vaccine working and soon (the FT reported on Russia going into production with one). But I never try to figure out the rationality of the market – I just follow the market trend but selectively about which shares I am buying and selling.

There is a great deal of irrationality in the world at present. A good example was a webinar I attended this morning run by Landor Links on Low Traffic Neighbourhoods (LTNs). These are being promoted by the Government and frequently consist of road closures using the euphemistically named “modal filters” Several of the speakers promoted the wonders of such schemes typically using slides showing the joy of cycling in sunny weather. They failed to cover how the residents of boroughs such as Waltham Forest got to vote on the proposals, before or after implementation. I know there is a very large amount of opposition in Waltham Forest, in Lewisham in the Oval area, in Islington and several other parts of London. But the Covid-19 epidemic is being used to justify emergency measures without any public consultation.

It’s all quite disgraceful as democracy is being undermined and the road network is being destroyed. Traffic congestion in Lewisham for example has been made a lot worse to my personal knowledge and that’s even before the schools return. Labour controlled Councils are frequently a particular problem as they tend to like to decide what is good for you rather than listening to their electorate or taking into account any rational arguments.

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

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Virtual AGMs and How Innovation Works

The Financial Times ran an article today headlined “What’s an AGM without a chat with directors over a prawn sandwich?”. It covered the lack of attractiveness of AGMs now that there are only virtual electronic ones, if any at all, that shareholders can attend. I added this comment to the article on their web site:

“It is most disappointing that many companies are failing to hold virtual AGMs while the epidemic is around. AGMs are a valuable opportunity to ask questions of directors, both formally and informally. But as most have been held in London that means physical attendance for many was not practical. The best solution is a hybrid AGM where people can attend in person or electronically.

The smaller the company, the more valuable the AGM becomes. If they don’t want to hold formal AGMs electronically they could at least provide a seminar for shareholders to attend. But the FCA should draw up some firm rules that stop companies avoiding doing anything.

I am one of those people who regularly attends AGMs and I find them essential to learn more about companies and their management”.

There were a number of other good comments posted, but it is most unfortunate that the FT’s article writer talked about the free lunches and other goodies. Personally I could not care less about the lunches and frequently avoid them. The offered buffets I have found to be a good source of an upset tummy.

Anyway it was good to see today that Polar Capital Technology (PCT) are going to hold a virtual AGM on the 2ndof September. This will not just provide on-line access to the meeting but also support on-line voting using the Lumi Global web site or App (see  https://www.lumiglobal.com/ ). They also support hybrid AGMs which may be useful when the epidemic is over. I am a firm supporter of hybrid AGMs when normality returns as not many people can spare the time to attend meetings in person, particularly if they live remotely from the venue. But physical attendance is still the best if you want to chat informally to the directors, or fellow shareholders, so I would not want to see conventional AGMs abandoned in place of solely virtual meetings.

Polar Capital Technology are of course one of the big investors in innovative technology companies. I am just finishing reading a recently published book by Matt Ridley entitled “How Innovation Works”. I can certainly recommend it for summer holiday reading.

He dispels the myth of the lone inventor or genius creating leap forwards in products by covering many of the histories of past inventions such as the steam engine, the light bulb, the computer, the airplane and the adoption of farming – in other words a very wide period of history. The research that has gone into this book must have been very extensive indeed as so many examples are covered.

What conclusions are drawn? That innovation is typically a collaborative process of many minds and it is frequently difficult to pin down the first inventor. They often all learn from each other. He also looks at what environments encourage innovation and what discourage them. A wealthy and free society helps, while Government direction and monopolies are disadvantages. Few innovations come directly from scientific research financed by Governments or others.

The author emphasizes that innovation is often a gradual process with no great leaps forward in reality – it often just appears so in hindsight. For those investing in technology companies it’s well worth reading to understand why some companies are successful and others not. It certainly matches my experience of working in the software industry.

Now it’s the height of summer, and our windows are open, the flies are swarming into our houses. I recently purchased a great product which I consider a major step forward in fly killing. It’s a typical innovation in other words. It’s like a tennis racket but has wires connected to a battery in the handle that enable you to swat the flies and they instantly get fried when they touch the wires. No more swatting flies with newspapers and leaving squashed flies. Who invented this product? I have not been able to find out. But it is clearly a development of large mains powered fly killers that one saw on the walls of shops in the past. A photograph is below.

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

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FCA Seminar and Property Funds Rule Change

The Financial Conduct Authority (FCA) is consulting on a rule change for open-ended property funds. The problem of such funds holding illiquid investments in direct property are well known. If investors want to sell when property goes out of favour, the funds simply cannot sell their underlying holdings fast enough. It can take months to do so when investors in the funds expect their cash immediately. Or as the FCA puts in, there is a mismatch between the liquidity offered to investors in the funds, and the liquidity of the fund’s holdings.

This problem has resulted in the funds having to be “suspended” or “gated” to stop redemptions, and many still are after the March crash this year.

The FCA’s solution is to require investors to give notice before they can get their cash – potentially up to 180 days. But this would probably mean that investors would not be able to hold such funds in ISAs, unless their rules are changed. Needless to say, investors who currently do so are not going to be best pleased as they would have to sell them.

This is a very simplistic solution to a long-standing problem, and to my mind may not solve the problem as disposing of property can take longer than 180 days if you want to obtain a fair value for it. Permitting illiquid investments of any kind to be held in open-ended funds is simply wrong.

Such funds should be wound up, or converted to investment trusts which is surely not impossible. Meanwhile I won’t personally be responding to this consultation as I am not so daft to hold such funds, only property investment trusts.

See the FCA press release here for details: https://www.fca.org.uk/news/press-releases/fca-consults-new-rules-improve-open-ended-property-fund-structures  and for how to respond to the consultation.

Yesterday the FCA presented at a seminar hosted by ShareSoc and UKSA as a webinar. Mark Seward was the speaker from the FCA but he did not cover the above issue at all (he is responsible for “Enforcement and Market Oversight”).

He did cover the outcome of the Redcentric case where grossly misleading accounts were published. He said the investors had “purchased a lemon”. They did not fine the company, but the company is compensating the shareholders affected and 3 former executives are awaiting trial. He explained the reasons for the FCA’s actions which seemed reasonable to me (I never held the shares though – those more familiar with the case might have a different view). He also mentioned the Burford case and the legal decision re disclosure of trading data and made some uncalled for derogatory remarks about the comments made on it by some ShareSoc members.

He covered the emergency measures introduced by the FCA for the Covid-19 epidemic which he said enabled the UK markets to raise 3 times more capital than any other European market in the first half of the year. But Mark Northway raised the issue of the problems of private investors participating in these fund raisings. I would also have liked to see the issue raised of companies not providing access to AGMs nor any other means for shareholders to talk to the directors while the epidemic rages.  

Another issue discussed was the outright refusal of the FCA to provide any information on the progress of an investigation. This is exceedingly frustrating for investors as it means after a complaint is made, there is no apparent action for many months if not years. When many of the facts are reasonably well known and in the public domain already (as in the Redcentric case, or in other cases such as those of Globo or Patisserie) this can appear quite unreasonable.

Mark Seward suggested that no regulatory body (for example, the Police) discloses anything about their investigations, partly because the evidence might disappear if they did. But this is simply not true. The Police often inform victims of crimes about the progress of a case, sometimes albeit on a confidential basis. Victims and the police are also entitled to follow the “Code of Practice for Victims of Crime” published by the Government which the police have to adhere to (but not the FCA who are specifically excluded for no good reason).

The seminar was not altogether a waste of time, but could have had a much sharper agenda.

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

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On the Wealth of Nations

The stock market’s in the doldrums and August is coming up when everyone goes on holiday. But I would guess many of my readers will not be going far, or not at all. You may need some lightweight tome to read on your sofa or on the beach though, so here is a book I have just finished and can recommend.  

It’s called “On the Wealth of Nations” by P.J. O’Rourke. First published in 2007 and claiming to be a New York Times Bestseller, it’s a digest and analysis of that venerable book of the same title by Adam Smith which was published in 1776. I tried reading that book many years ago but found it heavy going. It’s long and in a somewhat archaic style but it was the foundation of much subsequent thought in economics. For anyone interested in the worlds of business and finance, it provides a primer on the division of labour, productivity, and free markets.

P.J. O’Rourke is a very unlikely person to take a stab at popularising Adam Smith’s book but he makes a very fine job of it. He is a comic writer and wit whose reporting on the war in Iraq and in motoring stories in such books as “Give War a Chance” and Holidays in Hell” are also worth reading.

O’Rourke relates much of Smith’s adages, aphorisms, epigrams, insights, observations, maxims, axioms, judicious perceptions and prejudiced opinions (which Smith produced in large numbers) to the modern world. Here’s one example: “The freedom of the market, though of uncertain fairness, is better than the shackles of government, where unfairness is perfectly certain”.

Smith lived before the rise of modern capitalism and the importance of the joint stock company. But he wisely had this to say (as O’Rourke quotes) that as the result of an immense capital divided among an immense number of proprietors [shareholders]:  “It was naturally to be expected therefore, that folly, negligence, and profusion should prevail in the whole management of their affairs”. That’s still true of many companies is it not?

O’Rourke relates two very amusing anecdotes about Smith and his absentmindedness. He is supposed to have gone out into the garden in his dressing gown and, lost in thought, wandered into the road. He walked to Dunfermline, fifteen miles away, before steeple bells broke his reverie and he realised he was wearing his robe and slippers in the midst of a crowd going to church.

At another time, deeply involved in conversation over breakfast, he put bread and butter and boiling water into a teapot and then pronounced it was the worst cup of tea he had ever had.

Some of the issues that Smith discussed in his book such as whether to support free trade or not, what are good taxes or bad taxes, and what level they should be at, are still the subject of topical debate.

In summary O’Rourke’s book is easy reading but still prompts much thought on the world of business, economics and politics.

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

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