Epidemic Over? Unable to Trade and Chrysalis VCT Wind-Up

The news that the Pfizer vaccine for Covid-19 appears to work (at least 90% of the time) and has no negative side effects gave stock markets a good dose of euphoria yesterday. It suggests that we might be able to return to a normal life in future, but exactly when is far from clear. Actually producing and distributing the vaccine is going to be a mammoth task and it is very clear that it will only be given to certain people in the short term – the elderly and medically vulnerable. Some people might not accept the vaccine and transmission of the virus may still take place. It is clearly going to be many months before we can cease social distancing and wearing face masks – at least that is the situation if people follow sensible guidance which they may not. Some countries may not be able to afford to immunize everybody so how this good news translates into reality is not clear. In summary, the epidemic is not over.

But the good news did propel big changes in some stocks such as airlines, aerospace industry companies and the hospitality sector which have been severely damaged by the epidemic. Rolls-Royce (RR.) share price was up 44% yesterday for example, although I wouldn’t be buying it until it can show it can make a profit which it has not done for years. In the opposite direction went all the highly rated Covid-19 diagnostic stocks such as Novacyt (NCYT) which I hold. There have probably been way too extreme movements both up and down in the affected stocks as sentiment was only one way.

The big problem faced by many investors though was that platforms such as Hargreaves Lansdown and AJ Bell Youinvest actually ceased to function. It is reported that their customers were unable to log in and trade. But this is not a new problem. See this report in December 2019 when there was a previous bout of euphoria that affected the same two brokers: https://roliscon.blog/2019/12/16/euphoria-all-around-but-platforms-not-keeping-up/ .

They clearly did not learn their lesson and should have done better “load testing”. Perhaps the moral is don’t put all your eggs in one basket by relying on one broker (I use 5 different ones and spread my holdings over them).

For those with an interest in Venture Capital Trusts (VCTs) it has been pointed out to me that Chrysalis VCT (CYS) is putting proposals to wind up the company to its shareholders. I used to hold the company, but sold out in 2018 at prices ranging from 62p to 66p – the current share price is 35p. I had big concerns then about the shrinking size of the company (NAV now only £14.9 million) as cash was returned to investors. The other major concern was the holdings in the company, particularly that in media company Coolabi and the valuation thereof (last filed accounts were to March 2019 and showed a loss of over £7 million).

VCTs that shrink too much, even if they are good at returning cash to shareholders, can get themselves into an unviable position as costs of running the VCTs sooner or later get out of proportion. As the announcement by the company makes clear, in such a situation a VCT has the following options: a) merge with another VCT; b) change the manager and raise new funds; c) sell the company or its portfolio; or d) wind it up.

But raising new funds under the tougher VCT rules that now apply might not be easy, while mergers with another company might be difficult. Who would want to acquire a portfolio where 29% of the current valuation is that of Coolabi – even if you believe that valuation!

The directors give numerous reasons why a wind-up is the best option after they got themselves into this difficult situation. They correctly point out that some investors will be prejudiced by this move as some original investors will have claimed capital gains roll-over relief. They will get their tax liability rolled back in after the wind-up and the ultimate cash cost might be more than what they obtain from the wind-up. Ouch is the word for that. But the directors are going to ignore those investors on the basis that a wind-up “best serves shareholders as a whole”.

The other problem is that a wind-up of a company with holdings of private equity stakes takes a long time and there is no certainty that the value they are held at in the accounts can actually be obtained. Investors in Woodford funds will have become well aware of that issue! Who would actually want to buy Coolabi for example, or some of the other holdings?

Another VCT I held in the past that got into the situation of returning cash to shareholders while finding no good new investments and not raising funds was Rensburg AIM VCT. They managed to escape from it after a lot of pushing from me by merging with Unicorn AIM VCT. But I fear Chrysalis VCT have left it too late and hence the choice of the worst option.

But if I still held the shares, I might vote against the wind-up and encourage the directors to take another path. It is possible to run VCTs on a shoestring if a big focus on costs in taken. In addition, the directors say that they did have some discussions about fund raising, possible mergers or the acquisition of the company but have rejected those for various reasons. But I think they need to look again, after a more realistic view of the values of the existing portfolio holdings has been obtained.

One change that should certainly be made if the company chooses not to wind-up is a change in the directors and fund managers who allowed the company to get itself into this unenviable situation. Regrettably there often appears to be a tendency for directors and fund managers to want to keep their jobs and their salaries long past when tough decisions should have been made.

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

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AJ Bell and FinnCap IPOs

Here are some comments on the IPOs of AJ Bell and FinnCap which are open to private investors  ̶  the former to any of their clients who wish to put in £1,000 or more. The latter can be purchased from the PrimaryBid platform.

Bearing in mind that I have previously said that you should never invest in IPOs (see my comment on Aston Martin which was certainly right as the shares are now down over 20% since IPO here: https://roliscon.blog/2018/09/09/the-market-dunedin-and-standard-life-smaller-companies-merger-and-aston-martin-ipo/ ), these comments will be reserved in nature. Even the very successful launch of Smithson Investment Trust which went to an initial premium seems to have retraced its steps. But there are exceptions.

One reason why you might wish to buy AJ Bell shares, or at the very least read their prospectus, is if you are a client who uses their Youinvest platform. As we saw with past debacles in stockbrokers, such as the recent events at Beaufort, because investors on such platforms are in nominee accounts it’s definitely worth keeping an eye on their accounts. Being a shareholder means you can go along to their AGMs and ask questions. Investors will be pleased to hear that AJ Bell claim to have a “strong regulatory capital position which is supported by a high Pillar I coverage in excess of approximately 440%”.

The company has 95,000 retail investor customers and 89,000 customers via advisors. All are execution-only clients, i.e. AJ Bell provides no advice. Their average customer account value is higher than most of their big competitors and this is probably because of their historic concentration on SIPP accounts which represent 63% by asset value of their accounts.

Founder Andy Bell is still with the company as CEO after 23 years and will remain. No very specific reasons are given for the IPO – it’s just referred to as a “natural next step”. No new capital is being raised and Andy Bell is selling 10% of his shares in the IPO, which will cut his holding to 25%, but together with related parties (a “Concert Party”) he will still control more than 30% after the IPO. Major shareholder Invesco is also selling a major proportion of their shareholding. No new money is being raised for the company.

The financials look very good in comparison with many platform operators, other than possibly Hargreaves Lansdown who are the gorilla in this market, but the shares are likely to be cheaper than theirs. Share price range will be between £1.54 and £1.66 giving a market cap of over £626 million.

Is it a good time to invest in platform operators whose profits can depend on the volume of share trading and assets under management? Certainly recent volatility might have helped but it is difficult to judge the longer-term trend. But as stockbrokers are highly regulated businesses it’s worth reading the “Risk Factors” and associated warnings in the prospectus. Market trends of an ageing population who may be tending to move their pension funds into SIPPs or have saved in ISAs has no doubt helped AJ Bell in recent years and is likely to continue to do so. This has generated compound growth in numbers of customers at AJ Bell of 24% in the last 7 years.

It’s particularly interesting to read the “asset transfer momentum” table on page 45 of the prospectus. That shows AJ Bell among the top few for transfers in, while Alliance Trust Savings is at the bottom – perhaps Alliance Trust were wise to dispose of it.

I have never heard complaints about the AJ Bell IT platform (they have a proprietary client front-end with “outsourced” software being used for the back-office work), so that bodes well for the future. Although it would be good if they made it easier for investors to vote their shares on their nominee platform which I think was promised but has not arrived.

I think this will be a popular IPO and although the market has been depressed by Brexit worries it might therefore get away easily. But you’ll have to make your own mind up whether it is good or bad value. I repeat my warning about buying IPOs in general – the sellers know more about the business and market trends than you do.

Details of the IPO can be found here: https://www.youinvest.co.uk/markets/ipo/ajbell

As regards FinnCap, they spell it as “finnCap” which rather shows their ignorance of English grammar. The business is a small company corporate broker and AIM Nomad. I hold a number of AIM companies who they act as broker for and they seem to do a competent job on the whole – at least no worse than any other AIM Nomad who operate in a market full of companies with optimistic future growth projections but frequently unrealistic ambitions and unproven management. This is no doubt a business with substantial regulatory risk.

FinnCap are merging with Cavendish Corporate Finance before the IPO. As a very people-dependent business, operating in a cyclical market sector, I am not sure these kinds of companies are ideal to be public companies. Therefore I won’t even attempt to comment on the valuation.

I repeat my warning about investing in IPOs – see above.

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

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IPOs, Platforms, Growth Stocks and Shareholder Rights

I agreed with FT writer Neil Collins in a previous article when discussing the prospective IPO of Aston Martin (AML) – “never buy a share in an initial public offering” he suggested because those who are selling know more about the stock than you do. We were certainly right about that company because the share price is now 24% below the IPO price.

Smithson Investment Trust (SSON) did rather better on its first day of trading on Friday, moving to a 2% premium. That’s barely enough to have made it worth stagging the issue though. But I think it will be unlikely to outperform its benchmark in the first year simply because as the largest ever investment trust launch it might have great difficulty investing all the cash quickly enough. On the other hand, if the market continues to decline, holding mainly cash might be an advantage.

One company that is lining up for a prospective IPO is AJ Bell who operate the Youinvest investment platform. They reported positive numbers for the year ending September recently but I suspect the IPO may be delayed given recent stock market conditions. One symptom of this is perhaps their rather surprising recent missive to their clients that discouraged some people from investing in the stock market. This is what it said: “In this year’s annual survey we had a small number of customers who identified themselves as ‘security seekers’, which means, ‘I am an inexperienced investor and I do not like the idea of risking my money and would prefer to invest in cash deposits’. If this description sounds like you, please consider whether an AJ Bell Youinvest account is right for you. If in doubt, you should consult a suitably qualified financial adviser”. It rather suggests that a number of people have moved into stock market investment after a long bull run and have not considered the risks of short-term declines in the market.

An interesting article was published on another platform operator, Hargreaves Lansdown (HL.), in this week’s Investors Chronicle. Phil Oakley took apart the business and showed where it was generating most of its profits – and it is undoubtedly highly profitable. Apart from the competitive advantage of scale and good IT systems it enjoys, it also benefits from promoting investment in funds, and running its own funds in addition. The charging structure of funds that it offers means it makes large amounts of money from clients who invest mainly in funds – for example £3,000 per annum on a £1 million SIPP portfolio. Other platforms have similar charging structures, but on Youinvest Mr Oakley suggested the charges on such a portfolio might be half.

His very revealing comment was this: “It is not difficult to see how this is not a particularly good deal for customers. It’s the main reason why I don’t own funds at all”. That goes for me also in terms of investing in open-ended funds via platforms.

Hargreaves Lansdown has been one of those typical growth stocks that do well in bull markets. But with the recent market malaise it has fallen 20% in the past month. Even so it is still on a prospective p/e of over 30. I have never invested in the stock because I was not convinced that it had real barriers to competition and always seemed rather expensive. Stockbroking platforms don’t seem greatly differentiated to me and most give a competent and reliable service from my experience. Price competition should be a lot fiercer in this market than it currently appears to be.

Almost all growth stocks in my portfolio have suffered in the last few weeks as investors have moved into cash, or more defensive stocks such as property. One favourite of private investors has been Renishaw (RSW) but that has fallen 35% since July with another jerk down last week. The company issued a trading statement last week that reported revenue growth of 8% but a decline in profits for the first quarter due to heavy short-term investment in “people and infrastructure”. According to a report in the FT Stifel downgraded the company to a “sell” based on signs that demand from Asian electronics and robotics makers has weakened. But has the growth story at this company really changed? On a prospective p/e now of about 20, it’s not looking nearly as expensive as it has done of late. The same applies to many other growth companies I hold and I still think investing in companies with growing revenues and profits in growing markets makes a lot more sense than investing in old economy businesses.

Shareholder rights have been a long-standing interest of mine. It is good to see that the Daily Mail has launched a campaign on that subject – see https://www.dailymail.co.uk/money/markets/article-6295877/We-launch-campaign-savers-shares-online-fair-say-company-votes.html .

They are concentrating on the issue of giving shareholders in nominee accounts a vote after the recent furore over the vote at Unilever. But nominee account users lose other rights as well because they are not “members” of the company and on the share register. In reality “shareholders” in nominee accounts are not legally shareholders and that is a very dubious position to be in – for example if your stockbroker goes out of business. In addition it means other shareholders cannot communicate with you to express their concerns about the activities of the company which you own. The only proper solution is to reform the whole system of share registration so all shareholders are on the share register of the company. Nominee accounts only became widespread when it was necessary to support on-line broking platforms. But there are many better ways to do that. We just need a modern, electronic (i.e. dematerialised) share registration system.

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

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