Brexit Investment Strategies

Investors may have noticed that the pound is in free fall and heading towards US$1.20. That’s near the low after the initial Brexit vote. Pundits, not that they can be relied on for forex forecasts, suggest it could go lower now that we seem to be heading for a “no-deal” Brexit.

With the pound falling, and potential damage to the UK economy from a hard Brexit, investors should surely have been avoiding companies reliant on UK sales, or UK consumers, or those such as engineers and manufacturers that rely on just-in-time deliveries from Europe. The key has been to invest in those UK listed companies that make most of their sales overseas in areas other than the EU.

One such company that announced interim results today is 4Imprint (FOUR), a supplier of promotional merchandise. Most of its sales are in the USA and its accounts are in dollars. Revenue in dollar terms was up 16% at the half year and pre-tax profit up 22%. The share price rose 6.5% yesterday and more this morning but the former suggests the good news leaked out surely. With the added boost from currency movements, this is the kind of company in which to invest but there are many other companies with similar profiles. For example, many software companies have a very international spread of business, or specialist manufacturers such as Judges Scientific (JDG). Those are the kind of companies that have done well and are likely to continue to do so in my view if the US economy remains buoyant and the dollar exchange rate remains favourable.

The other alternative to investing in specific UK listed companies with large export revenues and profits is of course to invest directly in companies listed in the USA or other markets. But that can be tricky so the other option is to invest in funds such as investment trusts that have a global spread of investments with a big emphasis on the USA. Companies such as Alliance Trust (ATST), Scottish Mortgage (SMT) or Polar Capital Technology Trust (PCT) come to mind. Alliance Trust has a one-year share price total return of 11% according to the AIC and the share price discount is still about 5%. I received the Annual Report of PCT yesterday and it makes for interesting reading. Net asset total return up 24.7% last year and it again beat its benchmark index. The investment team there has been led by Ben Rogoff for many years and what he has to say about the technology sector is always worth reading. Apparently the new technology to watch is “software containerisation” which is compared to the containerisation of cargo shipments in its revolutionary impact.

Another interesting comment is from the Chairman complimenting Ben on having the skill of buying shares and holding those which go on to outperform, but also knowing when to sell at the right time which the Chairman suggests is not common in fund managers.

Another hedge against a hard Brexit is to invest in companies that own warehouses because a lot more stockpiling is already taking place as a protection around the Brexit date by importers, but also more will be required to hold buffer stocks for manufacturers in the future. Companies such as Segro (SGRO), Tritax Big Box (BBOX), and Urban Logistics (SHED) have been doing well for that reason. They have also been helped by the trend to internet shopping which requires more warehousing space and less retail space. These trends are likely to continue in my view and the retail sector is likely to remain difficult for those retailers reliant on physical shops. You can see that from the results from Next (NXT) this morning. Shop sales down while internet sales up with the overall outcome better than expected as on-line sales grew rapidly. Anyone who expects the high street or shopping malls to revive is surely to going to be disappointed in my view.

There are bound to be some problems for particular sectors if we have a hard Brexit. The plight of Welsh sheep farmers was well covered by the BBC as Boris Johnson visited Wales yesterday. Most of their production currently goes to Europe but they may face 40% tariffs in future. The Prime Minister has promised assistance to help them but they have been heavily reliant on subsidies in the past in any case. There will need to be some difficult decisions made about the viability of farming on marginal land in future.

The falling pound has other implications of course. It will help exporters but importers will face higher prices with the result that inflation may rise. However, there are few products from Europe that cannot be substituted by home grown or produced equivalents, or by lower cost products from the rest of the world. With import tariffs lowered on many imports the net effect may be very low in the long term. But it will take time for producers and consumers to adjust. Tim Martin of JD Wetherspoon is well advanced in that process so you can see just how easy it will be to adapt.

In summary, investors should be looking at their current portfolios and how they might be impacted by Brexit now, if they have not already done so. There will clearly be winners and losers from the break with Europe and investors should not rely on any last-minute deal with the EU even if Boris is expecting one. Any solution may only be a temporary fix and the policies suggested above of international diversification are surely wise regardless of the political outcome.

Note: the author holds some of the stocks mentioned.

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

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Alliance Trust Results and Directors’ Pay Cuts

Very long-established investment trust Alliance Trust (ATST) issued its annual results for 2018 on the 1st of March. Total return for the year was minus 5.4% with its equity portfolio slightly behind its benchmark index. It put this down to not holding a “narrow group of very large companies”. That performance is similar to my own personal investment portfolio and better than a number of active managers so I hope investors will be satisfied with it after the past revolution at the company.

It is of course disposing of Alliance Trust Savings which finally managed to show an operating profit after many years of losses, and it is also getting shot of some private equity investments and mineral rights in North America. It’s basically returning to its roots as a simple global investment trust which will please many investors.

Citywire have highlighted that many of the directors are taking a pay cut, with Chairman Lord Smith seeing his annual pay reduced from £120,000 to £80,000, Deputy Chairman Gregor Stewart losing £55,000 as he will no longer be a paid director of Alliance Trust Savings. Other directors’ fees are also reduced. Do not be too concerned about Lord Smith’s descent into poverty though – he still has a couple of other well paid jobs.

The pay changes are a rational move because although it was necessary to pay highly to new directors for the effort required to sort out the mess that was the company before Elliott launched their bid for changes, and for the reputational risk if they failed, it is hopefully now more stable and more similar to other investment trusts who do not pay enormous amounts to their non-executive directors. The pay changes will undoubtedly please the many Scottish holders of shares in the trust.

I do hold a few shares in Alliance Trust. I consider it can now be one of those core holdings that any investor who does not wish to track every gyration of the market can hold.

The current share price discount to NAV is 4.4% which is acceptable but the company says it is considering how they can stimulate additional demand for the shares. Investment trusts often have the problem of spending very little on marketing which can be a shame when they provide a low cost route for stock market exposure by investors and have a number of advantages over open-ended funds and ETFs.

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

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Alliance Trust Savings Sold

Alliance Trust (ATST) has sold its Alliance Trust Savings (ATS) subsidiary to privately-owned company Interactive Investor. The ATS investment platform was always a peculiar business for a traditional investment trust to be holding. It was also consistently loss-making and reported an operating loss of £19.3 million in 2017 after a big write down of intangible assets. The directors valued the ATS business at £38.3 million in the 2017 accounts and Interactive Investor are paying £40 million for it but it looks like they are getting the Dundee offices of ATS valued at £4.9 million in addition.

The ATS business will continue to operate from Dundee as will Alliance Trust itself. But there will presumably be some rationalisation of IT systems in due course so clients of ATS may need to learn new software eventually. Charges might also presumably be harmonised also. Interactive Investor charge a fixed quarterly fee of £22.50 which covers some trading fees. Otherwise trading charges are £10 per trade, or less for frequent traders. This structure means that charges do not rise as your portfolio grows and is particularly well liked by those with larger portfolios.

The disposal of ATS was always on the cards after the revolution and board changes a couple of years ago at Alliance Trust. This looks a good deal for both Alliance Trust and users of the ATS platform. It completes the dismantling of the empire built by former CEO Katherine Garrett-Cox.

It is also another step in the consolidation of the “investment platforms” market which is certainly a trend as a lot of them aren’t making much in the way of profits at present (other than Hargreaves Lansdown covered in the previous blog post).

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

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GB Group, Social Media, Rightmove and Alliance Trust

Yesterday I attended the Annual General Meeting of GB Group (GBG) in Chester. An absolutely horrendous road journey both there and back mainly due to road works as far as I can tell. But my satnav took me on the M25, M11, A14, M6, M54 and numerous minor roads on the way there from south-east London, and the M6, A50, M1, A14, M11, M25 and other minor roads on the way back. A typical example of how the UK road network is not fit for purpose while we spend £56 billion on HS2 (that’s the Government’s estimate – it could be a lot more) to transport a few wealthy business people and politicians from London to Birmingham.

It’s also a good reason for introducing on-line AGMs, hybrid ones preferably, as someone just posted on the ShareSoc blog. Total journey time to get to/from Chester: 10 hours, meeting duration: one hour.

GB Group is an AIM-listed supplier of identity verification solutions. There has been a rapidly growing demand for quick, on-line ID verification by all kinds of financial institutions as well as by investigatory bodies such as the police. GB have exploited this demand well by both organic growth and acquisitions. Revenue up 37% last year, and adjusted profits up 55%.

There were half a dozen ordinary shareholders at the meeting and I’ll just cover some of the questions and points of note. The announcement by the company in the morning did not cover current trading but just some positive items of news. It mentioned a change in “branding strategy” to talk about “solutions” rather than “products” with a new single, focused brand of “Loqate” for their location intelligence businesses. I asked the Chairman, David Rasche, whether this means they will rename the company also (I never have liked the “GB Group” name because it is very unmemorable and not therefore a good brand)? But he said not in the short term. Same answer as given the last time I asked this question two or three years back. Regret I do not like poor names for companies as investors can easily forget who they are. But it does not necessarily seem to have an impact on share performance.

Another shareholder asked whether new Data Protection regulations would help or hinder the company. The answer was in principle it helps. The CEO said it was neutral in the short term but positive longer term.

I also asked where the future growth of the business would come from. The answer was from geographic expansion with Asia being a strong opportunity for the Loqate sector, and from acquisitions. With cash on the balance sheet rising they clearly could afford some acquisitions. They have very good penetration in some sectors (e.g. over 50% of id verification in the UK gaming sector) but lower in many others so there is room for organic growth.

When it came to the votes on resolutions (by a show of hands) I voted against the Remuneration Report and a new “Performance Share Plan”. The latter enables grants of options over 100% of employees’ salary each year, subject to performance conditions which are primarily eps based. It transpired that only 84% of shareholders voted FOR the Remuneration Report and even less for the Share Plan. Why was that I asked? It transpired that this was because ISS recommended opposition mainly because more than 10% of the company’s share capital is now under option to staff which breaches guidelines. I told the Chairman later that I voted against simply because I considered the pay scheme too complex and too generous. He justified it on the basis of the growth in the company and the need to match market levels. Difficult for shareholders to complain too much given the performance of the company over recent years (it’s one of my “ten baggers”).

After the AGM we had a demonstration of some of their software and how it can confirm postal and email addresses, phone number and other information on individuals and who they are connected to. I had seen this before but this time they even showed how they can map a person’s location by the social media tweets they post, e.g. on Facebook, Twitter and lots of others. That’s a good reminder if you have not already reviewed and tightened up your security settings in Facebook et al that you should do that pronto. GB Group obviously have limitations on who they supply information to, and they help to ensure that you are not going to be subject to “impersonation” fraud, but social media seem to have no limits on personal information and privacy.

Hence of course the recent scandal about Facebook’s activity which helped to wipe off $120 billion in its market cap yesterday as sales growth slowed. Most peculiar is the number of advertisements that Facebook has been running in the national press pointing out their failings and how they are going to reform. It included one that spelled out the enormous number of fake accounts it was removing – 583 million in the 1st quarter apparently. More to the point perhaps why did they allow such fake accounts to start with? Why don’t they use a service like GB Group provides to stop people from even registering such accounts?

I have long advocated that people should only use their genuine name on internet posts and have adhered to that principle for some years (apart from where I am posting on behalf of an organisation). I do not see why anyone should be allowed to send anonymous communications or create accounts in fictitious names. If you are not willing to be attributed as the author of something, you should not be allowed to use a false name.

A possible cause of the problems at Facebook is the dominance of CEO Mark Zuckerberg who is both Chairman and Chief Executive which is never a good idea. In addition he has majority voting power in the shares because of the dual class share structure. This is surely bad corporate governance and might have contributed to their lax approach to privacy as it’s likely to be difficult to argue policy with him.

On the subject of privacy, interesting to note that Huawei, a Chinese supplier of IT infrastructure, has been classified as a national security risk in a recent report (reference the National Cyber Security Centre). As I use a Huawei smartwatch does that mean there is a risk of people reading my personal emails, tweets and text message and breaching my privacy? Perhaps one can get too paranoid about security.

Rightmove Plc (RMV) is another company in which I hold shares. They announced interim results this morning which were unsurprising, and also a 10 for one share split. The share price is currently about 4900p (i.e. £49). They are calling a general meeting to approve that. I will vote against as I never see any point in rebasing a share price. It only fools the ignorant but at some cost to the company, and confusion among investors.

Alliance Trust (ATST) also announced interim results yesterday (I still hold a few shares after the bust-up there a couple of years ago). One interesting point in the announcement was the mention of “expressions of interest” in Alliance Trust Savings – their investment platform. The strategic advantage of having an investment trust own a savings platform was never really clear now that the platform market is so diverse so disposal was always likely to be considered. They claim an “improvement in operational performance” for the division but whether they will be able to recoup the current book value of the division seems questionable. Might have to “bite the bullet” on this one, surely better sooner than later.

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

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Alliance Trust, Katherine Garrett-Cox and Perverse LTIPs

I have previously commented positively on the outcome of the “revolution” that took place at Alliance Trust (ATST) as reflected in their latest accounts which were recently published. That revolution resulted in the departure of former CEO Katherine Garrett-Cox who resigned in February 2016.

The latest Annual Report shows that she is still being paid large amounts though. For example, total “single figure” remuneration for the 2016 calendar year is given as £1,305,000 and was £832,000 for 2017.

She is likely to be paid still more in future as she is still entitled to LTIP and performance share awards that will vest in 2020. The pay-outs will depend on the positive performance of the company which has been achieved since her departure, which she obviously will have had little influence over. Certainly not by 2020.

Now she may be contractually entitled to these payments under her contract or as might have been agreed to ensure her timely departure, but is it fair and reasonable for her to claim such amounts? Some shareholders think not and are writing to her to suggest that she might like to consider waiving her entitlement or donating the value to charity.

This is of course yet another example of how LTIPs and other performance schemes in public companies lead to perverse outcomes.

P.S. Would anyone like a proxy appointment to enable them to go to the Persimmon AGM on the 25th April in York – and harass them about the wonders of their LTIPs? I can supply if you telephone 020-8295-0378.

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

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The Dangers of Share Tipping, Alliance Trust and AIM Regulation

Share tipping is a mug’s game. Both for the tipsters and their readers. More evidence of this was provided yesterday.

Investors Chronicle issued their “Tips of the Week” via email during the day. It included a “BUY” recommendation on Conviviality (CVR). Unfortunately soon after the company issued a trading statement which said the forecast EBITDA for the current year (ending 30th April) will be 20% below market expectations. Conviviality is a wholesaler, distributor and retailer of alcohol and it seems there was a “material error in the financial forecasts” in one part of the business and that margins have “softened”.

The share price dropped by almost 60% during the day and fell another 10% today at the time of writing. This puts the business based on the new forecasts on a prospective p/e of less than 6 and a dividend yield of over 10% (assuming it is held which may be doubtful). Is this a bargain?

Having had a quick look at the financial profile I am not sure it is. Although net debt of £150 million may not be too high in relation to current revenues or profits, their net profit margin is very small and their current ratio is less than 1, although this is not unusual in retailers who tend to pay for goods after they have sold them.

(Postscript: Paul Scott of Stockopedia made some interesting comments on Conviviality including the suggestion that they might be at risk of breaching their banking covenants and hence might have to do another placing. Certainly worth reading his analysis before plunging into the stock. He also commented negatively on the mid-day timings of the announcements from Conviviality and Fulham Share which I agree with, unless there was some compulsive reason to do them – perhaps they were aware of the Investors Chronicle commentary being issued).

Another tip Investors Chronicle gave yesterday was on Fulham Shore (FUL) which they rated a SELL on the grounds that “growth looks unsustainable”. They got that one right. The company issued a trading statement on the day which also said EBITDA would be below market expectations. Their London restaurants are simply serving fewer customers. The share price dropped 17% on the day. This looks to be symptomatic of the problems of restaurant chains – Prezzo are closing a number of outlets which I was not surprised at because from my visits it seemed rather pedestrian food at high prices. Restaurant Group also reported continuing negative like-for-like figures recently, perhaps partly because of price cutting to attract customers back. Restaurants are being hit by higher costs and disappearing customers. Boring food from tired formulas is no longer good enough to make money.

Another announcement yesterday was results from Alliance Trust (AT.). This is a company that I, ShareSoc, some investors in the trust and hedge fund Elliott Advisors spent a lot of effort on to cause a revolution a couple of years ago so it’s good to see the outcome has been beneficial. Total shareholder return was 19.1% which was well ahead of their benchmark. There was a lot of doubt expressed by many commentators on the new multi-manager investment strategy adopted by the board of directors and the involvement of Elliott, who were subsequently bought out, but it has turned out very well.

The only outstanding issue is the continuing problems at Alliance Trust Savings. They report the integration of the Stocktrade business they acquired from Brewin Dolphin has proved “challenging”. Staff have been moved from Edinburgh to Dundee and the CEO has departed. Customer complaints rose and they no doubt lost a lot of former Stocktrade customers such as me when they decided to stop offering personal crest accounts. So Alliance have written down the value of Alliance Trust Savings by another £13 million as an exceptional charge. No stockbrokers are making much money at present due to very low interest rates of cash held. It has never been clear why Alliance Trust Savings is strategic to the business and it’s very unusual for an investment trust to run its own savings/investment platform. Tough decisions still need to be taken on this matter.

AIM Regulation. The London Stock Exchange has published a revised set of rules for AIM market companies – see here: http://www.londonstockexchange.com/companies-and-advisors/aim/advisers/aim-notices/aim-rules-for-companies-march-2018-clean.pdf .

It now includes a requirement for AIM companies to declare adherence to a Corporate Governance Code. At present there is no such obligation, although some companies adhere to the QCA Code, or some foreign code, or simply pick and choose from the main market code. I and ShareSoc did push for such a rule, and you can see our comments on the review of the AIM rules and original proposals here: https://www.sharesoc.org/blog/regulations-and-law/aim-rules-review/ and here is a summary of the changes published by the LSE: http://www.londonstockexchange.com/companies-and-advisors/aim/advisers/aim-notices/aim-notice-50.pdf (there is also a marked up version of the rule book that gives details of the other changes which I have to admit I have not had the time to peruse as yet).

In summary these are positive moves and the AIM market is improving in some regards although it still has a long way to go to weed out all the dubious operators and company directors in this market.

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

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