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 )

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

The Market, Dunedin and Standard Life Smaller Companies Merger, and Aston Martin IPO

Is it not depressing when you go away for a week’s holiday and your portfolio falls every day in that time? I do monitor any exceptional movements while on vacation but try to avoid trading. It just seemed to be a general downward trend and reviewing the movement over that week my portfolio is down 1.73% while the FTSE All-Share is down 1.72%. So that is what I had already surmised.

Those stocks that seemed to have become overblown did fall and there were some like Scottish Mortgage Trust (SMT) were hit by specific news – in their case the events at Tesla. But the fall in my portfolio last week was less than it went up the previous week. I feel not quite so depressed now I have done the analysis.

Anyway, I am back from holiday now and on my desk is a proposed merger of Dunedin Smaller Companies Investment Trust (DNDL) and Standard Life UK Smaller Companies Investment Trust (SLS). I need to take a decision on this as I hold the latter.

DNDL is smaller than SLS and following the merger of DNDL’s manager, Aberdeen Asset Management, with Standard Life the merged manager now has two trusts with a similar focus. SLS has a superior performance record – 100.7% net asset value total return versus 68.9% for DNDL over the last 5 years. The merged trusts would be managed by Harry Nimmo who has managed SLS for some years.

The directors argue that the merger makes sense because it will result in reduced on-going costs and improved liquidity in the shares, although they don’t quantify either claim. There is no immediate change proposed to the fund management charges on SLS. DNDL will be paying the costs of both parties if the merger goes through.

It no doubt makes sense for the manager to merge these trusts. Not much point in having two trusts in the same stable with a similar focus and they will save on management costs. It also makes some sense for DNDL holders but does it for SLS shareholders?

Enlarging a trust or fund can degrade future returns particularly in small cap funds. This is because buying larger quantities of smaller company shares is more difficult and exiting is also difficult. In other words, the manager may find they cannot be as nimble as before. Alternatively the number of companies in the fund has to grow and we surely know that this is a recipe to reduce returns as there are only so many “good ideas” out there. The more companies in a portfolio, the more likely it is to approximate to a tracker fund.

Therefore, I think I will vote against this merger for that reason.

But what alternatives were there for DNDL shareholders? The company could have changed the manager to avoid the conflict of interest. Or simply wound up if it was too small to be viable. Perhaps a wider international focus when SLS is UK focused would be another alternative.

Luxury car maker Aston Martin is to float on the market. I agree with Neil Collins comments in the FT this weekend – “never buy a share in an initial public offering”. He suggested those who are selling know more about the stock than you do. Car companies, particularly of niche brands, are notoriously tricky investments. Aston Martin has been bust as many as seven times according to one press report. As Mr Collins also said “The private equity vendors are dreaming of a £5 billion valuation for a highly geared business with a decidedly unroadworthy past”.

Car companies exhibit all the worst features of technology businesses. Product reliability issues (which was a bugbear for Aston Martin for many years), very high cost of new model production, Government regulatory interference requiring major changes for safety and emissions, competitors leapfrogging the technology with better products, and sensitivity to economic trends. In a recession few people buy luxury vehicles or they simply postpone purchases – so it’s feast or famine for the manufacturers.

There can be some initial enthusiasm for companies after an IPO that can drive the price higher but the hoopla soon fades. Footasylum (FOOT) was a recent example but McCarthy & Stone (MCS) was another one where investors found that the market proved more challenging than expected.

Resist the temptation to buy IPOs!

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

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.