Mello Meeting Report, Stopping Market Abuse and FRC Fraud Meeting

So far this week I have attended a couple of webinars. These are now getting totally out of hand now that folks have realised they are so easy to set up. I seem to have at least one lined up every day recently and sometimes as many as three. This can get very tedious if they last more than a few minutes each.

The first one I attended on Monday was the Mello meeting and I dropped out after a couple of hours so can only report on the first two sessions. The first one was Keith Ashworth-Lord and a colleague in Sanford DeLand Asset Management talking about their Buffettology Fund. Keith is always worth listening to as his approach to investment very much the same as mine, although I don’t actually hold the fund as I prefer investment trusts. The Buffettology fund has a great performance record, and is of course based on the investment style of Warren Buffett.  

One interesting comment he made was “one day we will stop investing in retail – probably now”. His key tips for investors were “do your research” and “monitor the delta” (i.e. the changes in financial ratios).

It was disappointing that the company did not manage to launch a new small cap investment trust, but they tried to do so when nobody was buying anything in the market. Shares might have been cheap then and have since recovered so it was a missed opportunity.

Of course like all fund managers Keith talked his own book, i.e. promoted the merits of his holdings, some of which I also hold. Keith was of course very careful in what he said – no direct encouragement to buy the shares. But this is a form of market abuse of course, in the same way as the shorting brigade rubbish the holdings where they are short by publishing derogatory articles. It has occurred to me that one way to stop both the approaches is to introduce a simple rule that nobody (person or company, or their associates) can publish articles or talk about companies in which they have an interest. That would surely stop both the positive and negative promotions.

That would of course imply that only independent journalists and media could comment on stocks or funds. Would that be a bad thing?

Some people argue that those who short stocks and publish derogatory articles on companies at the same time are doing a public service in bringing to the attention of the public the issues, and without them the problems might go unreported. But that is not necessarily so – see the reporting by the FT on Wirecard for example.

The second Mello session was a presentation by Sumo Group (SUMO), a video game development company which was new to me. There is a big demand for their services, revenue has been growing rapidly and financially the profits also now look good. It’s worth looking at their web site for examples of some of their work. They are clearly operating in a growth sector.

But I have my concerns. Do they have any IP or barriers to entry? Not apparently so. It also looks a very labour-intensive business, dependent on recruiting skilled developers. At the same time they seem to be mainly sub-contractors to game publishers, rather than owning their own games. Also they appear to have a “project” based business model which I never like. This is the kind of business that does well when demand is strong, but can come a cropper when it fades away.

Yesterday I attended a presentation by the Financial Reporting Council (FRC) on a revision of Audit Standards to assist the detection/prevention of fraud. This was a joint UKSA/ShareSoc promoted event. The main presenter was James Ferris.

The intention is to remove the ambiguity over auditor responsibility to identify fraud, and not just a director responsibility (because as one person pointed out, sometimes the directors are complicit in a fraud as happened at Patisserie and in other companies).

These changes to the relevant audit standard might be helpful but there is also the question of increasing the obligations of directors to identify and prevent fraud – this is an issue the Government is considering.

Mr Ferris said that auditors need to generally develop more fraud awareness which one cannot dispute.

There is a public consultation on this matter which has recently been published and which you may care to respond to – see https://www.frc.org.uk/news/october-2020/consultation-on-revised-auditing-standard-for-the . The first document mentioned there contains useful appendices on how to identify fraud.

I consider most of the proposals therein to be sensible, but of course prevention is better than cure. Auditors are unlikely to detect fraud until they have been running for some time, and the money extracted may have long disappeared. Tougher penalties for corporate fraud and the publishing of false accounts are also needed.

Finally we seem to be heading into the normal pre-Xmas market boom that happens most years. This has been accentuated by many people not being able to spend on shopping, holidays, restaurant meals, etc, so the savings ratio has gone up (less spending, more saving). With deposit interest rates at record lows, a lot of money has clearly gone into the stock market. The hope of a Brexit free trade deal at the eleventh hour is also boosting optimism while the economic impact and high Government borrowing associated with the epidemic and lock-downs is ignored.

I think I’ll stand aside from this market euphoria as I am already fairly fully invested.

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

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