The Vultures are Circling – Woodford, Carpetright et al

With the demise of the Neil Woodford’s empire and the winding up of the Woodford Equity Income Fund, investors are looking for whom to blame – other than themselves of course for investing in his funds. One target is Hargreaves Lansdown (HL.) and other fund platforms who had it on their recommended or “best buy” lists, including long after the fund’s problems were apparent. Now lawyers are only too glad to help in such circumstances and at least two firms have suggested they can assist.

One is Slater & Gordon. They say they are investigating possible claims against HL. and that “We’re concerned to establish if there was any actionable wrongdoing or conflict of interest by Hargreaves Lansdown in continuing to include Woodford funds on their ‘Best Buy’ Lists if it had concerns as to their underlying investments. We’ll also be looking at the price achieved when buying and selling instruments, such as ordinary shares, on the Hargraves Lansdown platform and whether or not this represents Best Execution”. You can register your interest here: https://tinyurl.com/yyrhbfb3

Another legal firm looking at such a claim is Leigh Day who say they already have 500 investors interested in pursuing a case. See https://tinyurl.com/y6r2buav for more information.

Having been involved in a number of similar legal cases in the past, my advice is that there is no harm in registering an interest but do not pay money up front and certainly not until the basis of any legal claim is clear. In addition bear in mind that it would be very expensive to pursue such a claim and lawyers may be willing to do so simply in anticipation of high fees when there is no certainty of winning a case. How is the case to be financed is one question to ask? Funding such cases by private investors alone (the majority of HL. clients) is likely to be difficult so “litigation funding” is likely to be required which can be expensive and erode likely returns. Insurance to cover the risk of losing the case is also needed and expensive.

Yesterday saw news announcements from three companies I have held in the past but all sold some time ago. The most significant was from Carpetright (CPR) which I last sold in 2010 at about 800p. It’s been downhill ever since. The Daily Telegraph ran an article today suggesting that this was a zombie company and that it was a good time of year for zombie slaying. After the announcement of a trading update and possible bid yesterday the share price is now 5p.

The Board of Directors “believes that Carpetright is performing well….” and “the prolonged sales decline appears to be bottoming out….”, but the company has too much debt and needs refinancing. One of its major lenders and shareholders is Meditor who have proposed to make a cash offer of 5p per share for the company. The share price promptly halved to that level because it is likely that the offer will be accepted by enough shareholders to be approved. So it looks like we will have a company with revenues of £380 million (but no profits), sold for £15 million. Founder Lord Harris, who is long departed, must be crying over this turn of events. But it demonstrates that when a company is in hock to its bankers and dominant shareholders, minority investors should steer clear.

Another announcement was from Proactis Holdings (PHD) which I sold fortuitously in mid-2018. They announced Final Results yesterday. Revenues increased by 4% but a large loss of £26 million was reported due to a large impairment charge against its US operations. The business has undertaken an operational review and restructuring is in progress. It has also been put up for sale but there is little news on potential “expressions of interest”. Just too many uncertainties and debt way too high (now equal to market cap) in my opinion.

The third announcement was from Smartspace Software (SMRT) which I sold earlier this year at more than the current share price as progress seemed to be slow and I wanted to tidy up my over-large portfolio. It reported interim results where revenue was up 57% but there was a large loss reported (more than revenue). There were some positive noises from the CEO so the share price only fell 0.7%. The company has some interesting products for managing office space but it’s a typical “story” stock where the potential seems high but it has yet to prove it can run a profitable business.

I have also noticed lately that the fizz has gone out of the share price of Fevertree (FEVR). It’s been falling for some time. I sold it in 2018 at a much higher level. It still looks quite expensive on a prospective p/e basis. Overall revenue is still growing rapidly but the USA is still the big potential market yet to be proven. I like the business model and the management even if I don’t personally like the main product. But perhaps one to keep an eye on. But generally buying back into past investments can be a mistake.

Given my track record on the above, perhaps my next investment book should not be on choosing new investments but on choosing when to sell existing ones?

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

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Woodford and Hargreaves Lansdown, Rosslyn Data AGM and Brexit

To follow up on my previous blog post over the collapse of Woodford Investment Management and how to avoid dud managers, the focus has now turned in the national media upon Hargreaves Lansdown (HL.). Investors who have lost a lot of money, and now won’t be able to get their cash out for some time, are looking for who to blame. Neil Woodford is one of course, but what about investment platforms such HL?

The Woodford Equity Income Fund was on the HL “best buy” list for a long time – indeed long after its poor performance was evident. They claimed at a Treasury Committee that Woodford had displayed similar underperformance in the past and had bounced back. But that was when he had a very different investment strategy so far as one can deduce.

The big issue though that the Financial Conduct Authority (FCA) should be looking at is the issue of platforms favouring funds that give financial incentives – in this case via providing a discount to investors and hence possibly generating more revenue when better performing funds such as Fundsmith refused to do so. HL have not recommended Fundsmith in the past, despite it being one of the top performing funds.

It is surely not sensible for fund platforms to be recommending funds unless they have no financial interest in the matter whatsoever. Indeed I would suggest the simple solution is for platforms to be banned from recommending any funds or trusts, thus forcing the investor to both get educated and make up their own minds. Such a rule might spawn a new group of independent retail investor advisors which would be surely to the good.

Today I attended the Annual General Meeting of Rosslyn  Data Technologies (RDT). This is an IT company that I bought a few shares in a couple of years ago as an EIS investment. It was loss-making then, and still is but is getting near break-even.

There were only about half a dozen shareholders present, but they had lots of questions. I only cover the important ones here. New Chairman James Appleby chaired the meeting reasonably well, but left most of the question answering to others.

Why did company founder Charles Clark step down (as announced today)? Reason given was that he had set up another company where there was  a potential conflict of interest.

I asked about the Landon acquisition that was announced in September. How much revenue would this add?  They are not sure but maybe £0.5 million. Bearing in mind they only paid £48,750 for the assets and client list from the administrator, that seems to be me a remarkably good deal. But it later transpired that they have outstanding contracts (pre-paid) which they have to finish so that might be another £250,000 of costs. However, that’s still cheap and by rationalising some of the costs they should quickly turn Langdon profitable. It was suggested that Langdon had been mismanaged with over-expansion and too many staff which is why it went bust – only a few of the staff have been taken on. Note that the impact of this acquisition is not yet in broker’s forecasts.

It was noted that RDT is currently broadly on track for analysts forecasts but it has been a slow start to the year. Deals are slipping into the second half. Decision timescales in major corporates seem to be stretching out at present.

One shareholder, who said “I am talking too much – a daft old man”, which it is difficult to disagree with as he asked numerous questions, some not very intelligent, asked whether they were charging enough for their services. There was a long debate on that issue, but it was explained that competitors were charging less.

There were also concerns about the slow rate of revenue growth (only 8.3% last year). Comment: this company is clearly not operating in a hot, high-growth sector of the market. But it does seem to be competently managed and if they can do acquisitions like Langdon that are complementary then profits should grow.

Altogether a useful AGM.

Brexit has of course made many UK companies nervous about new projects. At the time of writing the latest position appears to be that the EU and Boris have agreed a deal. Most Conservatives like it, but the DUP does not and Labour, LibDems and SNP will all seem likey to vote against it in Parliament. The last group all seem to be playing politics to get what they individually want, but not a general election which on current opinion polls might result in a big Conservative majority. Most people are very frustrated that this group are blocking support of Brexit so we can close down the issue and move on when there seems to be no overall public support for another referendum or cancelling Brexit altogether.

But even given this messy situation, I am hopeful that it will be resolved in one way or the other soon. But then I am the perpetual optimist. I am investing accordingly.

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

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Brexit Bounce, Green Accreditation, Security Issues and Hargreaves Lansdown AGM

The FTSE and my portfolio jumped up this morning on the hope of a Brexit Agreement after all. RBS is up 16% which seems to be a function of euphoria. I think I’ll wait and see the progress of discussions in the next few days before plunging in to buy some more stocks. But if an Agreement is reached then the market is likely to power ahead so keep that cash handy.

The London Stock Exchange (LSE) announced today a new “Green Accreditation” scheme which will recognize companies and funds that derive 50% or more of their revenues from products or services that contribute to the global green economy. One company that has promptly announced accreditation is Blancco Technology (BLTG) in which I hold a very few shares after a disappointing track record. How do they qualify for this award? They do so because they provided data erasure services thereby helping people to recycle and reuse hardware rather than scrap it. No doubt there will be other “virtue signalers” claiming this award but I doubt it will make a lot of difference to my investment choices.

The takeover of Cobham (COB) has run into a lot of criticism about the threat to national security. The founding family have raised concerns and the Government has decided to intervene. On a personal note should I be worried that our new home security system based on Hikvision technology leaves us open to being hacked? Not only that but I also have a Huawei smartwatch. Both companies have been banned by the US due to their links to the Chinese Government. Hikvision have 1.3 million cameras installed in the UK, often in NHS facilities. This is surely an issue where the Government should be providing some advice. Why do we now have cameras all around our house? Not because of worries that my views on Brexit might stimulate some demonstrators but because the home of two Asian families in our street were recently burgled. Apparently such families are particularly at threat of such attacks because they often keep gold at home. Readers can be assured that there are no gold bars in our house. The burglaries that did take place were to houses with non-functioning alarm systems but my wife was somewhat concerned.

There was an interesting report in the Financial Times on the Hargreaves Lansdown (HL.) Annual General Meeting (I do not hold the shares). It sounds like it was a lively affair. Apparently some shareholders were not happy with the reaction of HL to the Woodford Equity Income Fund suspension after HL had promoted the fund. One shareholder said the reopening of the fund “has been postponed more often than Brexit” and suggested that HL should push for Woodford to liquidate the fund immediately. Comment: liquidating the fund abruptly would be easier said than done due to the nature of its holdings, but I agree that more vigorous action could have been taken. The fact that Neil Woodford is still running the fund when it will clearly be every unlikely to recover rapidly if at all is far from ideal.

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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Investment Platforms Market Study

The Financial Conduct Authority (FCA) have just published an interim report on their study of “investment platforms”. It makes for very interesting reading. That is particularly so after the revelations from Hardman last week. They reported that the revenue per assets held on the platform from Hargreaves Lansdown (HL) was more than twice that of soon to be listed AJ Bell Youinvest. HL is the gorilla in the direct to consumer platform market with about 40% market share. HL earns £473 per £100,000 invested while Youinvest earns only £209.

That surely suggests that competition is weak in this market. Indeed the FRC report highlights that investors not only have difficulty comparing the charges of different platforms, but they do not seem too concerned about high charges as they focus more on other aspects of the service provided. It also says on page 23 of the report: “Our qualitative research also found that consumer satisfaction levels are sometimes linked to satisfaction with overall investment returns, which tend to be attributed to the performance of the platform. This suggests some confusion about consumers’ understanding about platforms’ administrative function as opposed to the performance of investment products. So it is possible that consumers’ relatively high satisfaction levels with platforms could be influenced by the positive performance of financial markets in recent years”. In other words, the consumers of such services are very complacent about the costs they pay at present.

Another piece of evidence that this is not a competitive market obtained by the FRC was that they found that when platforms increased or decreased prices it had no significant impact on flows in and out of the platform. No doubt some platform operators will read that with joy, but others despair! 

Indeed when I made some comments on Citywire effectively saying I thought it suspicious that there were so many positive comments about Hargreaves Lansdown in response to an article reviewing the Hardman news, particularly as they were clearly much more expensive than other platforms who provided similar effective services (I use multiple ones) I was bombarded with comments from lovers of the HL service. Bearing in mind that platform charges can have a major impact on overall returns in the long term from stock market investments, you would think investors would pay more attention to what they are being charged.

One particular problem is that switching platforms is not only difficult and a lengthy process but can also incur charges. This is clearly anti-competitive behaviour which has been present for some years and despite complaints has not significantly improved.

The FRC summarises its findings as:

  • Switching between platforms can be difficult. Consumers who would benefit from switching can find it difficult to do so.
  • Shopping around can be difficult. Consumers who are price sensitive can find it difficult to shop around and choose a lower-cost platform.
  • The risks and expected returns of model portfolios with similar risk labels are unclear.
  • Consumers may be missing out by holding too much cash.
  • So-called “orphan clients” who were previously advised but no longer have any relationship with a financial adviser face higher charges and lower service.

That’s a good analysis of the issues. The FCA has proposed some remedies but no specific action on improving cost comparability and the proposals on improving transfer times are also quite weak although they are threatening to ban exit charges. That would certainly be a good step in the right direction. Note that a lot of the problems in transfers stem from in-specie transfers of holdings in funds and shares held in nominee accounts. Because there is no simple registration system for share and fund holdings, this complicates the transfer process enormously.

One interesting comment from the AIC on the FCA report was that it did not examine the relative performance of different investment managers, i.e. suggesting that lower cost investment trusts that they represent might be subject to prejudice by platforms. They suggest the FCA should look at that issue when looking at the competitiveness of this market.

In summary, I suggest the platform operators will be pleased with the FCA report as they have got off relatively lightly. Despite the fact that the report makes it obvious that it is a deeply uncompetitive market as regards price or even other aspects, no very firm action is proposed. But informed investors can no doubt finesse their way through the complexities of the pricing structure and service levels of different platform operators. I can only encourage you to do so and if an operator increases their charges to your disadvantage then MOVE!

The FCA Report is present here: https://www.fca.org.uk/publication/market-studies/ms17-1-2.pdf

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

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Hargreaves Lansdown and Fund Charges

There was a good article published yesterday by Phil Oakley of Sharescope on Hargreaves Lansdown (HL). Why are they so profitable a business when, as Terry Smith said, they seem to be in essence a “distributor” operating in a highly competitive field with few barriers to entry? The answer, apart from their high-quality customer service, is the level of charges they make on investment in funds (unit trusts and OEICS, not investment trusts which are treated as shares).

Investors in SIPPs via HL might be paying several thousands of pounds per year on larger portfolios (e.g. £3,000 on £1m and more on larger amounts), when investors would only pay £200 for a similar portfolio in shares. Other platforms also charge more for funds, but are substantially cheaper even so.

Why do they charge so much more for funds than shares? Phil questioned whether there is any more administration as a result.

But you can see why HL and other platforms promote funds so aggressively rather than direct investment in shares or in investment trusts (and bear in mind that there are usually equivalent investment trusts for most OEICs, often even managed by the same managers).

HL seems to be a company that it is better to be an investor in than a customer. Customers are suffering from the syndrome of buying something that they are sold that is in the seller’s interests, rather than standing back and deciding what they want, who they wish to buy it from and what price they wish to pay. In other words, investors are not “shopping around” for the best deal.

For that reason when HL adopted their new platform charges, I closed my account and moved my SIPP portfolio elsewhere. But it’s not a thing to be done lightly as it takes a lot of time and hassle to do so as disgruntled customers of Barclays are finding out. An example of the FCA not ensuring there is a competitive market by guaranteeing rapid transfers as they should be doing.

Now many readers might say, but I don’t have a large portfolio – just a few tens of thousands in value. And I get the same high-quality service for relatively little money. Firstly you need to bear in mind that overall portfolio charges are a significant drag on investment returns. As your portfolio grows, the bigger the drag.

HL may be vulnerable to losing their larger customers, who are clearly the most profitable ones, to competitors who could cream off the big hitters by various marketing tactics. Having a number of different stockbroking accounts, in general I find the administration is fine and they seem to compete on price to a large extent rather than facilities or service. Their focus is on attracting new investors who wish to start investing rather than converting existing investors from other platforms. Perhaps it’s the difficulty of persuading clients to move their accounts that inhibits them and reduces the competitiveness of the market for stockbroking services.

HL might therefore be vulnerable to regulatory change if the FCA tacked this issue vigorously and other platforms got their marketing act together.

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

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