Recent Annual Reports and Trust Discounts

After the news over the weekend, it’s clearly going to be another very bad day on stock markets. One rare riser initially was Ten Entertainment Group (TEG) despite the fact that they announced this morning that all their bowling venues had been closed but they made some positive comments about their cash balances and Government support which might have helped.

As per guidance issued by the Financial Conduct Authority (FCA) it has delayed publication of its Preliminary Financial Results for two weeks as many other companies will be doing. This seems unfortunate to me as a company could just give only a limited outlook statement in there and issue separate trading statements as the crisis developments. But there is no reason to delay the historic figures for the last year.

The AIM Regulator (the LSE) has also announced that in response to the epidemic it is making the rules around suspension of listings more flexible. It is also permitting Nomads not to do site visits to new clients. See https://www.londonstockexchange.com/companies-and-advisors/aim/advisers/inside-aim-newsletter/inside-aim-coronavirus.pdf for details.

Clearly all companies affected by the closure of all public entertainment venues such as pubs, bowling alleys and cinemas are going to suffer greatly. Although they might get some financial relief from the Government, a close examination of their balance sheets and debt will be essential. Some might request suspension of their shares until their financial position becomes clearer. Property companies seem to have been badly hit simply because independent valuers are having difficulty valuing commercial properties as the market is frozen. Retailers with physical stores are also closing them, apart from supermarkets who are doing well due to panic buying and the shift from eating out to eating in as restaurants close. But they seem to be having difficulties adapting their supply chains and coping with the new demands for on-line ordering.

With preliminary announcements being delayed, the AGM season might be delayed also. Companies might have difficulty holding physical meetings and venues might become unavailable, particularly in London. We might see companies holding small meetings in their own offices instead as they won’t expect many people to turn up – I certainly won’t be attending as I am one of those people being told to stay at home for 12 weeks. Some larger companies may try and provide a live on-line stream of the meeting such as Alliance Trust (ATST) who just issued their Annual Report which I would certainly encourage them to do, preferably with some way to submit questions.

It is interesting to look at the discounts to NAV of the share price of that trust and other similar large trusts. According to the AIC, their discount was 17.5% at the weekend, and others were Brunner on 17.5%, F&C on 19.3%, Monks on 12.6% and Witan on 15.6%. These are much higher discounts than such trusts have traded on of late. When private investors have lost faith in the stock market, the discounts tend to rise, although some of the discount can be accounted for by the delay in reporting.  There may be some bargains in investment trusts in due course as private investor sentiment tends to lag financial news.

One company that just distributed their Annual Report and which I hold is property company Segro (SGRO). They had a good year last year although the share price is down 28% from its peak in February due to the general malaise in the property sector as open-end funds close to redemptions and run out of cash. I won’t  be attending their AGM but I will certainly be submitting a proxy vote which all shareholders should do anyway. I will be voting against their remuneration report simply because the total pay of executive directors is too high. The remuneration report consists of 27 pages of justification and explanation, which is way too long and is a good example of how both pay and pay reporting has got out of hand of late.

With bonuses, LTIPs and pension benefits, the total pay of the 4 executive directors (“single figure” report) was £20.4 million. They also wish to change the Articles of the company to raise the limit on the total pay of non-executive directors to £1 million so I will be voting against that also. I would encourage shareholders to do the same.

Lastly for a bit of light relief as it looks like we might have a major recession this year, I mentioned the book “Caught Short!” by comedian Eddie Cantor on the 1929 Wall Street crash in a previous blog post. Now Private Eye have repeated one of his comments in October 1929 after John D. Rockefeller (probably the richest person in the world at the time) said “during the past week, my son and I have for some days been purchasing sound common stocks”. This was seen as an attempt to calm the market in a world where a few very wealthy investors could influence financial markets. Eddie Cantor’s response was “Sure, who else has any money left”. I hope readers do not feel the same.

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

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Stale Directors and the UK Corporate Governance Code

One interesting fact highlighted by the Financial Times today was the impact of the proposed new UK Corporate Governance Code on company Chairmen. It pointed out that the change in the Code to limit the length of service of directors will include their time as Chairmen and will mean dozens of long-standing Chairmen may need to retire.

The FT suggests 67 of FTSE-100 chairmen will be affected, and there will be another 48 chairmen of FTSE-250 companies according to an analysis by the FT and Manifest. The reason for the 9-year rule for non-executive directors is simply because they cannot be considered “independent” after that length of time.

One aspect that the FT did not mention was the prevalence of such long-standing chairmen on the boards of investment trusts. Without doing a formal check, I found two in my holdings very easily. Anthony Townsend who actually “rejoined” the board of Finsbury Growth & Income in 2005 and John Scott who was on the board of Scottish Mortgage for 16 years until he retired in June. Investment Trusts seem to exhibit this symptom of permitting investment world grandees to serve for many years both as chairman and ordinary non-executive directors quite often. This has been condoned by the AIC (a trade body for investment companies) who seem to believe that length of service is no handicap. They have even suggested that such companies are not bound by the UK Corporate Governance Code in this area in the past. Will they try to take the same stance on this issue one wonders?

Will this change in the Code, if adopted, lead to a loss of highly experienced directors to the disadvantage of investors? Not likely. I suggest it will just result in a game of musical chairs where they simply move to another company when the clock would be reset. But it might at least give a hint to those too long in service to consider retirement.

It is surely a positive change as I have seen too many directors hang around for too long. They may not show actual signs of dementia (although one of the Chairmen of one my holdings did before retiring), but they are not always as sharp as they could be. Regrettably the generally aged shareholders who turn up at the AGMs of companies are averse to voting against such directors even when the issue is raised. So perhaps the boards affected by this problem of the Code change might simply choose to ignore it on a “comply or explain” excuse – I can volunteer the words they could use because I see them regularly. But that would be a pity.

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

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