John Murphy, Branding, Fevertree, Downsizing, McCarthy & Stone & the Motor Industry

In yesterday’s Financial Times there was an article on John Murphy, my ex-brother-in-law. It covers his “downsizing” which in his case means moving from three houses (Tuscany, Suffolk and Islington) to one in London. Although I rarely meet him nowadays as he divorced my sister many years ago, he has an interesting history. He developed the first large branding and trade mark consultancy (Interbrand) and I worked with him briefly in it. He taught me the importance of strong branding and protectable trade marks. He subsequently was involved in the re-establishment of Plymouth Gin and claims to have started the whole fashion for gin which was otherwise a declining market at the time. Charles Rolls, one of the founders of Fevertree (FEVR), worked with John at Plymouth and that company is another good example of how important strong branding is in consumer products. The FT article is here: https://www.ft.com/content/c48fcdec-3071-11e9-8744-e7016697f225

On the subject of downsizing, I visited the latest McCarthy & Stone (MCS) “retirement living” development in Chislehurst recently – Shepheards House. It’s recently been completed and is not far from where I and my wife currently live. And very nice it is too. A 2-bedroom apartment costs £552,000 but the big problem would be downsizing to fit all our offices (3 including two “work rooms” for my wife), books and art into the one apartment. They have limited storage space in them. My wife suggests we would need two of them. Don’t think we are yet old enough to justify doing this and the economics of two of them don’t work.

Just reviewing the latest share price of McCarthy & Stone, which I held briefly, it’s still only about half the price at which it did an IPO in 2016. With the housing market in London and the South-East declining that is not going to make life easier for the company, although they seem to have sold the apartments in Shepheards House very rapidly. Profits were down last year and build costs are increasing which combined means the shares are looking relatively cheap now. It’s a typical problem with IPOs – the sellers know when it’s a good time to sell.

There was a good article on the UK motor industry in the main section of the FT yesterday under the headline “forced into the slow lane”. Apart from the mention of the impact of Brexit, which the FT has been repeatedly promoting with negative articles and editorial in the last few months, much to my annoyance, it does explain why the motor industry is facing difficulties.

It’s not just Honda’s decision to close Swindon, which has nothing to do with Brexit, as a Honda executive spelled out, but there is a general malaise in the industry which is also affecting German car manufacturers. The abrupt policy change over diesel vehicles, which has made them unsaleable to many people, has tripped up many manufacturers such as JLR and the fact that the EU has now negotiated a tariff-free trade deal with the EU means that Japanese car manufacturers no longer need to bother with manufacturing in Europe. That is particularly so when their markets in the Far East are growing while Europe is shrinking (Honda’s production at Swindon has been declining).

Vehicle sales have been dropping in the UK in what is a notoriously cyclical industry. It’s one of those products that does wear out, but new purchases can always be put off for some months if not years if there is uncertainty about technological change. With vehicles lasting longer than they ever did, there is no reason for buyers to acquire new vehicles at present.

Perhaps the Government should ask Tesla or other new electric car manufacturers if they want a ready-made facility and reliable workforce that will become available soon? In a couple of years’ time, the market for vehicles may well pick up.

But John Murphy’s decision to stop owning a car as part of his downsizing is a sign of the times also. When I first knew him, he owned the revolutionary Citroen DS and subsequently owned Bentleys. It must be quite a change for him.

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.