Mello Event, ProVen and ShareSoc Seminars and Lots More News

It’s been a busy last two days for me with several events attended. The first was on Tuesday when I attended the Mello London event in Chiswick. It was clearly a popular event with attendance up on the previous year. I spoke on Business Perspective Investing and my talk was well attended with an interesting discussion on Burford Capital which I used as an example of a company that fails a lot of my check list rules and hence I have never invested in it. But clearly there are still some fans and defenders of its accounting treatment. It’s always good to get some debate at such presentations.

On Wednesday morning I attended a ProVen VCT shareholder event which turned out to be more interesting than I expected. ProVen manages two VCTs (PVN and PGOO), both of which I hold. It was reported that a lot of investment is going into Adtech, Edtech, Fintech, Cybersecurity and Sustainability driven by large private equity funding. Public markets are declining in terms of the number of listed companies. The ProVen VCTs have achieved returns over 5 years similar to other generalist VCTs but returns have been falling of late. This was attributed to the high investment costs (i.e. deal valuations have been rising for early stage companies) in comparison with a few years back. Basically it was suggested that there is too much VC funding available. Some companies seem to be raising funds just to get them to the next funding round rather than to reach profitability. ProVen prefers to invest in companies focused on the latter. Even from my limited experience in looking at some business angel investment propositions recently, the valuations being suggested for very early stage businesses seem way too high.

This does not bode well for future returns in VCTs of course. In addition the problem is compounded by the new VCT rules which are much tougher such as the fact that they need to be 80% invested and only companies that are less than 7 years old qualify – although there are some exceptions for follow-on investment. Asset backed investments and MBOs are no longer permitted. The changes will mean that VCTs are investing in more risky, small and early stage businesses – often technology focused ones. I suspect this will lean to larger portfolios of many smaller holdings, with more follow-on funding of the successful ones. I am getting wary of putting more money into VCTs until we see how all this works out despite the generous tax reliefs but ProVen might be more experienced than others in the new scenario.

There were very interesting presentations from three of their investee companies – Fnatic (esports business), Picasso Labs (video/image campaign analysis) and Festicket (festival ticketing and business support). All very interesting businesses with CEOs who presented well, but as usual rather short of financial information.

There was also a session on the VCT tax rules for investors which are always worth getting a refresher on as they are so complex. One point that was mentioned which may catch some unawares is that normally when you die all capital gains or losses on VCTs are ignored as they are capital gains tax exempt, and any past income tax reliefs are retained (i.e. the five-year rule for retention does not apply). If you pass the VCT holdings onto your spouse they can continue to receive the dividends tax free but only up to £200,000 worth of VCT holdings transferred as they are considered to be new investments in the tax year of receipt. I hope that I have explained that correctly, but VCTs are certainly an area where expert tax advice is quite essential if you have substantial holdings in them.

One of the speakers at this event criticised Woodford for the naming of the Woodford Equity Income Fund in the same way I have done. It was a very unusual profile of holdings for an equity income fund. Stockopedia have recently published a good analysis of the past holdings in the fund. The latest news from the fund liquidator is that investors in the fund are likely to lose 32% of the remaining value, and it could be as high as 42% in the worst scenario. Investors should call for an inquiry into how this debacle was allowed to happen with recommendations to ensure it does not happen again to unsuspecting and unsophisticated investors.

Later on Wednesday I attended a ShareSoc company presentation seminar with four companies presenting which I will cover very briefly:

Caledonia Mining (CMCL) – profitable gold mining operations in Zimbabwe with expansion plans. Gold mining is always a risky business in my experience and political risks particularly re foreign exchange controls in Zimbabwe make an investment only for the brave in my view. Incidentally big mining company BHP (BHP) announced on Tuesday the appointment of a new CEO, Mike Henry. His pay package is disclosed in detail – it’s a base salary of US$1.7 million, a cash and deferred share bonus (CDP) of up to 120% of base and an LTIP of up to 200% of base, i.e. an overall maximum which I calculate to be over $7 million plus pension. It’s this kind of package that horrifies the low paid and causes many to vote for socialist political parties. I find it quite unjustifiable also, but as I now hold shares in BHP I will be able to give the company my views directly on such over-generous bonus schemes.

Ilika (IKA) – a company now focused on developing solid state batteries. Such batteries have better characteristics than the commonly used Lithium-Ion batteries in many products. Ilika are now developing larger capacity batteries but it may be 2025 before they are price competitive. I have seen this company present before. Interesting technology but whether and when they can get to volumes sufficient to generate profits is anybody’s guess.

Fusion Antibodies (FAB) – a developer of antibodies for large pharma companies and diagnostic applications. This is a rapidly growing sector of the biotechnology industry and for medical applications supplying many new diagnostic and treatment options. I already hold Abcam (ABC) and Bioventix (BVXP) and even got treated recently with a monoclonal antibody (Prolia from Amgen) for osteopenia. One injection that lasts for six months which apparently adjusts a critical protein – or in longer terms “an antibody directed against the receptor activator of the nuclear factor–kappa B ligand (RANKL), which is a key mediator of the resorptive phase of bone remodeling. It decreases bone resorption by inhibiting osteoclast activity”. I am sure readers will understand that! Yes a lot of the science in this area does go over my head.

As regards Fusion Antibodies I did not like their historic focus on project related income and I am not clear what their “USP” is.

As I said in my talk on Tuesday, Abcam has been one of my more successful investments returning a compound total return per annum of 31% Per Annum since 2006. It’s those high consistent returns over many years that generates the high total returns and makes them the ten-baggers, and more. But you did not need to understand the science of antibodies to see why it would be a good investment. But I would need a lot longer than the 30 minutes allowed for my presentation on Tuesday to explain the reasons for my original investment in Abcam and other successful companies. I think I could talk for a whole day on Business Perspective Investing.

Abcam actually held their AGM yesterday so I missed it. But an RNS announcement suggests that although all resolutions were passed, there were significant votes against the re-election of Chairman Peter Allen. Exactly how many I have been unable to find out as their investor relations phone number is not being answered so I have sent them an email. The company suggests the vote was because of concerns about Allen’s other board time commitments but they don’t plan to do anything about it. I also voted against him though for not knowing his responsibility to answer questions from shareholders (see previous blog reports).

The last company presenting at the ShareSoc event was Supermarket Income REIT (SUPR). This is a property investment trust that invests in long leases (average 18 years) and generates a dividend yield of 5% with some capital growth. Typically the leases have RPI linked rent reviews which is fine so long as the Government does not redefine what RPI means. They convinced me that the supermarket sector is not quite such bad news as most retail property businesses as there is still some growth in the sector. Although internet ordering and home delivery is becoming more popular, they are mainly being serviced from existing local sites and nobody is making money from such deliveries (£15 cost). The Ocado business model of using a few large automated sites was suggested to be not viable except in big cities. SUPR may merit a bit more research (I don’t currently hold it).

Other news in the last couple of days of interest was:

It was announced that a Chinese firm was buying British Steel which the Government has been propping up since it went into administration. There is a good editorial in the Financial Times today headlined under “the UK needs to decide if British Steel is strategic”. This news may enable the Government to save the embarrassment of killing off the business with the loss of 4,000 direct jobs and many others indirectly. But we have yet to see what “sweeteners” have been offered to the buyer and there may be “state-aid” issues to be faced. This business has been consistently unprofitable and this comment from the BBC was amusing: “Some industry watchers are suggesting that Scunthorpe, and British Steel’s plant in Hayange in France would allow Jingye to import raw steel from China, finish it into higher value products and stick a “Made in UK” or “Made in France” badge on it”. Is this business really strategic? It is suggested that the ability to make railway track for Network Rail is important but is that not a low-tech rather than high-tech product? I am never happy to see strategically challenged business bailed out when other countries are both better placed to provide the products cheaper and are willing to subsidise the companies doing so.

Another example of the too prevalent problem of defective accounts was reported in the FT today – this time in Halfords (HFD) which I will add to an ever longer list of accounts one cannot trust. The FT reported that the company “has adjusted its accounts to remove £11.7 million of inventory costs from its balance sheet” after a review of its half-year figures by new auditor BDO. KPMG were the previous auditor and it is suggested there has been a “misapplication” of accounting rules where operational costs such as warehousing were treated as inventory. In essence another quite basic mistake not picked up by auditors!

That pro-Brexit supporter Tim Martin, CEO of JD Wetherspoon (JDW) has been pontificating on the iniquities of the UK Corporate Governance Code (or “guaranteed eventual destruction” as he renames it) in the company’s latest Trading Statement as the AGM is coming up soon. For example he says “There can be little doubt that the current system has directly led to the failure or chronic underperformance of many businesses, including banks, supermarkets, and pubs” and “It has also led to the creation of long and almost unreadable annual reports, full of jargon, clichés and platitudes – which confuse more than they enlighten”. I agree with him on the latter point but not about the limit on the length of service of non-executive directors which he opposes. I have seen too many non-execs who have “gone native”, fail to challenge the executives and should have been pensioned off earlier (not that non-execs get paid pensions normally of course. But Tim’s diatribe is well worth reading as he does make some good points – see here: https://tinyurl.com/yz3mso9d .

He has also come under attack for allowing pro-Brexit material to be printed on beer mats in his pubs when the shareholders have not authorised political donations. But that seems to me a very minor issue when so many FTSE CEOs were publicly criticising Brexit, i.e. interfering in politics and using groundless scare stories such as supermarkets running out of fresh produce. I do not hold JDW but it should make for an interesting AGM. A report from anyone who attends it would be welcomed.

Another company I mentioned in my talk on Tuesday was Accesso (ACSO). The business was put up for sale, but offers seemed to be insufficient to get board and shareholder support. The latest news issued by the company says there are “refreshed indications of interest” so discussions are continuing. I still hold a few shares but I think I’ll just wait and see what the outcome is. Trading on news is a good idea in general but trading on the vagaries of guesses, rumours or speculative share price movements, and as to what might happen, is not wise in my view.

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

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Bearbull Also Doubts Reliance on Financial Analysis Alone

The writer Bearbull in the Investors Chronicle made some interesting comments in this week’s edition. He said:

“Talking of research, I might question the way that I dig out investment candidates. My off-the-peg approach focuses on number crunching from a company’s accounts. It uses past performance as the basis for guesstimating a range of per-share valuations – from optimistic to pessimistic – based on both accounting profits and cash flow. I back that up with more spreadsheet work to assess the trends in a company’s efficiency, its productivity and its financial resilience.

The merits of this approach is that it is an efficient way of scanning lots of candidates. Its shortcoming is that it pays insufficient attention to the future, which is where investment returns will come from. True, but the lion’s share of my time spent crawling over any company always comes down to relating the quantitative findings to the question, to what extent is the future likely to be as good as the past, better than or worse than? I don’t think that will change”.

This is very much my own approach. Doing an initial scan of the financials to weed out the worse candidates for investment makes a lot of sense. But the problem with relying on financial analysis alone is that it is not very predictive of the future. In the modern world where markets and businesses are rapidly changing, relying on a study of past accounts is of limited use. Or as I say in my book Business Perspective Investing: “typical ratios used by investors to evaluate and compare companies tell you almost nothing about the future”. That’s assuming you can even trust the accounts of companies which is another dubious proposition of late.

I’ll be covering this more and what investors really need to look at in my presentation at the Mello London event (Tuesday the 12th at 12.55 pm: https://melloevents.com/event/ ).

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

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Bango Loses Grant Thornton and Mello Event

On Friday I missed the Bango AGM (I am a very smaller holder of the shares) as I wanted to attend the last day of the Mello event – a brief report on that is below. There was a surprising vote against the reappointment of Grant Thornton as the auditors at Bango (BGO). This is very unusual. Most auditors can assume they will get back in unless they have really cocked up a previous audit.

So why did Grant Thornton (GT) lose the vote with 55% of shareholders against? Was it disgruntled investors who held Patisserie or Globo previously – both cases of massive frauds undiscovered in the GT audits of those firms? Or was it because of events at AssetCo, Nichols or the University of Salford where GT were censured?

None of those reasons. According to Bango Chairman David Sear it was because proxy advisor ISS recommended voting against on the basis that the company had paid GT marginally more for other work than for their audit of the company. That’s despite Mr Sear’s comments that the latest audit by GT was the toughest they had ever had and they were competitive on a re-tender.

I suspect some investors might prefer another auditor even so.

Mello Meeting

This event in Chiswick was certainly worth attending – mainly for the quality of the speakers and the opportunity to network with other investors. Leon Boros gave a very good presentation on why you should invest directly in equities rather than funds or bonds. We probably can’t all manage to achieve his feat of becoming a multi-millionaire solely from ISA investment via a very focused portfolio. He not only evaluates companies well, but also has learned how to trade shares to maximise profits and minimise losses. He recommended the book “The Art of Execution” by Lee Freeman-Shor and I would do so also – see my previous blog post here for a review: https://roliscon.blog/2018/02/18/the-art-of-execution-essential-reading-for-investors/ .

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

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Mello Trust and Funds Event and ShareSoc AGM

I managed to attend part of the Mello Trust and Funds Event in West London yesterday and although I had other commitments today, I may manage to attend the second day of the main Mello 2019 event tomorrow. If you have not attended one of these events before, it is definitely worth doing so. The only slight criticism I would have is that getting to Chiswick from South East London where I live via the slow District Line is not great. The wonders of the London transport network meant it almost took me two hours to get there. I’ll give a brief report on the sessions I attended, and what particularly interested me:

There was a good presentation by the young and enthusiastic George Cooke on the Montanaro European Smaller Companies Trust (MTE). This is a company I had not come across before and it looks to have a good performance record. It’s a stock pickers fund in essence but Mr Cooke’s approach to small cap company research seems similar to mine. However he covers the whole of Europe whereas my focus on direct investments is the UK. I will take a more in-depth look at this company.

I attended a panel session on investing in small cap funds and one member of the audience questioned why one would do so when you can invest in the companies directly. Here are two possible reasons: It can give you exposure to geographic or sector areas that you cannot adequately research oneself (as in MTE), and for UK funds it is always interesting to see what the high-performing fund managers are buying and selling even if you only get a limited view. That’s why I invest both directly in companies and in funds.

I also attended a presentation by Carl Harald Janson on International Biotechnology Trust (IBT) a company I already hold so I did not learn a great deal new. This is a sector specialist with a good track record and it is now paying dividends out of capital which has help to close the discount to NAV when it used to be quite high. The discount is now negligible.

Several stand staffers in the exhibit area tried to sell me “income” funds but that proved difficult as I had to tell them I never buy income funds. For long-term returns, growth funds usually provide better performance and you can always sell a few shares to produce cash income – and you may be better off tax-wise also as a result. But many people buy funds for retirement income so they are attracted by the “income” name. This is where more financial education might be beneficial.

The last presentation I saw was by Nick Britton of the AIC (Association of Investment Companies who represent investment companies). Their web site is always useful for researching investment trusts and their past performance, which I tend to prefer as against open-ended funds although I do own a few of the latter.

Nick covered the differences between the two types of funds (open versus closed). His presentation suggested that closed-end funds consistently performed better for several reasons and he compared some funds of both types run by the same manager as evidence. There are a number of reasons why closed-end funds perform better in the long term and I was convinced by the statistics on this a long time ago. But Nick gave some more data on the subject.

So why do open-ended funds dominate the fund industry (£1.2 trillion versus £189 billion funds under management)? I rather expected that after the Retail Distribution Review (RDR) that platforms would no longer have a strong financial incentive to promote open-ended funds but it seems there are other reasons remaining which are not exactly clear. But it’s the investors who are suckered into buying open-ended funds who should know better. Like in most markets, folks buy what they are sold rather than do their own research and buy the best option. That’s particularly problematic on property funds which Nick was particularly scathing about.

I hope ShareSoc members are better informed. Which brings me on to the subject of their AGM which was held at the Mello meeting. This was a relatively straightforward event as there were no controversies of significance, although I did suggest that with more funds in the bank they might want to hire more staff and spend more on marketing. As one of the two newly appointed directors pointed out, few investors have heard of ShareSoc although they do enormously good work in promoting the interest of private investors and in educating them. In my experience, sales of anything often relate simply to how much money is spent on marketing even if some attention has to be paid to the most cost-effective channels. But if you don’t know what works best, you just have to experiment until you find the most productive approaches.

However ShareSoc membership is growing and it’s now twice the size of UKSA with whom merger discussions are now taking place – which I wholeheartedly support incidentally. There are also discussions taking place about supporting Signet activities, who run investor discussion groups, following the recent death of John Lander who led Signet for many years.

ShareSoc is spending money though on improving their back-end membership system which will help to improve the services provided to members.

In summary this was a useful event, and like all such meetings, as useful for networking and picking up gossip as much as from learning from the formal sessions.

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

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Tungsten, RedstoneConnect, Proactis, LoopUp, Mello and productivity

ITesterday there was an announcement by Tungsten Corporation (TUNG) that there was press speculation about a possible requisition of a general meeting to remove some of the directors, including the Chairman and CEO, and appoint others. This is likely to come from Odey Asset Management supported by other large investors the company understands. Their combined holdings could give them a good chance of winning any vote, or at least it would be a hard-fought proxy battle.

It would seem that the former CEO Edi Truell is involved in this initiative. It would be most unfortunate in my view if he returns to this business (and I did purchase a very few shares in the company after he departed which I still hold). Richard Hurwitz has done a good job in my view of turning this company from a financial basket case with very substantial annual losses into a sounder one. Revenue has been rising and costs have been cut although profits have been longer to appear than hoped. However the company does report that EBITDA was at breakeven for the first four months of the calendar year. It’s at least heading in the right direction now so I am unlikely to be voting for any such requisition.

I attended the Mello event at Hever yesterday and was hoping to get an update from Mark Braund on RedstoneConnect (REDS) where he was due to present. But his presentation was cancelled. Now we know why because an announcement this morning from the company said he was leaving. Perhaps he wants a new challenge. This was another basket case of a company where Mark turned it around in the two years he has been there. So some investors may not be pleased with his departure and the share price predictably dropped on the news. The new CEO will be Frank Beechinor who is currently the Chairman. He is also Chairman of DotDigital and clearly has experience of running IT companies so it’s probably a good choice. A new non-executive Chairman has been appointed (Guy van Zwanenberg).

The Mello event, organised by David Stredder of course, was held near Hever Castle in deepest Kent. I know some of the roads in the area as I live nearby but even so managed to get lost. Not the ideal location. But it was a useful event otherwise. I did an interview for Peter of Conkers Corner and sat on the panel covering the Beaufort case. Videos of both are likely to be available soon, and I will tweet links to them when they appear.

A company that did present at Mello was Proactis (PHD) with CEO Hamp Wall doing the talking. I was unsure of the potential future growth for the company as I thought the market for procurement software might be quite mature (i.e. most likely users had such a product/service). But not so it seems, particularly in the USA and their target vertical segments. Hamp spoke clearly and answered questions well. He is clearly an experienced IT sales/marketing manager. He said he was surprised though that the share price fell over 40% recently when they announced the loss of two of their largest customers. He thought it might fall 15%. I agreed with him that it seemed excessive. But the market does not like surprises.

Today I attended the AGM of LoopUp Group (LOOP) who sell conferencing software. They recently merged with a competitor named MeetingZone and it looks likely to double revenue and more than double profits if things go according to plan. The joint CEOs made positive noises about progress. The company is chaired by heavyweight Chairperson Lady Barbara Judge CBE which is somewhat unusual for this kind of company – at least heavyweight in terms of past appointments if not lightweight in person.

Tim Grattan was the only other ordinary shareholder present and may do a fuller report for ShareSoc. A disappointing turnout for a very informative meeting as both I and Tim asked lots of questions.

Tim advised me after I mentioned the Foresight 4 VCT fund raising that it was odd that no mention was made in the prospectus of the alleged illegal payment of a dividend. Is this not a “risk factor” that should have been declared he asked? That company and its manager seem to be turning a blind eye to that problem.

There was an interesting letter from Peter Ferguson in the Financial Times today. It covered the issue of a declining productivity growth in the UK and other countries aired in a previous article by Martin Wolf. This is certainly of concern to the Government and should be to all investors because only by increasing productivity can we get richer. Mr Ferguson suggested one cause was the negative impact of increasing regulation. He suggested it has three impacts: 1) more unproductive people appointed to monitor and enforce the regulations, 2) more compliance officers, and 3) less productivity as a result in companies due to sub-optimal practices. Perhaps fortuitously I am invested in a company that sells risk and compliance solutions. It’s certainly a growth area and there may be some truth in this argument. Has MIFID II reduced productivity in the financial sector with few benefits to show for it? I think it has.

But Rolls-Royce are going to improve the productivity in their business at a stroke. They just announced they are going to fire 4,600 staff. But are any of them risk and compliance staff?

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

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