Tag: Mello

News from Israel and Paul Scott Podcasts

I missed most of the Northern VCT (NVT) webinar today as I was watching the BBC TV news at 1.00 pm and they did not send out a reminder. It was mostly bad news from Israel of course although trouble in the Middle East has resulted in a rise in the price of oil which has had a positive impact on my oil/gas company holdings. But the rest of my portfolio has fallen today at the time of writing which has been a consistent story of late.

I cannot understand the tactics of Hamas. The chance of them achieving a military victory over Israel I would view as negligible and politically by killing civilians they just encourage the hardliners in Israel to stick to their views. Retaliation from Israel will follow. Hamas will also destroy any support they have from the rest of the world. It’s certainly not a recipe for peace but for more war. What do they hope to achieve? It’s simply stupidity.

Monday is usually a positive day for stocks but not lately. Paul Scott suggests that one reason for recent falls in equities is fund managers of open-end funds having to sell to meet realisations by investors. Folks are ditching equities and piling into cash and fixed income bonds and he is probably right. This can only be a short-term solution though. I am keeping my powder dry until I see good market opportunities. Companies that generate real profits and cash are what I prefer to hold.

I did listen to the latest Paul Scott podcast this morning (readily available on the internet) and he had the usual wise words about markets and events. He writes for Stockopedia. His favourite phrase now seems to be “I dunno” even though he mostly gets his comments on companies right. Humility is always a good thing when commenting on markets.

There is a Mello webinar this evening starting at 5.00 pm. With its focus on small cap stocks this is a useful event to get the feel of the market and learn about smaller UK listed companies.

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

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Company Webinars, RIP David McCallum and Lord Harris Donation

I attended the Mello Trust and Funds webinar yesterday where a number of such organisations presented. That included Impax Environmental Markets, Ocean Dial and the India Capital Growth Fund, Polar Capital Global Financials Trust and JP Morgan UK smaller companies (JMI). I can’t say any of them excited me. When the market is trending down there is a tendency to switch holdings but usually to no advantage. The JMI holdings might have been interesting but their holding in Aston Martin Lagonda, a consistently loss making business, is enough to put me off.

I also attended a ShareSoc webinar on CQS Natural Resources Growth and Income (CYN). This company provides diversified natural resources exposure through smaller companies. It’s a closed end fund. Manager Robert Crayfourd said there were further legs to energy while ESG policies were constraining supply. These have blocked the capitalist response function.

But he confirmed the energy transition was happening and they have been focussing on battery materials. They are also keen on precious metals due to central bank demand.

With 36% invested in oil/gas and 7% in uranium which they are bullish on as demand is exceeding supply I asked why we should bother investing in smaller companies when large oil/gas companies are on high yields at present. Not sure I got a clear answer to that.

The historic financial record looks fairly boring with dividends flat-lining but it was mentioned they will have surplus cash in their investment account so the directors may decide to increase the dividend. In summary I was positively impressed by the presentation and it may therefore be worth further research.

Actor David McCallum, star of the Man from UNCLE, NCIS and other popular TV series, has died. I once landed at New York’s Kennedy airport after a transatlantic flight to find a long queue for a taxi. Confusion reigned as numbered tickets for your place in the queue had been cycled around so there were two people holding the same number. Then David McCallum rolled up and he was clearly in a hurry because he attempted to bribe the queue organiser – to no effect. A memorable occasion! 

Another blast from the past was the news report today that Lord Harris of Peckham, one of my former bosses, has donated £5,000 to Rachel Reeves, Labour shadow chancellor. He has previously been a big donor to the Conservative Party and an active supporter. He is quoted as saying: “Tories don’t deserve to win the next election” and there is a big profile of him in the Telegraph here:  https://www.telegraph.co.uk/business/2023/09/26/thatcher-donor-lord-harris-tories-dont-deserve-power/

He has made many charitable donations to schools and hospitals from the fortunes he made at Harris Queensway and Carpetright but I doubt this donation will win him many friends.

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

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Silicon Valley Bank Rescue and Wandisco Discussion

Silicon Valley Bank (SVB) has been rescued both in the USA and UK. In the UK HSBC has taken over the business for £1 and put in some more cash. But bank share prices are still being negatively impacted as doubts about their stability remain.

The problem at SVB was in essence a failure to manage interest rate risks on bonds they held as security which they could not sell to meet depositor redemption requests without recognising big losses. It demonstrates the knife edge that most bank balance sheets sit on, which is why I don’t invest in banks. Lending long and borrowing short as all banks do is a recipe for disaster unless very carefully managed.

Last night there was a panel discussion of the problems at Wandisco (WAND) at the Mello event. I gave my view of the likely problem at the company which is likely to have wiped out investors in a company that was worth £905 million before the shares were suspended.

This company has been reporting numerous very large “orders” in recent months but if you read the last annual report it says this: “Commit-to-Consume contract structure to be widely utilised across all future clients, where a customer is contracted to move a minimum amount of data over a given time” and reports several new deals using that structure. What exactly were the implied commitments in terms of cash by these “orders” is the key question which is not apparent. The company revenue forecasts were probably based on more than the minimums committed and probably inherently too optimistic. We will no doubt learn more in due course.

Who was to blame for this fiasco? The sales person or persons involved as the company suggests or the CEO and CFO for not being more sceptical about the likely future cash flows? The latter I suggest. The announcements made by the company were in my view misleading and hence effectively a fraud on investors.

Can the company recover? As I said in the meeting, the company does appear to have some good technology but avoiding administration is not going to be easy. The company may need more funding urgently to meet its customer commitments but who would invest in the business as confidence in the management will have been lost and investigating the problem will take time? It may take weeks if not months to resolve and the longer the company shares are suspended the more difficult it becomes.

There was a general discussion at the Mello event on how to avoid frauds which lose investors their money. Can you spot likely frauds was one question discussed. I think you can in many cases. There were warning signs at Wandisco such as never reporting a profit since they listed which is why I never invested in it. But sometimes it’s very difficult as at Patisserie Valerie where the audited accounts were fictitious.

One of the speakers mentioned a good book on the subject entitled “Lying for Money” by Dan Davies. I have ordered a copy. I would also recommend “The Signs Were There” by Tim Steer and I cover some of the things to look at when researching companies in my own book entitled “Business Perspective Investing”.

What should be done to avoid investors losing money from frauds?

Tighter regulation of announcements was one suggestion and tougher penalties for convictions was another. In general the UK legal regime is much too weak and the FCA has historically been very lax although they have been improving.

David Stredder suggested that companies that list should contribute to an “insurance” fund in case the company suffers fraud that would compensate investors (it’s rarely possible to recover funds from the fraudsters). This is an interesting idea but it would need to be a large fund to cover the likely cases.

Note that relying on non-executive directors or Nomads to pick up and stop problems does not work. Investors need to do their own due diligence.

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

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Silicon Valley Bank Collapse, Wandisco Discussion and Fundsmith Equity Fund Annual Meeting

The collapse of Silicon Valley Bank (SVB) is a typical story of a bank run after depositors lost confidence and rushed to the exit door. This bank may not be well known to UK investors but they were very active on funding and providing banking services to early-stage US technology companies on the West Coast. This could have a severe impact on the tech sector.

The UK entity has also ceased trading and a letter signed by more than 140 companies was sent to the Chancellor begging him to step in with emergency funding. Without access to their funds, companies won’t be able to meet payroll or other commitments so might have to also enter administration.

There may be some justification for intervention in this case and hopefully keeping depositors protected will not cost an enormous amount.

The Nasdaq fell sharply on Friday and expect the same on Monday.

Also on Monday, Mello are hosting a panel discussion on Wandisco (I am on the panel) from 5.00 onwards – see  https://melloevents.com/mm13march2023/

I made some comments on the apparent fraud at Wandisco in a previous blog post and it is clear that many private investors were suckered into investing in the company (not me in this case). You should get some good tips on how to avoid such disasters.

I have just watched a recording of the Fundsmith Equity Fund annual shareholder meeting – see https://www.fundsmith.co.uk/tv/ . Terry Smith gave his usual slick performance and brushed off the negative 13.8% fund performance last year with the comment that “it was predictable” after such a long run of positive returns.

The detractors in the fund’s holdings were mainly tech stocks such as Meta, Paypal, Microsoft and Amazon. He reiterated the investment strategy of “only investing in good companies, don’t overpay and then do nothing”.

It is worth watching the video. I will continue to hold the fund as the formula followed is still likely to be effective.

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

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Alliance Trust, Segro and NatWest AGMs

Yesterday I attended the Annual General Meeting of Alliance Trust (ATST) online. This at least enabled me to avoid travelling to Dundee and I am still avoiding physical meetings because of the Covid risk. From the experience of one tradesperson who visited us yesterday this is still very sensible I think – he caught it in London but had been very unwisely avoiding vaccination – as a result he spent several days in hospital with pneumonia despite being a young and fit person beforehand.

The Alliance Trust AGM was held as a “hybrid” meeting using the Lumi platform which enables on-line voting and was a very well managed event.

Alliance Trust is of course a generalist global trust and after a difficult few years in the past have now reverted to being one of those trusts suitable for widows and orphans, or anyone who desires a “simple, high-quality way to invest in global equities at a competitive cost” to quote from their Annual Report. They use WTW to select and manage a portfolio of independent fund managers.

The Chairman, Gregor Stewart, made the following comments. They outperformed their benchmark in the first half of the year but underperformed in the second half. This was due to the market being focussed on a few large US technology stocks in which they are underweight. But the dividend was increased last year with a total increase of 32.5%. NAV Total return was 18.6%. The discount to NAV has widened but that is true of most investment trusts as people lost confidence in the stock market and its prospects.

When it came to the Q&A session, one shareholder questioned the increase in the dividend which was done by paying out capital profits. The Chairman’s response was that there were differing views on this issue and they had consulted shareholders who generally thought the yield needed to come up a bit. Longer term their expectation is that dividends will be covered by income. Comment: Capital growth retained within the trust is tax free while if it is paid out as income you get taxed on the dividends. So I would personally prefer they not do this. But I can understand why some people would prefer increased dividends and companies in which they are invested are tending to pay lower dividends (the very high dividend payers are often mature businesses in sectors to be avoided). There is also the problem that Alliance may look less attractive to investors if they pay a headline lower yield than other similar trusts. In summary this is not a straightforward issue and will certainly not affect my decision to hold this trust.

Segro AGM

This was only held as a physical event yesterday although there was a recording made which I watched this morning (it’s available from their web site). There were only a few shareholders in physical attendance. Why could they not hold a hybrid meeting? They could surely afford to set one up using Lumi or other platforms.

The meeting was chaired by Gerald Corbett who is retiring this year. CEO David Sleath gave a presentation and I note here some of what he said: Adjusted eps was up 14.6%, adjusted NAV was up 39.7% and dividends were up 10%. The board believes there is a lot more growth to come due to favourable market dynamics. There is a record demand for space resulting in an unheard of vacancy rate of 3.5%.

They even reacquired some offices in Slough sold in 2016 to redevelop into industrial units. The board is confident in the outlook for the business and there is the potential to double rental income.

The Q&A was relatively brief and hampered by not everyone using a microphone so that was another organisational failure.

I commented previously on the voting for this event in March and in particular the remuneration Report and Policy (see  https://roliscon.blog/2022/03/20/its-the-agm-season-but-voting-not-easy/ ). But the actual voting as reported showed only 2.4% of shareholders voting against the Remuneration Report and 1.1% against the Remuneration Policy. This is exasperating. Irrespective of the fact that the company is doing very well and I have no complaints about the directors, the performance is due to market conditions and the remuneration is excessive.

NatWest Group AGM

The NatWest AGM is being held on the 28th April as a physical meeting in Edinburgh although there was a virtual event to enable shareholders (of which I am not one) to ask questions yesterday. Why cannot they hold a proper hybrid meeting?

Remuneration is an issue at this company also. ShareSoc have published some voting recommendations and other comments written by Cliff Weight – see here: https://www.sharesoc.org/vci/nwg-natwest-group-information-and-vote-guidance-2022/ although I understand you need to be a member to read them.

One thing Cliff said was this: “I question what was the need and rationale for the CEO to be given a 19% pay rise only 1 year into a new job – has she over delivered to such a degree that the Board think they were underpaying her?”. It’s clearly another case of excessive and unjustified remuneration which is all too common in the banking sector. NatWest is still recovering from its near collapse and effective nationalisation by the Government in the financial crisis of 2008 which it is no doubt trying to forget by changing its name from the Royal Bank of Scotland.

There is obviously still a generic problem of excessive pay for executive directors in public companies which changes to corporate governance and regulations in the last few years have failed to tackle. With votes on remuneration dominated by institutional investors who have no interest in controlling pay as they swim in the same pond, and private shareholders typically disenfranchised by obstructive platforms more substantial reforms to tackle this issue are clearly required.

In the case of NatWest, even the Government must have been consulted upon and voted to support the remuneration as they still hold 48% of the shares!

Mello Event

One physical event that investors may be interested in is the return of the three-day Mello meeting in Chiswick on the 24th to 26thof May run by David Stredder. See https://melloevents.com/ .

There is nothing like meeting companies and fellow investors in person to gain real understanding of what is going on. But regretfully David I won’t be joining you. Have just been advised to have a fifth covid vaccination!

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

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Mello Event and Crimson Tide  Presentation  

 

I attended the Mello event yesterday where I reviewed Terry Smith’s book entitled “Investing for Growth” and Andrew Latto reviewed my book entitled “Business Perspective Investing”. He gave it a very positive review and made some suggestions for a second edition such as adding some case studies. I will ponder whether to work on another edition.

Another interesting session was a presentation by Crimson Tide (TIDE). This is a very small company even though it’s been around for a number of years – market cap only £19 million. It sells a software product called MPRO5 which claims to be a “leading mobile workforce management platform and service” on their web site. I own a very few shares in the company.

The presentation was by Luke Jeffrey, CEO, and he clearly has a technical background. He somewhat disappointed me by saying the product is a “toolkit”. It’s obviously a technology platform not an application solution. It has to be configured to meet application needs of which there seem to be a wide variety, i.e. there is no very strong focus on any business sector.

My experience of the software industry has taught me that people are looking for solutions not toolkits. Not surprisingly, he mentioned when asked about competitors that they often come up against “point solutions”.

They also seem to be extending their technology to cover IOT applications and also developing a “micro business” version. I find the idea of marketing software products to businesses such as plumbers to be a quite horrific business proposition. Selling low-cost software solutions to small businesses is rarely economic because it takes as much time and effort to sell to a small business as it does a large one while the price you can charge never reflects that. Sales, marketing and distribution in that sector is a major problem.

In summary I am not convinced that they can turn their interesting technology into a big business unless substantial changes are made. The presentation actually discouraged me from buying more shares in the company which is no doubt the opposite of what the speaker was aiming for.

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

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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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