Northern Venture Trust AGM Report

I attended the Northern Venture Trust (NVT) AGM this morning via Zoom. This trust gave a good performance last year and the AGM was well organised in some ways with shareholders both attending physically and via Zoom (i.e. it was a hybrid meeting but all votes had to be submitted in advance).

Tim Levett representing the fund manager gave a presentation on the historic results and covered one or two other points. He specifically mentioned the “sunset clause” on dividend income tax relief which is due to be removed in 2025 due to EU regulations but he said he believed it was likely to be retained. This is an important issue for VCT investors because the zero tax on VCT dividend income is one of the major attractions and is one of the few things that make them attractive to investors as otherwise the overall returns are no great shakes. This issue really needs to be resolved while VCTs are attracting such high levels of funding at present while many investors are not aware of the issue.

Note that Tim Levett has been on the board a very long time but is retiring from the fund manager. However he is remaining on the board which I do not consider good corporate governance as I don’t think managers or ex-managers should be on the board. I voted against him therefore as usual. He got 443,000 votes against and the Chairman, Simon Constantine, also received 375,000 votes against his re-election.

Questions could be submitted before the meeting or during the meeting (both on-line and by shareholders present of which there were a few apparently).

But the Chairman did not read out the pre-submitted questions in full or give the name of the submitter. He also did not answer my question directly which I had submitted in writing which was “Last year the trust paid a performance fee to the fund manager of over £2.5 million. On my calculations this resulted in the overall total of expenses and fees of 4.5% of closing net asset value. In my view this is way too high even allowing for the work involved in managing a portfolio of small, unlisted investments.

Could the board please consider reverting to the arrangement when the trust was first launched; in other words no performance fee being payable at all as there is no evidence that performance fees improve the performance of investment trusts. Other VCTs such as Amati manage without them”.

All that was said was that 76% of shareholders had voted for the introduction of the performance fee in 2013 and all of the top 20 VCTs have performance fees. That’s hardly a justification for the excessive level of fees. [Postscript: The Amati AIM VCT has a total return per annum over ten years of 13.9% according to the AIC while Northern has a total return of 9.4% p.a. so I do not believe the claim about top 20 VCTs is true].

Just to reinforce that point, a shareholder physically present suggested that after taking into account other fees collected via the manager such as arrangement and monitoring fees from investee companies, the total percentage was 7% of assets (I have not verified that claim but it was not denied by the directors).

Summary comments: Like other VCTs this company is doing very well from investing in technology and software companies with substantial realisations being achieved. The market is hot for such businesses but whether that will continue to be the case I am not sure as valuations are getting very high. This is of course also driving up the cost of new investments.

There were questions about the payment of performance fees (in cash of course) when the declared profits include unrealised gains as well as realised ones. But that that was discounted as being a concern. This is an issue however as unrealised gains can disappear in future.

The key problem with this and other VCTs as I see it is that the company is run more for the benefit of the fund managers and the directors, rather than shareholders.

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

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Big Audit Firm Break-Up and Northern VCT AGM

A report commissioned by the Labour Party has advocated the break-up of the big four audit firms that dominate the audits of FTSE-350 firms. The report, co-authored by Prof. Prem Sikka et al, even goes so far as to suggest that their share of that market should be limited to 50% and that joint audits be promoted. In addition it argues that audit firms should be banned from doing non-audit work for the same company, and an independent body to appoint audit firms and agree their remuneration should be set up.

It also calls for the auditors to owe a duty of care to shareholders, not just the companies they audit, which would enable shareholders to pursue litigation over audit failings which they have great difficulty in doing at present. It is surely sensible to reinstate what was always assumed to be the case before the Caparo judgement.

These are revolutionary ideas indeed to try and tackle the problems we have seen in recent years and it seems to be now generally accepted by investors, if not the audit profession, that there have been too many major failings and the general standard is low. Even the Financial Report Council (FRC) seem to accept that view at a recent meeting with ShareSoc/UKSA.

But would breaking up the big four, effectively forcing some larger companies to use smaller audit firms improve the quality of audits? I rather doubt it. In my experience problems with smaller audit firms are just as common as in large ones – it’s just that the big companies and their audit failings get more publicity. Larger firms do have more expertise in certain areas and more international coverage. So there are good reasons to use them. But this report is certainly worth reading because if Mrs May continues to make a hash of Brexit and proves unable to stop dissension within her party we may see a Labour Government looking to implement these policies. See http://visar.csustan.edu/aaba/LabourPolicymaking-AuditingReformsDec2018.pdf . I may make more comments on the report after I have read the whole 167 pages.

Note that this issue of audit firm size came up at the Northern Venture Trust (NVT) Annual General Meeting which I attended today. This is a long-established Venture Capital Trust – it was their 23rd AGM, many of which I have attended. One shareholder voted against the reappointment of KPMG on the “show of hands” vote, and there were 1.2million votes against them on the proxy counts (versus 10.9 million “for”). It is unusual to see so many voted against such resolutions. When I asked the shareholder why he voted against I was told it was because he thought that a smaller audit firm might do better as VCTs are relatively smaller investment companies. However I pointed out that VCT legislation is very complex so it makes sense to use an audit form that is more knowledgeable in that regard.

The other possible reason for high proxy votes against the auditors is that Nigel Beer, who chairs the Audit Committee is a former partner in KPMG although he told me later that he had departed many years ago. Anyway I did raise this issue in the meeting and the fact that both Nigel Beer and Hugh Younger had just passed 9 years of time on their board. In addition, Tim Levett, who is Chairman of NVM, the fund manager, is on the board. So according to the UK Corporate Governance Code that’s three directors out of 6 who should be considered non-independent.

I urged the Chairman to look at “refreshing” the board although I did not doubt their experience and knowledge. It was also pointed out to me after the meeting that there are no women on the board. So effectively this is really a stale, male, pale board. However the Chairman said they do regularly review board structure and succession.

Other than that there were some interesting comments given by Tim Levett in his presentation. He said that due to the change in the VCT rules in 2016 they have changed from being a late stage investor to being an early stage one. In the last 3 years they have built a new portfolio of 22 early stage companies and are probably the most active generalist VCT manager other than Titan. NVM have opened a new office in Birmingham and built up the Reading office. There were also a number of new staff who were introduced at the meeting.

He also said that like all the top 10 VCTs, an awful lot of special dividends had been paid in the last three years. This was because of realisations and the VCT rules that prevented them from retaining cash. This has meant a reduction in the NAV of the trust but in future they will try and maintain that at the same time as maintaining a 5% dividend. Note: that historically it means that capital has been paid out in tax-free dividends that investors might have reinvested in the trust and hence collected a second round of up-front income tax relief. One can understand why the trust does not want to continue doing that as it may otherwise spark some attention from HMRC. I also prefer to see VCTs maintain their NAV as otherwise the trusts shrink in size which can create problems in due course as we have seen with other VCTs.

NVT are doing a new share issue in January which will of course improve their NAV and I was glad to hear that at least some of the directors will be taking up shares in the offer and adding to their already considerable holdings. That inspires some confidence that they can cope with the changes to the VCT rules that mean there will be more emphasis on investing in riskier early stage companies.

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

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