Euphoria All Around, But Platforms Not Keeping Up

The Conservative General Election Victory has generated large movements in stock prices with utility companies and banks some of the major beneficiaries. National Grid (NG.) rose 4% on Friday as the threat of nationalisation disappeared and Telecom Plus (TEP), which I hold, rose 11%. I sold the former some time ago as the business seemed challenged on a number of fronts and regulation of utilities in general in the UK and hence their likely return on capital seemed to becoming tougher. My view has not changed so although foreign investors might be mightily relieved, I am not rushing into buying utility companies today.

The euphoria seems to have spread to a very broad range of stocks. Even those you would think would be negatively affected by the rise in the pound, which will depress the value of dollar earnings, have risen. This may be because US markets have risen on the prospect of a US/China trade deal which was announced on December 13th.  This might roll back some of the imposed and proposed tariffs on Chinese products to the USA, and cause cancellation of retaliatory Chinese tariffs, but the details are yet to be settled. This may not be a long-term solution though as it will likely still leave the USA with a very large trade deficit with China.

One noticeable aspect of the euphoria infecting markets on Friday morning was the inability of some investment platforms to keep up. According to a report on Citywire, two of the largest operators were affected with AJ Bell suffering intermittent problems due to a four-fold rise in volumes and Hargreaves Lansdown also experiencing problems. Some of the issues apparently related to electronic prices not being quoted by market makers which was reported as a problem by Interactive Investor. This meant that trades had to be put through manually via dealers who became overloaded.

It is very disappointing to see that yet again a moderate rise in volumes caused an effective market meltdown. The Financial Conduct Authority (FCA) should surely be looking into this as it is their responsibility to ensure the markets and operators therein have robust systems in place. If there is a real market crash, as has happened in the past, retail investors could be severely prejudiced if platforms fail or market makers fail to quote prices.

Eurphoria also seems to have become prevalent in the market for VCT shares in the last couple of years with figures from HMRC showing that the number of new VCT investors claiming income tax relief reached a ten-year high in 2017-18, up 24% over the previous year. The amount invested increased by 33% and in 2018-19 the amount invested increased again by 1.6% to £716 million. The pension changes such as the reduction in the lifetime allowance and new pension freedoms are attributed as the causes. High earners have been flocking to VCTs to mitigate their tax bills it appears.

But the investment rules for VCTs have got a lot tougher so whether they will continue to achieve the high returns seen in the past remains to be seen.

The recently published HMRC report on VCT activity is present here: https://tinyurl.com/vuro5p8

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

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FCA Makes Platform Switching Easier

The Financial Conduct Authority (FCA) have today announced some measures to improve competition in the platforms market. Experienced investors who use electronic trading platforms will be well aware of the problems of switching to another provider if they are dissatisfied with the service, wish to move to a cheaper provider or for other reasons such as consolidating on one provider or spreading their risk over several. It simply takes too long to move “in-specie” holdings from one platform to another ̶ it can take many months to transfer with endless chasing required.

Such transfers are also discouraged, resulting in an uncompetitive market, by the charging of exit fees by platforms. Together with the delays that investors face, this tends to lock in investors to their existing platform providers.

You can read my response to the FCA’s previous public consultation on this subject here: https://www.roliscon.com/Investment-Platforms-Market-Study.pdf . I mentioned my and others past experiences of delays of over 3 months on transfers.

The FCA is proposing to ban or limit exit fees. The FCA is also encouraging firms to take part in the STAR initiative (see https://www.joinstar.co.uk/) to improve the efficiency of the transfer process.

One particular problem with fund transfers is that sometimes a conversion of unit class is required, or it is preferable to move to a discounted class. They have set out proposals to mitigate that issue.

More information on the FCA’s proposals and a public consultation on the subject, to which I will certainly be responding, is here: https://tinyurl.com/yyjw2jpf .

At least one platform provider, AJ Bell Youinvest, has welcomed the FCA’s findings. They say a restriction on exit fees will not have a material impact on their business, and as a net receiver of assets they would expect to benefit from more transfers if they are made easier. Other platform providers may not be so happy, and may complain they won’t be able to cover their real costs of handling transfers. But there is little incentive to reduce those costs and reduce the complexity and delays in transfers at present. Therefore surely these are positive proposals that all investors should support. Everyone can respond to the consultation so if you have been affected by these problems in the past, please do so.

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

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Shareholder Voting and Financial Times Generosity

Anyone using an on-line investment platform will be aware that your shares are normally held in a nominee account (i.e. you do not own them, your broker does – you are only the “beneficial owner”). ShareSoc has long campaigned for reform of this system because it usually results in you not being able to vote your shares at General Meetings, and you are unlikely to be sent information such as Annual Reports. You are effectively disenfranchised and the lack of voting by private shareholders undermines good corporate governance. Platforms can enable you to vote by submitting proxy votes on your behalf, but many do not offer this facility.

Last week the Association of Investment Companies (AIC) published some information that helps you to get a vote. They showed which platforms provide such voting facilities. See https://www.theaic.co.uk/aic/news/press-releases/aic-releases-information-to-help-shareholders-vote-on-platforms for the details. Note though that some may permit it but often without providing an easy to use system of voting.

Ian Sayers of the AIC had this to say: “We need all platforms to offer a simple, online solution that means that shareholders get the information they need on resolutions affecting the company and can exercise their democratic rights at a click of a button. In the meantime, investors should consider whether and how they can vote their shares as part of their decision over which platform to use.”

One can only agree with his sentiment on this. The solution is to reform the laws and regulations in this area, and ideally have all shareholders on the share register of companies. But in the meantime, it’s worth reviewing the AIC list when choosing a platform to use.

Another item of news last week was a report from Reuters that a group of Financial Times journalists have complained about the pay of their CEO John Ridding. He earned £2.55 million pounds in 2017. The group led by an NUJ representative have written to their colleagues around the world saying the pay was absurdly high and that he should give some of it back to lowly paid staff.

Comment: Pay is escalating all over in the business world and this is just another example of outrageous pay inflation among senior management. The journalists’ initiative is to be applauded. As a daily reader of the Financial Times, I also have concerns that the CEO is not doing a great job either than might justify these gazillions. In the last couple of years, since the acquisition of the FT by Nikkei, the content of the paper has substantially changed.

It still publishes very good in-depth analyses of financial issues – for example, the review of accounting and audit standards headlined “Setting Flawed Standards” on Thursday which is well worth reading. But it has taken a very pro-EU and pro-Remainer political stance with numerous articles and published letters with a highly political slant. At the weekends we have to suffer from ex-sports journalist Simon Kuper’s views on that subject. He may know a lot about football but his views on UK politics and those who support Brexit seem very ill-informed.

Coverage of hard news on companies is also now very patchy, with more on the politics of foreign nations and on social issues. The FT needs to get back to reporting on financial matters and cut back on the political polemics.

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

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Which Is The Cheapest Platform?

Many investors do not research which trading platforms (a.k.a. on-line stockbrokers) are the cheapest before they sign up with them. Neither do all platforms offer the same facilities – for example all the different types of ISAs and allow investment in both funds and investment companies or direct shares. Retail investors tend to depend on which name they remember from advertising, from friends’ recommendations and other sources. But now the Association of Investment Companies (AIC) has provided a useful comparison tool.

The AIC represents investment companies and has issued the following press release about the launch of their new platform comparison tool: https://www.theaic.co.uk/aic/news/press-releases/aic-launches-platform-comparison-tool-on-its-website

This is an exceedingly useful tool and shows that the platform charge on several platforms can be as high as over £3,000 p.a. or as low as less than £100 p.a. for a portfolio valued at £1 million invested solely in open-ended funds. In other words, an enormous range!

They also have separate tables for investments in investment trusts so you can compare those charges against open-ended fund portfolios, or a mix. Funds are often more expensive. You might notice they don’t give the cost of directly investing in shares, but these would be the same as investment trusts as they are simply listed company shares.

They don’t include transaction costs on trading which is worth bearing in mind though. The volume of trading as well as the size of portfolio affects the overall costs.

Surely you don’t need reminding that minimising what you pay to platforms is one of the key ways to maximise long-term investment performance as they can seriously erode your returns. If you are looking for a new stockbroker, it would be worth reviewing this comparison tool first because although service quality is important there is little correlation between cost and service. Some of the lowest cost brokers provide very good service in my experience so one wonders why there is such a price difference in this market. One reason might be the difficulty investors have in switching brokers that reduces competition in this market.

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

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