Tag: Woodford

Another Good Year for Fundsmith

Terry Smith has issued his latest report to investors on the performance of the Fundsmith Equity Fund. It contains some of his usual acerbic comments on the financial world which I cover below.

Total Return on the fund last year was 25.6% and that beat the MSCI World Index benchmark which was only up 22.7%. As Fundsmith is one of my bigger holdings, that helped to contribute to my own portfolio performance although my overall gain was better. But that compares with the previous year when Fundsmith was well ahead of my portfolio which has more small cap stocks in it. Undoubtedly investors in Fundsmith will be happy with this continued good performance and the fund has continued to attract new investors so is now the largest UK retail equity fund. Many people have concerns that the fund is now so large that returns may drop away but Terry Smith continues to confound them.

The top five contributors to outperformance were Microsoft, Estee Lauder, Facebook, Paypal and Philip Morris with the detractors being 3M, Colgate Palmolive, Clorox, Brown-Forman and Reckitt Benckiser. Terry continues his management style which he defines as buying good companies, not overpaying and then doing nothing. He also likes to invest in companies with a good Return on Capital Employed (ROCE), good margins and good cash conversion. These are good lessons for all stock market investors.

He derides “value investing”, i.e. buying apparently cheap stocks and the alleged rotation from growth into value. He says “most of the stocks which have valuations which attract value investors have them for good reason – they are not good businesses”. He argues that returns from stock market investment come from the growth in company earnings and the compounding of reinvested retained capital, not from buying cheap companies.

He clearly does not intend to change his investment style and makes some critical comments on the Woodford debacle which he assigns to a change in investment strategy with Woodford moving into illiquid small cap stocks in an open-ended fund.

Fundsmith are holding the Annual Shareholders Meeting on the 25th February for those who wish to question Terry on his management, or on why he is not reducing the fund management charges given the growing size of the fund, although they are not expensive in comparison with some actively managed funds.

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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The Vultures are Circling – Woodford, Carpetright et al

With the demise of the Neil Woodford’s empire and the winding up of the Woodford Equity Income Fund, investors are looking for whom to blame – other than themselves of course for investing in his funds. One target is Hargreaves Lansdown (HL.) and other fund platforms who had it on their recommended or “best buy” lists, including long after the fund’s problems were apparent. Now lawyers are only too glad to help in such circumstances and at least two firms have suggested they can assist.

One is Slater & Gordon. They say they are investigating possible claims against HL. and that “We’re concerned to establish if there was any actionable wrongdoing or conflict of interest by Hargreaves Lansdown in continuing to include Woodford funds on their ‘Best Buy’ Lists if it had concerns as to their underlying investments. We’ll also be looking at the price achieved when buying and selling instruments, such as ordinary shares, on the Hargraves Lansdown platform and whether or not this represents Best Execution”. You can register your interest here: https://tinyurl.com/yyrhbfb3

Another legal firm looking at such a claim is Leigh Day who say they already have 500 investors interested in pursuing a case. See https://tinyurl.com/y6r2buav for more information.

Having been involved in a number of similar legal cases in the past, my advice is that there is no harm in registering an interest but do not pay money up front and certainly not until the basis of any legal claim is clear. In addition bear in mind that it would be very expensive to pursue such a claim and lawyers may be willing to do so simply in anticipation of high fees when there is no certainty of winning a case. How is the case to be financed is one question to ask? Funding such cases by private investors alone (the majority of HL. clients) is likely to be difficult so “litigation funding” is likely to be required which can be expensive and erode likely returns. Insurance to cover the risk of losing the case is also needed and expensive.

Yesterday saw news announcements from three companies I have held in the past but all sold some time ago. The most significant was from Carpetright (CPR) which I last sold in 2010 at about 800p. It’s been downhill ever since. The Daily Telegraph ran an article today suggesting that this was a zombie company and that it was a good time of year for zombie slaying. After the announcement of a trading update and possible bid yesterday the share price is now 5p.

The Board of Directors “believes that Carpetright is performing well….” and “the prolonged sales decline appears to be bottoming out….”, but the company has too much debt and needs refinancing. One of its major lenders and shareholders is Meditor who have proposed to make a cash offer of 5p per share for the company. The share price promptly halved to that level because it is likely that the offer will be accepted by enough shareholders to be approved. So it looks like we will have a company with revenues of £380 million (but no profits), sold for £15 million. Founder Lord Harris, who is long departed, must be crying over this turn of events. But it demonstrates that when a company is in hock to its bankers and dominant shareholders, minority investors should steer clear.

Another announcement was from Proactis Holdings (PHD) which I sold fortuitously in mid-2018. They announced Final Results yesterday. Revenues increased by 4% but a large loss of £26 million was reported due to a large impairment charge against its US operations. The business has undertaken an operational review and restructuring is in progress. It has also been put up for sale but there is little news on potential “expressions of interest”. Just too many uncertainties and debt way too high (now equal to market cap) in my opinion.

The third announcement was from Smartspace Software (SMRT) which I sold earlier this year at more than the current share price as progress seemed to be slow and I wanted to tidy up my over-large portfolio. It reported interim results where revenue was up 57% but there was a large loss reported (more than revenue). There were some positive noises from the CEO so the share price only fell 0.7%. The company has some interesting products for managing office space but it’s a typical “story” stock where the potential seems high but it has yet to prove it can run a profitable business.

I have also noticed lately that the fizz has gone out of the share price of Fevertree (FEVR). It’s been falling for some time. I sold it in 2018 at a much higher level. It still looks quite expensive on a prospective p/e basis. Overall revenue is still growing rapidly but the USA is still the big potential market yet to be proven. I like the business model and the management even if I don’t personally like the main product. But perhaps one to keep an eye on. But generally buying back into past investments can be a mistake.

Given my track record on the above, perhaps my next investment book should not be on choosing new investments but on choosing when to sell existing ones?

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

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Woodford Fund and Trust News

The good news for investors in the Woodford Patient Capital Trust (WPCT) is that Schroders are taking over management of the portfolio.  The share price promptly jumped upwards on the news (up about 29% at the time of writing), but speculators need to be wary. Although the trust is still at a large discount to the Net Asset Value, I looked at the portfolio yesterday and was not impressed.

These are the top ten holdings by value: Rutherford Health, Benevolent AI, Atom Bank, Oxford Nanopore, Industrial Heat, Immunocore A Pref, Kymab B Pref, Mission Therapeutics, Ratesetter and Autolus. There may be some value in there but actually judging it, or confirming it, is far from easy.

One issue not raised in the recent BBC Panorama programme on Woodford was that of the naming of the Woodford Equity Income Fund. Such funds typically focus on paying high dividends to investors and to do so they invest in high dividend paying companies. They therefore tend to hold boring large cap companies. But the Woodford fund, which is now being wound up, was very different. It did have some high dividend paying holdings in the fund but not necessarily large cap ones and it also had a number of early stage companies that were unlisted. This was not a typical “Equity Income” fund. Investors might feel they were misled in that regard by the name.

For a more typical “equity income” fund, look at City of London Investment Trust (CTY) who are holding their Annual General Meeting today at 2.30 pm. You may be able to watch the AGM on-line, or see a recording later, by going to https://www.janushenderson.com/en-gb/investor/ . Their top ten holdings at the year end were: Shell, HSBC, Diageo, BP, Unilever, Prudential, Lloyds Bank, RELX, BAT and Rio Tinto.

But these were the top ten holdings in the Woodford Equity Income Fund: Barratt Developments, Burford Capital, Taylor Wimpey, Benevolent Ai, Provident Financial, Theravance Biopharma, Countryside Properties, Oxford Nanopore, Ip Group and Raven Property Convertible Pref 6.5%. That’s a very different kind of portfolio.

The AIC definition of an equity income fund primarily says that typically the company will have a yield on the underlying portfolio ranging between 110% and 175% of that of an All-Share Index (World or UK). It says nothing about the riskiness of the companies being invested in nor their size when income investors are typically looking for security of income. Surely the definition of an equity income fund needs revisiting and more information provided to investors. The latter is of course now taking place as new direct investors have to confirm they have read the KID on the fund when doing so on-line but do they read them and understand them?

Postscript: The broadcast on-line video of the City of London IT AGM as definitely promised in the notice of the meeting could not be found when required and after contacting Janus Henderson I am still awaiting a call back 24 hours later to tell me where a recording might be. This is really not good enough.

Postscript 2 (4 days later): A recording of the presentation by Job Curtis at the City of London AGM and the business of the meeting is present here: https://www.janushenderson.com/en-gb/investor/investment-trusts-live/ .

As regards Woodford Patient Capital Trust, it has been pointed out to me that one aspect I did not mention and which might affect an investors view of the valuation was the high level of debt in the company. The gearing has grown as some equity holdings were disposed of and this may be another problem for Schroders.

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

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Panorama on Woodford – Expletives Deleted?

Panorama covered the Woodford debacle last night and the issue of conflicts of interest in fund managers. They tried door-stepping Neil Woodford to ask him some questions, but he just walked past them. I think the questions would have been rhetorical anyway, such as “why did he make so many duff bets on companies” and “why should he have made millions while investors in his funds lost money”?

The Financial Conduct Authority (FCA) came in for a lot of criticism for not intervening sooner and allegedly not enforcing the rules concerning the liquidity of holdings in open-ended funds.

My old sparring partner T** W** was interviewed in his new home in Wales – looks like he has a renovation project on his hands. I don’t like to mention his name in case it attracts readers to follow him when they might find his use of language somewhat offensive. But in this interview there were no expletives which is unusual for him – perhaps the BBC deleted them.  They also interviewed some investors in the Woodford funds and one of them definitely had her expletives deleted.

The programme also covered the issue of the conflicts of interest in fund managers such as the fact that as their fees are based on the value of funds under management, there are strong incentives to grow the assets and also an incentive to manipulate the share prices. For example, without suggesting that Woodford specifically did these things, if a fund manager buys more of a listed stock in the market then that can raise the price, particularly when the stock is a small cap one and relatively illiquid. In the case of unlisted stocks, investing at a higher price than any previous trades causes the whole company to be revalued upwards (see BVCA valuation rules). There is clearly the possibility of perverse incentives here.

The programme also mentioned the case of Mark Denning an investment manager for Capital Group who allegedly had been trading in stocks on his personal account that were also held by the fund he managed. He denies it, but clearly such activity could enable “front-running” of trades and other abuses. The Panorama programme argued that there was in essence very little oversight of fund managers.

In summary the BBC programme was a good overview of the issues and T** W** made a useful contribution. The FCA should certainly be tightening up on the oversight of open-ended funds and their managers, and should be reviewing the liquidity rules even if they are bound by the EU Directives in that regard at present.

As the FCA never acts quickly, which is of course part of the problem, in the meantime investors might like to consider what I said in my recent book in the chapter on Trusts and Funds. I repeat some excerpts here:

“A key measure of the merit of a fund is its long-term performance against similar funds or its benchmark”. [Woodford’s funds, after he set up his new management company. never demonstrated that].

“One issue to examine is whether a fund manager has a consistent and effective process for selecting investments if they are an active manager. It is important that they are not simply making ad-hoc decisions about investments however experienced they are”. [See my comments on City of London Investment Group in a previous blog post for an example].

“To judge whether a fund manager is competent it helps to look at the underlying companies in which they invest. Are they investing in companies that show a high return on capital while being on relatively low P/Es and with significant growth in earnings or are they investing in shares that appear to be simply cheap? Are they picking companies that are of high quality – in other words displaying the characteristics covered in the first few chapters of this book?” [Anyone looking at the holdings of the Woodford Equity Income Fund or Patient Capital Trust would have realised that many of the holdings were speculative].

One issue not raised in the BBC programme was that of the naming of the Woodford Equity Income Fund. Such funds typically focus on paying high dividends to investors and to do so they invest in high dividend paying companies. They therefore tend to hold boring large cap companies. But the Woodford fund was very different. It did have some high dividend paying holdings in the fund but not necessarily large cap ones and it also had a number of early stage companies that were unlisted. This was not a typical “Equity Income” fund. Investors might feel they were misled in that regard by the name.

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

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Woodford, Buffett Bot and FRC Survey

There was a very good article in the FT on Saturday on the “rise and fall of a rock star fund manager”, i.e. Neil Woodford. Essential reading for those who have lost money in his funds. A tale of hubris and obstinate conviction it seems. They report that lawyers are looking at a possible claim for investors but I cannot see any obvious grounds. But lawyers like to chase ambulances. Panorama are also covering the Woodford debacle on Monday.

That well-known phrase “Where are the customers’ yachts” comes to mind. While Woodford and his associates have made millions from his management company, the customers have lost money. That is an issue that the FCA might wish to consider but I cannot think of any immediate solution.

Another article in Saturday’s FT was on a Buffett “App” which would imitate the value investing style of Warren Buffett. Neil Woodford was once known as Britain’s answer to Buffett in the deadwood press but that is now being forgotten of course. This new App from Havelock London is aimed to imitate the investing style that is claimed to be the source of Buffett’s above average long-term performance.  They claim that App will focus on long-term value rather than short term performance which is the approach of most such “quant” investors. This was the marketing pitch of Woodford’s Patient Capital Trust in essence as you can tell from the name.

But in my view this whole approach that you can pick out sound investments by clever analysis of the historic financial numbers or of other metrics is simply misconceived. I have explained why this is so in my book “Business Perspective Investing (see https://www.roliscon.com/business-perspective-investing.html ). One reason why Buffett was so successful, which is obvious if you read about his career, is that he looked carefully at the business models of the companies in which he invested and such matters as the barriers to competitor entry. Yes you can cover some of his analysis by looking at return on capital or other metrics of a company, but that’s only half of the story. You need to understand the business from the perspective of a business analyst.

The Financial Report Council (FRC) have just published a survey on “The Future of Corporate Reporting” (see   https://www.frc.org.uk/news/october-2019/future-of-corporate-reporting-survey ). As the announcement says: “Respondents views will inform the FRC’s project which seeks to make recommendations for improvements to current regulation and practice and develop “blue sky” thinking. A key aim of the project is to challenge the FRC to think more broadly in responding to the recommendation by Sir John Kingman to promote greater “brevity, comprehensibility and usefulness in corporate reporting” moving forward”. So this is something all investors who read company reports should look at. It should take no more than 15 minutes to complete they assure us. I completed it in not much longer.

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

Woodford and Hargreaves Lansdown, Rosslyn Data AGM and Brexit

To follow up on my previous blog post over the collapse of Woodford Investment Management and how to avoid dud managers, the focus has now turned in the national media upon Hargreaves Lansdown (HL.). Investors who have lost a lot of money, and now won’t be able to get their cash out for some time, are looking for who to blame. Neil Woodford is one of course, but what about investment platforms such HL?

The Woodford Equity Income Fund was on the HL “best buy” list for a long time – indeed long after its poor performance was evident. They claimed at a Treasury Committee that Woodford had displayed similar underperformance in the past and had bounced back. But that was when he had a very different investment strategy so far as one can deduce.

The big issue though that the Financial Conduct Authority (FCA) should be looking at is the issue of platforms favouring funds that give financial incentives – in this case via providing a discount to investors and hence possibly generating more revenue when better performing funds such as Fundsmith refused to do so. HL have not recommended Fundsmith in the past, despite it being one of the top performing funds.

It is surely not sensible for fund platforms to be recommending funds unless they have no financial interest in the matter whatsoever. Indeed I would suggest the simple solution is for platforms to be banned from recommending any funds or trusts, thus forcing the investor to both get educated and make up their own minds. Such a rule might spawn a new group of independent retail investor advisors which would be surely to the good.

Today I attended the Annual General Meeting of Rosslyn  Data Technologies (RDT). This is an IT company that I bought a few shares in a couple of years ago as an EIS investment. It was loss-making then, and still is but is getting near break-even.

There were only about half a dozen shareholders present, but they had lots of questions. I only cover the important ones here. New Chairman James Appleby chaired the meeting reasonably well, but left most of the question answering to others.

Why did company founder Charles Clark step down (as announced today)? Reason given was that he had set up another company where there was  a potential conflict of interest.

I asked about the Landon acquisition that was announced in September. How much revenue would this add?  They are not sure but maybe £0.5 million. Bearing in mind they only paid £48,750 for the assets and client list from the administrator, that seems to be me a remarkably good deal. But it later transpired that they have outstanding contracts (pre-paid) which they have to finish so that might be another £250,000 of costs. However, that’s still cheap and by rationalising some of the costs they should quickly turn Langdon profitable. It was suggested that Langdon had been mismanaged with over-expansion and too many staff which is why it went bust – only a few of the staff have been taken on. Note that the impact of this acquisition is not yet in broker’s forecasts.

It was noted that RDT is currently broadly on track for analysts forecasts but it has been a slow start to the year. Deals are slipping into the second half. Decision timescales in major corporates seem to be stretching out at present.

One shareholder, who said “I am talking too much – a daft old man”, which it is difficult to disagree with as he asked numerous questions, some not very intelligent, asked whether they were charging enough for their services. There was a long debate on that issue, but it was explained that competitors were charging less.

There were also concerns about the slow rate of revenue growth (only 8.3% last year). Comment: this company is clearly not operating in a hot, high-growth sector of the market. But it does seem to be competently managed and if they can do acquisitions like Langdon that are complementary then profits should grow.

Altogether a useful AGM.

Brexit has of course made many UK companies nervous about new projects. At the time of writing the latest position appears to be that the EU and Boris have agreed a deal. Most Conservatives like it, but the DUP does not and Labour, LibDems and SNP will all seem likey to vote against it in Parliament. The last group all seem to be playing politics to get what they individually want, but not a general election which on current opinion polls might result in a big Conservative majority. Most people are very frustrated that this group are blocking support of Brexit so we can close down the issue and move on when there seems to be no overall public support for another referendum or cancelling Brexit altogether.

But even given this messy situation, I am hopeful that it will be resolved in one way or the other soon. But then I am the perpetual optimist. I am investing accordingly.

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

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Woodford Closure, Renishaw Trading, DotDigital Results, Accesso Technology Bids Disappearing and Probate Fees

The big news today was that the Woodford Equity Income Fund is to be wound-up after a decision by Link Fund Solutions, the fund administrator. Neil Woodford has made known his opposition to the move but it is something I have advocated for some time. Decisive action was required because a fund that nobody wants to buy into and with a name on it that puts investors off is going nowhere. Blackrock and PJT Partners will take over the fund immediately and wind it down although it seems likely to be some months before investors receive any cash return. That’s just from the liquid listed investments. Some of the illiquid or small cap holdings could take much longer and valuations are questionable. Neil Woodford surely needs to retire.

What’s the moral of this story? That investors should keep a close eye on their fund holdings and not put up with poor performance for more than a short period of time. They should not have absolute faith in star fund managers however good their past records, and they should be more sceptical about recommendations from their share platforms.

The other issues to be looked at are the EU regulations on liquidity and how Woodford ignored the rules by listing stocks in the Channel Islands. The Financial Conduct Authority does also need to tackle the problem of open-funded funds holding unlisted stocks or property.

Another favourite holding of private investors has been Renishaw (RSW) whose stock price has been falling of late. This morning a trading statement indicated a sharp fall in revenue for the first quarter. The share price is down by 11% at the time of writing. The company’s statement is full of negative phrases – “reduced demand for our products”, “challenging global macroeconomic environment” and “trading conditions are expected to remain challenging”. I am glad I sold my holding some time back. Has the market for the company’s products changed, particularly in the APAC region? I don’t know but shareholders need to ask some tough questions and perhaps it is time for a change of leadership.

Other bad news was from Accesso Technology (ACSO)  in which I still hold a few shares. This company had entered a formal sale process but it seems none of the offers received were considered good enough. The sale process is still on-going but the share price has fallen 15%.

But there was good news from DotDigital (DOTD) one of my “ten-baggers” which was first bought ten years ago. Sales and profits were ahead of expectations for the full year in a Final Results Statement. Revenues were up 19% and recurring revenues are now 86% of the total – the latter rose even higher in the first quarter of this year which “has started well” they say.

Investors Chronicle ran an article in last Friday’s edition on how to identify multibagger stocks. It focused particularly on pharmaceutical and resource stocks but these are very tricky sectors in reality. You might strike lucky with a blockbuster drug or exploration company but you can also lose a lot on failed projects. The better approach is simply to aim for companies that consistently grow revenues and profits like DotDigital. That company also meets the profile of the companies I like as documented in my recent book “Business Perspective Investing”.

DotDigital has strong IP, high customer loyalty, small transactions, diverse customers and high recurring revenue. What more do you want?

More good news from wealthy investors came as the Government announced it was to rethink the proposed change on probate fees – effectively scrap the major hike for large estates that was due to be imposed in April next year. The previous proposals generated a lot of criticism as it was seen as a new way to generate tax to go into Government coffers instead of an equitable fee to cover the cost of the work involved on larger estates.

I watched the Queen’s Speech yesterday for the first time live. The Queen has never been a great speech maker but she managed to turn what should be exciting announcements about future Government policies and programmes into a dull recital. Perhaps a change of management is required there also?

You can read her full text here: https://www.gov.uk/government/speeches/queens-speech-2019 , although there is little that might affect investors directly.

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

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JESC and WPCT – Much in Common

Last week I received the Annual Report of JP Morgan European Smaller Companies Trust (JESC) which I have held since 2012. It has a good long-term performance but last year was disappointing. Net asset value return of minus 7.5% which is worse than their benchmark of minus 3.6%. The share price did even worse and it is now on a discount to NAV of nearly 15% as the discount has widened. The under-performance was attributed to poor stock selection.

The Chairman, Carolan Dobson, is stepping down at the AGM this year after nine years’ service. I did not support her re-election last year as I thought she had too many jobs. She is also the Chair of The Brunner Investment Trust plc, Baillie Gifford UK Growth plc , BlackRock Latin American Investment Trust plc and a director of Woodford Patient Capital Trust (WPCT). You have probably been reading much about the latter of later given Neil Woodford’s difficulties.

The Annual Report of JESC says “The Trust’s excellent longer-term performance remains intact” which is a very questionable statement. JESC is an actively managed fund and the manager says “The investment process is driven by bottom-up stock selection with a focus on identifying market leading growth companies with a catalyst for outperformance”, i.e. it’s a stock picking model like the Woodford funds.

Last year that clearly has not worked. Perhaps it is because of a new focus on environmental, social and governance factors (ESG) which has been “rigorously integrated into their investment process”. They have also been “selectively adding cyclical companies back into the portfolio where valuations have become attractive”.

I will be unable to attend the AGM on the 10th July but I think shareholders who do need to question whether this is another stock-picking manager who has lost his touch like Woodford.

On WPCT there was an interesting article today (Saturday 15/6/2019) on Industrial Heat, an unlisted company which is the biggest holding in the fund. The company is valued at almost $1 billion after a new round of fund raising. The company is focused on cold fusion which nobody has yet proved to be a viable technology and the FT article is somewhat of a hatchet job on the business. It all looks exceedingly dubious and I could not find any detailed review of the technology that the company is claiming or much information on the company at all.

I think the boards of both WPCT and JESC need to start asking some tough questions of their fund managers. Such as “convince me why these companies in the portfolio are good investments?”.

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

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Horizon Discovery – Ripe For Some Activism?

Horizon Discovery Group (HZD) announced their interim results this morning. Still not making any profits although the EBITDA losses improved “before exceptional items”, i.e. before depreciation and amortisation which they prefer to ignore.

As I mentioned in a previous blog post, this is one of my speculations in the field of gene biotechnology. In this mornings’ announcement the new CEO said: “In light of this rapid change, and since my appointment as CEO, we have taken the opportunity to refresh our five-year strategic plan. Horizon is uniquely positioned to capitalise on rapidly growing market demand through our scientific and commercial leadership. With limited direct competition, Horizon has strong prospects for growth and is moving swiftly to capitalise on these opportunities. Our goals remain ambitious:  to harness the power of the cell in order to be the ‘go to’ provider of IP-rich cell engineering solutions and to establish leadership positions in our key markets, based on a highly scalable and repeatable business model.”

Sounds like they are going to spend more cash, whereas I suggested previously that this is one company that might be nearing profitability in this sector. I also attended the last AGM of Horizon in June and it was clear to me then that this was a company that could be turned profitable very easily (see blog report here on that: https://roliscon.blog/2018/06/19/horizon-discovery-agm-and-chrysalis-vct/ ).

The company also received a tentative bid from Abcam not long ago which they rejected as undervaluing the business.

The interesting thing is that the FT reported today that activist investor ValueAct had acquired another 5% of the company (they already held 5%) from Woodford Investment Management. Between these two companies they now hold 28% of the shares. Although ValueAct may be one of the less aggressive activist investors, it does suggest that change might be afoot.

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

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