Simplifying your life – expensively

In the New Year edition of the Hargreaves Lansdown newsletter, founder Peter Hargreaves leads off with this comment: “I am in a quandary. I can’t work out whether life just becomes more complicated the older you get, or whether successive legislation and regulation that has happened in abundance during the last 15 years is increasingly making life intolerable. I rather suspect both are root causes of life’s complications”.

I have had similar concerns of late. Having gone through some major technological upgrades in the last year (new car, new TV, new PC) it’s truly astonishing the amount of time one now has to spend to learn how to configure these products. No longer can you jump in a car and drive off, and that’s apart from the complexities of the buying process. No longer can you plug in a TV, tune it in and enjoy it. It now needs an expert to set up a Smart TV, and most of the options you will never use. At least Microsoft have improved the Windows operating system over the years so it is almost “plug and play”, but most of the application software it supports just gets more and more bloated.

The investment scene has also become more complicated over the years, not just for those in the financial services industry. The nominee system and on-line platforms distance retail investors from their investments and the companies they own, and the complexities of voting and attending AGMs defeat all but the expert.

Mr Hargreaves solution to simplifying his life is to have as few investments as possible and to use “multi-manager” funds where he can buy and forget because they will always perform well. I might be distorting his words slightly there but that is the gist of them. Needless to say that Hargreaves Lansdown promotes such funds. But this is what Moneywise have to say on their web site about such funds (there is a page dedicated to the subject): “Should you pay Michelin-starred prices for greasy-spoon style returns? Of course not – but that’s what thousands of investors routinely do by choosing from a menu of mediocre funds of funds”. They point out that the average TER (Total Expense Ratio) on a multi-manager fund is 2.14%, according to fund research group Morningstar, compared with 1.5 to 1.8% for single manager funds.

Now I would hope readers of this blog already know that any collective investment scheme that charges you over 2% is likely to be severely damaging to your long term wealth. In fact most of the returns created by the businesses which are creating wealth in the economy are being diverted into the hands of financial intermediaries at that rate (and the TER actually underestimates the overall costs being incurred and charged to you). Read the books by John Bogle if you want the evidence on this subject.

So if you want to simplify your life and still achieve reasonable investment returns some other approach is required. Perhaps a low cost index tracker or some investment trusts are solutions if you really want to spend no time on your investments. Alternatively just try to keep your core portfolio to no more than 20 individual stocks and stick to quality companies so you don’t have to bounce in and out of them all the time. By “quality” I mean the kind of companies that generate consistently high returns on capital and have a growing business.

Some software tools to help you research companies and manage your portfolio I would also recommend to cut down the time you need to spend on your investments.

But with so much information available in the investment field, the key time saver is to decide what information is important and what is not! That surely only comes from experience.

Roger Lawson

A Christmas present for the kids, and goodwill from Avocet directors

The Government has announced that it will allow Child Trust Funds to be transferred to Junior ISAs. The investment returns and charges on Child Trust Funds compare poorly with those available in ISAs so this is a welcome move. The only reservation is that it may not be possible to implement this until April 2015.

Avocet Mining, a gold mining and exploration company, have also got into the spirit of the season by announcing that the fees paid to the Chairman and other non-executive directors are to be substantially reduced – down from £110,000 to £70,000 for the Chairman and down from £40,000 to £30,000 for other non-executives. This is “in response to the changed financial position and reduced market capitalisation of the Company” it says in their announcement.

EBITDA was negative in the last quarter to September, with gold production down on forecasts and the company has also been hit of course by the reduced market price of gold. The company may need to do some more fund raising before it runs out of cash. Bearing in mind the patchy financial history of this company, and recent events, no doubt shareholders will welcome this reduction from a level that was quite unreasonable. But shareholders may consider the Christmas spirit has not gone far enough when the market cap of the company is now only £18m. But let us not carp in this season of goodwill. Any reduction in the excessive pay of directors must be welcomed when so many small natural resource companies pay their directors too much.

Roger Lawson

Fiduciary Duty Consultation – no major changes proposed

The Law Commission is running a public consultation on the “Fiduciary Duties of Investment Intermediaries”. This was prompted by a recommendation in the Kay Review that examined the issue of “short-termism” in business and investment decisions. It suggested that this area should be examined. One question posed was whether the legal concept of “fiduciary duty” should be extended so that investment intermediaries had clearer moral responsibilities to their clients.

For example, trustees of pension funds have a general legal obligation to act in a fiduciary manner and solely in the interest of those they represent, but investment managers only have contractual obligations.

In addition, case law on fiduciary duties emphasise that the financial interests of beneficiaries should take primacy so such matters as wider social responsibilities can only be taken into account in a limited way. Hence the focus tends to be on short term financial returns (or so it is alleged).

Now reading the Report of the Law Commission (which is available here: http://lawcommission.justice.gov.uk/areas/fiduciary_duties.htm ) makes it very clear that not only is the investment world enormously complex, but that the responsibilities of different parties are indeed somewhat unclear. The report is 280 pages in length and anyone operating in this arena on a professional basis might well find it of interest.

The main thrust of the recommendations in the Report is not for major change to the legal framework. Where there are some uncertainties or problems they recommend changes to FCA Rules.

One smaller area they cover is the problem of the legal uncertainties that apply to “intermediated securities” – for example those investments held in nominee accounts where an investor has a beneficial interest but not direct ownership. A UNIDROIT convention was devised to solve this problem but neither the UK nor any other country has signed up to it. This potentially directly affects retail investors.

ShareSoc is likely to submit a response to this consultation so please let us know if you have any views on the matters discussed. But it looks as though any major change to widen the obligations of investment intermediaries is unlikely to take place if the Law Commission’s recommendations are accepted. Responses to the consultation must be in by January 22nd.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

Roger Lawson

Whitewash at British Smaller Companies VCT

British Smaller Companies VCT has called a General Meeting to approve resolutions to rectify past accounting errors that resulted in technically illegal payments of dividends and share buy-backs back in 2006-2008. In essence the company did not have the reserves required. So these “whitewash” resolutions as they are called ask shareholders to waive any claims against the directors for these errors, and claims against shareholders who received the dividends when they should not have. This follows similar whitewash resolutions that were passed at a previous General Meeting in July this year for later mistakes of the same kind.

Now shareholders might be happy to support these resolutions, but there is one thing they should consider.  I can see no mention in the recently circulated documents of the position of the fund manager (YFM) who actually gets a performance fee partly based on dividends distributed. So in fact the performance fees paid out might have been incorrectly calculated.

In essence it appears to me that YFM have been paid a performance fee based on an illegal payment of dividends. Not only that, but YFM actually look after administration and accounting in this company so they are responsible for the error in the first place. It would seem to me that they should be refunding any performance fee that was incorrectly paid out, but there is no mention of this in the recent documents.

I have written to the company chairman, Mrs Helen Sinclair, asking for some explanation and why no adjustment to the performance fees has been mentioned.

The General Meeting is on the 13 January 2014 in London and shareholders might care to attend to hear further explanation. In the meantime they may wish to delay voting by proxy on the resolutions before Mrs Sinclair provides some answers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

Roger Lawson

BAE Systems – Typhoon deal shot down, and credit extended

There was bad news from BAE Systems yesterday – issued after close of trading which is always a negative sign.

Firstly the prospective deal to sell Typhoons to the United Arab Emirates (UAE) is apparently a dead duck. That’s perhaps not altogether surprising. But the worse news was that the pricing of a sale of the same planes to Saudi Arabia under the Salam contract has still not yet been agreed. The announcement says the parties are “actively engaged” but a “definitive agreement has yet to be reached”.

To put it bluntly, after three years of negotiation and having built and delivered the products, there is still no deal and no obvious timescale for its conclusion.

As I said back in August this year, surely delivering anything before you have agreed a price is a basic business error. The other party has no need to agree anything other than a deal very favourable to them if you let them use the product without paying in full.

This no doubt is a legacy of the Chairmanship of Dick Olver, who when I spoke to him at the time of the BAE/EADS merger debacle suggested that there were few other people who could negotiate with heads of state on major deals such as this contract. Perhaps someone with more common sense might have done better!

Roger Lawson

VCTs – Stopping the tax relief abuses

The Government has published its response to the public consultation on share buy-backs in Venture Capital Trusts (VCTs). In particular the proposals put forward were aimed at stopping “Enhanced Share Buy-Backs” where VCTs were buying back shares from investors and immediately reinvesting the cash paid to investors in a new shares issued to the same investors, thus enabling them to obtain tax relief on the same original cash more than once.

There was a general acknowledgement in the responses to the consultation (you can see ShareSoc’s response on our web site), that this was an abusive use of a generous tax relief provision aimed at encouraging investment in smaller companies. You can see the full Government’s response here: https://www.gov.uk/government/consultations/venture-capital-trusts-share-buy-backs

In essence the Government did not accept most of the comments from respondents which were quite varied, but they have conceded that individual VCT companies will be treated as independent so it will be possible to sell shares in a company from one VCT in the stable of a VCT manager, and then subscribe for new shares in a separate one from the same manager. But the restriction of 6 months from when you can sell and then buy shares as originally proposed will remain when some argued it should be a shorter period. It will mean VCT investors will have to be quite careful when these vehicles are already quite complex tax wise.

It is surely the case that investors should not subscribe for shares in these companies, or buy them in the secondary market, without a good understanding of the ways these companies operate, the tax rules and how to differentiate between the good ones and the bad ones (in terms of past performance). But it seems unlikely that many investors in these companies have that knowledge. Indeed the proposal to allow the use of nominee accounts when issuing shares will encourage the sales of such shares via on-line “platforms” where only a few clicks will be needed to make a commitment to purchase.

Another point worthy of note in the Government’s response was that it seems some VCTs have been abusing the rules by issuing shares on which tax relief has been obtained, and by the creation of a share premium account then almost immediately returning some of the cash subscribed to shareholders as a dividend. Which they can then no doubt use to subscribe for more such shares on which again tax relief is obtained. Yes there are some very bright people in the financial world are there not? But how anyone could see this is morally right is surprising. Anyway the Government is quite rightly planning to put a stop to this practice and will be undertaking a further consultation on that issue.

Let me not dissuade you from considering VCTs though if you can take advantage of the tax reliefs and understand the risks involved by the comments above. They have been very successful vehicles for promoting investment in SMEs in the UK. Hopefully as the sector matures we might see more consolidation in the sector with larger VCTs and lower fund management and administration costs. 

Roger Lawson

B&B Finance Director fined

Christopher Willford, the Finance Director of Bradford & Bingley in 2008, has been fined £30,000 by the Financial Conduct Authority (FCA) for “failing to provide the board with up-to-date information about B&B’s financial position” ahead of the right issue in May of that year.

The FCA state that Mr Willford “failed to identify and investigate potentially material risks, or alert the board, at a crucial time for the firm. Bad mortgage debts, arrears and repossessions had all risen while the net interest margin was falling, so profit forecasts for the year were likely to fall short.

If you read the details of their report (available from here: http://www.fca.org.uk/news/former-b-and-b-group-finance-director-fined), you find out however that the FCA tempered their penalty due to the wider financial crisis at the time, the absence of the CEO (on sick leave), the fact it did not justify a trading update and probably did not contribute to the relative “failure” of the rights issue which was mostly left with the underwriters. Bradford & Bingley was nationalised soon after of course even though it had a strong balance sheet in comparison with other banks as a result of the rights issue.

One has to ask why it has taken over 5 years to issue this notice by the FCA? It is of course very convenient that any legal action relating to the rights issue has probably timed out after 5 years and one firm of lawyers had been pursuing a claim based on the prospectus not presenting a fair view of the position of the company. The information contained in the report might have been very helpful to them.

Roger Lawson