FCA launches campaign on investment scams

The Financial Conduct Authority (FCA) have launched a campaign to warn people about investment scams. They get about 5,000 calls a year from investors about suspected scams and the average investor loses £20,000. The FCA have launched a new web site called Scansmart (see www.fca.org.uk/scamsmart ) which enables you to learn about the warning signs and even provides a menu on which you can check the investment you are considering.

The FCA gives the key signs that the investment may be a scam which are:

  1. You are contacted unexpectedly about an investment opportunity through a cold call, email, or follow up call after receiving a promotional brochure out of the blue.
  2. You are pressured to invest in a time-limited offer, for example, a bonus or discount is promised if you invest before a set date.
  3. The risks to your money are downplayed, for example you are told that you will own assets you can sell yourself if the investment doesn’t work as expected, or legal jargon is used to suggest the investment is very safe.
  4. The returns sound too good to be true, for example, better interest rates than those offered elsewhere.
  5. You are called repeatedly and kept on the phone for a long time.
  6. You are told the offer is only available for a limited time or to a limited group of people.

As someone who is often the initial contact point to ShareSoc for new inquiries, and who our Members also sometimes contact if they have a problem, I have received many calls about dubious investments over the years – usually when it’s too late to do anything about it. Prevention is definitely better than cure in these circumstances. As the FCA warns, the key is to avoid investing to begin with in dubious propositions.

The nature of these scams has changed somewhat over the years – for example there seem to be fewer promotions of investment in nominally “listed” overseas companies. But the characteristics of those who are duped remain constant. They seem to fall into these categories:

a) Those over a certain age (i.e. above normal retirement age) who have little real investment experience and get pushed into investments in unlisted companies, which are often alleged to be about to list. In other words investments which should normally only be sold to “sophisticated” investors with substantial experience of such investments or are high net worth individuals. The investors concerned appear to be gullible, and sometimes verging on senility without it being immediately obvious, and have an unreasonable trusting faith in the person who is selling them the investment (like all con-men, they are very persuasive though). The investors natural suspicion goes out of the window as they become attracted by the “story” they are sold.

b) Younger investors who again have little experience and are attracted by “green”, eco-friendly propositions. For example, biomass or hydro power generation, forestry, bamboo plantations and sustainable energy propositions. The fact they may be doing the world some good seems to cause investors to look at such propositions in a more favourable light and ignore the risks (or assume the promoters are of a similar benevolent point of view).

c) Investors in “alternative assets”, such as wine, diamonds, carbon credits, vintage automobiles and other exotica. The market for such assets is often exceedingly opaque, and once you are in you can’t get out. It might be exciting to own such “investments” and give you a warm feeling but usually the returns are negative.

d) Investors in gold and other precious metals, or holes in the ground of other kinds – I would include undeveloped oil and gas resources in that. Investors in gold mines or other similar propositions should be reminded of what Mark Twain had to say on this subject after losing money on some speculative investments: “a mine is a hole in the ground owned by a liar” (it may be apocryphal), or the older saying “a mine is a hole in the ground into which you pour money”. Having once invested in a dot.com business that transmogrified into a gold mining company after the first venture failed and then raised money from new investors on the prospect of re-opening a mine in central Asia, I know exactly the kind of investors who take up such propositions. In essence those who ask few questions and are blinded by the lure of gold. The company concerned was eventually struck off by Companies House for failing to file accounts after being unable to recover loans made to the mine owner.

e) Property investors where the proposition is usually to borrow money to buy the asset and you are in a geared play on the equity. After all property is “safe” is it not and will always have a value? Perhaps so but that does not mean you are going to make money from it. That particularly applies to overseas property investments and such things as “part-ownership” schemes which are fortunately less common than they were.

Do you fall into any of the above categories or are considering such investments? If so go to the FCA web site mentioned above to at least check whether you are dealing with an authorised firm and review what they have to say. Also make sure you take some advice from an accountant, solicitor or anyone with some investment experience because usually the scams are pretty obvious to anyone other than the patsy.

One of the key principles is never to listen to anyone who phones you out of the blue without any prior contact (and if they claim some previous contact do not believe them either unless you remember them). Indeed it’s probably safer to go ex-directory which may remove some of the calls if not all. Likewise if you get an email from someone that promotes an attractive investment proposition, and perhaps points you to an impressive web site, ignore it – indeed it’s safest not to open any web site link in an email from someone you don’t know.

In summary, if you think there are golden fleece out there just ready to be plucked from trees, then it is likely to be you that will be fleeced instead.

Roger Lawson

Glaxo Q3 results – in need of more treatment

GlaxoSmithKline (GSK) issued its 3rd Quarter Results today (22 Oct 2014). It’s one of those large FTSE-100 stocks that it’s difficult to avoid holding if you are a UK stock market investor. It’s such a large constituent of the index that all those index funds, and indeed almost all generalist unit or investment trusts, are likely to have a big stake in them. It’s also one of those stocks that many people hold directly (as does this writer) simply as a defensive stock with a high dividend yield – currently 6%. People will always need medication and with an ageing population they may need more is how the argument runs.

The announcement was moderately positive at first glance as it had a headline stating that Core EPS was up 5% at Constant Exchange Rates excluding divestments, and mentioned a dividend of 19p. What does “Core EPS” mean? In reality it’s all the stuff they prefer to exclude. Here’s the definition given on page 26 of the results: “Core results exclude the following items from total results: amortisation and impairment of intangible assets (excluding computer software) and goodwill; major restructuring costs, including those costs following material acquisitions; legal charges (net of insurance recoveries) and expenses on the settlement of litigation and government investigations, and acquisition accounting adjustments relating to the consolidation of material acquisitions, disposals of associates, products and businesses, other operating income other than royalty income and other items, together with the tax effects of all of these items”.

As is usual of late with Glaxo, there are more restructuring announcements which are typically some of the bigger items that make up the above list. So in the latest news it mentions a “catalyst to fundamentally re-shape GSK”, a “new executive management structure”, the spin off of their HIV business and a “refocus” of their global pharmaceuticals business and cost base. All of this no doubt means more exceptional charges in future, in addition to those incurred in the last quarter.

Looking at the reported financial information and ignoring all the above sophistry, earnings per share fell by 58% over the same quarter in the prior year, and the first 9 months of the year they fell by 41%. That’s not so impressive is it! Even worse is apparent when you look at cash flow, because a lot of exceptional items such as writing off historic costs have no impact on cash.  Net cash flow from operating activities for the first 9 months is also down 41%.

The dividend is “maintained” at 19p per share this quarter and they expect the full year dividend to grow by 3%, but next year (2015) they only expect to maintain it at the same level. But perhaps as compensation they do plan to return £4bn to shareholders in 2015 via a B share issue (current market cap is about £65bn) following completion of the Novartis deal.

This writer is not particularly competent to judge the merits of the company’s future drugs pipeline and as is usual with GSK announcements there are positive noises in there about that. But we have surely been hearing this for a few years now and the results seem to be slow in appearing.

The key question that investors need to ask themselves is “does this look like a healthy business”? Looking at the share price trend over the last few months clearly many have come to the conclusion that it does not. New Chairman Sir Philip Hampton (from a similar tough job at Royal Bank of Scotland) will need to take some strong medicine to sort out this business. But unfortunately he does not seem to have any background whatsoever in the pharmaceutical industry. Let us hope he learns quickly.

One bit of positive news in the announcement is that GSK is working hard to develop a potential vaccine for Ebola and they have a candidate in the pipeline. But unless Ebola spreads to western and other developed countries, which now seems unlikely, there may not be great profits from that.

In conclusion GSK is a patient some way from recovery by the look of the latest figures.

Roger Lawson

The Vote at Electra Private Equity

Electra Private Equity have fought off an attack from Sherborne Investors Management. The latter wanted a change of directors and for the company to conduct a strategic review, but resolutions to remove three directors were defeated with over 61% of the votes cast against them.

The interesting aspect of this event was that over 81% of the votes in issue were actually voted. There was considerable debate last week at the meeting ShareSoc held on shareholder rights about the difficulty of getting investors to vote. This surely shows that when votes are critical and the company concerned puts in effort to get the vote out then a high percentage is achievable but it may have cost the company several million pounds to achieve this.

It is of course now a regular feature to get over 60% of the shares voted at General Meetings and this has improved in recent years because of the encouragement to institutional investors to vote. However, the turn-out of private investors is known to be much lower, particular if they are holding shares via nominee accounts. It is their voting level that really needs to be improved.

Note that ShareSoc took no position on this particular battle, although both PIRC and ISS supported the existing board in their voting recommendations. The issue did not seem particularly clear cut to this writer. But another interesting aspect of these events is that the board have now announced a review that will cover the fee arrangements with the manager, the capital structure and the distribution policies of the company. It is surprising how often that a vote that arises from shareholder activism and which is defeated causes a company to promptly reconsider some matters. This happened at Alliance Trust also for example. So the moral is: if you fight an activist campaign it may not be necessary to win the vote outright because you may achieve much of what you want anyway.  You just have to maintain the pressure long enough until the directors see more merit in your arguments.

Roger Lawson

Shareholder Rights campaign launched

Last week ShareSoc launched a campaign to improve shareholder rights with a meeting in London. It focussed on the problems associated with nominee accounts and the adopted legal requirement to replace paper share certificates with an electronic system in a few years time.

There was an impressive line-up of speakers at the meeting which included John Kay (author of the Kay Review and FT writer), Michael Kempe from Capita representing the ICSA Registrars Group, Peter Swabey from ICSA, John Lee (Lord Lee of Trafford, a well known FT writer and private investor), Cas Sydorowitz from Georgeson Inc, Paul Scott, a well known private investor and blogger and Roger Lawson from ShareSoc. A full report of this lively event, and the 30 page document given to delegates which argues the case for change, are available from this web page: http://www.sharesoc.org/shareholder-rights.html

The numerous problems associated with the existing voting arrangements and the use of nominee accounts were highlighted by several speakers. Shareholder engagement and activism is often thwarted to the detriment of good corporate governance. Roger Lawson emphasised the need to put everyone on the share register so that there are “Guaranteed Votes for All Shareholders” which is the title of the supporting document.

To enable investors to support our campaign ShareSoc has also launched an on-line petition which is present here: http://www.sharesoc.org/sr-petition.html .

Please do sign it so we can get some changes made. 

Roger Lawson

Directors Pay Up 21%

There can be no clearer indication that the pay of company directors is out of control than the latest figures from Income Data Services (IDS). They have reported that the total remuneration of FTSE-100 company directors went up by 21% last year, based on figures in the annual reports of companies.

Although base salaries only rose by 2.5%, the overall increase has been driven by “performance” awards such as bonuses and LTIPs (Long Term Incentive Plans). The 21% increase is of course way ahead of the pay rises of most employees which do not even match inflation at 2.2% last year.

Mr Cable can huff and puff as much as he likes about excessive board pay, but there are no signs that his legislation to provide better reporting on pay levels and give shareholders a vote on pay is having any significant impact. We still see the same aggressive bonus schemes being adopted by Remuneration Committees and approved by the large block votes of institutional shareholders.

One thing that would bring more pressure to bear on this would be ensure that private shareholders can and do vote because they are more likely to oppose over generous pay schemes. ShareSoc is launching a campaign on that issue today. If you wish to support it please go to this web page and sign our new petition: http://www.sharesoc.org/sr-petition.html

Roger Lawson

A Tale of Two Trusts – SLS and BRWM

Yesterday Blackrock World Mining (BRWM) announced they were writing off their investment in London Mining. This was one of their largest holdings and cut the trust’s net asset value by almost 8%. The share price promptly fell by 8% on the day and fell further today. Who are London Mining you may ask? This is a small iron ore mining company based in Sierra Leone which has been badly affected by the slump in iron ore prices and the Ebola crisis which has affected operations in the country. The company announced several days ago that the equity of the company was likely to be worthless even if the company managed to find funding to continue.

Now this is surely a rather unusual event at a large trust such as BRWM which seemed to be primarily a play on the commodity sector and where most of its holdings are large international companies. It’s biggest holdings are Glencore (12.6%), Rio Tinto (12.1%) and BHP Billiton (11.1%). Why was this trust risking it’s investor’s money on a big investment in a company such as London Mining?

It’s worth comparing that with Standard Life UK Smaller Companies (SLS) whose AGM I attended yesterday. That company, ably managed by Harry Nimmo for many years, has a policy of “top slicing” any holding that goes over 5%, and they have about 50 holdings in total – Harry’s highest conviction ideas as it was suggested. So if they come a cropper over an individual holding (such as Blinkx last year), then the overall portfolio performance is not badly affected. Top slicing also enabled them to sell a lot of ASOS before the recent fall back in the share price and otherwise not get too overweight in highly valued stocks.

But Mr Nimmo was not as positive about the prospects for small cap stocks in the next few years as in the past five. He suggested growth might be only 10% per annum instead of 25% per annum. There is a report on the AGM and the managers presentation in the ShareSoc Members Network. Certainly worth reading for anyone interested in small cap stocks.

Roger Lawson

Tesco and why ShareSoc members should not have been surprised

After we published some previous comments on Tesco, Warren Buffett publicly admitted that his investment was a “huge mistake”. He currently has about a 4% stake in the company, and may have lost over $800 million at the current share price after first buying it in 2007.

It’s perhaps worth reminding ShareSoc members and others of the fact they could have read a report on the Tesco 2013 Annual General Meeting in June 2013 which spelled out some of the problems the company was facing. It is generally a pretty unenthusiastic report looking back at it. The share price then was 395p, it’s now 180p (at the time of writing). One item worth mentioning was the failure of the Audit Committee Chairman to attend that meeting. It’s a safe bet he won’t be missing the next one.

ShareSoc publishes a lot of AGM reports which are available to subscribing members. For the cost of the £38 annual membership fee, investors in Tesco might have saved themselves a lot of money by reading the report in 2013.

The latest negative news on Tesco is that they have just taken delivery of a Gulfstream 550 corporate jet which is likely valued at US$50 million, although it is reported that the new CEO is selling all the aircraft Tesco owns. But this is what ShareSoc said in December 2013:

How many corporate jets does Tesco need? Four is the answer apparently. Every little helps (sic) as is their motto no doubt. The cost of these aircraft has actually risen in recent years and the expenditure on them was £8.9m last year. In addition the company has established a new “corporate” office in the West End of London for meetings rather than have directors travel to Cheshunt (that’s just north of London for those who don’t know).

One has to ask whether they have lost the plot so far as management of a retailing company is concerned, where a focus on controlling costs is always a paramount consideration. Also senior management have to set an example to all other staff in the company if costs are not to escalate. But this surely sets a bad precedent even if the company now has operations in far flung locations.”

So ShareSoc members may not have much excuse if they did not heed the warning signs about this company.

Roger Lawson