FCA Criticised in Parliament

The Financial Conduct Authority (FCA) has been severely criticised today (27/3/2015) in a report issued by the Treasury Select Committee. Here are a few things they say in their overall conclusions about the events surrounding the press briefing on the Government’s planned review of the life insurance market, which caused share prices in some companies to drop sharply.

“The events of 27 and 28 March…..revealed multiple flaws in the FCA’s processes and practices. These failings went right to the top of the organisation, including the Chairman and Chief Executive”.

“Procedures within the FCA for identifying and controlling the release of price sensitive information were inadequate and not of the standards that the FCA expects of the firms it regulates”.

” The FCA itself created a false market in life insurance shares, despite being the markets regulator and containing the UK Listing Authority”.

“The FCA’s response to the serious incident on 28 March was seriously inadequate. In particular, the Executive Committee failed to react urgently and effectively…”.

“Overall, the FCA failed to meet the minimum standards that it sets for listed firms”.

“If the Executive Committee has failed properly to discharge its responsibilities, then the Board has consequently failed in its duty to oversee and challenge the Executive Committee effectively. It is also clear from the evidence that the Board as a whole failed in its duty to identify and manage risk”.

The report recommends an internal examination of the FCA’s methods and an external review of its effectiveness, and concludes by saying that financial services consumers (i.e. you and me) need a robust consumer protection body on which they can rely. They suggest a wider review of the FCA’s activities and its governance in the next Parliament.

Comment: such a review is long overdue. The FCA is slow and ineffective at regulating the market and seems to be short of adequate resources to do its job properly. This report simply highlights the problems within the organisation.

Roger Lawson

April 2015 Investor Masterclass – Don’t miss it!

In the light of the popularity of ShareSoc’s Investor Masterclass series, we are pleased to announce the next Masterclass, to take place from 3:30pm to 6:30pm on the 23rd April. It forms part of the two-day Mello Workshops investor education event, being held in Peterborough (only 45 minutes from London).

Our Masterclasses are designed to offer an entertaining and educational experience for investors. Our panel comprises: David Stredder, Paul Scott, Ed Croft of Stockopedia and one other to be announced.

You will find full details of this Masterclass here: http://www.sharesoc.org/masterclasses.html

Admission is by ticket only and places are limited, so please book early to avoid disappointment! We are offering a free 6 month Full Membership of ShareSoc, worth £22.50, to anyone booking full-priced tickets if you are not already a Member. If you purchase full-priced tickets we will automatically grant you the free membership, including our Full Members’ monthly newsletter, access to the Members Network (with our extensive library of AGM reports) and access to our exclusive Full Member discount offers.

Roger Lawson

Alliance Trust – ShareSoc Press Release

ShareSoc has issued the following press release after talking to both representatives of Alliance Trust and Elliott Advisors. If you have any views on this matter please let us know, and we would particularly like to hear from any holders of Alliance Trust shares (for publication or privately if you prefer).

This is one company where private shareholders are in the majority but it will be interesting to see how many can and do vote. It may prove an interesting example of how the shareholder rights of those in nominees need to be improved which ShareSoc is running a campaign on at present. If you hold Alliance Trust shares, do make sure you vote at the forthcoming General Meeting.

Press Release: ShareSoc Comments on the Proposals for Alliance Trust

ShareSoc makes the following comments on the requisition to appoint three new non-executive directors to the board of Alliance Trust by Elliott Advisors. We do this from the stance of an independent not-for-profit organisation whose objective is to represent the interests of private shareholders.

Many of our members have an interest in investment trusts which generally provide a low cost and diversified way of investing in the stock market. But the issues that have arisen at this Trust such as long term underperformance and wide discounts of share price to net asset value are not uncommon. We are generally of the opinion that shareholders should demand action when such conditions persist, and that action might include the appointment of new directors so that a fresh view of the strategy of the company can be obtained.

Therefore, and ignoring the arguments about what has been exchanged in the past between the two parties involved, we think there are two key points to consider:

  1. The share price discount to Net Asset Value (NAV). On the 16th March the AIC (Association of Investment Companies) reported this as being 14.6% although it has subsequently narrowed no doubt because of the possibility of some changes arising from the Elliott campaign. We consider 14.6% too high for such a non-specialist trust.
  2. According to the AIC at the time of writing, the Share Price Total Return over one year for Alliance is 118.5 compared with the comparable sector performance of 118.9 – in other words below average. Over 3 years, 5 years and 10 years it is also below average. Although there was some improvement in the last year, this seems to have partly arisen from special circumstances related to their private equity and mineral rights investments. In essence the performance has been pedestrian for many years.

New Directors and their Independence

It would therefore seem perfectly sensible for a major investor in the trust such as Elliott Advisors (who have an interest in more than 12% we understand) to make some suggestions to the board of the company. Their nominations appear to be independent and of course under Company Law the nominees would only have to consider the interests of the Trust when acting as Directors.

Discount Control

ShareSoc is generally keen that investment trusts, particularly those on wide discounts to Net Asset Value, have a specific policy on how the discount is to be controlled. This can be via share buy-backs or tender offers for example. If Elliott Advisors have suggested a tender offer in the past then that is perfectly understandable and tender offers are one of our most preferred solutions because investors then have the option of accepting it or not. But with such “self managed” Trusts as Alliance there can be reluctance to downsize the company which tender offers and large market share buy-backs can imply. But it is what is in the interest of investors that matters, not the company management or the board.


In summary, we therefore think that shareholders in Alliance Trust should consider the proposed requisition very carefully and vote in favour of the proposed directors unless the Trust comes up with stronger arguments than they have to date. Their rejection of the proposals out of hand seems unwise and is unfortunately a typical response seen from boards who are reluctant to tackle the key issues when faced by criticism from outside.

ShareSoc Deputy Chairman Roger Lawson had this to say on the matter: “I think there are good causes for concern about this Trust and it is perfectly reasonable for Elliott Advisors to take up their worries with Alliance and propose directors if they feel the issues they have raised are not being dealt with. Requisitioning resolutions is simple democracy upon which shareholders can make their own minds up and the initial and rapid response from Alliance has been less than temperate“.

Full information on the background to the requisition from Elliott Advisors is provided on their dedicated web site here: http://www.improvealliancetrust.com

Roger Lawson

The Chancellors Budget – Gin and Tonics All Round!

For private investors the Chancellor’s Budget is mostly good, and we can all drink his health in spirits on which the tax is cut. The other good news is as follows:

– The personal allowance will rise to £11,000 over two years from which all taxpayers will benefit and the threshold for higher rate income tax will also rise.

– There will be a new flexible ISA where you can take money out and then put it back in within the same tax year without losing your ISA allowance. Will this mean you can run it like a current bank account?

– The maximum ISA contribution will be raised to £15,250, making it ever easier to become one of those “ISA millionaires”.

– There will be a new ISA for those saving for a deposit on a house with matched contributions from the Government, although the amounts involved may not help much for those in the South-East.

– Beer and spirits duty is down, and wine duty frozen. Fuel duty is also frozen.

– Paper tax returns will be scrapped, and replaced by on-line filing.

– If the Conservatives win power in the General Election, then the first £1,000 of interest income received will be tax free for basic rate taxpayers. This will take a surprisingly high 95% of savers out of that tax altogether.

– Pensioners will be able to trade in their existing annuities for cash (this is of course in addition to the already announced ability to take other pensions in cash rather than as an annuity).

– There will be encouragement for oil companies, particularly North Sea operators.

The bad news is as follows:

– The lifetime maximum pension allowance will be reduced from £1.25m to £1m. This will save the Treasury a considerable amount.

– Deeds of variation where after your elderly relatives have died you can effectively rewrite their wills to pass on money directly to your offspring (or others) rather than yourself, thus avoiding inheritance tax, are to be reviewed. This is a clever wheeze that the well advised and wealthy have been exploiting more of late.

– Banks continue to be the “whipping boy” of the economy with a rise in the “bank levy” and they will no longer be able to deduct compensation payments from corporation tax calculations.

– Business rates and how they operate are to be reviewed but that does not mean they will be reduced overall.

– The sale of mortgage assets of Northern Rock and Bradford & Bingley will raise £13bn for the Chancellor but will former shareholders or bondholders in those companies benefit even though there is clearly a substantial surplus remaining as was always expected?

The Chancellor is bullish about the prospects for the economy. Unemployment is falling and thus reducing benefits payable, while inflation and interest rates are low thereby helping to reduce the Government’s debts. Therefore it is expected that the Governments borrowing and budget deficit will fall very substantially over the next few years.

In summary a generally positive budget for most private investors, although a few will suffer as a result of the pension cap. Whether the positive aspects will induce the “feel good” factor in the electorate in general sufficient for the Tories to win the General Election outright seems doubtful.

Roger Lawson

Active Management and Collective Action

An article in yesterday’s FT (16/3/2015) on active investment management, versus passive, by Sophia Grene prompted some thoughts on the topic of “public goods”. Passive management is where a manager is simply tracking an index whereas active managers are actually making their own investment decisions. Active management typically costs more to the investor, on the premise that more work is required to be put in by the manager, but they argue that it is justified because they can outperform the market. Others suggest their additional costs are not worth paying.

Let’s not get into that debate here. But the interesting point made by Ms Grene was, and I quote: “Passive investors reap the benefit of having active managers do the work, while only the active managers’ clients pay for it”. As she points out this is called “free-riding”.

Without the active managers doing specific stock selection, and buying and selling stocks based on their independent views, there would be no real market. You can see this if you consider the extreme case where there was one active manager with the other 99% of the market tracking an index.  It would be extremely volatile as the active manager’s every move would swing the whole market. If the active manager did not consider it wise to hold a stock, nobody would want to hold it and the price would rapidly fall lower and lower. If the active manager decided to buy a stock then the herd would quickly follow. Indeed with such a high percentage of the market now held by index trackers and “closet trackers”, one can possibly already perceive this herd instinct in play.

Ultimately one might have to tackle this problem by regulation or other means to ensure that there was sufficient diversity to make a market. However the more “herding” there is, the more the lone active manager can profit because all they have to do is bet on themselves being followed, or anticipate when momentum effects will no longer persist. In other words in the latter case when the market is becoming truly illogical and therefore offering exceptional value. So this might put a limit on the lack of diversity in the market.

Now as an aside ShareSoc like many representative organisations has the “free-riding” problem. We campaign on matters of public interest, or at least in the interest of a wide spectrum of investors. But we are supported by very few of them financially. Why should others join when they potentially will get the benefit of our campaigns on such matters as shareholder rights when they can freeload on the support of others? This is of course a typical problem for trade unions. Potential union members may be willing to pay subscriptions when a strike is looming, but not at other times and for general representation.

A good book on this subject is “The Logic of Collective Action” – subtitled “Public Goods and the Theory of Groups”  – by Mancur Olson. One of the things that groups can do to engage a wider audience  and cover the cost of representing the free-riders is to provide other services. So for example, the AA was an organisation originally formed to promote the interests of motorists (and actually to help them avoid speed traps), subsequently started to offer breakdown and other services and have finally became a totally commercial organisation with the “public benefit” sidelined and spun off. That is one reason why ShareSoc not only does representation (to Governments or companies on behalf of members), but we also provide an information service, discounts on third party services and education. One might say our members get a lot of the representation aspects thrown in for free. But by offering other services it enables us to keep our membership cost low. That is how we manage to do so much with so little.

Roger Lawson

MeetInvest – a Warning

ShareSoc was recently invited to promote a new web service named MeetInvest to our members. The email said that it provides a “tool for selecting stocks using the exact success formula of some of the world’s foremost investors including Warren Buffett, Benjamin Graham, Jim Slater or John Templeton”. Of course anyone who thinks that Warren Buffett was successful based on a simple stock screening system is surely misinformed, but I thought it was worth trying out and reviewing.

The promotional videos are quite impressive. It appears to provide a stock screening tool similar to what you can obtain from other vendors and packaged around various investment gurus’ ideas, plus an ability to discuss stocks or other topics with other investors. They claim to have 5000 registered users (worldwide) and they are based in Switzerland so cover markets in many countries.

But I was in the process of logging onto their “free service” when I read their “Privacy Policy”. It includes this provision under the heading How We Share Data : “We may also share your Personal Data with affiliates and third parties for them to help us provide, understand and improve the Services and our affiliates’ services, including the delivery of ads”. In other words they may supply your personal information including email addresses to any third party who could then send you advertisements.

I asked them whether they really expected people to sign up to this, but have so far not had a response. Now financing a service via advertisements on a web site may be acceptable, but passing your email and other personal information to third parties is definitely not. And there seems to be no limitations on what that third party might then do with the information. Surely the result will be large amounts of unwanted emails including potentially spam on unrelated products and services.

Unfortunately I was not able to review the service as I certainly would not accept those contract terms. But as most people don’t read the small print when signing up to web sites, you need to be made aware of this issue.

Roger Lawson

Alliance Trust Under Attack

Alliance Trust, an investment trust held by many private investors, is coming under attack for poor performance and poor corporate governance for a second time. It defeated a campaign by Laxey Partners back in 2011, and although their AGM resolutions were defeated the company did subsequently make some changes – for example more share buy-backs were done to help control the share price discount. This time it is the turn of Elliott Advisors who control over 12% of the shares. They have requisitioned resolutions for the Annual General Meeting in late April to appoint three new non-executive directors.

At the time of writing the discount to NAV on the company’s shares is 14.6% according to the AIC, which is generally higher than most large non-specialist investment trusts where discounts have narrowed recently. The performance of the company’s shares over the last 5 years has been 66.5% based on share price total return.

Alliance is unusual in that it is a self managed trust and also has other business activities in addition to the management of the investment trust fund. It also has a peculiar arrangement for recording votes as being cast by investors in their savings scheme who do not themselves vote.

ShareSoc will probably make some comments and provide more information on this matter once we have understood the details for the reasons of these proposals.

Roger Lawson