Quindell law suit, and Camkids

Many private investors lost money on their investments in Quindell. It was one of the most highly traded stocks on the market. Now a legal action has been launched by law firm “Your Legal Friend” on the basis of misleading statements being issued by the company during 2013 and 2014.

To quote from the lawyers web site, where you can register your interest (see https://www.yourlegalfriend.com/types-of-claim/public-incidents/quindell-investment-claims ):

“We have been contacted by many such investors who relied on a range of positive statements issued by Quindell about the group’s trading, profitability and cash generation in RNS announcements to the London Stock Exchange and other documents. Other investors have informed us that they relied upon the RNS announcement on 5 November 2014 that the directors of Quindell had purchased 1,575,000 shares in Quindell.   

We are investigating whether various of the RNS announcements issued by Quindell and relied upon by investors could be considered to be untrue and/or misleading, and if material facts were not disclosed to the market at the appropriate time, which may in turn have caused investors to suffer actionable losses. We believe that there are grounds for a s.90A Financial Services and Markets Act 2000 claim against Quindell in relation to those announcements.”

Co-incidentally, it has been decided that Quindell is one company we will be discussing at our next Masterclass on the 4th November. No doubt part of the discussion will be how to avoid investing in similar companies where investor expectations turn out to very different to the glowing statements by the management! See this web page for more information on this event in due course: http://www.sharesoc.org/events.html .

Another questionable company in terms of investment in the past was surely Chinese company Camkids which ShareSoc has covered in our past newsletters to Members. The latest announcement states that two more directors have resigned including the CFO, and that the Nomad (Allenby) has also resigned. This follows the decision to pay out most of the company’s cash holdings to buy back stock from distributors. If they cannot find another Nomad to take them on quickly then the shares will be delisted, which seems very likely to be the result.

Roger Lawson

Glencore Placing Attacked

In a previous blog post I said that Glencore’s plans to cut its debt and strengthen its balance sheet by disposals and a new share issue were “just what the doctor ordered”. But it turns out that the detail of the prescription was not to everyone’s liking. Institutional fund managers have rightly deplored the fact that the equity issue was a “placing”, i.e. not a rights issue that is subject to the normal pre-emption rules. In other words, existing shareholders were not entitled to participate pro-rata to their existing holdings, if at all.

Pre-emption rights are the key to protecting one’s investment in a company from excessive dilution and is a fiercely guarded provision of the UK corporate environment for larger companies, although almost anything goes for smaller companies. An “Investor Forum” was created in the UK only recently to tackle issues of common interest to major shareholders and they are apparently taking up the case. It is alleged that Glencore broke an agreement the company made with shareholders at their AGM in May on this issue.

Glencore placed 1,307 million shares representing 10% of the share capital. The placing price was 125p which was only a small discount to the then prevailing market price, but the latter has since fallen to 97p at the time of writing so those who took up the shares might not be happy either.

To rub salt into the wound, the CEO, Ivan Glasenberg, and other senior managers participated in the placing at a cost of $550 million to maintain their interest. Why should insiders be able to participate when other shareholders cannot?

As with smaller company placings, urgency and simplicity were no doubt the justifications for taking this route rather than doing a full rights issue. But it sets a very bad precedent and the Investor Forum are surely quite right to take up the matter. It will also raise further questions about the leadership of Glencore. Let us hope that the Investor Forum shows that it has some teeth and can have an influence on companies.

Roger Lawson

Elliott Raises Stake in Alliance Trust

Elliott Advisors have raised their stake in Alliance Trust to 14%. After a battle before the last Annual General Meeting of Alliance, the company effectively conceded defeat by appointing two new non-executive directors as suggested by Elliott. But the issues raised by Elliott of a high share price discount to net asset value, and long-standing poor performance have not gone away – the discount currently stands at about 12%, much higher than most generalist investment trusts. Indeed many trusts are now on minimal discounts since they have become much more popular of late following the Retail Distribution Review (RDR).

From the feedback to ShareSoc’s own campaign to reform this trusts, long standing investors in Alliance have a large number of concerns about the management of the company and the investment strategy. Some feel “locked-in” because of the high discount and the problem that if they sold they would realise a large, and taxable, capital gain having held the Trust for many years.

More information on the issues around the Trust can be found on our campaign page here: http://www.sharesoc.org/alliance.html . The Alliance Trust Shareholder Action Group (ATSAG) supported by ShareSoc has been writing to shareholders on the register to get support for some changes. Any investor with an interest in the company should sign up to support this campaign.

It is clear from the increased stake that Elliott will continue to raise pressure on the Trust for change but private investors need to have their say in this matter also.

Roger Lawson

Corbynomics, Director Remuneration and Voting

The media is full of analyses of late of the impact of the new Labour front bench and the policies of the key players such as Shadow Chancellor John McDonnell and Business Secretary Angela Eagle. Mr McDonnell apparently advocates big increases in public spending, higher taxes on the wealthy, cancellation of the independence of the Bank of England and widespread nationalisations of energy companies and the railways.

The Financial Times ran an editorial on 16/9/2015 suggesting that Mr McDonell’s “cavalier disregard of property rights, and for the solvency of pension schemes which hold such shares, is bizarre” and went on to suggest that the European Court of Human Rights (ECHR) would likely block such plans. Although the FT’s Editor rightly pointed out that nationalisation without compensation was created by the precedent of Northern Rock, he argued that the legal challenge to that was not accepted by the ECHR because they accepted the independent valuer’s view. That was not the reason why the legal challenge failed in both the English Supreme Court and the ECHR. It failed because the Supreme Court considered that Parliament had a right to dictate the matter based on their view of the policy necessities, i.e. it was for the wider good, and the court was unwilling to overturn the will of Parliament. The ECHR never actually heard the case or the arguments against nil compensation, but relied on the English Courts as providing the necessary forum and hence there were no grounds to challenge it. Therefore, any view that a future Labour Government could not justify nationalisation without compensation, as the last one did, is mistaken. Any reasonable excuse will suffice, so shareholders and pension fund investors need to bear that in mind.

A New Voting Rule for Company General Meetings?

One of the first acts of the new front bench was to oppose new Government legislation to require a 50% vote of the relevant membership before trade unions could call a strike. Well if you consider that reasonable, would it not also be reasonable to require a 50% turnout of votes at company General Meetings for resolutions to be passed. In other words, company votes should require 50% or 75% of those eligible to vote, not just of those voting!

This thought came to mind after noting the results of two recent AGMs. Auto Trader Group achieved 81% or 82% turnout (i.e. of votes of those on the register) on all resolutions (including Remuneration Policy and Report) which is good, and with no more than 6% votes against any resolutions they would pass my proposed new rule. Even better in one way was Intercede who achieved 100% in favour of all resolutions (i.e. no votes against or withheld which is the first time I have ever seen this). But they only got a turnout of 51% so only just squeaked past my proposed new rule. Bearing in mind past controversies at Intercede on such issues as pay it is surprising they got such a high positive vote on all resolutions, but there is of course no Remuneration Report vote at this company as it is AIM listed and the directors choose not to bother with one.

But in many other companies, where turnouts are low (60% is more common), and there are substantial votes against some resolutions, such a voting rule might have major advantages. It would ensure companies had to get a high percentage of votes FOR resolutions to get them passed, and even more importantly, it would encourage companies to ensure that all investors (including beneficial owners in nominee accounts) actually voted. For example, it would mean the directors had to get specific positive approval for votes on their own pay from ALL shareholders, rather than them having to rely on the support of a few unfocussed institutions using block votes, the apathy of many investors about corporate governance, the complexity of voting defeating many, and the inability of most private investors to vote at all (if they even knew the event was taking place).

Complex Pay Schemes Under Attack

The Investment Association, which represents institutional investment managers, have initiated a review of executive pay schemes aimed at radically simplifying the structure. Daniel Godfrey, CEO of the Association, said “Complex pay structures can make it difficult for investors and the wider community to judge whether high rewards are being earned for exceptional performance or mediocre performance flattered by favourable external factors”. It is undoubtedly true that the prevalence for multi-layered pay structures with cash bonuses, LTIPs, options, generous pensions and other awards making up total remuneration which are now so common have led to a rapidly rising total pay figure for public company directors.

A New Remuneration Initiative by ShareSoc

This initiative of the Investment Association is surely to be applauded. But the ShareSoc board of directors has recently decided to put together our own policy document on remuneration following such cases as that of Vislink. It will attempt to cover both large and small companies, using a principles based approach rather than attempt to lay down detail rules as we recognise that different pay structures may be necessary to meet different circumstances and types of company. But the overall magnitude of remuneration in relation to the size and profits of a company may be of relevance and over-complicated schemes with too much emphasis on performance related elements will no doubt be two particular focuses. We are forming a steering group to develop our policies in this area. If you would like to join it, please contact us via the contact page of our web site – see http://www.sharesoc.org/contact.html

Front-bench Experience

Angela Eagle has been appointed Shadow Business Secretary. The London Evening Standard suggested that Chuka Umunna, her predecessor in the role, or even Vince Cable, were “pussycats” in comparison with Eagle. Vince Cable of course had real business experience, as does Sajid Javid the Conservatives Business Secretary – indeed the latter even used to borrow money of his bank manager to buy shares in his early years according to one press report. Ms Eagle read PPE at Oxford and did spend a few months at the CBI (not sure that is real business experience), but otherwise has spent her whole career working for a trade union or being a politician. She also has a reputation for being aggressive and looking back in history, was actually Exchequer Secretary to the Treasury during the Northern Rock nationalisation events – and defended that process vigorously in Parliament while clearly having no sympathy for shareholders in the company.

How the Conservatives Might Respond

How might the Conservatives defend against aggressive left-wing Corbynomics with these characters leading the charge? Well surely one thing they could do is attack the excessive remuneration of public company directors, and undermine the politics of envy, by tackling pay issues more strongly. Vince Cable certainly went part of the way, but more clearly needs to be done. Remuneration committees need reforming and the role of pay consultants diminished. But one simple step might be a new rule which required votes in favour to be 50% of all shareholders (or 75% for special resolutions), as proposed at the start of this article. Now that would really shake things up would it not!

Roger Lawson

Hargreaves Lansdown and opaque accounts

Hargreaves Lansdown (HL.), who claim to be the largest UK investment platform, announced their Preliminary Results yesterday (9/9/2015). I have made some comments recently about the benefits stockbrokers receive from client cash funds, and in particular the fact that dividends received by holders of nominee accounts are received and retained by the broker unless asked for, instead of being paid direct to the shareholder as happens when you are on the share register. So I thought it useful to look at the financial figures of Hargreaves Lansdown who only offer nominee accounts.

They have 736,000 active clients and client cash held is £5.5 billion (see Note 10), i.e. about £7,500 each on average on which they pay no or little interest. In the good old days, stockbrokers used to pay significant interest on cash deposits but now few do, or the interest rates are trivial. So HL pays zero interest on cash held within share dealing accounts other than SIPPs below £5,000, and only 0.05% on higher figures. In effect a miniscule amount.

HL report that interest rates remain low and “therefore income from cash balances remained low” and “in the short term we continue to experience subdued margins on cash balances”. They also complain that the FCA introduced restrictions on the use of term deposits for client money from the 1st July 2014 which reduced the margin on client money to 0.53% from 0.91%. How much of their profits arise from the interest margin? It’s not immediately obvious from the published announcement but 0.53% of £5.5 billion is £29 million. Profit before tax was £199 million last year so that contributed 14.5% of profits.

The reduction in interest margin (although they now seem to have side-stepped the regulations for SIPP accounts), no doubt contributed substantially to the overall fall in profit before tax which was down by 5%.

One can understand why stockbrokers are so keen to use pooled nominee accounts rather than have shareholders receive the dividends directly that are rightly theirs. But it’s to the disadvantage of their clients. This is one reason why ShareSoc believes investors should own shares directly and be on the register of companies and that nominee accounts should be actively discouraged (and not be required for ISA or SIPP accounts). See our shareholder rights campaign here: http://www.sharesoc.org/shareholder-rights.html

Roger Lawson

Amlin and Glencore – Market surprises, but not at Berkeley

This morning a takeover bid for insurer Amlin was announced by Mitsui Sumitomo Insurance. A cash offer of 670p which represents a premium of 34.5% to last nights closing price. With Amlin having been warning for some time about increased competition in the catastrophe insurance sector, this is surely a done deal assuming they can get over any regulatory hurdles.

I was going to write that unlike many mega deals the news seemed not to have leaked out in advance, but it’s good they made such an announcement because I just noticed that the FT ran a headline story on the “takeover talks” in this mornings paper so clearly knew about the announcement ahead of time.

As a long-term holder of Amlin my only regret is that this takes me out of one of my stable and defensive holdings with a high dividend yield of over 5%. Historically it always traded on a low p/e ratio and the only reasons it seemed lowly rated were a propensity for analysts’ earnings forecasts to be somewhat inaccurate and rather opaque financial accounts as with many insurance companies. The only down side I can see is that having held the shares since 2005, with some bought for as little as 175p, I will end up with a significant capital gains bill.

If anyone has any suggestions for suitable replacements for my portfolio, let me know. But with the new dividend taxation arrangements, high dividend payers may be less of interest.

The other surprise was the announcement yesterday that Glencore is to try and cut its debt pile. This is an astonishing figure of $30 billion. With commodity prices falling, the share price has been one of the worst hit of mining companies (down by 65% over the last year) as investors became wary of the level of debt. I wrote an article on the natural resource sector for the last ShareSoc Informer Newsletter which we have just issued saying companies in this sector had only themselves to blame. They expanded production too much with excessive debt. I suggested correction only happens when a few producers go bust, and I rather thought Glencore might be one of them.

Glencore have pre-empted that outcome with a plan to cut its debt by one third, some asset sales , an equity share issue of $2.5bn and the suspension of the dividend. It’s also suspending copper production in Zambia and the Congo, which they expect to boost the market price of copper. Surely just what the doctor ordered! The share price immediately bounced upwards on the day of the announcement, closing 7% up. Not many private shareholders probably hold Glencore (I do not), and it’s surely only a share for those wanting to bet on a recovery in commodity prices and those guessing that we are nearing the bottom of the cycle.

Talking of cycles, I was at the Berkeley Group AGM this morning in deepest Surrey. Another company in a cyclical market – in this case housebuilding. As the Annual Report spells out, “We recognise the property market is inherently cyclical“. The Interim Management Statement issued before the meeting tells you what they are doing to counter that to some extent. They expect to remain ungeared after the next dividend payments, and are still on track to return £13 per share to shareholders by 2021 as planned (current share price was £33.80 last night). In other words they are returning cash to shareholders rather than expand operations too rapidly as many housebuilders did in the last boom time (and overpaid for land also).

But there were otherwise no real surprises at the AGM. Despite PIRC opposing the Remuneration Report, and I speaking against it, it was passed with 85% of votes in favour on the proxy counts, and none against in the room other than mine so far as I noticed. This just shows how difficult it is to get investors to vote against resolutions when they are happy with the company’s performance and its share price. Just to remind you, Executive Chairman Tony Pidgley received a “single figure of total remuneration” amount of £23.3 million last year. His bonuses , as PIRC reported, amounted to 27 times his base salary. And why does he need an LTIP to incentivise him when he is such a major shareholder in the company? Mr Pidgley noted he would avoid any political comments in response to one question, but he might feel differently if Jeremy Corbyn ever gets into power as he has vowed to tackle excessive remuneration and wants a maximum pay limit imposed apparently.

I’ll be doing a more comprehensive write up of the Berkeley AGM for the ShareSoc Members Network.

Private Individuals Own More of the Stock Market

The Office of National Statistics (ONS) have published their latest survey of share ownership in UK companies. Historically there has been a long term trend for individuals to own less as a proportion of the overall market. But the latest figures tell a different story. From historic lows of 10% in 2010 and 2012, the figures for 2014 show an increase to 12%.

The proportion owned by the “Rest of the World” (which might also include some individuals) remains the highest at 54%. UK resident individuals are now second after the Rest of the World, with unit trusts and “other financial institutions” third and fourth. Holdings of pension funds and insurance companies continued to decline and are now only 6% and 3% respectively. This is no doubt because they have moved out of investment in equities due to regulatory changes rather than a view of the market attractiveness of equities.

It is of course interesting to note that while individuals hold 12% of the shares, they undoubtedly have much less influence on matters such as directors’ pay and corporate governance issues in general than pension funds and insurance companies. Why is this? Simply because the latter have block votes and use them while individuals are more often in pooled nominee accounts and don’t vote. ShareSoc has of course been campaigning on this issue for some time and been trying to act as a representative body for private shareholders. It emphasises the need for there to be an organisation that represents the interests of the millions of individual shareholders.

Other interesting data reported by the ONS shows that 31% of shares in AIM companies are owned by individuals, but only 9.5% of FTSE-100 companies. Other quoted companies are an intermediate figure of 21%. This probably reflects to some extent the high share ownership by directors in smaller companies, but also the fact that many individuals invest in smaller companies while institutions often steer clear of them.

Note that the ONS analysis looks behind the ownership on the share register to identify the beneficial owners. This is necessary because now some 58% of the shares by value are now in multiple ownership pooled nominee accounts.

Comment: It is good to see that the statistics suggest that private individuals are finally realising it is better to hold shares directly rather than have some intermediary step in between. Perhaps investors have woken up to the fact that the costs of intermediation offset any benefits there might be and that you don’t need to be a genius to manage your own share portfolio. Indeed the chances are you can do as well as the professionals. ShareSoc does of course encourage direct share ownership so let us hope this trend continues. All we need now is to achieve a system where such shareholders are properly enfranchised and not stuffed into pooled nominee accounts by default.

Note: more information about what is known on UK shareholdings by individuals is given on this page of the ShareSoc web site: http://www.sharesoc.org/market_statistics.html

Roger Lawson