Alliance Trust Vote – A Victory for Private Investors and ShareSoc

Today Alliance Trust shareholders voted to support the Board’s proposals to change the investment management arrangements and to buy out Elliot. This is surely a major win for private investors and for the stance taken by ShareSoc and the Alliance Trust Shareholder Action Group (ATSAG) which ShareSoc has supported over the last 3 years. ShareSoc wholeheartedly backed the Board’s proposals. Alliance Trust can now move forward.

But it was a close run thing as proxy advisory services who advise institutions were not happy with the buy-back. As a result only some 77% and 83% of votes were cast for the relevant resolutions and the second one required a 75% vote as it was a special resolution.

See the ShareSoc Alliance Trust campaign page for more information and a report on the Meeting: http://www.sharesoc.org/alliance.html

Roger Lawson

Interesting FT Articles on Fund Performance , Nick Train and Executive Pay

There have been some very interesting articles in the FT in the last few days. On the 25th February John Authers discussed market timing and passive versus active management. He quoted consumer research group Dalbar who have compared active and passive funds. Although passive funds have beaten active funds in the long term, because of their lower costs, investors in active funds have received higher returns in the last 15 years. How can that be? It’s because to quote: “Holders of passive funds are generally terrible timers, buying at the top and selling at the bottom”. So the message is “The easier it is for us to time the market, the more we take advantage of the opportunity to time it badly”. That’s a very important message for all private investors who invest in funds of all kinds.

On the 27th February there was a profile of fund manager Nick Train (manages top performing trust Lindsell Train and others). Interestingly he discounted the wisdom of meeting company management – he was quoted as saying “But the truth is that there is no correlation between access to company management and superior investment performance”. He apparently prefers to spend time reading – a part of his library is devoted to books on Warren Buffett for example. Like many master investors, he is clearly an avid reader. It’s an interesting article although I am not sure that I would altogether discount the wisdom of meeting management. From my experience, even a brief contact, e.g. at an AGM, can often tell you a lot about whether you wish to back the management or not although it’s certainly not a foolproof process. There are a lot of bullshitters in this world who get to be company directors – readers no doubt know a few.

On the same day there was also an article by Daniel Godfrey, one of the founders of “The People’s Trust” (we expect to publish an interview with him in the next ShareSoc Informer Newsletter). He tackled the issue of executive pay and made an interesting suggestion. This was to go for a “salary-only” model where part of the salary is paid in shares which have to be held for seven years. No need for any other performance incentive – if the company performs then the shares become worth more.

Well that seems eminently fair, workable and simple to me. Complexity of late in remuneration policies has become an absolute nightmare and has led to the ramping up of pay. What do readers think about this idea?

Roger Lawson

AIC Press Release on VCTs

To follow on from my last blog post, another interesting press release from the AIC today was that on the performance of Venture Capital Trusts (VCTs). That’s particularly so when everyone is considering their tax bills at this time of year, i.e. those just paid and how they can avoid such big ones for the current year and next.

VCTs do of course offer upfront income tax relief when investing in new shares, and also tax free dividends thereafter. Many have been achieving high dividend yields in recent years. The AIC notes that the VCT sector “as a whole is up 82% by share price total return over the last decade”. In addition the top 20 VCTs are up an average of 141% over the last 10 years and have paid our an average total tax free dividend of 87 pence per share. The press release tells you which have been the top performing VCTs and when buying shares in these trusts it’s probably best to go for those who have demonstrated good long term performance as running these funds is not easy and proven experience is what seems to count. AIC press releases are given here: http://www.theaic.co.uk/aic/news/press-releases

Needless to say perhaps that Foresight VCT, which ShareSoc recently commented on, does not get a mention as it’s not in the top 20.

The AIC does of course give you comparative historic performance data on most investment trusts including VCTs on their web site.

Roger Lawson

AIC Response to Green Paper

The Association of Investment Companies (AIC) have published their response to the Government’s Green Paper on Corporate Governance. One recommendation contained therein is that “The AIC also recommends that a detailed study to assess retail investors’ access to voting services on platforms and other nominee account services is undertaken to identify any necessary reforms”. This is of course a very positive endorsement of an issue that ShareSoc has been campaigning upon for some time – see our campaign page here: http://www.sharesoc.org/shareholder-rights.html

In addition if you read the detail submission, they say “Additionally, the study should assess any barriers to switching providers that may be preventing shareholders, that do want to vote but are unable to, from moving to a provider that does offer this service”. This is indeed a very important issue also as currently it takes way too long to switch between brokers or platforms. For example, my latest broker switch has now been running since last October. And that’s not the first time I have experienced such delays. Anyone who experiences this problem should complain to the FCA as I have already done in the past – but they clearly do not get enough complaints about it because no action has been taken and the response did not likely indicate any will be.

Otherwise the AIC’s response to the Green Paper can be read here: http://www.theaic.co.uk/sites/default/files/hidden-files/AICBEISCorpGovReformresponseFeb17.pdf

Roger Lawson

The Future Value of Money

The future value of money was a question highlighted by a Government decision yesterday. The discount rate to be applied to awards to road accident victims and others, to ensure they always have enough to support their future needs, is to be changed to -0.75% (that’s minus 0.75%). Previously, and for many years, it has been assumed that they could invest a cash lump sum at a rate of plus 2.5%. That was on the assumption that they could invest in risk-free assets and get a return of that amount. But the Government is proposing to revise the rate. This will result in much higher payouts for major road accident injury claims, and for medical negligence claims.

There was a negative impact on the share prices of insurers such as Direct Line (down 7% on the 27th Feb), but others such as Admiral and Esure were little changed. However the Association of British Insurers (ABI) called the ruling a “crazy decision” and also said “To make such a significant change to the rate using a broken formula is reckless in the extreme, and shows an utter disregard for the impact this will have on consumers, businesses and the wider operation of the insurance market”. They forecast sharp rises for all forms of vehicle insurance with suggestions being made that it could be as much as £75 extra per car on average.

In addition because the NHS is one of the most frequent defendants to medical claims, it might add £1 billion to their annual bill for such costs. Something that the NHS surely cannot afford at present.

You may be wondering what is the risk free rate of return that one can actually get at present. The best measure traditionally for this has been assumed to be long-dated index linked gilts. The yield to redemption on those is now about -1.6% (see http://www.fixedincomeinvestor.co.uk for a good source of information on those). That’s taking account of inflation of course. In other words, you would actually definitely lose money by investing in them! That of course drives up the capital that is required to cover future investment losses enormously.

Now we all know that the Government has driven down interest rates to a ridiculously low level and negative gilt yields is one consequence. Together with tougher rules for pension and other funds, to ensure they cover future liabilities, this has led to an excess of demand for index linked gilts over their current availability. Hence the below zero interest rates. But surely no sensible person investing for the long-term would at present put all their assets into such gilts?

Even the most conservative and risk averse investor would surely not do so, and it seems unreasonable to argue that beneficiaries of court awards should be assumed to do so. Indeed they probably don’t and it seems unlikely that any financial advisor would suggest they do so either with current interest rates. Having some certainty of future income is important, but having absolute certainty about future finances for those dependent on a court settlement does not seem fair when nobody else does – pensioners for example, many of whom are also incapacitated and rely on Government care assistance, or even divorcees who benefit from other court awards. Incidentally there are specialist firms that look after funds for such beneficiaries such as listed company Frenkel Topping who presented at one of the ShareSoc seminars and there is a big market for “Personal Injury Trusts”.

The ABI previously launched a legal challenge by a judicial review to the Government’s inadequate consultation and decision process on this issue but it was rejected by the High Court.

Roger Lawson

FRC to Investigate Redcentric Audit

Further to ShareSoc’s campaign regarding accounting irregularities and related matters at Redcentric (AIM:RCN), I am delighted to see that the FRC has launched an investigation into the audit of Redcentric’s accounts by PWC: https://www.frc.org.uk/News-and-Events/FRC-Press/Press/2017/February/Investigation-in-respect-of-PricewaterhouseCoopers.aspx

The FT also reports on this investigation today, coming hot on the heels of PWC’s embarrassment at the Oscars ceremony: https://www.ft.com/content/4e710e1e-fcfc-11e6-8d8e-a5e3738f9ae4

This article highlights that PWC is also under investigation in relation to audits of BHS; Barclays compliance; Connaught and RSM Tenon. It has already been sanctioned in respect of its audit of Cattles. Further, PWC has been replaced as Tesco’s auditor, following the accounting scandal there, and failed to detect irregularities at BT’s Italian subsidiary.

Shareholders may wish to question any firms currently employing PWC as auditors.

I am also pleased to report that two members of the campaign and I met with the Redcentric chairman and new CFO last Friday. The meeting was productive, and amongst other matters, included discussion of PWC’s performance and action being taken. I will be publishing a report on the meeting for campaign members shortly, and taking further action, as described in the report.

Mark Bentley

NCC Group – All Credibility Gone?

NCC Group is a FTSE-250 company operating in the “cyber security”and “risk mitigation” areas primarily, and the former is surely one of the “hottest” sectors of the market at present. But it’s hotter in other ways for NCC at present it seems.

Yesterday at 4.16pm (always a bad time to make announcements) they issued the latest of a series of profit warnings. In addition they announced a “strategic review” and that the capital markets event scheduled for today was cancelled. The share price fell 30% before the market closed yesterday and was down another 30% this morning. The share price was about 365p last October. It’s now about 90p at the time of writing.

Looking back over the recent history of the company, the long-standing Chairman Paul Mitchell announced he was stepping down in January, and in the same month a new CFO was appointed. In that month the company also announced the sale of the “open registry” group of companies that was trying to establish the use of trusted web sites in which the company had invested a lot of money without success.

The company has made a number of acquisitions in the cyber security area including Accumuli for £55m and Fox-IT for £126m in 2015. These were expected to generate rapid growth in sales and profits and the forecasts have turned out to be optimistic while the cost base has grown and hence damaged margins. Indeed the latest announcements says that sales levels are “unlikely to utilise fully the cost base deployed across the Assurance Division in the current financial year”.

In October last year the company announced the loss of three large contracts and problems with retention of others. Clearly the company has acquired businesses that have lumpy revenues with large projects that are subject to cancellation or implementation issues.

Meanwhile the Escrow Division “continues to perform in line with expectations” according to the latest announcement. This side of the business is very attractive in that the customers are very “sticky” and a very large percentage will renew each year, so there is very high and reliable repeat revenue.

So in essence the company has appeared to make dubious acquisitions which have turned out badly. This is undoubtedly a massive management failure for which the long-standing and previously successful CEO Rob Cotton must surely take part of the blame. Is he the right person to sort out this mess? We shall no doubt see in due course but any shareholders who have an opinion on that might like to comment.

Note: I have to admit to holding this stock, but I sold most of my holding in January. Simply did not like the emphasis on EBITDA in the reporting and the large number of reported “adjustments”. It was also clear that the nature of the business had been changed substantially by the acquisitions, and the previous trading update in October gave a way too optimistic view of the future with comments such as the rate of growth of profitability “remains in line with the Board’s expectations” and that “we remain on course to sustain our double digit organic revenue growth”. This was surely pure hogwash in essence.

As Mr Cotton was presumably responsible for these announcements, I doubt many investors will continue to believe that he should lead the company.

Roger Lawson