Upcoming ShareSoc Events

We have a number of events lined up for investors in the next few weeks. That includes:

In the North:

Leeds on the 28th March (that’s next Tuesday!)

Companies presenting at that event are:

AVATION (AVAP): Passenger aircraft leasing company; and

BERKELEY ENERGIA (BKY): Uranium mining in Spain.

In addition we have guest speaker David Scott of wealth management company Andrews Gwynne. David will discuss the implications of recent global macro economic developments and how this might be a time for caution in terms of the equity markets. He has recently shared this presentation with senior figures in the City and it is causing some pause for thought. Our Members will be some of the first people to see David’s analysis.

Go here for more information and registration: http://www.sharesoc.org/leeds-seminar.html

Also please note that registration is now open for our next event in Altrincham on the 16th May. Go here for more information: http://www.sharesoc.org/altrincham-may.html

In the South:

Don’t miss the next ShareSoc event in London which is  Richmond on the 4th April. This is a “supper” event with Marshall Motor Holdings presenting – an automotive sales and leasing company. Go here for more information and registration:

http://www.sharesoc.org/richmond-apr.html

Our next seminar in the City of London will be on the 11th April. Companies presenting will include:

– HAYDALE GRAPHENE INDUSTRIES (HAYD): Research, development and manufacture of graphene products.

– LIDCO (LID): Non-invasive hemodynamic monitoring equipment for hospitals.

– BIOVENTIX (BVXP): Biotechnology company involved in the development and supply of antibodies.

Go here for more information and registration: http://www.sharesoc.org/london-apr.html

These events are all great opportunities to learn about companies and chat to other investors, so if you have not been to one of our events before, why not come along? They are of course open to anyone.

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

Asset Management Market Study

I commented previously on the FCA’s Asset Management Market Study, which suggested there was weak competition in this market. Needless to say, most asset managers do not seem to agree.

ShareSoc has now submitted a response to the questions raised in that document which you can read here: http://www.sharesoc.org/Asset-Management-Market-Study-Response-2017-02-21.pdf

In summary, we agree with the general conclusions and support regulatory intervention where necessary. We also note that although the study does not address the issue directly of financial education, it is our view that this needs to be substantially improved if the public is to be able to engage with financial professionals and make their own informed decisions.

Please read our more detailed response for our answers to all the questions posed.

Roger Lawson

Brexit, Industrial Strategy and Productivity

What next now that we are committed to Brexit? Well first we need an “industrial strategy” to help us develop a new place in the world and possibly to pay for the up to £60 billion that might be demanded by the EU (as settlement for outstanding commitments if you believe that – yes divorce can be expensive). Now it just so happens that the Government has just published a Green Paper entitled “Building our Industrial Strategy” on that topic which is worth reviewing.

If you don’t think revolution is in the air, or would prefer it was not, it’s worth quoting from the Prime Minister’s foreword to the document: “Last summer’s referendum was not simply a vote to leave the European Union, it was an instruction to the Government to change the way our country works – and the people for whom it works – forever.”

Another comment in her foreword is on the need to tackle low productivity in the UK and she says: “This is vital because if we want to increase our overall prosperity, if we want more people to share in that prosperity, if we want higher real wages, and if we want more opportunities for young people to get on – we have to raise our productivity.”

That is undoubtedly true. Productivity in the UK has been a problem for many years as the Paper explains. It improved up until the financial crisis in 2008, but then fell behind our competitors in France, Germany and the UK (they produce as much in four days as UK workers do in five). There are also bigger disparities across the UK than in other countries, with London being 72% higher than the UK average. Note: this probably reflects the very high “added value” achievable in financial services in London and over reliance on that distorts the UK economy in many ways.

Now Governments, particularly socialist ones, tend to talk at length about improving the economy by improving productivity, backing new technology, backing selected winners, developing sectors where we have obvious strengths, improving capital investment, developing a more educated workforce and suchlike. This makes for good political speeches but in practice does not often result in much change. Or worse, a lot of money is wasted on backing losers, or subsidising industries in decline.

So let’s just pick out what might be new in the Green Paper. The Government proposes ten “pillars” for the strategy – investing in R&D, developing skills, upgrading infrastructure, supporting start-ups and early stage businesses, and several others with somewhat woolly definitions.

The Government is to invest an extra £4.7 billion in R&D funding. How this will be spent has not yet been determined but a whole list of possible “hot” sectors are given that might be supported by the new “Industrial Strategy Challenge Fund”.

There will be effort expended to develop improved technical education and improvement in STEM skills where the UK has long been behind other countries (we basically have too many people studying for useless or easy degrees, and not enough focus on less glamorous technical skills – best not to comment perhaps that the Prime Minister has a degree in Geography; she may have realised her mistake as she promptly joined the Bank of England before going into politics). The creation of a new system of technical education is promised.

There will also be a commitment to improve our transport infrastructure – rated second lowest among G7 countries. That includes, roads and railways, energy production, housing and even our digital infrastructure. The failure of long term planning in these areas is surely obvious to everyone. The road network is a particularly good example of under investment and obstructive planning processes resulting in some of the worst traffic congestion in the developed world. This certainly damages productivity.

The low level of investment in infrastructure, and in plant and machinery, is a long established aspect of the UK economy which the Government wishes to change.

To promote the growth of long term investment the Government has launched a new Patient Capital Review, led by the Treasury. It will be looking at the problems of obtaining and providing development capital for growing innovative firms. And it will consider the role of “market practice and market norms” in facilitating investment. It even suggests that dual class share structures such as those of Google, Facebook and LinkedIn where founders can retain dominant voting control might assist in the development of winning businesses, even though UK stock market investors generally dislike them.

One can anticipate a big fight over this idea as surely this is not the cause of those companies success. Indeed if you look at Apple, where in its early days Steve Jobs was dominant he made so many mistakes that he was removed and replaced by a businessman. Only later did he return and make a success of the company in a conventional share structure. The dominance of Henry Ford over Ford Motor Company and his reluctance to change meant that he subsequently lost out to General Motors where a more normal corporate share structure was present. The beauty of a conventional structure is that when the CEO is going awry, they can be changed. A dual share structure can block change. The Government’s analysis here is surely simplistic and they have spent too much time talking to entrepreneurs rather than students of business history.

Anyway it seems we are soon going to get a discussion paper from the Financial Conduct Authority that will review the structure of the UK’s listed markets. So that’s one more consultation to add to the current pile – we seem to be snowed under with them at present. But it sounds like we will definitely need to respond to that one. And you can of course respond to the Industrial Strategy Green Paper as it poses some questions to which they would like answers.

For those who invest in smaller companies, the Minister for Small Business will take on the role of “Scale-Up Champion” and there will be a review into entrepreneurship led by the “Chief Entrepreneurial Adviser to the Department for Business, Energy and Industrial Strategy (BEIS).

Comment: The responses to the Green Paper by businesses and the media was unenthusiastic (“politely lukewarm” as the FT called it). They have no doubt seen it all before, with no obvious benefits arising. Unfortunately asking civil servants, or politicians, to develop sensible business development strategies does not work simply because they have no relevant experience or understanding. There are not many people with MBA degrees for example in the Treasury or BEIS I would guess, and even fewer with real business experience. In simple terms asking them to pick technology or market sectors to back is not realistic, and they will waste a lot of money backing projects and people that fail.

The existing approach of providing tax relief to those who back smaller companies (via EIS and VCTs for example), and risk their own money, has worked. Providing direct stimulation does not. Exiting the EU will enable us to escape from the limitations of EU rules in this area concerning tax relief. But providing a good educational framework can help and that should surely be one of the key roles for Government to play. Fixing the infrastructure is also where Government can assist.

If you wish to make your own comments, the Government’s Green Paper is present here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/586626/building-our-industrial-strategy-green-paper.pdf

Note that I hope to write an article for the next ShareSoc newsletter than will explain the conundrum of poor UK productivity. There are a lot of misconceptions about what can and what cannot improve productivity.

Roger Lawson

Share Tipsters Poor Performance in 2016

There was an article published on stock screens in the last edition of the ShareSoc Informer Newsletter which has just been issued. It reviewed a number of published screens and the performance overall was poor, mainly because few of them tipped mining or oil sector stocks.

So how did the national newspapers share tipsters perform in comparison? Private Eye just published a report on that subject. It said only one national newspaper, the Sunday Times, beat the index with its collective tips. Most failed to get even close with the Guardian being the worst at minus 12 per cent.

The Telegraph only managed an average gain of 5% and the Times only up 2.4% (in comparison with the FTSE-100 up 14.4%). The wide spread on the individual tips from all the tipsters also suggests that they were picking speculative stocks or “special situations” which did not work out in a lot of cases.

Now I said in our last newsletter that my portfolio performance was disappointing in 2016, but I am feeling a lot better now as I made a reasonable profit and better than most of the “expert” tipsters it seems. Even experienced investor John Rosier who writes a diary for the Investors Chronicle managed to lose 4.1%, including dividends.

Perhaps the moral to be drawn from this news is that it might be best to do your own research rather than pick up tips from others and rely on them for investment purposes. Reading the national press or other publications might be useful for picking up ideas, but you should consider any tips with an appropriate amount of scepticism until you have researched the companies and fully understood what they do and their financial structure. In other words, don’t simply believe what you read.

Roger Lawson

Learning from the Experts 2 – Scottish Mortgage Investment Trust

A previous blog post covered how one could learn from experts such as Harry Nimmo at Standard Life UK Smaller Companies Trust. Another company, but a very different one, I hold is Scottish Mortgage Investment Trust (SMT) and I thought this comment in their recently received Interim Report was worthy of note:

“Outlook: There is a strong structural asymmetry in equity market returns, given the potential for a successful company to grow to many times its size. This means it is of critical importance to be a patient optimist. The greatest investment mistakes come not from those investments which fail, but from the opportunities missed. 

Whilst others are focused on questions around political issues in the United States of America, what global GDP figures will be or whether the Federal Reserve will raise interest rates, those able to

take a long term and global approach can focus on investing in those companies which are placed to benefit from the significant structural shifts which are occurring on the back of technological

progress. A number of these companies have already reached significant scale, but have the potential and capital to grow substantially from here. This is truly exciting.”

Words of wisdom indeed and needless to point out that Scottish Mortgage have a superlative track record and it is now the largest UK listed investment trust. The net asset value total return per share was up 25% at the half year. The high weighting in US and other overseas stocks helped of course because of the fall in the pound. But they also beat their benchmark index as they have done over the last five years also (share price up 183% in that period).

How have they achieved this? By investing in “new economy” shares such as Amazon, Illumina, Inditex, Tencent Holdings, Alibaba, Baidu, Tesla Motors, Facebook, Alphabet (Google) and Ctrip.com to list their top ten holdings.

The fund is managed by James Anderson and Tom Slater of Baillie Gifford. They point out that worries about the UK economy do not bother them as only 5% of the portfolio is invested in UK listed companies, and conclude by saying that “this is a great time to be a long term global growth stock picker”.

And what’s the charge investors pay for such an active fund, bearing in mind the recent comments from the FCA about the merits of active versus passive funds and the high charges on some active funds? The “On-going” charge for Scottish Mortgage as reported by the AIC is 0.45% and there is no performance fee.

Roger Lawson

FCA Study of Asset Management – Interesting Interim Results

The Financial Conduct Authority (FCA) has published an interim report on its Asset Management Market Study. Some of the results are not that surprising, but others are.

For example, it reports that around half of retail investors were not aware that they were paying fund charges. Needless to point out perhaps that can be linked to another conclusion. Namely that there is weak price competition. How can investors be expected to compare prices when they are not even aware of the charges?

Indeed very few asset management firms told the FCA that they lower charges to attract business, particularly for retail investors. They do not believe that would win them more business. Surely retail investors are suckers for the pitch that goes something like this: “you want the best managers to get you the best returns, and that is more important than the cost”. Retail investors are often like buyers of wine – when you don’t know much about wine you tend to buy on price – the more expensive it is the better it must be. Unfortunately that is not how it works in reality for investment funds. As the FCA report states “there is no clear relationship between price and performance – the most expensive funds do not appear to perform better than other funds before or after costs”.

Even where fund size increases, price does not fall, according to the FCA. They suggest economies of scale are captured by the fund manager, rather than being passed onto investors. In addition they have identified a number of expensive funds which are closet index trackers and hence should really be lower cost.

Retail investment platforms also do not seem to bring pressure on pricing by the pooling of assets and the FCA “also have concerns about the value provided by platforms and advisors, and are proposing further FCA work in this area”. Let us hope they are quaking in their boots over that comment.

The FCA has a number of suggestions for remedies upon which it is inviting feedback (ShareSoc is likely to send in some comments so let us know if you have points you would like made). Some of the proposals include clearer charges, strengthening the duty of asset managers to act in the best interest of investors and providing retail investors with tools to identify persistent underperformance (although they spell out that relying on past performance data is problematic as there is little evidence of persistence).

The full FCA report is available here: https://www.fca.org.uk/publication/market-studies/ms15-2-2-interim-report.pdf . It certainly emphasises that retail investors can be woefully ignorant, but without proposing good remedies for that problem. Now if we could encourage them all to join ShareSoc, we might improve upon the situation!

Roger Lawson