Good afternoon. Well, the UK market is progressing comfortably whilst the US has slipped-back. Our clients’ 5 April reports will be landing on door mats imminently and it is pleasing to note that generally gentle progress has continued since then.
BHP makes an audacious bid for UK-quoted Anglo American, owner of DeBeers amongst other mining interests. It is not much above the latest share price and I don’t think it will succeed but what it does note is how undervalued so many large, UK-quoted companies are and that more bids are almost inevitable. Frustratingly it’s not one in our stable… but we have others, comparable to this and the interest has piqued their share prices so we shan’t complain! Look too at how bank shares have been so strong since last autumn when we were shouting about the tremendous value to exploit generally, issuing a rare, special newsletter to all clients to consider buying/investing action at what appeared the cusp of a great ‘value’ opportunity.
And after spiking as a consequence of greater fears in the Middle East, the oil price has been reversing again so that’s good news. The cocoa price has collapsed from its highs too – excessive speculative demand creating an artificial peak despite the real problems with the harvest. It is still over four times higher than it was not all that long ago and still over-extended but as long as our importers haven’t locked-in supplies at really high prices (as most energy suppliers did, to ‘protect’ their customers’ provision), then this will impact inflation on the right side.
A new report suggests that nearly a third of financial services companies on Companies House disappeared within five years of starting (62,531 going from January 2019). That will be for myriad reasons but mainly ‘bad’ ones, so what value do consumers place upon longevity I wonder! We hope quite a bit! After all, we have been trading for nigh four decades now (and as a Plc since 1996) with the same investment manager at the helm and managing £235million on a discretionary basis.
It is good that the bad ones go but the colossal universal regulatory demands now in place are meaning that many more good ones will also give-up the ghost and their principals will leave the industry – at a great loss to the Country. All and excessive regulation is not good – however well-intended it is at the beginning. Indeed, one wonders, in that Baroness Altmann (who is integral in pushing to secure the long-overdue correct recognition of published costs for Investment Trusts) last month noted publicly: “It is deeply concerning that the regulator is not properly informed about how the market works, even though it is responsible for overseeing it.” Indeed, perhaps related but speaking to the Financial Times on another matter of concern about ‘innocent till proven guilty’, Chancellor Jeremy Hunt has reminded the FCA that last year it was charged with competitiveness and growth objectives. He noted that their ‘naming and shaming’ decision “doesn’t feel consistent with that new secondary growth duty that they have.”
Jeremy Hunt warns FCA against ‘naming and shaming’ businesses under investigation (ft.com)
Taxing people till the pips squeak…
Treasury analysis has found that over 1,000 higher rate taxpayers have left Scotland since 2018/9 when the Scottish Government raised taxes above UK rates. So, rather than raising the extra few percentage bips from them, Scotland has lost the whole up to 45% or whatever the top rate of tax they paid was – and the rest of the UK benefited when they came here. The estimated cost in that first year was £61million.
More than 1,000 higher rate taxpayers flee Scotland after hikes (telegraph.co.uk)
When they go, they don’t rush back immediately after the rates may be cut either. The signal to wealthy, high earners and businesses thinking of locating to Scotland are loud and red, so a great discouragement for them to come in the first place too, over other options. The attacks on UK non-doms by both Conservatives and also accelerated by Labour are having similar effects, so political idylls to satisfy the baying masses will end- up losing net revenues as people are driven away and not encouraged to stay (or come in the first place) and not only shall we lose all of their tax receipts but their employment, investment and spending as well, all big tax-generative activities. That means the rest of us must pay more tax to make-up the short-fall we have created unnecessarily. Hmmm. Even the Guardian has published an interesting article on the matter but will the politicians heed the many concerns?
‘I am moving – that is it’: tycoon speaks out about the end of non-dom tax status
Good news, bad news
Riverstone Credit Opportunities Fund has announced it will be winding-up so the discount on its shares will evaporate and another bonus for investors from the share price, just for waiting. That’s another ‘green’ investment closing from poor demand after the flurry at launch. The 31/3/24 net asset value was $1.06 versus a share price around 89c on 16/4/24, so that’s an uplift of 19% and 7.5% income whilst we wait.
Darktrace succumbs to a bid too – too cheap but we shouldn’t complain as a useful 20% improvement on the morning. The bid is almost three-times the end Jan 2023 level. We started buying very cheaply but frustratingly we don’t have enough of this one but is that just plain greedy? However, it again signals how undervalued so many UK stocks are. Tiddler Carclo jumps 62% as well as it announces stronger cash generation than expected. If it survives, it’s far too cheap. For most investors the jump is just a lower loss from earlier higher levels. We aren’t complaining.
Petrofac slumps even further with delays on annual accounts and ongoing frets regarding refinancing. Investors will have lost most on this one already so a further few coppers may look a large percentage drop but not much in reality. The good news is that many ‘similar’ value-selected stocks in strategies have been nudging higher to offset this upset.
BH Macro Ltd – populism at play?
Such a shame but we couldn’t do it for clients as the regulations would not allow it (however technically attractive) but privately it was an interesting position to take, short-selling. This was the exact opposite to the discount buys in Investment Trusts we so like, where one was almost inevitably going to see price falls and a discount open-up from the premium at which the shares had been trading.
So, a successful fund manager (ostensibly), Brevan Howard, sees the shares in its hedge fund trading ahead of the underlying asset value, to such an extent the Company raised £315million of new money at a premium to the value of its assets. Well done all round but the populism with which investors chased the assets was also its undoing. These excessive prices couldn’t continue (familiar warning?). In September 2022 the shares traded at a premium of 22% to the assets and since have been as low as a discount of 19% this March. This is despite being £1.6billion in size.
However, this wasn’t the trigger for our previous notes on this ones and the short position which appeared wise. It was the merger of Investec and Rathbones which led to a combined 26% stake in the Trust, far too much for one manager as it constrains further purchases and disposals (and arguably the new firm could not sell-up because of the liquidity issues even if it had wanted to do so, in advance of the ‘inevitable’ price drop). So the combined wealth manager doesn’t have to sell stock by special Takeover Panel dispensation but is it going to buy more ever? Really it can’t so – will it be a constant seller of stock as its clients leave by natural attrition and thus a permanent tap on the market? Two of its biggest supporters (who no doubt supported stock at that expensive price too don’t forget) are thus passive holders.
The Trust’s assets haven’t performed especially well but the move from a 22% premium to a 19% discount creates a 41% slump from which anyone short-selling the shares over that time will have profited. I have to say I’m still not convinced by the ‘portfolio’ which is opaque albeit uncorrelated but most investors haven’t a ‘clue’ about what they may be buying in the shares. That said, if asset value discounts of say 20% were available today then I suggest the shares would probably be attractively priced for an ‘inevitable’ rebound at some stage, even if via corporate action. We don’t own any (yet?).
My best wishes
Philip J Milton DipFS CFPCM Chartered MCSI FPFS FCIB
Chartered Wealth Manager
Fellow Of The Personal Finance Society, Fellow Of The Chartered Institute Of Bankers
