ShareSoc Chairman's Blog

Sunday, Sep 02 2012 by

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No warranty is given by ShareSoc as to the reliability, accuracy or completeness of the information contained within this publication. Any information provided is accurate and up to date so far as ShareSoc is aware, but any errors herein should be referred to ShareSoc for correction. The information contained herein is intended for general information only and should not be construed as advice under the UK’s Financial Services Acts or other applicable laws. ShareSoc is not authorised to give investment advice, and is not regulated by any Regulatory Authority, and nor does it seek to give such advice. Any actions you may take as a result of any
information or advice contained within this publication or otherwise supplied to you by ShareSoc should be verified with third parties such as legal or other professional advisors and is used solely at your own risk. You are reminded that investment in the stock market carries substantial risks and share prices can go down as well as up. Past performance is not necessarily an indication of future performance. The Editor of this publication and other contributors may hold one or more stocks mentioned herein.


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431 Comments on this Article show/hide all

emptyend 17th Nov '12 192 of 431

In reply to JakNife, post #191

It is BATS Chi-X.

BATS bought Chi-X 18 months ago and, according to Wiki:

The deal was referred by the Office of Fair Trading to the Competition Commission in June 2011 for further investigation to "determine whether a substantial lessening of competition is probable as a result of the anticipated merger."

....but was allowed to go ahead. The result is that a third of all FTSE100 share trading is now hidden from the view of private investors and doesn't appear in the LSE numbers.

The numbers on the FT website are daily numbers and bounce around quite a bit - but the LSE is usually less than 60% of the total FTSE100. Even more worryingly, if you look at the breakdown for the USA,  you will see that by far the biggest "market" (at 27%) is OTC trading that doesn't appear on ANY of the 7+ exchanges!

I'd note that if this was news to me and Jaknife, then my 98% number earlier may have been an underestimate! ;-)

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dbfromgb 17th Nov '12 193 of 431

Not sure I get this. My advfn level 2 screen shows all trades/quotes on an aggregated basis, includiing TQ, Chi-X and TQ as far as I can see.

If you take SIA on Friday the LSE is showing 363,750 trades which is the same as showing on my level 2 summary. Drill down into the trades history for that day and it clearly shows that the total of 363,750 is made up of trades from all the exchanges.

Is FTSE 250 different from FTSE 100?

So I have been working on the basis that daily volume is aggregated, but if I am reading the above posts correctly the suggestion is that this is not the case? Am I misreading teh data feeds?

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marben100 17th Nov '12 194 of 431

In reply to emptyend, post #189

Fair enough - thanks for making that clear (I hadn't noticed the additional word in the title, which I think was added after earlier comment). It would be even clearer if he posted as "Chairman" or something else, because postings as "Sharesoc" imply it is an agreed "party line" to which the Board all subscribe.

Fair comment (the heading was changed soon after the thread was created).


As I've suggested previously, ShareSoc should pick its fights carefully.

That is something we agree with completely. We have limited resources - but are working hard to increase them*, so we are careful about where and how we deploy them.

There are plenty of examples of outright malpractice and it is easier for ShareSoc to influence the outcomes with smaller companies than with megacaps like VOD

The trouble is that a significant proportion of our membership are primarily interested in large caps (from recent feedback), and we must serve our broader membership. ShareSoc aims to be the representive organisation for the UK individual investor community. We are already the largest such organisation by membership, by a considerable margin, and growing rapidly. Only by addressing the "broad church" can we have much chance of wielding influence on government and regulatory bodies. IMO inadequate regulation and (probably more important) enforcement lies at the heart of deterring malpractice. I am appalled (as I am sure you are too) with what some directors of AIM quoted companies have "got away with", with no more than a slap on the wrist. Under US legislation, they would more than likely be doing time in orange suits for defrauding investors.


Incidentally, one market-wide matter on which ShareSoc might care to consider forming a view: I attended a NEDucation day last week and the presentation from FinnCap pointed out that liquidity in the London market has fallen by 60% (yes 60%) in the last 5 years. 

You'll undoubtedly be pleased to hear that we most definitely are aware of this and I (together with other ShareSoc directors) have already held several meetings with the LSE on this matter - sadly with limited success, so far. The core problem, as I'm sure you are aware, is that a vicious circle develops, especially amongst SEAQ traded stocks, where low trading volumes lead to market makers widening their spreads, to account for the extra risk that they take by making a market in an illiquid stock. That, in turn, deters investors from trading, knowing that they must take an immediate a hit of several % due to the spread, as soon as they buy.

I am pleased to say that (in response to pressure) the LSE did make some rule changes earlier this year (see Notice N10/12 here) that are intended to improve liquidity by promoting greater competition between market makers. Soon after those rule changes came into effect, I did observe some improvement to the spread in certain stocks and larger numbers of MMs quoting. However, spreads still remain much too wide and volumes too low in too many smaller cap. stocks.

NB ChiX/BATS/Turquoise are primarily active in larger/more active stocks anyway (i.e. they go for the hgh volume "low hanging fruit") so have little relevance to this issue of smallcap liquidity.

Personally, I would like to see easier access to DMA for brokers and knowledgable retail (and institutional) investors, so that they can place limit orders narrowing the spread directly and obtaining better execution as a result. My understanding is that charges/fees associated with DMA are currently too high for broader availability. We will continue to pursue this matter.


As an aside, I'll also mention that a significant factor in promoting liquidity, which companies can affect themselves, is maintaining good shareholder relations, including presenting regularly to investors and potential investors.


*To increase our available resources, we need to:

  • Increase our membership and voluntary effort
  • Convert more associate members into full members, and obtain more donations, contributing to our funds.
  • Obtain income from other sources


ShareSoc has made considerable progress on all these matters (as well, of course, in our primary aim of serving our members' interests) since our formation less than two years ago - but we still have a long way to go! If any readers would like to help, full membership (with voting rights and a full monthly newsletter) is available at just £35 p.a. here. We welcome ad hoc donations here. [I hope Stockopedia will excuse the blatant plug - but we are a not-for-profit organisation :0)]



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marben100 17th Nov '12 195 of 431

In reply to dbfromgb, post #193

Hi dbfromgb,

Am I misreading teh data feeds

It appears that you are (or ADVFN isn't providing sufficient detail). IG Markets DMA platform shows data from individual, as well as aggregated, exchanges*. It shows that as well as the 363,750 shares traded on the LSE, a further 21,042 were traded on Turquiose, 4,086 on BATS and 42,380 on CHI-X. Aggregate volume is shown as 431,258, confirming that the non-LSE trades are not included in the LSE reported volume.

It could be that "lit pool" trades are included in the LSE volumes but "dark pool" trades are not (or vice versa) - I don't know about that.

All these factors have made trade reporting very messy.




*For those interested in such arcane matters, IG Markets' platform provides "smart order routing". Users can place a limit order and the platform will automatically try to execute it on any of the exchanges - including in dark pools. Sometimes orders placed only slightly above the bid (buy order) or below the offer (sell order) are executed immediately and this can be due to the presence of dark pools of limit orders that are placed on the non-LSE exchanges but are not visible (hence the term "dark pool"). IG provides a breakdown of your order execution and you can see that sometimes execution of a single order can be split across multiple exchanges and/or filled from a dark pool. Undoubtedly similar smart order routing is available to brokers, prop. traders and institutions. Algos will use their own sophisticated techniques to try to outwit the multiplicity of exchanges (and other algos) to try to shave a few points off everyone else's orders.

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emptyend 17th Nov '12 196 of 431

In reply to marben100, post #194

Thanks for the responsesMark - duly rec'd!

As an aside, I'll also mention that a significant factor in promoting liquidity, which companies can affect themselves, is maintaining good shareholder relations, including presenting regularly to investors and potential investors.

Whilst I agree that regular presentations etc can help liquidity, I'd observe that this can be pretty one-directional. There is no shortage of info when a stock is rising nicely and the market is bullish - but when that reverses then mysteriously information is much harder to come by. I can think of a couple of Canadian E&P stocks where that seems to have been the case recently (exacerbated by distance in their case too).

Re the trade reporting point, I couldn't agree more that it is now very messy. Quite unnecessary too, since volumes could be reported in an aggregated form across all exchanges. It is also relevant to know the split between exchanges for stocks you are trading in, because "the touch" is highly likely to span two or more exchanges - and so only if the order-taking system you use spans those exchanges (as you say IG's does) will you actually be sure of getting best execution.



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james8 17th Nov '12 197 of 431

In reply to marben100, post #194

Hi Mark,
Regarding poor liquidity of small caps, I see that CBI are pressing Govt to scrap Stamp Duty on AIM shares in next Budget. I wonder whether Sharesoc could work with CBI to help bring this about.

Mentioned at bottom of this link (sorry cut & paste not working)

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marben100 17th Nov '12 198 of 431

In reply to james8, post #197

Thanks James,

We'll look into that.


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ShareSoc 18th Nov '12 199 of 431

Posted by ShareSoc at 00:00, November 18 2012.

Farage or Farrago?

Is this a farrago in the latest FTMoney supplement? Out goes experienced private investor and commentator on small cap stocks John Lee, in comes UKIP leader Nigel Farage.

Mr Farage is not a complete stranger to financial matters as he worked in the City as a commodity trader early in his life. His autobiography called “Fighting Bull” is well worth reading for both general amusement and how membership organisations can degenerate into in-fighting as the writer has experienced himself. What pearls of financial wisdom do we get from him? Basically he gives us a “sector” tip.

Sell anything French seems to be his view based on the likely impact of the new French Government on the economy of the country in due course. So a short French Government bond, long German bond, trade is his best tip.

But he’s not the only politician with a new column. John Redword is in there also talking about “getting the basics right”. Apparently he is to run a dummy fund to show how it’s done and his first punt will be on Chinese equities. It’s a pity the same edition of the publication contained an article from Merryn Somerset Webb rubbishing that idea – headline “Chinese shares are still not cheap enough”.

Next week, perhaps we could have Ed Miliband or Chuka Umunna giving us their hottest share tips? Let’s not be too politically partisan in the advice given to private investors.


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ShareSoc 20th Nov '12 200 of 431

Posted by ShareSoc at 00:00, November 20 2012.

Predictability is important – Telecom Plus, Software Radio Technology and London Capital Group

This morning there were interim results published by Telecom Plus (LON:TEP) and Software Radio Technology (LON:SRT) . You can see why shareholders like Telecom Plus, which is now on a forecast of about 23. Revenue up 30% and earnings up 10% on the prior half year and “the board has expressed confidence that we will deliver record turnover, profits and earnings per share for the full year”. They have even committed to paying 31p in dividends for the full year and knowing them, they will do so. Highly predictable revenue streams from known trends in customer numbers and arrangements to minimise volatility from energy prices (which hit them in the past) now mean they seem unlikely to meet unexpected headwinds.

At the other extreme you have Software Radio Technology. They are dependent on large orders for their AIS Marine products via third parties, which the company seems totally unable to forecast accurately. Revenue for the half year was down from £4.6m in the prior year to £3.5m, and pre-tax profits of £1.2m were turned into losses – and even that could be seen as flattering because inventories trebled. Last year was very disappointing and shareholders are losing faith in the “story” the management has been promoting of the enormous worldwide potential for their products. This continues in the Interim Results with the Chairman reporting “solid progress against our long term strategic plan…” and more such spiel. Stock has been built up to meet “expected orders”, not definite ones it seems. Shareholders were not impressed apparently because the share price fell further today and it has been on a downtrend for some time. Forecast p/e before these latest results was only 10 but even those forecasts now look extremely suspect.

The problem at SRT is clearly the business model. No repeat revenue and customers not their own as they are dependent on their distributors. One off hardware sales are in essence the problem, irrespective of your views on what the management have been saying. They probably have no better idea than shareholders of the likely outcome for the year.

I was reminded of the issue of predictability at the presentation I attended last night by Simon Denham, CEO of London Capital Hldg (LON:LCG) , at a Mello dinner. Although Mr Denham reported that the company has more cash in the bank (and no debt) than its market cap, there are some aspects of this company that are worth more consideration.

London Capital provide on-line trading services (such as spread betting), mostly via “white label” arrangements with partners such as Betfair, TD Waterhouse, etc. Note that it had £35m in cash at the half year versus £20m market cap, but £8m is tied up in regulatory capital and Mr Denham reported only £4m of “surplus cash”. Indeed he also said there was “no visibility in revenue and earnings” and there was some doubt about whether the full year dividend will be maintained. As with other gaming businesses, the company also seems to have a high churn rate of customers, with few become long-standing or loyal users of their services. The company faces a bout of cost cutting apparently to get back on track. Now the gorilla in the market space occupied by London Capital is IG Group in which I used to be a shareholder. No longer though because I found exactly the same problems there – volatile share price and forecasts by analysts never very accurate.

Needless to say, on simple financial analysis London Capital does look very cheap, although I think anyone considering investing would need to study their accounts carefully and try and understand the business in detail (including how the cash is tied up). But I suspect that because of its business model, it may remain comparatively lowly valued.

Investors simply do not like the unpredictability of businesses like LCG and SRT even if they do make large profits in the good times.


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dangersimpson 20th Nov '12 201 of 431

Investors simply do not like the unpredictability of businesses like LCG and SRT even if they do make large profits in the good times.

When I read statements like that I can't help thinking that this is where opportunity lies - the most money is made where other investors fear to tread for whatever reason (usually agency problems due to reporting requiremnets and liquidity for professional invetsors.) IMO this makes consistency one of the most overvalued things in the market. Paying high prices for past consistency is as much an error as paying high prices for future growth. Is it just me who'd rather own London Capital Hldg (LON:LCG) trading at less than NCA than pay 20x Earnings for TEP in the hope that they can keep growing at a consistent 20%+ over the long term? I do hope so :-)

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ShareSoc 23rd Nov '12 202 of 431

Posted by ShareSoc at 00:00, November 21 2012.

HP and Autonomy – Do the allegations stand up?

HP have announced they are writing off $8.8bn after finding questionable accounting in the operations of Autonomy which they blame for $5bn of that amount. Bearing in mind they paid $11bn for Autonomy only a year ago, which many people thought at the time was too much anyway, you can see why the allegations are so serious. This is not just a few minor accounting discrepancies or discovery of overvalued assets that often come to light after an acquisition. It basically alleges quite serious misrepresentation and false accounting.

From my experience in the software industry (and as an investor in software companies), let me try and make some sense of it for the uninitiated.

The allegations seem to boil down to:

1. Claiming hardware revenue was software revenue by selling “bundled deals” and misallocating the revenue. Why is this important (after all revenue is revenue, is it not)? It’s important because when valuing software companies, a buyer would likely attach much more value to the software element than the hardware – the latter are typically much lower margin and therefore of lesser interest to buyers. Such “misallocation” might suggest software revenue was growing much faster than it was in reality, and the rate of growth of software revenues is a key element in valuation of such companies. But even HP's general counsel has suggested that the actual amount of hardware sales were “10 percent to 15 percent” over 8 quarters which hardly suggests there would be a massive impact from misallocation (even if true).

2. Booking revenue from sales to partners or re-sellers when there was no actual end-user customer. This is known as “channel stuffing” in the industry, and is a common source of accounts manipulation in software companies. Basically it means persuading your partners to sign up for licenses in advance of them getting an end-user to buy the software. Of course you may ask them to pay some cash, but even that might be “refundable” if they ask nicely if no such sales arise. HP characterises this as “accelerated revenue recognition” which obviously would have inflated the apparent value of the business.

UK based Alterian was of course a recent example of the latter problem, which is endemic in software companies. They had to revise their past accounts and the CEO resigned before being taken over by SDL when dubious practices came to light (and yes their accounts had passed an audit by an large audit firm, as had Autonomy’s of course). Would such practices have been discoverable in due diligence? Not necessarily because unless every single partner deal is examined in depth and the partners questioned, it might not be obvious what was going on. Sometimes it’s a question of how conservative you want to be on revenue recognition, or not, rather than the technical revenue recognition rules being broken. But poor apparent revenue conversion to cash can give you a hint that something might be wrong, and this was one of the allegations made about Autonomy’s accounts, even before it was sold, by one analyst.

HP also seems to be suggesting there was some mixing up of “hosting subscriptions” with “license revenue” which have to be accounted for on a different basis and conversion from one to another might have accelerated revenue.

Meg Whitman, HPs CEO put it bluntly: “There appears to have been a wilful effort on the part of certain former Autonomy employees to inflate the underlying financials of the company in order to mislead investors and potential buyers”. Meg Whitman also pointed out in a video interview that she fired Mike Lynch, former CEO and major shareholder in Autonomy in May because of the failure of the acquired division to meet targets so it appears there might be some animosity already. But Mike Lynch vigorously denies the HP allegations.

Now the problem with these kinds of allegations is often you don’t know how far up the management tree these kinds of practices might have been condoned and the extent of the practice. Sometimes it’s simply the enthusiasm of a sales manager to book revenue to meet their targets that induces it. Some of it could be accidental mistreatment of particular deals or arrangements. Whether it was endemic to Autonomy is the key question (and not just whether it was there at all), and how much it might have affected the overall revenue, profitability and growth figures. It would have to be quite extreme to result in a write-off of almost half the value of the company (except in the eyes of the buyer).

But as this subject can be a great theatre for accountants and lawyers to perform their arts within, and Meg Whitman seems to want to appear to be acting tough with the money at stake being large, you can expect this issue to be pursued at length. Mike Lynch looks like he will have a fight on his hands.

Incidentally the news yesterday seemed to have a very negative effect on the share price of Blinkx (LON:BLNX) , an AIM listed stock that spun off from Autonomy and of which Mike Lynch is a non-executive director and substantial shareholder. But Blinkx does not sell software so it seems unlikely to be affected by such problems.


Postscript: it seems Mike Lynch has conceded that Autonomy gave away hardware with software bundles and then charged the cost of the hardware as a “marketing expense” rather than a “cost of sale”. This I consider somewhat unusual. If you give away chocolates to car buyers, it might be justifiable to account for the cost that way, but when I used to throw in expensive printers with software sales I reckoned it was a cost of sale so it looks like a somewhat aggressive treatment to me.


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ShareSoc 23rd Nov '12 203 of 431

Posted by ShareSoc at 09:18, November 23 2012.

Pay in AIM Companies – Inland Homes and Bezant Resources

One of the problems in AIM companies is that remuneration sometimes seems totally out of kilter with normal standards. A couple of examples recently where shareholders have started to kick up a fuss about excessive pay are Inland Homes (LON:INL) and Bezant Resources (LON:BZT) . The former is a property development company and the latter a mining company. Both have AGMs coming up in the near future.

Revenue and profits at Inland Homes have been variable to say the least since it listed in 2007, with net profits last year of only £0.76m, but the directors paid themselves over £1.3m for the year. Market cap is only £33m.

At Bezant, the company has made losses for the last five years, and although it might be sitting on valuable assets (market cap £17m) whether it can realise those in the near future is debatable. But last year total director pay rose to £824,000 (from £224,000 in the previous year).

In both companies the explanations for the pay packages last year are difficult to obtain.

Investors Champion have recently published a report on Inland Homes and the author commenced by studying the AIM IPO prospectus. It’s always worth reading those documents before investing in any AIM company, even if it’s a few years old. In the case of Inland it shows how the directors benefited by the move from a private company to a publicly listed one, and the instant increase in remuneration packages that was achieved which have subsequently grown further. A lot of the growth in assets and hence cash that enabled large payouts to the directors did of course come from shareholders, not from growth in generated profits.

AIM company directors can of course decide what they pay themselves and the only possible control of it is down to shareholders. But there is not even an obligation to have an advisory remuneration resolution in such companies (there is none on the AGM agenda at Inland, but there is one at Bezant). Even where there is such a resolution with many small shareholders in these companies, problems of voting from nominee accounts and difficulty in co-ordinating shareholder action, it’s not easy to win such resolutions. And even if won, it’s a case of closing the stable door after the horse has bolted.

So in reality many companies like Inland and Bezant simply operate like they are private companies with the directors paying out what they can without much apparent regard to the profits of the company or the interests of shareholders.

Now in large companies which are much more subject to public scrutiny, independent non-executive directors might help to moderate pay by providing some external view but in small AIM companies these matters are usually handled a lot more informally. The lack of an independent non-executive Chairman, as at Bezant, compounds the problem.

Until there are better arrangements put in place to control pay (such as having shareholders on the remuneration committee), personally I will be avoiding any such companies where pay seems unreasonable because in my experience high pay demonstrates simple lack of regard for shareholders interests. Let them take their rewards for good performance in the growth of share value or in dividends from their share stakes as they probably would in a private company, with otherwise a low basic salary. Investors should search out those AIM companies that operate that model – there are some.


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ShareSoc 24th Nov '12 204 of 431

Posted by ShareSoc at 16:12, November 24 2012.

TR Property – Should one vote for the merger?

TR Property Investment Trust (LON:TRY)  currently has two share classes – the original “Ordinary” shares and the “Sigma” class [TR Property Investment Trust (LON:TRYS) ] which was created in 2007 and focuses on smaller property companies. It was expected that the latter might achieve better capital performance but of course might be more risky or volatile. But the performance over the last five years has been very similar, even though the funds have had different fund managers at some times. Marcus Phayre-Mudge now manages both classes.

Five year performance (based on AIC reported figures) for NAV Total Return is:

TR Property Ordinary Shares: 110.4

TR Property Sigma Shares: 109.5


Investors in the original ordinary shares could opt to convert a part of their holding into Sigma shares but since then the shares have traded separately. One difference though is that the Sigma shares have on average traded at a higher discount to net asset value than the ordinary shares (23.4% versus 13.3%). But that difference has closed recently, presumably in anticipation of the merger, to 21.1% and 18.2%. Yes the proposals has had the perverse effect of depressing the price of the ordinary shares and raising that of the Sigma shares as traders presumably have bet on the merger taking place.

One possible reason for the wider discount on the Sigma shares is that the size of that fund was significantly smaller - £121m versus £488m for the ordinary share net asset value. Indeed this is one reason given by the directors for the merger - that investors are prejudiced against smaller, and less liquid funds. Another difference between the two shares classes has been dividends which are higher on the Ordinary share class than the Sigma class (so the total return has been delivered in a slightly different way).

As the Ordinary share fund already has a substantial holding in smaller company shares, indeed there is large overlap with the Sigma fund in that respect, there does not seem to be much obvious benefit to the Ordinary share class. But they are being bribed with a “conversion charge” of 2% applied to the Sigma net asset value on conversion – otherwise it’s on a proportional net asset value basis as normal for these kind of transactions.

The cost of this merger is expected to be £620,000, i.e. about 0.5% of the Sigma class fund whose investors seem to be the main beneficiaries (from improved liquidity, a larger fund, and potentially a narrower discount to NAV). It’s clearly also possibly a sensible simplification of a rather complex arrangement.

One has to ask, why not take a more aggressive discount control approach for the Sigma fund rather than undertake the merger? Or perhaps simply wind up the Sigma fund? In that case though as the holdings overlap they may have impacted the prices of holdings in the Sigma fund.

The benefits of the merger are reasonably plain, but Sigma share investors may take a more dubious view as effectively they are losing 2% of their fund value. A narrower discount might result in the short term but discounts widen and narrow based on investor sentiment and can be controlled by other means.

This is by no means a clear cut voting decision for Sigma holders (but it seems generally a straightforward decision for Ordinary holders). In effect, as many investors will hold both we may see some tactical voting where some Sigma holders vote for it simply because they hold both classes.

But the author of this piece intends to attend the General Meeting and hear the arguments before making a final decision (he happens to hold both classes in about equal values). Those who only hold one class have a simpler decision to make.


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ShareSoc 26th Nov '12 205 of 431

Posted by ShareSoc at 13:33, November 26 2012.

ShareSoc Launches AIM Company Rating System (Scorecard)

ShareSoc has been concerned with the quality of companies on AIM for a long time. It is difficult for investors to tell good companies from bad, particularly in the AIM market which is full of dross. ShareSoc has invented a simple way for you to differentiate between good and bad and we have now made this publicly available. It's a "Scorecard" that anyone can use to rate companies, with a particular focus on the point of view of individual investors.

Go to this page of the ShareSoc web site for more information and a copy of the Scorecard:


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ShareSoc 28th Nov '12 206 of 431

Posted by ShareSoc at 15:43, November 28 2012.

ShareSoc Opposes Major Changes to the Retail Price Index

ShareSoc has submitted a response to the public consultation on “improving the Retail Prices Index (RPI)” in which we oppose major changes. In reality a large change to the index would threaten the returns obtained by investors on index-linked gilts and savings certificates, plus also the income of pensioners which are often indexed by RPI. We are opposed to completely changing the basis of the index or making it the same as CPI because this would also reduce technical comparability with previous time periods. Consistency is one of the key foundations of any index. However we accept that changes made a couple of years ago undermined the basis of the index and therefore have accepted that some minor revision to remove that bias be made.

See for our full response.


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emptyend 28th Nov '12 207 of 431

In reply to ShareSoc, post #206

We are opposed to completely changing the basis of the index or making it the same as CPI because this would also reduce technical comparability with previous time periods.

...err....why is that relevant at all?

In reality a large change to the index would threaten the returns obtained by investors on index-linked gilts and savings certificates, plus also the income of pensioners which are often indexed by RPI.

Actually that remains to be proven. If housing costs (mortgages, insurance, council tax etc) and other things In the RPI basket but not CPI  (such as TV licences and vehicle licence costs) should happen to see less inflation than the CPI basket, then it wouldn't be impossible for RPI to be less than the CPI. Clearly that hasn't been the case in the recent past - but it might be in the future.

The main reason that the RPI should go is that it is statistically flawed due to the "formula effect" which creates an upward bias to the index.

There may, however, be matters of contracts based on the RPI - and those would be more difficult to deal with and there may be valid grounds for complaint.

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marben100 28th Nov '12 208 of 431

In reply to emptyend, post #207


If you read our response, you'll see that we acknowledge the "formula effect" and recommend one of the ONS's suggestions for dealing with it - which still leaves a degree of continuity/comparability with past index values, and does not throw out the baby with the bathwater.

Investors are entitled to expect that the basis of their RPI-linked contracts with the government will not be fundamentally altered.



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emptyend 29th Nov '12 209 of 431

Investors are entitled to expect that the basis of their RPI-linked contracts with the government will not be fundamentally altered.

This is an interesting point - and the precise reason why I said ".....matters of contracts based on the RPI - and those would be more difficult to deal with and there may be valid grounds for complaint."

The reason I say it is interesting is because past RPI-linked returns have included the statistical flaw from the formula effect, which can never have been anticipated by owners of such assets (including me, incidentally). Accordingly taxpayers have paid more than they should have and investors have received more than they should have....albeit that the index was calculated in good faith. If the Government then decides there is a better way to calculate the movement in retail prices, then why should investors be allowed to keep their past erroneous gains? There is a case for saying that "the RPI is the RPI" published - and NOT for claiming that the formula itself is somehow sacrosanct.

If one takes the view that RPI indexed contracts should not be altered (as you suggest) then where will that leave ShareSoc's position when it comes to the vastly larger market in LIBOR-linked contracts? The method for setting LIBOR in these was quite clear - and was specified as "BBA LIBOR" in most cases, which had a clearly defined process under which it was set.......

....yes of course it now seems that attempts were made (over quite short periods of extreme market turmoil when prices and rates were intrinsically uncertain to an unprecedented degree) to "fiddle the inputs" but, because of the controls inherent in the BBA process, it is probable that these "attempts to fiddle" had no actual impact on the LIBOR setting in most cases (due to outliers being discarded) - and a very minor 0.01% or so impact in the worst cases.  And yet it now seems likely that the process by which LIBOR will be set will be fundamentally changed as a result of that malpractice during a few high-stress weeks in what is clearly fast becoming a bygone era in terms of banking culture. Is that going to be "fair" on all of those who hold the trillions of pounds/dollars/euros/yen etc based on LIBOR rates to arbitrarily change the way that LIBOR is set?



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Roger Lawson 30th Nov '12 210 of 431

In reply to emptyend, post #185

Not sure why this has just come to my attention, but a share buy-back is obviously not a case of the company investing in itself. Cash is being taken out of the company and given to shareholders who sell the shares in the market (which are bought by the company). There is therefore dis-investment by the company in its own operations!

Website: Roliscon
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ShareSoc 6th Dec '12 211 of 431

Posted by ShareSoc at 09:41, November 29 2012.

SIPP operators’ capital requirement – far too low!

Did you realise that the operator of your SIPP might only need a minimum regulatory capital of £5,000? Yes that is the current level imposed by the FSA on small operators. Obviously this would be a grossly inadequate requirement to cover the cost of recovering clients’ assets if a SIPP operator got into financial difficulties (as we know from what happens when brokers and other financial institutions fail such as Lehmans, MF-Global, Pacific Continental, etc). The FSA is proposing to introduce new rules which impose a much higher requirement – a £20,000 minimum with a graduation upwards for larger funds. For example assets under management of £10m would require capital of £63,000 and for £100m it would be £200,000 under the proposed rules. In addition if any of the assets were “non-standard” (in effect unlisted securities or other illiquid investments), then an additional capital requirement would be imposed.

ShareSoc fully supports the proposals and has submitted a response to the public consultation on this matter which can be read here:


Newsletter: ShareSoc Informer
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About ShareSoc


ShareSoc is dedicated to the support of individual investors. Our aim is to make and keep you better informed so as to improve your investment skills, and protect the value of your investment. We won’t shirk from tackling companies, the Government or other institutions if we think you are not being treated fairly. more »

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