Small Cap Value Report (Fri 9 Nov 2018) - VCP

8th Nov '18 by Paul Scott

44 comments 9404 reads

Good evening/morning, it's Paul here!

Sorry about yesterday's report being essentially empty. I trudged into the City to see Geoff Wilding of Victoria (LON:VCP) instead, which seemed a more useful use of time. It's an interesting & topical subject. Bullet points of our meeting;

I was late, so we only had time to rattle through the Qs which our readers here submitted earlier this week. Geoff commented;
Share price, even after recent fall, is up 2927% since 2012, so shareholders are happy
Day-to-day business is unaffected by recent aborted bond refinancing
Bond issues get pulled all the time, it's not a big deal
"Open goal for those with less than pure motives to spread outrageous untruths" - I asked directly if this was directed at me or Graham? Absolutely not. Apparently there have been negative market rumours, which this was referring to. Geoff said that he hadn't seen my commentary. "That's probably a good thing", I quipped in reply

We then went into Q&A, me asking the Qs that readers submitted here earlier this week, as follows;

Tristan - Debt fuelled acquisitions need to slow down. Accounts difficult to interpret.

A: VCP is in debt reduction mode now. Focus is on organic growth & paying down debt. 99% cash conversion. Annual Report explains the business model, so a little frustration. Understand that shareholders need reassurance.

Carcosa - what are your key assumptions? What trade-offs are inherent within your strategy?

A: (pause) Err, I'm happy to answer any questions, but I have to understand the question!

me: (pause) yes, I have no idea what those questions are about either. Let's move on.

Pippasfan - the Board is all male. What about more diversity on the Board?

A; (perplexed look) We're an equal opportunities employer. We just employ the best people for the job, and don't care how they look, or what colour or gender they are, etc.

Me - why did terms of bond issue deteriorate last week?

A: because the share price fell. Not ruling out bond funding in future. Business model is to use bank funding to make acquisitions, then refinance as needed. Nothing wrong with the business, could go back to bond market in future. In debt reduction mode now.

Markids28 - what impact will a slowing economy have? VCP is diversified - 30% UK, 20% Australia, 50%…

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timarr

10th Nov '18

I don't think the data support your position. Diversity is just a modern "religious" credo.

That data doesn't really show anything. Perhaps a small decline in performance. But currently for a woman to force her way onto a board she's probably got to exhibit the same traits as her male colleagues, so little actual diversity in behaviour anyway.

And as for Norway, and other experiments in positive discrimination, if you promote anyone without the experience, skills, training or support to a senior role it won't lead to good results. And if you impose quotas that's what you'll get because the pool of senior female talent is small to start with. It doesn't prove anything about diversity, it just shows that imposing quotas in this way is a stupid way of addressing this kind of imbalance.

But this doesn't need to be about diversity improving performance - although I suspect it would, if you were selecting from 100% of women instead of 5% - the point is that it's wrong. Women form 50% of the population and 50% of the workforce and 50% of the brainpower. If they're not forming 50% of the management cadre it suggests something is off and if existing managements don't acknowledge this and start acting to do something about it by changing their company culture to actively recruit, train and support female talent it won't ever get any better.

Or do we believe that men are genetically better at running corporations?

underscored

This has nothing to do with ability and everything to do with preferences and interests. Men and women are different in preferences and interests.

https://en.wikipedia.org/wiki/Sex_differences_in_psychology#Personality_traits

At the same time it is a fallacy to say the because you are male/female individual your interests must be aligned with the group average of male and female.

bwakem

If the best interviewee for the position was a man then why would you employ a woman instead? Once you start employing people to tick boxes and fill quotas, everybody will be thinking "is she here because she know's what she's doing or to tick a box?", she may even start thinking that herself.

If these quota systems become common place (and it doesn't just apply to gender) then what message does that send to young girls? That they don't need to bother working hard, they'll get gifted high-paying positions. And the message to young boys - no point in trying. Bored young men unable to fulfil ambition because of lunatic PC quotas is what fuels crime and violent crime.

Let everyone stand on their own 2 feet.

The only sensible way to run a business is to employ the best person for the job. That is what I did. As it happens, of the 65 employees I had when I sold, more that 50% were female (sorry, don't have the exact figure). But you find that men and women prefer very different jobs, so most of sales ended up male and most of customer service female. That's just how it is.

Personality traits are atheoretical - there's no theoretical basis for the concepts. The output is - ironically, given the nature of Stockopedia - based on factor analysis. But that doesn't prove any underlying genetic basis for the traits, only that the way behaviours are expressed tends to follow these trends and there's not much evidence that those trends are genetic rather than social in nature.

Sociobiology - which is basically what this is - is mired in controversy because it all too often proves whatever the researchers set out to prove. In fact separating nature and nuture is like trying to unbake a cake - for example, we know that men have better spacial awareness and map reading skills than women. Only it turns that this may actually be a facet of the way the tests are presented, rather than any real underlying difference:

(As an aside exactly the same problems have been found with tests for loss aversion - the experiments of Tversky and Kahneman works in the lab, but John List found it reverses in real life once people gain enough experience - the result may be a facet of the way tests are presented).

This type of bias starts as soon as parents are aware of a baby's gender and express themselves throughout life. Loosely, girls are brought up to be communicative and gravitate towards social professions, men to be less expressive of their feelings and more likely to work in areas that require less emotional involvement. Could there be a genetic component to this? Yes, possibly. Is it all nature? No, how could it be?

So, yes, it's quite likely that if corporate cultures are male dominated women will express a preference for going somewhere else and doing something else. But genetically they still constitute 50% of the brainpower and 50% of the smartest people. Sensible companies are working towards addressing their cultures to help address this imbalance. But corporate cultures start at the top - as the Italian phase has it: "the fish rots from the head down".

No one on this thread has so far suggested that quotas are a good idea. No one. No one at all.

I am very sceptical of the idea that we are born blank slates that culture imprints with roles. Whilst there is clearly some role for culture to modify behaviours, for something as fundamental as sex difference this is an implausible hypothesis.

Treating otherwise male children as female, fails to instil in them a belief that they are female... https://en.wikipedia.org/wiki/David_Reimer

I'm not quite sure what that means. I'm certainly not trying to argue that men and women are born identical and that everything about us is subsequently determined by upbringing. In particular the evidence for people's sexuality being largely genetically defined is quite strong - for instance, gay conversion therapy has a very long history of not being very successful.

The David Reimer case was a disgrace and John Money, the therapist behind it, had some views that these days would probably have had him arrested, if the lynch mob hadn't got to him first.

But if the underlying argument is that women have a preference for avoiding senior management roles for some combination of genetic and social reasons I can't agree. They almost certainly have a preference for avoiding companies with an overly male dominated culture - that would be partly economic (if you figure you can't get promoted you'll go elsewhere) and partly preference (you'd prefer to work somewhere less macho).

And the argument is that that is ultimately a bad thing for the company, as they have a reduced talent pool to recruit from. I don't really see why that's a controversial position?

"But if the underlying argument is that women have a preference for avoiding senior management roles for some combination of genetic and social reasons I can't agree. They almost certainly have a preference for avoiding companies with an overly male dominated culture - that would be partly economic (if you figure you can't get promoted you'll go elsewhere) and partly preference (you'd prefer to work somewhere less macho).

And the argument is that that is ultimately a bad thing for the company, as they have a reduced talent pool to recruit from. I don't really see why that's a controversial position?"

Part of the culture of senior management is allowing your position in the company to consume you. You have no other life, no time for non-work friends, no time for family, no time for sleep. If you won't do it, someone else will, and it is not credible to propose that a highly talented part-timer will be able to compete with a highly talented obsessive that has sacrificed everything.

I work in a STEM industry with significant gender equality and we still have the same culture among the senior management - even when they are female, otherwise our competitors would crush us. I propose that such extreme sacrifice is not too healthy and far more likely to exist in males than females.

mmarkkj777

I completely agree with Timarr on this one.

Its a combination of genetics, upbringing and personal interest leanings, that make up the whole number.

I could believe that men have better spacial awareness and navigation, due to thousands of years of hunting, etc.

I can also believe that women might have a tendency to be better at multi-tasking, because historically, women have tended to organise everything in the household.

BTW. I'm not stereo-typing , these are just examples. Animals are shown to have elements of skill and retained "memory" from birth. to allow them to do things instinctively. Why would humans be any different?
The simple fact is, as far as overall ability is concerned, women are as good as men. To be a good Senior you need to be an all-rounder, that may make women better, who knows?

What I do know is that there should be more genuine opportunity for women in senior business roles without needing to resort to positive discrimination.

11th Nov '18

I work in a STEM industry with significant gender equality and we still have the same culture among the senior management - even when they are female, otherwise our competitors would crush us. I propose that such extreme sacrifice is not too healthy and far more likely to exist in males than females.

Yes, but it's never safe to draw general conclusions from personal experience - that's the base rate fallacy.

For instance: my experience across 30 countries over 30 years, primarily in finance and IT, that the general standard of senior management is, at best, average. Those companies that demand long hours and personal sacrifices don't seem to generate better results. By and large most people muddle along and by and large success is more due to economic conditions, a bit of luck and very often a good moat, often acquired by accident.

But that's my experience, and I've no idea whether it's more typical than yours.

As for your comment on "part-timers", I can only guess that's an oblique reference to the fact that women have babies and men expect them to look after them. Well, the former's an undisputed biological fact but the latter isn't. Declining fertility rates across the world are testimony to the choices women are making - less babies, born later in life:

https://www.thelancet.com/jour...

The future isn't being made in boardrooms, it's being made in bedrooms.

"women have babies and men expect them to look after them" - I believe Charlie Munger said to invert. Try "Women have babies and expect to look after them (i.e. spend time with their children)."

I find the narrative that women spend time with their small children only because men make them very odious and in denial of biology.

Fertility is a problem, that is compounded by the narrative that we all need to optimise our lives for economic production. All else is worthless.

I find the narrative that women spend time with their small children only because men make them very odious and in denial of biology.

The point was I'd already inverted the usual argument, that women are biologically driven to look after their children ... :)

But let's try that another way: why don't men spend an equal amount of time looking after their children? Is that biological too?

Meanwhile the link between fertility and economics is more complex than you might suspect. From that Lancet report:

An important debate in the medical literature about the decreases in fertility has been regarding the relative contribution of declines in the under-5 mortality rate, women’s educational attainment, and the availability of reproductive health services, particularly modern contraception methods.

Most of those things are somehow correlated with economic growth, although there's a definite chicken and egg problem - as the late, great Hans Rosling showed it rather looks like economic growth really kicks off after fertility rates fall and fertility rates fall after child mortality rates decrease.

Basically if we want global population growth to level off we need to promote a narrative of economic growth everywhere. To get that we need reduced fertility. Basically the economic narrative - which in the developing world is about seeing less of your children die - is the only thing between us and an unsustainable population.

Always assuming we don't accidentally set the planet on fire first, of course ...

Whitbourne

Wow, I had no idea my comment would start such a debate - thanks Timarr and all those who contributed.

I work for what used to be DTI, now BEIS, and spent some time on this issue. The FTSE 100 has gone from having an average of 12.5% women on boards in 2010 to almost 30% today. That has been achieved by a business-led campaign involving both men and women. Two of the greatest champions have been Sir Philip Hampton (GlaxoSmithKline and RBS) and Lord Mervyn Davies (Standard Chartered and Diageo) together with Dame Helena Morrissey (Newton, L&G) and the late Dame Helen Alexander. I am just saying this to emphasise that it's widely recognised as a genuine business issue, by people with top-level experience.

Underscored says there are two possible causes:

#1 All boys clubs are keeping the women out. #2 Women are not inclined to make the journey to the top

Both are true, according to our research.

I have never heard anyone in business advocate quotas, although some politicians and pressure groups did. We spent years in Brussels successfully arguing against them. They are a harmful distraction, in my view.

Of course, the selection panel should always appoint the best candidate. The questions are: has the panel worked hard enough to ensure that the widest possible range of candidates is actually applying and is it using the right criteria to determine what 'best' means?

The debate in this thread mirrors the conversations we had. In particular, those in favour of increasing the propertion of women were split roughly 50:50 between "the evidence and/or my experience say that this will improve the company's culture and performance; it's a business issue" and "the evidence is flaky, the reason for doing this is that it's the right thing to do; it's an ethical issue."

The strongest argument against is the one made by underscored:

Part of the culture of senior management is allowing your position in the company to consume you. You have no other life, no time for non-work friends, no time for family, no time for sleep. If you won't do it, someone else will

That's not an attractive career offer for most women, and many men. However if you believe that this approach is necessary or even desirable, then it's true that senior management is likely to be male-dominated.

Finally, Timarr expressed the original point much better than I did:

you'd have to have been living in a monastery to have no awareness of the groundswell of support for more female managerial participation and the reasons behind it.

I could respect a reasoned, thought-through argument for why that 'groundswell of support' is misguided or why the issue is not a priority for Victoria (LON:VCP) - it was Mr Wilding's dismissive attitude to the question that I found objectionable.

PS the latest report on this issue is due to be published on Tuesday https://news.sky.com/story/fts...

Thank you. That is an instructive response.

Fangorn

If you have an all-male board and take no positive action whatever then it will be a self-perpetuating club and the company will be worse off for it.

It's slightly surprising that, at one point, 5 readers had given your post a thumbs down. I wonder if any of them would care to step forward and explain their rationale?

Because many of us don't go in for this politically correct diversity gender drivel

I say that as one who didn't even vote on such post.

We have gone beyond farce to utter tediousness.

Most people want the best person qualified for the job, they aren't interested in ticking diversity boxes and being forced to do such is outrageous.

As to being told we have to accept gender fluidity. Anyone that tries to force me to believe such can get stuffed...

There are two reasonable hypotheses as to why there are a low number of females in senior positions. #1 All boys clubs are keeping the women out. #2 Women are not inclined to make the journey to the top.

You miss one.

Many simply aren't good enough.

My personal suspicion is that it is often they no 2 and they simply aren't as competitive/aggressive.
(Average man : Average woman)

No, a change in attitude generally and it’s probably going to take a long long time.

Not a comment about this particular company because I don’t know the circumstances, but applies in general.

TQ12

"I've got £100m riding on this personally, so I'm risk averse" is indeed correct; however, given all his shares (he recently sold another £60m worth) were accumulated in lieu of incentive pay doesn't suggest that shareholders are all eating the same cooking.

12th Nov '18

Many simply aren't good enough ... My personal suspicion is that it is often they no 2 and they simply aren't as competitive/aggressive. (Average man : Average woman)

Just as many men aren't good enough. Why is having an incompetent male manager any better than an incompetent female one? Really good managers are hard to find, better to select from the biggest pool possible.

But your "personal suspicion" is almost certainly not evidence. As it stands it rather sounds like old-fashioned misogyny unless you have some hitherto unrevealed qualifications in biological determinism as it applies to management roles in modern capitalist corporations.

But anyway, it doesn't really matter what you think. It's happening and there's nothing you can do about it.

Small Cap Value Report (Fri 9 Nov 2018) - VCP

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Paul Scott

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