Small Cap Value Report (Mon 8 April 2019) - Market comment, KWS, IPX, LSR/THAL, TLY, AUK

Tuesday, Apr 09 2019 by

Good morning!

Let's see what the RNS has in store today.

A few announcements worth commenting on:


Market comment

I thought I'd take a step back for a moment and point out that the FTSE-100 is up by over 700 points this year - what a result! Up by 10.7% so far in 2019, or 12% including dividends.

During this period, GBP has actually appreciated against the US Dollar and the Euro.

So the gains have been spectactular and not caused by currency depreciation.

Also worth noting that retail fund flows have been weak/negative in the first couple of months of the year. This suggests to me that the buyers have been big, institutional money. Retail investors will follow later.

As for the rationale behind all of this bullishness, markets seem to be pricing in a long delay to you-know-what. Since big money loves certainty, I think they are taking the view that nothing is going to happen for the foreseeable future, and maybe never. As far as they are concerned, then, it's "safe" to pile in to UK equities again and return the FTSE to its pre-referendum trajectory.

Please note that this is just speculation on my part! - but I have seen broker notes expressing a lot of confidence that there will be a long delay and/or a second referendum. So I think this is what institutional money currently expects. They have been wrong before, of course!

There's also the small matter of interest rate expectations collapsing, bond yields tightening again, and other major equity markets rallying hard, too. The S&P 500 Index has gone up almost in a straight line over the past three months. According to Stocko, it's now on a (median) trailing P/E ratio of 21x and a forecast P/E ratio of 17.5.

As usual, the US markets carry a significant premium to the FTSE, whose forecast P/E ratio is just 14x.

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All my own views. I am not regulated by the FSA. No advice.

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33 Comments on this Article show/hide all

Graham Neary 8th Apr 14 of 33

In reply to post #466956

Hi ram, I have checked the AIM 100 and I also get a result of 10.2% year to date (as of last night), and more than 11% for the FTSE-250.

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jesseowens 8th Apr 15 of 33

Worth pointing out that Impax Asset Management (LON:IPX) forecasts from Equity development were reduced earlier in the year towards a year end AUM of £14bn. Now that end of March AUM is £13.3 bn , net inflows of £520 million in the previous quarter, and a reasonable expectation of 7% market gains in the remaining 9 months of the year, this forecast might now be too conservative. With the operational gearing in the business IPX may well be on a lower rating than appears from current Stocko forecasts

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laurie 8th Apr 16 of 33

In reply to post #466991

Re: compensation due to failed brokerage

Yes, the FSCS website does say that the compensation is for bad advice, and the compensation amount for a failed brokerage (e.g. Beaufort) has vanished from the website. This is why I asked specifically about the compensation level available for non-advice, execution only brokerages. The amount guaranteed by the FSCS (in cash and shares) was £50k before April 1st. According to someone at the FSCS, this has been raised to £85k. I asked for a transcript of the conversation but this has not appeared. I am willing to attribute this to technical failings on the site and/or an unwillingness to put anything in writing. (I have had issues with the FSCS being deliberately unclear in the past.)
If enough people ask the folk at the FSCS what the current compensation level is for a failed brokerage, perhaps they will be inspired to publish the amount on their website. is where the missing information should be.
Please let me know if you get a different answer.

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Laughton 8th Apr 17 of 33

In reply to post #467011

Re: compensation due to failed brokerage

Noticeable that:-

"in respect of a UK-authorised bank, building society or credit union that fails, we’ll automatically compensate you".

But, in respect of everything else:- "We may be able to compensate you"

And, the "everything else" doesn't include brokers where no advice was given.

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jombaston 8th Apr 18 of 33

I suspect the ED numbers for Impax Asset Management (LON:IPX) did not assume the market appreciation we have seen so far this year.

Impax Asset Management (LON:IPX) were also awarded a large mandate from West Midlands Pension Fund which will not have been funded yet so is not in the figures (my assumption but it was only in the press mid-March).

So I agree with Jesseowens that $14bn could be exceeded by year-end. Personally I'm also glad to see Pax has stabilised.

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GUYUKTRADER 8th Apr 19 of 33

I wonder what is the real significance of the 10/12% rise this year - I have read in several places how this or in other markets is a great quarter (is it?).

But in context to me it is no more than a marginal recovery play and not that exciting (yet). In May 2018 the FTSE had an intraday high of 7900 and in Dec a low of 6539 something like a 17%/18% drop the FTSE market today has barely surpassed the 200 moving day.

I am not complaining as the past quarter has been good to me just an observation of context and where the market may head next.

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sharmvr 8th Apr 20 of 33

A thought on FSCS and apologies if this is sucking eggs, but have some background on regulation (not FSCS specifically) so tend to keep abreast.

FSCS is in the event that a financial services provider goes bust, and covers for 85k (€100k actually), which is why the £ amount changes.
The €100k applied to deposit / savings and the amount for brokerage was £50k, which I believe has been increased to the same as for savings / deposits.
Basically, FSCS is targeting the value of client money / client assets held, not the cost / gains / losses of those assets.

I feel the need to share this in light of recent (what I consider) scams, where sellers of mini-bonds / diamonds / other hideously illiquid assets, have told me that my investment is protected under FSCS (of course they use the term guaranteed!)
As I expect we all know on this thread, the compensation scheme applies to the custodian of the assets, not the assets themselves, so if you lose 50k in bad investments, the FSCS does not care.

Where you were sold an inappropriate investment, the advisor can be held liable, but this would be a matter for the advisor. As far as I am aware, there is no upper / lower limit for this and if people fail to reach agreement, it would be escalated to Ombudsman and then court.
The Ombudsman itself has a cap I believe on what level of pay out they can impose on the advisor / insurer.

Where execution only, obviously no advisor to go after, so if investment goes south, so does your capital.

My sincere apologies if the above is a "how to suck eggs", but I think the clarifications above are important, especially where the community here is probably substantially more knowledgeable than the people FSCS is trying to protect.

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jonesj 8th Apr 21 of 33

In reply to post #467011

1 As the FSCS do not appear to explicitly say stockbrokers are covered on their website (as flagged by Laurie, above), I have e-mailed them to ask about this, as suggested by Laurie.
This kind of thing should be very clear on their website - ie a definition of what is and what is not covered.

2 As far as I know, schools do not teach subjects like personal finance or economics, but have taught some very questionable & lower value subjects for decades (probably centuries).

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Silver Moon 8th Apr 22 of 33

Graham, I'm relatively new to this game and since my shares are in a nominee account, probably like many LSR private shareholders, I find it difficult to place a vote on resolutions. I wonder though why it is that the LSR board of directors don't seem to want to make a go of the business. Also, who is going to receive most benefit should the Company achieve its liquidation? I do hold THAL.

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sharmvr 8th Apr 23 of 33

In reply to post #467071

Just got an update on this from a colleague:

FSCS does cover investments and as of April 2019, the compensation covers 85k worth of investments. Watch this space for updates to the website.
That said, if a broker / bank ceases to operate, the administrator is not able to use client money to cover administrator fees, BUT THEY CAN USE CLIENT ASSETS.

How the use of client assets to cover fees squares with the £50k (now £85k) guarantee she is not clear - i.e. would only clients with assets above £85k be hit by client asset sales for administrator fees, or how they would select which / who's client assets are to be sold.

As far as education is concerned, personally I find it a travesty of justice (and our taxes) that personal finance / financial management are not part of the national curriculum, while other subjects (insert rant) are.
I think my nephews would benefit more from learning the basics of finance than the intricacies of plant biology, but then again, all my plants are dying!

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Fegger 8th Apr 24 of 33

Martin Lewis has done his best to put financial education into schools. This is the Moneysavingexpert article giving details and where to download the textbook (very good by the way):

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back2value 8th Apr 25 of 33

Not to deny index performances, but I haven't noticed much improvement in my portfolio recently. Everything I have bought seems to have been ill-timed, or has failed to recover from falls last year. Cases in point being Flowtech Fluidpower (bought just before a market overreaction to weaker-than-expected results), Northern Bear (drifting steadily downwards despite apparent good performance), Treatt (has gone virtually nowhere for the whole time I have owned it) and Air Partner (went great guns at first, knocked down by an accounting error - groan - and has then never really recovered despite its house apparently being put in order).

My only recent successes have been Watkin Jones, Somero and XP Power.

Grumble over


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laurie 8th Apr 26 of 33

In reply to post #467096


Thank you, all, for confirming the new FSCS £85k compensation limit.

During the administration of Beaufort, the FSCS paid the (shocking) administrator's fees for accounts within the £50k compensation limit. I add some informative paragraphs taken from the FAQ from the Beaufort administration:

Shortfalls will be covered by the FSCS if you are eligible; the FSCS provide compensation for amounts up to £50,000 across client money and client assets taken together, less your share of certain costs

I have a vague memory that this share of certain costs was c. 10% of assets, but this could be incorrect. 

There are insufficient resources in the Firms to pay for the costs of returning assets to clients. Therefore these costs will need to be deducted from clients’ portfolios in accordance with Rule 135 of the Investment Bank Special Administration (England and Wales) Rules 2011.

Before this administration, I assumed that £50k compensation meant that it was reasonable to have £50k in a brokerage account. If fees during administration are 10% of assets held and it takes c. 6 months to regain access to the shares during which time, ideally, they are rising in value, £50k would not keep one under the compensation limit.

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Fangorn 8th Apr 27 of 33

In reply to post #466871

World’s biggest wealth fund piles billions of pounds into Britain after taking 30-year bet that UK economy will be STRONGER after Brexit"

The fund is one of the biggest foreign investors in Britain, as a co-owner of London's Regent Street, as a top five owner in firms such as HSBC and BP among others.

Norway's £740bn sovereign wealth fund has 8% of its total invested in Britain

World’s top wealth fund puts billions into Britain
UK will be stronger after Brexit, Norwegians say

UK's biggest investors bet on the British economy in Brexit show of faith

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gbjbaanb 8th Apr 28 of 33

In reply to post #467086

The LSR directors made it clear that they were going to liquidate the business a long time ago. they might have seen the writing on the wall for retail back then! So they've been selling off property as they go, everyone knows this, the LSR shareholders voted in favour.

Its only Duncan who is not happy, and frankly I can't see why he'd want the business as a going concern as there are less than a dozen properties left (he'd be better off buying them as they are sold!). It does have a load of cash (28p per share) that it was going to hand over until Duncan started the action.

IIRC all Nominees will let you vote, but some are much better at it that others. Selftrade only lets you if you tell them directly, II has a section with buttons for each resolution to vote directly.

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John Gibson 8th Apr 29 of 33

Hi Fangorn,
Thank you for those links.
I must admit I didn’t see anything there that supports the view that this country will be stronger after Brexit.
A foreign wealth fund taking advantage of a devalued pound and an under valued stock market to buy companies with international earnings that could easily relocate their headquarters.
As a thought experiment, imagine Britain was buying up other country’s companies while they were going through a similar period of domestic turmoil. Would it make sense to declare that as a positive for the country involved?

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PJ0077 8th Apr 30 of 33

In reply to post #467191

Fair point John

Moreover for liquidity reasons, a £740bn wealth fund would naturally be buying into FTSE-100 companies rather than the mid/small/micro UK companies that will bear the brunt of a hard Brexit.

So this Norwegian inflow has little/nothing to do with Brexit - just a media headline.

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peterg 9th Apr 31 of 33

In reply to post #467161

All they are betting on is that Britain will make money for them over 30 years. That tells us nothing itself about Brexit. And if we believe May and the Brexiteers it may never happen, so they are perhaps betting on Britain doing better in the EU?

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Silver Moon 9th Apr 32 of 33

In reply to post #467186

Many thanks gbjbaanb, I'll get on to the Share Centre as it's something I should be engaging in..

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dealtn 9th Apr 33 of 33

In reply to post #466911

Why is buying Index Linked Gilts at a price significantly above par a good idea exactly? Unless you want to guarantee yourself a loss in wealth and purchasing power.

I can think of many better ways of providing for my future than spending a pound to buy fifty pence pieces.

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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