Irregular Roundup, 29th April 2024

We begin today’s Irregular Roundup with fund restrictions for retail investors.

Fund restrictions

For Citywire, Jamie Colvin wrote about AJ Bell’s decision to restrict access to certain funds for retail investors.

• Out-of-favour investment trusts have been labelled “poor value” and removed from online trading.

The funds affected included:

• Chrysalis Investments (CHRY)
• Bluefield Solar Income (BSIF)
• Digital 9 Infrastructure (DGI9)
• Cordiant Digital Infrastructure (CORD) and
• Amedeo Air Four Plus (AA4).

Some platforms have interpreted the new consumer duty regulation from the FCA as requiring them to warn customers of the risk of poor returns.

Oddly, all these funds are based in the Channel Islands and are therefore exempt from providing fair value reports.

• Instead, external consultants (360 Fund Insight) carried out the valuation exercise on behalf of AJ Bell.

Bizarrely, investors could still trade the instruments by phone (and would only be charged the online fee of £5 rather than the regular phone price of £25) – though they may not have known this.

Jamie points out the obvious issue that restricting the purchase of deeply discounted funds could lead to further selling, depressing the price even further.

AJ Bell said:

Notifications were issued following fair value assessments and unfortunately in some cases administrative errors resulted in customers receiving incorrect messages. 

The assessments consider a range of factors, including cost and performance, in line with regulatory guidance. As with all our processes, it will be reviewed periodically and we’ll continue to listen to feedback from customers, regulators and other stakeholders.

The Association of Investment Companies (AIC) was not happy. Communications director Annabel Brodie-Smith said:

It’s hard to see how restricting consumer choice like this could be helpful for consumers. Surely, it’s up to investors to do their own research and then decide which companies they want to invest in. We have argued in the past for these rules to be changed and we will most definitely be firmly lobbying on this issue again.

You would think so, on execution-only platforms.

• It makes no sense that AIM stocks can be accessed freely but some investment trusts and ETFs cannot.

And of course, ITs on a hefty discount to NAV could well represent excellent value and provide good returns.

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Hargreaves Lansdown has also restricted investors from buying some of the same funds until they pass a ‘complex investments’ quiz.

• It’s a similar process for crypto and leveraged funds and seems fine to me, or at least preferable to pulling online orders.

HL said:

These questionnaires aim to protect clients from poor outcomes, and so provide information on the product type, including some of the associated risks, before  testing whether the client has an appropriate level of knowledge and experience.

Interactive Investors also uses a quiz, whilst Fidelity has stopped new purchases in AVI Global (AGT),
MIGO Opportunities (MIGO), RIT Capital Partners (RCP) and Abrdn Private Equity Opportunities (APEO).

• Existing investors can buy more, which doesn’t make sense to me.

As I’ve said before, it’s worth using a variety of platforms across the various types of accounts (SIPP, ISA, GIA).

• No platform carries every stock or fund, but as long as you can get hold of the instrument you need in at least one account, you should be fine.

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In a follow-up article, Jamie looked in detail at the 360 Fund Insight report on Bluefield Solar Income Fund.

BSIF is not appropriate for private investors because it has ‘worrisome’ borrowing levels and an ‘aggressive’ dividend policy.

He objects to the benchmark chosen by 360, the WilderHill New Energy Global Innovation index which tracks more than 100 renewable energy firms (and a growth/accumulation ETF based on it – GCLX).

Holding shares in a portfolio of over 100 global energy companies is a different investment proposition to a portfolio of actual assets delivering largely inflation-linked, government-backed revenues. Declaring the 8.80p per share dividend ‘aggressive’ is at odds with 360’s observation that Bluefield’s forward revenues from the inflation-linked contracts cover it twice over. 

BSIF itself says the purpose of the fund is to provide a return ‘principally in the form of regular income distributions’. Nor is the borrowing truly worrisome:

BSIF’s borrowing of 41.5% of gross assets is within the fund limits and the sector average and the board has pointed out in recent documents that at a 3.5% fixed rate, it’s pretty cheap.

The comparison ETF (like most ETFs) is barred from using leverage.

• That doesn’t make it a bad investment (it’s certainly cheaper, at 0.6% vs 1.9%), but surely individual investors can decide for themselves.

Bluefield’s portfolio manager James Armstrong said:

Since AJ Bell’s announcement to investors, the BSIF share price has fallen, trading away from BSIF has increased, and many frustrated investors continue to contact BSIF’s company secretary, expressing their confusion.

We’ll have to wait and see whether this is a storm in a teacup or the thin end of the wedge.

• I’m all for disclosure and risk warnings, but banning sophisticated DIY investors from buying a fund is a step in the wrong direction.

Woodford

The FCA has issued a warning notice to Neil Woodford and his firm Woodford Investment Management (WIM):

The FCA considers that during the relevant period (July 31, 2018 toJune 3, 2019) Mr Woodford held a defective and unreasonably narrow understanding ofhis responsibilities for managing [Woodford Equity Income’s] liquidity risks.

Woodford’s lawyers said:

It is striking that the FCA’s only criticisms of Neil Woodford relate to his involvement in matters relating to the fund’s liquidity framework, which was ,in fact, Link’s responsibility and supervised by the depositary. The team at WIM were surprised by Link’s decision to suspend the fund, only being informed on the morning of the suspension [in June 2019].

The FCA also criticised Link Fund Solutions, the administrator of Woodford Equity Income. Therese Chambers, ED at the FCA, said:

Link Fund Solutions’ job was to properly manage the Woodford Equity Income fund and to protect investors’ interests. Their failings led to losses for those trapped in the fund when it was suspended. It is right that they compensate investors for the losses that resulted from their failings, and we’re pleased that the scheme has started making payments.

A Link spokesperson said:

LFSL entered into a conditional settlement agreement on the basis that there is no admission of liability.  We are pleased the scheme has become effective and the initial payment has now been made to investors.

It’s interesting to note that Hargreaves Lansdown has escaped censure, despite promoting Woordford’s fund for years (and right up to the day of its suspension).

Reports suggest it could be another two years before Woodford actually faces any action, making it seven years from the collapse of his fund. Andy Agathangelou, founder of the Transparency Taskforce (TTF) campaign group is exasperated:

We’re verging on the absurd, the ludicrous. Has the regulator performed its  duty satisfactorily and quickly enough? No, it’s not been satisfactory. It’s been sloth-like.

I think what is already known in the public domain is sufficient to consider this goes beyond just failings of liquidity. The FCA is behaving in a way to consistently limit claims on the FSCS.

Ahead of his trial, Woodford has broken his recent silence on the scandal (he was interviewed in 2021 when he was trying to return to fund management). He is pitching himself as a financial commentator, with a new website called Woodford Views. On the blog, he says:

I am neither hero nor villain. I was never the financial saviour of middle England, but then, neither do I think I wasworthy of the onslaught that followed the failure of my business.

This is a tricky call – seven years to punish what appears to be a simple case of a fund investing in (unlisted, illiquid) assets beyond its remit is clearly too long a wait.

• But I wouldn’t want to move to the US model where alleged financial wrongdoing always seems to result in extradition followed by plea bargaining that still often results in substantial custodial sentences.

Buying a few ropey startups is not murder.

Hipgnosis

The board of SONG have agreed to a $1.4 bn cash takeover offer from a Nashville music rights firm I had not heard of, called Concord Chorus.

• The price is $1.16 (93.2p) per share, which is a 30% premium to the previous day’s price.

And since it’s an all-cash offer, I suspect most holders will be glad to see an end to the saga.

Chairman Robert Naylor described the offer as:

An attractive opportunity for our shareholders to immediately realise their holding at a premium. The board is confident that Concord is the right owner to take on the Hipgnosis catalogue and manage it in the interests of composers and performers.

Of course, regulator and shareholder approval is still needed. Bob Valentine, CEO of Concord said:

This offer for Hipgnosis has been unanimously recommended by its board and has the supportof 29.38 per cent of their shareholders. We believe we are offering a fair price. Concord is the world’s leading independent music company, with extensive experience in developing, producing, and marketing recordings and songs around the world.

Labour watch

Rachel Reeves is still keeping her cards close to her chest on Labour’s tax plans, but she has appointed a panel of tax advisors, so we can look at things they have asked for, applauded or opposed in the past. These include:

1. Higher income tax rates
2. Higher VAT
3. Higher corporation tax
4. Higher CGT rates
5. Lower CGT allowances
6. Higher IHT rates
7. Pensions included in IHT calculations
8. Lower investment allowances
9. Lower entrepreneur’s relief
10. Higher NICs (particularly for the self-employed)
11. NICs on rental and investment income, and pensioners (particularly those still in work)
12. Tax return digitalisation

Revves has already ruled some of these out, but you don’t need a weatherman to know which way the wind blows.

Quick Links

I have ten for you this week:

1. The FT said that the Darktrace exit snuffs out another light on the London market
2. And reported on The inequity method of accounting
3. And claimed that Fintech finally starts to add up for investors
4. Apporv looked at The Economics of Generative AI
5. Bridgewater asked Where Can Investors Find Geographic Diversification Today?
6. The Economist said that Tesla faces an identity crisis: carmaker or tech firm?
7. But told us Don’t be gloomy about Tesla and its EV rivals
8. And showed How American politics has infected investing
9. And explained How to fix Britain’s barmy VAT regime
10. Of Dollars And Data asked Why Do People Make “Bad” Financial Decisions?

Until next time.