James Harries has nixed IG from his Securities of Scotland trust over governance concerns after its recent acquisition of US online broker Tastytrade left a sour taste in investors’ mouths.
Harries (pictured) revealed he had made the “disappointing” decision to ditch his 0.9% stake in the UK spread-betting company last month.
The stock had been a constituent of the £200.9m trust since November when Harries took over from Martin Currie following the exit of its global equity income team. It had been a holding in his open-ended £481.3m Trojan Global Income fund since January 2017.
Though Harries said IG’s shares “looked set for some strong performance,” with the current uncertain macro environment just the sort in which the company “thrives”, he was perturbed by management’s decision to go over shareholders’ heads in its recent acquisition of US retail broker Tastytrade.
IG makes largest ever purchase without shareholders’ blessing
IG purchased the online options and futures firm in January for $1bn, its largest ever acquisition, in a bid to expand its toehold in the booming US retail market.
Despite ponying up $300m of cash and issuing a “material” 61 million shares to fund the deal, it was not put to a shareholder vote.
After engaging with IG, including the management team and the chairman of the board, to express reservations about the deal and the lack of a shareholder vote, Harries “received no comfort on either count” and ditched the shares.
“The sale is disappointing as the conditions under which this company thrives are precisely those currently pertaining: macro-economic uncertainty leading to elevated levels of volatility delivering opportunities for market participants to trade,” Harries said.
“Against this backdrop we considered the shares to be inexpensive and well set for some strong performance. Our hope was that excess capital would be used to fund a special dividend or reduce the share count to the benefit of existing shareholders.
“Instead, the management team executed what we think is a questionable capital allocation decision, part-funded by equity, and without seeking approval from shareholders.”
‘Wrong asset, bought at the wrong price, at the wrong time’
He believes there is “a reasonable risk” Tastytrade may see its valuation written down in the coming years.
The price IG paid “represented a full multiple at 8.6x 2020 sales – sales which are likely to have been bolstered by widespread speculative activity seen in the US market among retail investors,” he explained.
“We fear this may turn out to be the wrong asset, bought at the wrong price, at the wrong time.”
Last month Securities of Scotland saw NAV slump by 3.1% and its share price fall 4.7% compared to the 0.6% return for the Lipper Global –Equity Global Income index.
Harries and co-manager Tomasz Boniek had been tasked with building up assets in the trust when they replaced Martin Currie on the mandate in November. But since then, assets have tumbled from £234.7m to £200.9m.
The trust currently trades on a 1.3% discount, according to data from the Association of Investment Companies.
