Derek Pain: Reckless managers are destroying value

No Pain, No Gain

The behaviour of some fund managers can be quite astonishing. In the past few weeks Scottish Widows, part of the Lloyds Banking Group, has ruthlessly dumped almost 20 million shares in Nighthawk Energy. Its action devastated the oil and gas group's shares and caused considerable grief to the no pain, no gain portfolio.

I watched with some bewilderment as the shares, portfolio constituents for nearly three years, plunged to about 20p. The group's recent production update disappointed some followers but surely the crashing share price was an acute over-reaction?

Like others, I wondered whether Nighthawk had suffered a dramatic setback and a bombshell announcement was imminent. But no. The only message from the US-focused group was its half-year trading statement which, although reporting a sharply higher loss, was generally upbeat.

The slump, it seems, was entirely down to Scottish Widows. It revealed its stake of roughly near 20 million shares, which it inherited last year, had been cut dramatically and observers said the remaining rump had subsequently been eliminated.

This episode, with shares flooding on to an already saturated market, could have been avoided. Suggestions from the Nighthawk camp, including stockbroker Westhouse, that an orderly placing could be arranged were ignored.

I believe the fund manager would have extracted a higher price for the stake if it had played ball with the Nighthawk interests. Simon Cawkwell, aka Evil Knievel, the most well known short-seller in the City, said: "I do not understand what is going on at Scottish Widows since this reckless winding down at any cost is, in practice, hopelessly destructive of value". Informed opinion is that a placing could have been conducted at 26p to 28p a share. I estimate that much of the Scottish Widows' stock produced prices in the lower 20s.

The actions of some fund managers is attracting increasing criticism. The UK Shareholders Association (UKSA), which represents individual investors, blames them for meekly allowing the high rewards that many directors receive. It points out that directors of second-line companies expect higher pay packets than the Prime Minister, with bonuses and favourable share options on top. Increases in directors' pay, the UKSA claims, have easily outstripped progress in average earnings for at least 25 years.

I realise there are many who earn their money and can be proud of their achievements, but there is often a willingness to accept City injustices and succumb to herd-like instincts.

Tom Winnifrith, the chief executive of Rivington Street Holdings, has encountered a devastating example of small cap arrogance and greed. As a fund manager – the group has £20m under management – he complains that many of his rivals are prepared to accept situations most private investors would reject.

He tells the story of a company he describes as a "serial destroyer of value" that met with him to discuss its switch into a sexy new line of business which would require a significant cash injection. The new managing director was on £90,000 a year with shedloads of options. He survived the Winnifrith scrutiny, but the latter was appalled to discover that, in addition, the company's non-executive chairman commanded a £120,000 yearly salary. He described wages totalling £210,000 at a tiny business as "taking the piss". He added: "The surprise was not that the chairman was cross with me for asking a fair question [about salaries] but that he appears never to have been asked it before."

Rivington's fund management side is a relatively new creation, so former City journalist Winnifrith is something of a new boy on the block. He has, he says, been warned "not to rock the boat" or his group could be cut from share placings.

Fund managers, because they come in all shapes and sizes, are collectively an easy target. It must also be remembered they can have different objectives, ranging from short to long term and capital appreciation against income.

But, as the City's most powerful investors, their inability to dampen excessive pay packets at both Footsie stocks and small caps is a telling indictment of their lack of determination to ensure that the best interests of all shareholders are served.

Maybe many fund managers are just overpaid. That could be the explanation for their humiliating acceptance of a non-executive chairman at a tinpot company claiming £120,000 a year.