Alarm at cash pile gambling: Investors fear losses of up to pounds 500m

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The Independent Online
SHAREHOLDERS fear Britain's biggest companies have lost hundreds of millions of pounds from the collapse in bond prices this year. They are increasingly worried about how companies are speculating with their cash reserves.

The concern follows last week's disclosure that Glaxo, the pharmaceuticals group, had lost about pounds 100m from investing much of its pounds 2.5bn cash pile in bonds.

According to one analyst, the 10 most cash-rich companies in Britain alone may have lost as much as pounds 500m if they were each exposed to the bond market in the same proportions as Glaxo.

Many smaller companies, which have been running record cash surpluses in the recession, have also lost heavily in the financial markets.

'There is no doubt that lots of companies have been caught out by the change in the the direction of interest rates this year,' said one leading institutional investor.

'I don't like the idea of companies speculating with their cash piles,' he added, reflecting growing concern at the way some companies appear to be taking excessive risks in the money markets without warning investors.

Many of Glaxo's investments were in relatively risky mortgage-backed and derivative-related bonds. After discovering its loss, the company said it was handing its cash over to external managers, saying it would 'concentrate on pharmaceuticals from now on, rather than investment banking'.

In April, Associated British Foods, with a cash surplus of pounds 800m, alarmed the stock market by reporting a sharp fall in investment income, which many analysts interpreted as a heavy loss in the bond market.

The precise extent of overall money-market losses suffered by cash-rich companies remains uncertain, however, because of company secrecy.

'It is hard to estimate how much they may have lost, because companies do not tell you when they bought bonds and at what price,' said Mark Tinker, equity strategist for James Capel.

With falling interest rates, many companies switched their cash out of deposit accounts last year and into higher-yielding bonds before the market crashed. Among those known to have gone heavily into the bond market is Great Universal Stores, which invested nearly half of its pounds 961m cash pile there over the past year. Several utilities, including water and electricity companies, have also invested substantial amounts in bonds to fund future capital expenditure programmes.

But shareholders also worry that some companies may have undertaken even riskier investments, such as swaps. Increasingly, companies have tried to use cash as a separate profit centre rather than as a way of servicing their core businesses.

Unlike banks, which have to report all dealings in the highly risky derivatives markets to the Bank of England, no one regulates the dealing of company treasury departments. 'This is a grey area for regulation,' said Richard Kersley, equity strategist at BZW.

Since the late 1980s, it has become common for large companies to manage their funds in-house. As their treasury operation have become more complex, questions have been raised about their competence, and the degree to which board directors understand what is going on. 'The ability to manage risk varies enormously from company to company,' said Mr Kersley.

'How do you expect directors aged 45 or 55 to understand what the 20 to 30-year-old whizz-kids are doing in the treasury department?' said Gerald Leahy, head of the Association of Corporate Treasurers.

GUS was heavily criticised when it failed to announce any new initiative for using its pounds 1.4bn cash pile. Many investors had hoped it would pay back a bumper dividend.

----------------------------------------------------------------- WHO HAS CASH? ----------------------------------------------------------------- Company pounds m Hanson 8,067 Glaxo Holdings 2,497 British Telecom 1,966 ICI 1,661 BAe 1,449 GEC 1,409 SmithKline Beecham 1,180 Unilever 1,172 Zeneca 1,049 Great Universal Stores 961 Rolls-Royce 891 BTR 858 Assoc British Foods 801 Wellcome 778 Cable & Wireless 760 Marks & Spencer 688 Bass 685 Reuters Holdings 598 P&O 596 Argyll Group 568 Cash and short-term investments ----------------------------------------------------------------- Source: SG Warburg -----------------------------------------------------------------

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