Hands-on P&D plays it tough

News Analysis: Phillips & Drew's active strategy of `value investing' is keeping it busy
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The Independent Online
THESE ARE busy times at Phillips & Drew (P&D), the fund management arm of UBS. Today it will see Marston, the regional brewer in which it holds a 16 per cent stake, adjourn plans to securitise its tenanted pub estate due to shareholder pressure.

This may be a costly fiasco, but at least it leaves the way clear for Wolverhampton & Dudley's pounds 262m bid to be discussed more fully, while others may yet enter the fray.

Next week P&D will meet the management of Sears, the struggling retail group in which it has a 25 per cent stake. Having been instrumental in the departure of Liam Strong as chief executive - it regrets not ejecting him earlier - and pushed for the break-up of the group, it has reportedly met with potential bidders for the remaining operation.

P&D has also made it known that it is displeased with the terms of the merger between Siebe and BTR, in which it is a major shareholder. And at Marley, the building materials group, it turned its displeasure into action: it encouraged a hostile bid from John Mansfield and then switched horses to back a white-knight bid from Belgian group Etex, banking a pounds 20m paper profit within a week.

All this has taken place since the beginning of November, and there are hints of more such action to come in the near future. Is this sudden rush of activity just a coincidence, or is Phillips & Drew adopting a more active approach to fund management?

If it is, is this just a sign of the times, with fund managers being judged on ever-shorter time periods? Or is it a function of the group's philosophy of "value investing"? With a portfolio heavily weighted towards large holdings in out-of-favour smaller and medium sized companies, is P&D having to be more aggressive to get share prices to reflect the value of the businesses more accurately?

According to Jerzy Wielechowski, P&D's head of corporate governance, the firm has been taking a tougher line on what it regards as under-performing investments. He says: "The timescale has shortened as the fund management industry has become more active. There used to be a rather gentlemanly attitude in the industry, and sometimes we've left it too long. We look at an investment and if the value is not coming through because of a flawed strategy or because the management isn't getting it right, we will meet them to see why the share price is continuing to underperform. But we are not short-termist. We are happy to be patient. As a value investor you have to be."

P&D's investment strategy has been the subject of much debate in recent years. More than two years ago Tony Dye, the firm's head of investment, predicted a major correction in world stock markets and P&D's funds switched a significant proportion of assets into cash.

Unfortunately the markets moved relentlessly upwards until the middle of this year, leaving P&D languishing at the bottom of performance tables. Finally in the third quarter of this year it was partially vindicated when it became the top-performing fund in the City due to the collapse in equity markets and its strong cash position. As a result its funds shrank in value by 7.7 per cent compared with the industry average of 11 per cent. But the subsequent rally may well have caught the firm out again.

Its underweight position in equities has been exacerbated by some of the stocks it has chosen. At first glance its stock picks read like a list of some of the market's biggest duds - Albert Fisher, Sears, Kwik Save, Allied Domecq, Willis Corroon. The list goes on - and on.

But P&D insists value investing has worked and will continue to work. "We are 100 per cent confident it works. Our own track record proves it. Value investing historically has delivered above average results. But there are times when it doesn't work."

Put simply, P&D's value investment philosophy aims to judge whether the fair value of an asset, such as a company, is accurately reflected in its share price. Market value, it says, is affected by many things like investment fads, fashions and rumours, which often have little to do with the underlying business. So P&D looks at the standard measurements of value, such as cash-flow, yield, the quality of the management and the strength of its strategy, and makes a judgement as to whether this is reflected by the stock market.

At the moment, for example, this has led it to shun banking and telecoms in favour of sectors such as food retailing, engineering and building materials. It has avoided the largest companies, which it reckons are over-valued, in favour of smaller and mid cap stocks, which it says will return to favour.

But P&D claims it is being misjudged. It insists it is not a larger, more powerful version of shareholder activists such as UK Active Value, which shook up Signet, Scholl and Liberty, or Guinness Peat group, which has attacked Young & Co, the London brewer, for its outdated shareholder voting structure. "It is not our style to build up a stake and then go gung-ho changing things," Mr Wielechowski says.

Instead it looks at cyclical industries, such as housebuilding, where values rise and fall dramatically. It also looks at companies or sectors that could benefit from an improvement in the economy or a rationalisation of an industry, such as building materials or brewing. It will also look at businesses where there has been a change of management that may herald a change of fortunes.

Mr Wielechowski says P&D's apparent new aggression is not actually new. "We asked a lot of questions about Granada in the early 1990s, for example. But in the last few years we have been using our leverage more. If you want to make some noise it is a lot easier if you've got 20 per cent than if you've got 10, or 5."

If hints emerging from P&D are anything to go by, things could get noisy again soon.