Outlook: P&D looks in the Mirror and sees itself

LIKE APPLE PIE and motherhood, no one can really object to shareholder activism, can they? It is a shareholder's right, nay his positive duty, to bash underperforming, politically incorrect managements around the head, and if necessary to drum them out of their jobs. Nothing should interfere with the pursuit of shareholder value and correct corporate governance, should it?

Well here's an alternative view. Though big companies do occasionally feel the wrath of their institutional shareholders, it tends to be among smaller enterprises that the big investment houses are at their most active. The trouble spots are most often, though not always, found in the Mid Cap or Small Cap indices, not the FTSE 100.

Why is this? Modern investment trends, which favour large global companies, have combined with the economic cycle to ensure that many smaller and medium sized companies have pretty much ceased to figure on the City radar screen.

The bears keep warning about overvalued share prices, but you just look at the ratings on some smaller stocks. Bargain basement is hardly the expression for it. The plain truth is that, as a matter of course, smaller companies now tend to underperform the index.

According to Salomon Smith Barney, Britain's largest 15 blue chip stocks will account for 45 per cent of the entire value of the UK stock market once the present wave of mega-mergers has gone through. This in itself is an extraordinary statistic, but it is also indicative of the sort of pressures smaller companies, as well as out-of-favour larger ones, are now subjected to.

It feels pretty uncomfortable down there towards the bottom of the pile. From cost of capital through to buying power and access to the best advice and talent, smaller companies are increasingly disadvantaged. The upshot is that, to the extent that such companies are not ostracised completely by City investors, they are under intense pressure to improve performance and achieve the All Share benchmark.

From the general to the particular. Some active fund managers have been badly caught out by this growing disparity between the "in" bigger companies, and "out-of-favour" smaller enterprises. Somehow or other, they have to catch up, or they will lose business.

But it is worse than this. In the case of Phillips and Drew, the fund manager behind David Montgomery's removal as chief executive of Mirror Group, a policy of "value" investment has been pursued. This means deliberately targeting underperforming companies in the hope that some way of realising the underlying value can be found.

In the process of pursuing this investment strategy, P&D has built up some exceptionally large positions in a large number of underperforming companies. On top of this, it has for the past three years adopted a consistently bearish approach to the stock market. This may or may not eventually be vindicated, but in the meantime, P&D's own performance has suffered alongside that of its investments. Some clients have deserted or are in the process of doing so.

So not only is P&D itself under intense pressure to perform, to demonstrate that it can do something with the bombed-out stocks it has chosen to invest in, but it also needs to liquidate some of these holdings to pay back clients. Unfortunately, large, illiquid shareholdings, once built up, are by definition difficult to liquidate. Hence the need to generate excitement or merger and bid activity, and hence the shareholder activism - not just at Mirror Group, but among a whole host of similarly underperforming companies in recent months.

None of this means that P&D was wrong to do what it did at Mirror Group. P&D is not alone in believing Mr Montgomery, whatever his past achievements, the wrong man to take Mirror Group forward. But there is a sense in which it can be argued that Mr Montgomery has fallen victim to P & D's own flawed investment strategy.

It cannot be in clients' best interests to build up these large, illiquid positions, let alone the interests of the companies involved. In such circumstances the investment house comes to act more like a venture capitalist than a conventional fund manager, and as a consequence begins to demand rights of ownership and management control that go beyond those normally exercised by investors in publicly quoted companies.

P&D claims to speak for the shareholders as a whole, but actually in many of these situations it is pursuing its own self-interest. This may or may not coincide with the interests of other shareholders. Moreover, P&D would rightly criticise others for attempting to exercise management control from the position of a minority shareholding, and yet this is what it appears to be doing in many of these companies by agitating for a merger or a bid. Shareholder activism is more contentious than it might seem.

magisterial inaction may well be the right policy.

sportGareth Bale, Carl Froch and Kelly Gallagher also in the mix for award
Japan's Suntory Beverage & Food has bought GlaxoSmithKline's Lucozade and Ribena
A tongue-eating louse (not the one Mr Poli found)
newsParasitic louse appeared inside unfilleted sea bass
Life and Style
The reindeer pen at the attraction
lifeLaurence Llewelyn-Bowen's 'Magical Journey' and other winter blunderlands
ebooksNow available in paperback
Tana Ramsay gave evidence in a legal action in which her husband, Gordon, is accusing her father, Christopher Hutcheson, of using a ghost writer machine to “forge” his signature
peopleTana Ramsay said alleged discovery was 'extremely distressing'
Arts and Entertainment
Robin Windsor and Aljaz Skorjanec rehearse their same-sex dance together on Strictly Come Dancing
Anyone over the age of 40 seeking a loan with a standard term of 25 years will be borrowing beyond a normal retirement age of 65, and is liable to find their options restricted
propertyAnd it's even worse if you're 40
Arts and Entertainment
Perhaps longest awaited is the adaptation of Jack Kerouac’s On the Road with Brazil’s Walter Salles directing and Sam Riley, Kristen Stewart and Viggo Mortensen as the Beat-era outsiders
Arts and Entertainment
theatreSinger to join cast of his Broadway show after The Last Ship flounders at the box office
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Argyll Scott International: Risk Assurance Manager

Negotiable: Argyll Scott International: Hi All, I'm currently recruiting for t...

Argyll Scott International: Business Analyst - MGA - London Market - Insurance Broker

£50000 - £60000 per annum + benefits: Argyll Scott International: A Business A...

Ashdown Group: PR, Marketing & Events Executive - Southwark, London - £35,000

£30000 - £35000 per annum + benefits: Ashdown Group: PR Marketing & Events Exe...

Selby Jennings: C++ Developer – Hedge Fund – New York

$80000 - $110000 per annum, Benefits: Bonus and Employee Investment Scheme: Se...

Day In a Page

How bad do you have to be to lose a Home Office contract?

How bad do you have to be to lose a Home Office contract?

Serco given Yarl’s Wood immigration contract despite ‘vast failings’
Green Party on the march in Bristol: From a lost deposit to victory

From a lost deposit to victory

Green Party on the march in Bristol
Putting the grot right into Santa's grotto

Winter blunderlands

Putting the grot into grotto
'It just came to us, why not do it naked?' London's first nude free runner captured in breathtaking images across capital

'It just came to us, why not do it naked?'

London's first nude free runner captured in breathtaking images across capital
In a world of Saudi bullying, right-wing Israeli ministers and the twilight of Obama, Iran is looking like a possible policeman of the Gulf

Iran is shifting from pariah to possible future policeman of the Gulf

Robert Fisk on our crisis with Iran
The young are the new poor: A third of young people pushed into poverty

The young are the new poor

Sharp increase in the number of under-25s living in poverty
Greens on the march: ‘We could be on the edge of something very big’

Greens on the march

‘We could be on the edge of something very big’
Revealed: the case against Bill Cosby - through the stories of his accusers

Revealed: the case against Bill Cosby

Through the stories of his accusers
Why are words like 'mongol' and 'mongoloid' still bandied about as insults?

The Meaning of Mongol

Why are the words 'mongol' and 'mongoloid' still bandied about as insults?
Mau Mau uprising: Kenyans still waiting for justice join class action over Britain's role in the emergency

Kenyans still waiting for justice over Mau Mau uprising

Thousands join class action over Britain's role in the emergency
Isis in Iraq: The trauma of the last six months has overwhelmed the remaining Christians in the country

The last Christians in Iraq

After 2,000 years, a community will try anything – including pretending to convert to Islam – to avoid losing everything, says Patrick Cockburn
Black Friday: Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

Britain braced for Black Friday
Bill Cosby's persona goes from America's dad to date-rape drugs

From America's dad to date-rape drugs

Stories of Bill Cosby's alleged sexual assaults may have circulated widely in Hollywood, but they came as a shock to fans, says Rupert Cornwell
Clare Balding: 'Women's sport is kicking off at last'

Clare Balding: 'Women's sport is kicking off at last'

As fans flock to see England women's Wembley debut against Germany, the TV presenter on an exciting 'sea change'