Shareholders seize the day

News Analysis: Underperformers are feeling the heat and heads are starting to roll as investors adopt a more active approach to equities

THE DEPARTURE of David Montgomery from the chief executive's chair at Mirror Group is just the latest example of the increasing use of shareholder power in UK markets.

Leading Mirror Group shareholders, including Phillips & Drew (P&D) and Hermes, were unhappy about the media group's performance. They saw a destruction of shareholder value as a direct result of strategic mistakes and decided the chief executive should be held responsible.

This kind of shareholder activism is starting to become a regular feature of UK investing. In the last few days we have seen Sears surrender to a pounds 548m bid from Philip Green as shareholders grew tired of the retailer's management team led by Sir Bob Reid.

Before that P&D, the most restless of the UK activists, had voiced its displeasure at the terms of the Siebe-BTR merger and encouraged a hostile bid for Marley, the building materials group. Other underperformers to feel the heat in the past year include Tarmac, Dalgety and Albert Fisher, where management heads have rolled as the share price has drifted downwards.

"Things have become a bit more active," says Jerzy Wielechowski, head of corporate governance at P&D. "I see it as an inexorable trend that will start to be seen as normal."

Hermes, the former Postel pension fund group, is the latest to hear the calling. In October it established the Hermes UK Focus Fund alongside the Hermes Lens Asset Management to look after US investments.

They were established to run in tandem with Hermes' traditional portfolio of investments which are spread across the FT All-Share. This spread makes it harder to focus on under-performers as the stakes are usually too low.

So it set up the new funds to specifically target a small group of under- performers and built stakes of around 4 per cent in each. The stocks are all in the All-Share and most have market capitalisations of over pounds 200m.

However, they tend to exclude the largest companies due to political and regulatory complications. So far there are seven companies in the portfolio of which Mirror Group is the first to hit the headlines.

"With around 4 per cent you are taken much more seriously by the management," says Peter Butler, head of corporate governance at Hermes and chief executive of the new UK fund. "With 1 per cent they listen politely, but with a bigger stake you get noticed."

In a sense, it is no surprise that shareholder activism is becoming more prevalent. The performance of actively managed funds is being compared to that of index-tracker funds, which have soared due to the strength of the FTSE100 which is dominated by just a handful of mega-stocks. As a result, fund managers are having to work harder to justify their existence.

Another factor is the downturn in the economy which has exposed weaker companies. In a bull market, a "ginger group" approach would be considered less necessary. But in this more patchy market whole sectors are unloved, such as textiles and engineering, while the new "sizeism" is discriminating against smaller companies.

As John Hatherly, head of research at M&G, says: "Activism is borne out of a market where a whole range of companies have been caught out, whether by the strong pound, deflation or increased competition."

A third driver of this phenomenon is the increasing influence of big US investors. American institutions now account for around 15 per cent of the UK stock market and have major stakes in companies such as Somerfield, ICI, English China Clays, Tate & Lyle and British Steel.

Funds such as Capital International, Fidelity and Templeton are all value investors who are not shy about taking managements to task. Also influential is Calpers, the Californian Public Employees Retirement System, which controls $133bn of assets. It talks of the so-called "Calpers effect" where publicity about poor management, including a blacklist of companies, has led to a marked turnaround in performance. It has also set up a corporate government joint venture with Hermes and has a large portfolio.

John Hatherly at M&G feels the US influence is a good thing. "It can be comforting if you see that one of these US funds is building up a stake in a company you are already invested in. You know these guys are not going to just sit around. They will push and pull to try and get results."

Like P&D, M&G operates a value investing system where it targets companies that have under-performed or have suffered a de-rating, building stakes of no more than 15 per cent.

It has become more focused shaking up management teams and two years ago appointed a director of corporate analysis with the specific remit to examine M&G investments where value has not been delivered. Mr Hatherly says big shareholders are increasingly willing to talk to each other to agree a common strategy.

There are dangers if this enthusiasm tilts over into an overly active approach, however. Jim Cox, head of equities at Schroders, says: "The danger is in trying to play God. It is a problem if the institution thinks it knows how to run the company better than the management."

Another problem is if an institution is made an insider due to talks with management. It will then be restricted in dealing in the shares. However, fund managers say that most funds tend to hold stocks for the longer term and that larger stakes, in particular, make it very difficult to trade down in any significant way.

But despite the potential problems, most fund managers are agreed that this more muscular approach to equity investment is here to stay. "It is more likely to gather momentum than lose it," one says.

News
A 1930 image of the Karl Albrecht Spiritousen and Lebensmittel shop, Essen. The shop was opened by Karl and Theo Albrecht’s mother; the brothers later founded Aldi
people
Arts and Entertainment
Standing the test of time: Michael J Fox and Christopher Lloyd in 'Back to the Future'
filmA cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Arts and Entertainment
Flora Spencer-Longhurst as Lavinia, William Houston as Titus Andronicus and Dyfan Dwyfor as Lucius
theatreThe Shakespeare play that proved too much for more than 100 people
News
exclusivePunk icon Viv Albertine on Sid Vicious, complacent white men, and why free love led to rape
PROMOTED VIDEO
Arts and Entertainment
Stir crazy: Noel Fielding in 'Luxury Comedy 2: Tales from Painted Hawaii'
comedyAs ‘Luxury Comedy’ returns, Noel Fielding on why mainstream success scares him and what the future holds for 'The Boosh'
Life and Style
Flow chart: Karl Landsteiner discovered blood types in 1900, yet scientists have still not come up with an explanation for their existence
lifeAll of us have one. Yet even now, it’s a matter of debate what they’re for
Arts and Entertainment
'Weird Al' Yankovic, or Alfred Matthew, at the 2014 Los Angeles Film Festival Screening of
musicHis latest video is an ode to good grammar. But what do our experts think he’s missed out?
Sport
Colombia's James Rodriguez celebrates one of his goals during the FIFA World Cup 2014 round of 16 match between Colombia and Uruguay at the Estadio do Maracana in Rio de Janeiro, Brazil
sportColombian World Cup star completes £63m move to Spain
Travel
Fair trade: the idea of honesty boxes relies on people paying their way
travelIt seems fraught with financial risk, but the policy has its benefits
Arts and Entertainment
booksThe best children's books for this summer
Life and Style
News to me: family events were recorded in the personal columns
techFamily events used to be marked in the personal columns. But now Facebook has usurped that
News
news
News
i100
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Programme Director - Conduct Risk - London

£850 - £950 per day: Orgtel: Programme Director - Conduct Risk - Banking - £85...

Business Analyst (Agile, SDLC, software)

£45000 - £50000 Per Annum + excellent benefits: Clearwater People Solutions Lt...

Finance Manager - Bank - Leeds - £300/day

£250 - £300 per day + competitive: Orgtel: Finance Manager - Accountant - Bank...

Compliance Officer - CF10, CF11, Compliance Oversight, AML, FX

£100000 - £120000 per annum + BONUS + BENEFITS: Harrington Starr: A leading fi...

Day In a Page

Noel Fielding's 'Luxury Comedy': A land of the outright bizarre

Noel Fielding's 'Luxury Comedy'

A land of the outright bizarre
What are the worst 'Word Crimes'?

What are the worst 'Word Crimes'?

‘Weird Al’ Yankovic's latest video is an ode to good grammar. But what do The Independent’s experts think he’s missed out?
Can Secret Cinema sell 80,000 'Back to the Future' tickets?

The worst kept secret in cinema

A cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Facebook: The new hatched, matched and dispatched

The new hatched, matched and dispatched

Family events used to be marked in the personal columns. But now Facebook has usurped the ‘Births, Deaths and Marriages’ announcements
Why do we have blood types?

Are you my type?

All of us have one but probably never wondered why. Yet even now, a century after blood types were discovered, it’s a matter of debate what they’re for
Honesty box hotels: You decide how much you pay

Honesty box hotels

Five hotels in Paris now allow guests to pay only what they think their stay was worth. It seems fraught with financial risk, but the honesty policy has its benefit
Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

The 'scroungers’ fight back

The welfare claimants battling to alter stereotypes
Amazing video shows Nasa 'flame extinguishment experiment' in action

Fireballs in space

Amazing video shows Nasa's 'flame extinguishment experiment' in action
A Bible for billionaires

A Bible for billionaires

Find out why America's richest men are reading John Brookes
Paranoid parenting is on the rise - and our children are suffering because of it

Paranoid parenting is on the rise

And our children are suffering because of it
For sale: Island where the Magna Carta was sealed

Magna Carta Island goes on sale

Yours for a cool £4m
Phone hacking scandal special report: The slide into crime at the 'News of the World'

The hacker's tale: the slide into crime at the 'News of the World'

Glenn Mulcaire was jailed for six months for intercepting phone messages. James Hanning tells his story in a new book. This is an extract
We flinch, but there are degrees of paedophilia

We flinch, but there are degrees of paedophilia

Child abusers are not all the same, yet the idea of treating them differently in relation to the severity of their crimes has somehow become controversial
The truth about conspiracy theories is that some require considering

The truth about conspiracy theories is that some require considering

For instance, did Isis kill the Israeli teenagers to trigger a war, asks Patrick Cockburn
Alistair Carmichael: 'The UK as a whole is greater than the sum of its parts'

Alistair Carmichael: 'The UK as a whole is greater than the sum of its parts'

Meet the man who doesn't want to go down in history as the country's last Scottish Secretary