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
Wednesday 27 January 1999
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.
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