Why talking to management is a waste of time

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The Independent Online
So there you are. BZW, or rather its investment management side, thinks going out and seeing companies a waste of time. Getting to know a company, its strategy and management no longer matters, its top brass seem to have decided. Instead, number crunching and modelling is all. The new approach involves the old heave ho for 11 of BZW's more traditional fund managers. These are the ones that presumably hold to the old judgmental approach to spotting a good investment, and like to be wined and dined by our leading companies. In their place come the new technocrats, who invest according to a strict company model built around sentiment and valuation criteria, with a little bit of what directors are up to in their own share dealings added in for fun.

The biggest part of BZW's asset management business these days is already in indexed funds, which require no active management at all. But even on the "active" side, BZW plans to confine investment strategy within tightly set parameters from here on in.

This is very much the modern approach. The sort of freedom Peter Young was given at Morgan Grenfell to back his hunches is becoming the exception, even in quite specialised funds. From that point of view, clients can breath a sigh of belief. Out go the mavericks, in come the grey, besuited, professionals.

Presumably this is what the clients want; certainly it is easy to see why BZW thinks seeing companies a waste of time. Send your brightest young manager out on a day trip to Widgets of Watford and as likely as not he'll be misled by the crafty old owner-proprietor into believing this the best investment prospect since Microsoft. At the same time, you have to wonder whether these new methods are really any better than the old judgmental approach. Consistency and professionalism do not seem to have worked particularly well for PDFM over the past 18 months.

There are other dangers as well. The recent trend has been for institutional shareholders to become more involved and active in the affairs of the companies they own. The "meeting companies is a waste of time" approach runs in the opposite direction. Without that interface, managements are going to find it harder to understand the demands of their leading shareholders. Ownership and management will become even more divorced than they are at present, with unpredictable and possibly quite adverse consequences.

The importance of timing for water firms

With the impeccable timing that has become its hallmark, Yorkshire Water chose yesterday to announce an end to water restrictions on its long-suffering customers just as Ian Byatt at Ofwat was unveiling plans to bring them lower bills earlier than expected. If nothing else, the company that labours under the soubriquet of Britain's most hated business and its regulator are rowing roughly in the same direction at last.

For once, Yorkshire is actually ahead of the wave. Because of its little spot of bother, its prices were already due for review in 1999, not 2005, when the current price controls run out. Moreover, it is one of the small band of water companies that has already voluntarily offered customers money back from efficiency gains, before being pushed in at the deep end by Mr Byatt.

The fact that the remaining 28 water and sewerage companies are also to have their price controls reviewed five years early will provoke predictable howls that another watchdog has torn up its regulatory contract with shareholders.

In fact, it was universally assumed that Mr Byatt would exploit the clause that allows him to revisit the price controls early. The civil servants at the Department of the Environment inadvertently let the cat out of the bag anyway when they renewed his contract in June. The more interesting questions are whether he is justified in his intentions and why he has chosen to announce them three years in advance.

The answer to the first depends upon where you sit. There is no doubt that the regulatory climate is becoming more uncomfortable for investors in these companies. So much so that Severn Trent and Wessex may decide that the price demanded for letting them bid for South West is not worth paying.

On the other hand, shareholders can hardly complain. These companies have proved fabulous investments; the return is still way ahead of what it should be for bog-standard monopoly utilities. Furthermore it would be an odd regulator who let price controls run for 10 years and ignored the evidence of how much more efficient the companies under his charge were becoming. Only six out of 28 have attempted to manage the regulatory risk by volunteering price reductions.

The answer to the second - why announce it now - has to do with a much shorter time-frame. There are only six months left until John Major has to call an election. Ian Byatt wants to remain around if Tony Blair replaces him.

RBS's independence may hinge on Direct Line

There is no better comment on Peter Wood's brilliant entrepreneurial judgment than the manner and timing of his decision to end his profit- sharing arrangement with Royal Bank of Scotland.

In 1994, the bank agreed to pay him the best part of pounds 40m over a two- year period as a bonus and buyout premium for his contract with Direct Line, its immensely successful telephone insurance subsidiary. Now Direct Line's profits are falling alarmingly close to vanishing point and with hindsight Mr Wood has performed the rare feat of getting out at the top of the market.

The generosity of Mr Wood's profit sharing arrangement, and the reason it cost so much to get rid of the contract, was a result of Royal's decision some time earlier to buy out his direct equity stake in the business.

As Royal never tired of pointing out at the time - to deflect criticism of the board for employing the fattest cat in the UK - he would have been quite a lot richer still if he had kept his original equity.

Nobody, including Mr Wood, could easily have foreseen at the time quite how cut-throat the motor insurance business would become and how many direct sellers would enter the market. It was even harder to envisage the soaring court awards made recently for personal injury damages.

In recent judgements the courts have been assessing claims on the basis of standardised tables that project the loss of future earnings that might be sustained through injury. The bill for insurers is, as a consequence, far higher than it used to be, and this applies to all the claims in the pipeline.

By setting up Direct Line in the first place, Mr Wood may well have saved the bank's reputation, and perhaps its independence. With Direct Line now looking jaded, the questions will be asked afresh about whether Royal has an independent future.