Healthcare Shake-Out Ahead?
Is the Australian healthcare sector about to undergo another bout of takeover speculation?
Read MoreIs the Australian healthcare sector about to undergo another bout of takeover speculation?
Read MoreSo the Australian dollar is hovering above, at or just under the 80 US cent level, depending on the time of day in the trading cycle.
It finished above 80 USc Tuesday night and started trading around that level here today.
It’s risen to what is about its highest level in 10 years and analysts are all saying it was as a result of the low key warning on Friday by the Reserve Bank’s Deputy Governor, Malcolm Edey that some of the factors which pushed up inflation were still evident and still a concern.
Mr Edey is the RBA’s chief economist: he is the Deputy Governor, economic, and that probably makes him almost as influential as the Guv, Glenn Stevens.
That’s why his words last week were important where as a similar speech at the start of the month was not taken as seriously because they didn’t include phrases used on Friday.
This is the key phrase: “This outlook is still higher than ideal: it implies that inflation is more likely to be too high than too lower in the period we can foresee”.
It’s called jawboning, a word I’ve used many times to describe speeches by key officials in the US and here. Edey’s speech was no different.
Although it was a statement of the obvious to some in Australia, it also came as traders in the US started wondering if there was a chance of rates being cut this year, rather than left on hold.
Even though some looked at US producer and consumer price indexes last week as suggesting that inflation was returning (albeit in a small way), others looked through the figures, factored out volatile oil and food prices and said no way.
Then there’s the US housing slump and the problems in the subprime and lower levels of the prime mortgage markets which show no signs of improving. This week sees a number of key figures for the housing industry and the betting is that the problems still have a way to go before things get better.
It’s either the third or fourth version of the deal but it would seem that OneSteel, Smorgon Steel Group and BlueScope Steel have reached an agreement that will see a rationalisation of the country’s steel making business.
Read MoreNow for a reality check in the wake of the Bank of Queensland’s surprise move on its regional rival, Bendigo Bank.
The $2.46 billion offer is not going to herald more rationalisation in the banking industry.
Far from it, it will be a one-off deal that some big banks will look upon with amusement as a small competitor tries to get bigger by neutering its target’s business model.
If anything the BOQ offer has the potential to seriously wound both banks, if it proceeds and the execution is handled badly.
Adelaide Bank, which rose again yesterday on expectations someone would bid for it, is not the equal of BOQ or BEN, even in terms of market appeal as a merger candidate.
Its business model, being heavily dependant on mortgages and margin lending, does not lend itself to being easily integrated with the business model or any other bank in the country.
BOQ is using its inflated price earnings multiple to try and snatch control of BEN which is bigger in terms of profits and number of branches.
The savings to justify the claimed $70 million in cost cuts, will come from eliminating one back office (BEN’s), cutting advertising, marketing plus other backroom and support costs (all BEN’s). That will mean job losses in Bendigo which won’t be a good look.
There will not be any cost savings from branch closures and sales: that would be commercial suicide in a transaction which is going to be regarded with deep suspicion among BEN employees, customers and shareholders.
How the BOQ could launch a bid like this offering a huge premium, without talking to BEN management and the board, is worrying for its eventual success.
It’s as though BOQ and its advisers were scared of the reception and tried to show their generosity up front before talking: that will only encourage BEN to ask for more.
$17.92 for BEN shares is a very rich price, but what’s the price for making it friendly as against hostile: aggressive and nasty battles don’t work for bank, customers, especially depositors who still have choice.
That price is a 30 per cent premium but why should the BEN board throw in the towel now? There are plenty of ways for a skilled target to delay or defeat the inevitable, or to extract a far better price.
Could a higher price for board approval eliminate the synergies sought by BOQ and make the deal a costly exercise in self aggrandizement?
It will take a short while before the heat goes out of the banking sector (not helping was the approach by Barclays to ABN Amro which could see as $US 200 billion megabank created)
Adelaide Bank is the most obvious candidate to watch but as said before, its product manufacturing, especially in margin lending, isn’t the sort of model on which to build a successful franchise.
Suncorp (SUN) is in the throes of completing the Promina takeover. That will occupy the management team for the best part of a year.
It has just sold a very large parcel of shares to finance the Promina purchase; shareholders would not like to be approached so quickly for a banking deal that might stretch management and the balance sheet even more.
SUN CEO, John Mulchay said on Sunday his company would be interested in expanding in banking: that’s likely to be a dream for sometime to come.
St George is too big a bite now for the Big Four to justify: it would be too expensive and the ACCC and the Federal Government might have something to say, especially as we are in an election year.
St George might be on the radar for a foreigner like Citi, HSBC and Bankwest and its UK parent, but probably not given the risk of investing billions of dollars here when there’s growth to be had in China, India and in Eastern Europe
Finally the BOQ might have to issue up to $600 million in shares to pay the cash component of its offer (that’s the difference roughly between the valuation of BEN before and after the bid).
That implies an increase of a third in the issued shares: that will need shareholder approval, unless some form quasi equity is involved.
The real winners may well be the Big Four plus St George. They don’t have to do a thing; they don’t have to waste money on bids or on working up alternate strategies.
The $4 billion combined BOQ/BEN would still be too small to worry the Big Four plus one and they might just get some new customers if the takeover is handled badly.
It will be ironic if the actions of Telecom New Zealand end up being the difference between Hutchison Telecommunications Australia remaining with a solid rump of independent shareholders, or an almost wholly-owned subsidiary of its Hong Kong parent, Hutchison Whampoa.
Anyone with shares in HTA and wondering about whether to avail themselves of the offer of convertible prefs announced on Monday, should watch what TEL does.
TEL has a 19.9 per cent stake in HTA subsidiary Hutchison 3G Australia (H3GA) which is underwater. It was taken up when it did a deal with HTA on the new generation of digital mobile communications.
It’s though this subsidiary will also be recapitalised in the wake of the recapitalisation of HTA.
Analysts yesterday estimated that it would cost TEL $300 million to maintain its stake which would in effect be a vote in the future of HTA and 3G mobile in Australia (for AAPT, TEL’s Australian arm)
The $2.85 billion recap was announced Monday and pitched as a move to enable HTA pay down debt and speed up its push toward profitability. The company said debt would be slashed by well over $2 billion to $1.1 billion and interest costs would be cut by hundreds of millions of dollars a year.
Uranium bulls are snorting and stamping the ground as world prices rise towards the $US100 a pound level.
Read MoreIn terms of the dollar amount it was a big deal, in terms of the level of support, it was pretty interesting but that’s all you can say about the news yesterday that the heavily indebted mobile phone group, Hutchison Telecommunications (Australia) Ltd, plans to raise up to $2.85 billion in new equity to slash its crushing debt burden.
Read MoreQuietly, without too much fuss, Leighton Holdings, the country’s biggest civil engineer and contractor, saw its share price rise $1.47 at one stage yesterday before settling back to close 88c higher at $31.37.
Read MoreFrom the market’s point of view there’s only one group of winners from the surprise move by Bank of Queensland on fellow regional bank, Bendigo Bank.
It’s the shareholders in the Victorian regional bank which has pioneered the community bank idea in this country to solid success.
Bendigo shares (BEN) finished $3.84 higher at $17.05 yesterday after rising as high as $17.50, a huge rise of $4.29 on its close last Friday of $13.21. Volume was a high 2.2 million shares.
In contrast the Bank of Queensland finished 1c lower at $16.59. The shares had a low for the day of $16.46, so the small recovery towards the end of trading should be seen positively. Turnover was light, just half a million shares.
So initial reactions put the deal firmly in favour of BEN shareholders and indicate some scepticism about the economics from the deal, as structured by the Bank of Qld.
It also raises the question what would happen if Bendigo Bank launched a counter offer.
The offer values Bendigo at $2.46 billion, compared to the market cap last Friday of just over $1.8 billion. The combined banks will have a value of around $4 billion.
BOQ will offer $5.50 cash and 0.748 of its shares for each Bendigo share. It will make a placement to help fund the purchase.
BOQ shares have risen faster than BEN’s over the past year and its price earning ratio of 17 times is higher than BEN’s 15, hence the use of shares in the bid.
But the outperformance is based on expectations, not actual earnings and its the franchise model of BOQ which is quite trendy these days among brokers and banking consultants. BOQ is based in faster growing Queensland.
In contrast BEN’s ultra regional, community bank system isn’t popular with analysts and consultants, hence the downgrading of its shares.
The mechanics of the deal are similar to the move by fellow Queensland financial services group, Suncorp, to buy insurer, Promina with a combination of paper and cash and a big issue to raise the cash component.
That was a much larger deal than this aggressive move out of Queensland.
At the close yesterday the offer valued BEN shares at $17.90, BEN shares closed 85c down on that, as investors await the reaction of the BEN board.
It has to be a friendly deal even though BOQ made the approach without any prior discussions.
A key sticking point will be the future of the community banking system that Bendigo has helped seed across the country in cities, towns and suburbs of major cities.
Even though it’s a generous price there’s no certainty the BEN board will say yes until it has some assurances. These will be given, but will they last?
The bid set the shares in Adelaide Bank (ADB) running higher. It closed at $13.68, up 68c on the day.
ADB was considered to be a bit more of an obvious target.
Even though its earnings came in at the higher end of reduced guidance for the first half of 2007, there are still niggling worries about its aggressive home mortgage and margin lending business. Those concerns have kept the shares well under previous highs in recent weeks.
One pricing anomaly emerged late yesterday for BEN shareholders. BEN put out a statement that the DRP price for the interim dividend that will be paid on March 30 will be $13.40.
Those Bendigo shareholders who elect to take shares instead of cash dividends will have a nice fat profit to add to their existing holdings.
Bendigo is a slightly bigger bank in terms of profit: earning around $100 million in 2006 to the $76 million earned by the Bank of Queensland.
That is a big difference in a deal of this size and even though BOQ says there’s $70 million of synergies, the effect of the bid. If successful, will see its shareholders owning 60 per cent of the bank and running the combined operation.
The combined bank will have a value of around $4 billion. BEN is valued at $2.4 billion or thereabouts, so BOQ is valued at $1.6 billion. So how come the smaller bank gets to wag the bigger one?
That’s not quite how it should go: the more profitable bank should be the dominant partner, or it is a ‘merger of equals’.
Ratings agency Fitch though sees no problems for Bank of Queensland
It affirmed its credit ratings on Bank of Queensland Ltd (BoQ), and says the ratings outlook is positive.
“BoQ’s ratings reflect its excellent asset quality, increased revenue diversification and a growing interstate presence in Australia,” Fitch said.
“They also recognise the bank’s relatively small size and reliance on the Queensland residential mortgage market.”
Fitch has a BBB long term issue default rating on BoQ and a short term rating of F2.
Analysts say the BOQ’s franchise branch business hasn’t been the big success some thought it would be. Some franchises have been closed and it has had trouble making headway in Sydney.
And Bendigo Bank has been losing share of deposits in the past year and the community banking system is a relatively high cost business compared to the bank’s own branches.
In an irony the offer was revealed only a day after Suncorp CEO, John Mulcahy went on national TV to tell the world that the next move for his company wouldn’t be in insurance, it would be in banks.
Not many left and most are all bigger and better run than SUN!
Just when we were basking in the strength of the economy, along comes someone to remind us of the need for a dark cloud or three.
Read MoreIt didn’t take long for the Chinese Government to act to try and further control an economy which is starting to look like it is getting out of hand.
Read MoreAnother series of tests for the sluggish American housing market this week which is trying to cope with lower demand, oversupply and now the crisis battering the subprime mortgage sector which is threatening to spillover into the sounder parts of the home mortgage industry.
Read MoreAnother week closer to the ending of the $11.1 billion bid for Qantas and we are no closer to knowing its fate.
Read MoreTalk about being read the riot act.
If New Zealanders hadn’t got the message after last week’s interest rate rise to a new high of 7.50 per cent; and after more warnings this week after strong rises in house prices and retail sales, and a firm admonition from Finance Minister Michael Cullen, Kiwis copped a blast from New Zealand Reserve Bank Governor Alan Bollard.
He told a business conference yesterday that the days of easy money were over and that “exuberance” by consumers and banks (mostly Australian!) to borrow and lend had undermined his attempts to slow consumer spending and cool the overheating housing market.
Using words that recalled former Federal Reserve Governor Alan Greenspan’s 1996 comment about “irrational exuberance” in stock prices as the net and tech booms gathered pace, Bollard sent a very strong signal that he may have to increase interest rates even further consumers curtailed their current borrowing binge.
“We need to see realization amongst borrowing households and lending banks that this period of cheap international money has been unusual. That means thinking about other eventualities ahead, and in some cases showing less exuberance.”
According to the RBNZ’s website, total household debt rose 13 per cent to NZ$150 billion in January from the same month in 2006. That’s an almost doubling in the past five years.
Analysts say New Zealand has become a favoured destination for some big international investors who borrow at half a per cent in Japan in yen and then move the money to New Zealand where the gross margin is around seven per cent: much of this cheap money is being organised by the big local banks who then use it to finance their current mortgage war.
Before last week’s increase official rates were steady at 7.25 per cent for well over a year.
Complicating the matter is that well over 80 per cent of all home loans in New Zealand have an interest rate that is set for a fixed term, unlike here in Australia where we favour variable rates. That means it is very hard to influence the housing and home buying sectors in NZ by moving interest rates.
The downside is that the rates on business are variable and these are transmitted very quickly (and rates on personal loans and credit cards are variable): so you can have declining exports, a sluggish economy but booming house prices and solid activity in and around the industry.
No wonder Governor Bollard is sounding more than a little frustrated and why pie in the sky ideas of a levy on mortgages have surfaced and then been knocked down.
The Governor summed up the situation with this comment: “It is New Zealand households’ desire to keep investing in housing, while at the same time consuming strongly, that fuels their demand for funds”.
I think the chances are rising there will be a very rough landing.
With the NZ economy increasingly dominated by Australian corporates (banks, media and retailing) the fallout will bounce back here through the various profit and loss accounts and balance sheets.
It won’t be shattering, but it will be a reminder that being big in a very small market can hurt financially.
There may be worries about global growth and the health of US financial markets but here in Australia its been a surprisingly upbeat week: sunny in fact.
The economy is going well, retail sales are humming (a bit too fast for some), business and consumer confidence has recovered strongly from the battering at the hands of oil and petrol prices in the middle months of 2006, the resources boom shows no sign of tiring, the Chinese and Japanese economies are surging.
Inflation is a bit too high for comfort, wages growth is at the top end of the limit of around 4 per cent a year, our terms of trade are improving and personal income continues to rise.
The only concern is for problems among the no doc/low doc mortgage borrowers and some credit card debt.
Compared to the gloom around in the September quarter and towards the end of the year, the turnaround has been remarkable.
It seems like we have rebounded strongly but in fact it’s been a small but noticeable uplift.
It’s the change in confidence that’s made the difference, and now for the impact on the broader stockmarket.
With all the reservations expressed last month by Reserve Bank Governor, Glenn Stevens in the first Monetary Policy Statement of the year and then before the Housing of Reps. Standing Committee on Finance and the Economy, it’s clear the Australian economy is galloping along very nicely.
So after the upbeat figures on confidence and the second tentative signs of a recovery in housing finance, yesterday’s labour force figures for February were a bit of the same stuff.
Some economists however worry that another month with 22,000 jobs created (293,000 in the year to February) sends a flashing warning signal to the RBA.
There was lots of chat about capacity constraints, wages dangers, inflation and underestimating a rate rise but this is not New Zealand with its unbalanced economy, with surging house prices and an ‘easy money regime’ that again drew the ire of Dr Ian Bollard, head of the NZ Reserve Bank, in a speech yesterday.
The February labour force figures show that employment rose 22,000 in the month after falling a revised 4,800 in January.
Some progress yesterday on three takeover situations, with Rebel Sport falling to buyout group, Archer Capital; Qantas producing qualified forecasts with the share price edging higher towards and an uncertain outcome; and the ANZ looks even further from winning its bid for E*Trade.
Read MoreMarkets have recovered from this week’s reminder that things have changed: risk is being rediscovered and downside is now an option and not something someone remembers from history.
Read MoreMonday it was booming house prices, Tuesday it was booming retail sales: the New Zealand economy is starting to be buffeted by pressures that are proving almost impossible to control without causing wider damage.
Read MoreThere’s been a lot of talk about big nasty private equity buyers and how they are buying up Australia.
Read MoreOne of the recent stockmarket mysteries has been the strength of the Macquarie Airports’ price.
Read MoreIt’s a tough life being a CEO sometimes.
Read MoreWhile China’s exports continue to grow like topsy there’s good news for Australian exports (especially resource companies) from our largest trading partner, Japan.
Read MoreOn Monday Rio Tinto chairman, Paul Skinner said in the company’s 2006 annual report that the company expected the resources boom to continue because of the strength of demand from China.
Read MoreStand by for a rough day on the markets.The gathering US subprime mortgage crisis we’ve been writing about for the past month reared its ugly head today and hit Wall Street hard, assisted by lower than expected retail sales and a fall in the US dollar.
Read MoreAnother down day for Qantas shares yesterday. They shed 7c over the day to close weaker at $5.09, with turnover of 46.6 million shares.
Read MoreAccording to ABARE’s Outlook paper last week world gold mine production is estimated to have fallen by around 2 per cent last year, to 2463 tonnes, as higher production in China and South America was more than offset by lower output in South Africa, Australia, the United States and Indonesia.
Read MoreIt’s been one of the most striking features of the world gold market in recent years: the fall of South Africa and the rise of China.
Read MoreRio Tinto remains confident that China’s seemingly insatiable demand for minerals and other commodities will continue.
Read MoreNo wonder Qantas shares tumbled 8c yesterday to $5.16 on more than 70 million shares.
Read MoreIt will be a very quiet week here in Australia with probably the most important corporate stories being the push by some big shareholders to reject private equity deals: Qantas and Rebel Sport are high on the list of deals under threat.
Read MoreThe AMP’s head of strategy, Dr Shane Oliver last week said that ‘it was only a correction’ and we should relax.
Read MoreIt should be a modest start to trading in local stockmarkets today but the factor to look for is the weakness shown by key commodities such as gold, copper, oil, lead and zinc in European and US trading on Friday.
Read MoreThe problems in the US subprime mortgage market continue to resonate through American financial markets, despite official attempts to downplay the problems.
Read MoreThe highlight of the American financial year is the Berkshire Hathaway annual meeting in Omaha, Nebraska, in the great American mid-west.
Each May thousands upon thousands of people gather there for what amounts to a festival whose centrepiece is an annual meeting that can go for hours, with a suitable break for lunch.
No tea and biscuits and a furtive chat with the shareholders before fleeing in a smoked glass limo to an expensive eatery or back to corporate HQ for Buffett, Charlie Munger and others.
It’s been called ‘Woodstock for Capitalism’ and quite a few Australians travel there each year for the experience as much as anything else.
It’s Mid-west folksy, it’s very American and quite a few modern business people would scoff at it but it will draw the best part of 25,000 to 30,000 shareholders from the US and many other countries.
Read this carefully, especially the events surrounding it such as furniture and jewellery sales and special meal deals: many of these businesses are owned by Berkshire Hathaway and the money shareholders spend pays for the whole event and more.
Simple, but obviously something too hard for many of our businessmen in Australia and many elsewhere.
In fact you can imagine some of the types at Macquarie Bank and other high flying investment and financial products companies looking askance at Buffett and Berkshire, or eyeing the annual report (http://www.berkshirehathaway.com/2006ar/2006ar.pdf) and wondering about break up values, and completely missing the point about Buffett, the company and shareholders.
Here are details for this year’s outing.
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Our annual meeting this year will be held on Saturday, May 5th.
As always, the doors will open at the Qwest Center at 7 a.m., and a new Berkshire movie will be shown at 8:30. At 9:30 we will go directly to the question-and-answer period, which (with a break for lunch at the Qwest’s stands) will last until 3:00.
Then, after a short recess, Charlie and I will convene the annual meeting at 3:15. If you decide to leave during the day’s question periods, please do so while Charlie is talking.
The best reason to exit, of course is to shop. We will help you do that by filling the 194,300 square foot hall that adjoins the meeting area with the products of Berkshire subsidiaries.
Last year, the 24,000 people who came to the meeting did their part, and almost every location racked up record sales. But records are made to be broken, and I know you can do better.
This year we will again showcase a Clayton home (featuring Acme brick, Shaw carpet, JohnsManville insulation, MiTek fasteners, Carefree awnings and NFM furniture).
You will find that the home, priced at $139,900, delivers excellent value. Last year, a helper at the Qwest bought one of two homes on display well before we opened the doors to shareholders. Flanking the Clayton home on the exhibition floor this year will be an RV and pontoon boat from Forest River.
GEICO will have a booth staffed by a number of its top counselors from around the country, all of them ready to supply you with auto insurance quotes.
In most cases, GEICO will be able to give you a special shareholder discount (usually 8%). This special offer is permitted by 45 of the 50 jurisdictions in which we operate. (One supplemental point: The discount is not additive if you qualify for another, such as that given certain groups.) Bring the details of your existing insurance and check out whether we can save you money.
For at least 50% of you, I believe we can. And while you’re at it, sign up for the new GEICO credit card. It’s the one I now use (sparingly, of course).
On Saturday, at the Omaha airport, we will have the usual array of aircraft from NetJets available for your inspection. Stop by the NetJets booth at the Qwest to learn about viewing these planes.
Buffett is 76 this year so succession is looming larger in his mind.
There are candidates, but finding someone with longevity seems to be the key objective.
Here, Buffett spells out the criteria and the way the company is going about renewing the existing succession plan: there’s a telling confession of a big mistake, there’s some good criticisms of CEO remuneration and there’s news of some changes on the BH board.
And there’s an explanation for shareholders on Buffett’s decision to push much of his wealth into charitable foundations and what he expects will be done with it.
All in a direct and forthright commentary:
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I have told you that Berkshire has three outstanding candidates to replace me as CEO and that the Board knows exactly who should take over if I should die tonight. Each of the three is much younger than I. The directors believe it’s important that my successor have the prospect of a long tenure.
Frankly, we are not as well-prepared on the investment side of our business.
There’s a history here: At one time, Charlie was my potential replacement for investing, and more recently Lou Simpson has filled that slot. Lou is a top-notch investor with an outstanding long-term record of managing GEICO’s equity portfolio.
But he is only six years younger than I. If I were to die soon, he would fill in magnificently for a short period. For the long-term, though, we need a different answer.
At our October board meeting, we discussed that subject fully. And we emerged with a plan, which I will carry out with the help of Charlie and Lou.
Under this plan, I intend to hire a younger man or woman with the potential to manage a very large portfolio, who we hope will succeed me as Berkshire’s chief investment officer when the need for someone to do that arises.
As part of the selection process, we may in fact take on several candidates.
Picking the right person(s) will not be an easy task. It’s not hard, of course, to find smart people, among them individuals who have impressive investment records.
But there is far more to successful long-term investing than brains and performance that has recently been good.
Over time, markets will do extraordinary, even bizarre, things. A single, big mistake could wipe out a long string of successes.
We therefore need someone genetically programmed to recognize and avoid serious risks, including those never before encountered.
Certain perils that lurk in investment strategies cannot be spotted by use of the models commonly employed today by financial institutions.
Temperament is also important. Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investment success. I’ve seen a lot of very smart people who have lacked these virtues.
Finally, we have a special problem to consider: our ability to keep the person we hire.
Being able to list Berkshire on a resume would materially enhance the marketability of an investment manager. We will need, therefore, to be sure we can retain our choice, even though he or she could leave and make much more money elsewhere.
There are surely people who fit what we need, but they may be hard to identify.
In 1979, Jack Byrne and I felt we had found such a person in Lou Simpson. We then made an arrangement with him whereby he would be paid well for sustained over performance.
Under this deal, he has earned large amounts. Lou, however, could have left us long ago to manage far greater sums on more advantageous terms. If money alone had been the object, that’s exactly what he would have done.
But Lou never considered such a move. We need to find a younger person or two made of the same stuff.
* * * * * * * * * * * *
The good news: At 76, I feel terrific and, according to all measurable indicators, am in excellent health. It’s amazing what Cherry Coke and hamburgers will do for a fellow.
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The composition of our board will change in two ways this spring.
In selecting a new director, we were guided by our long-standing criteria, which are that board members be owner-oriented, business-savvy, interested and truly independent.
I say “truly” because many directors who are now deemed independent by various authorities and observers are far from that, relying heavily as they do on directors’ fees to maintain their standard of living.
These payments, which come in many forms, often range between $150,000 and $250,000 annually, compensation that may approach or even exceed all other income of the “independent” director.
And – surprise, surprise – director compensation has soared in recent years, pushed up by recommendations from corporate America’s favorite consultant, Ratchet, Ratchet and Bingo. (The name may be phony, but the action it conveys is not.)
Charlie and I believe our four criteria are essential if directors are to do their job – which, by law, is to faithfully represent owners. Yet these criteria are usually ignored.
Instead, consultants and CEOs seeking board candidates will often say, “We’re looking for a woman,” or “a Hispanic,” or “someone from abroad,” or what have you. It sometimes sounds as if the mission is to stock Noah’s ark.
I suppose one of the bugbears of many investors, large and small in every market is the amount of money fund managers make and the excuses they invent when they don’t perform.
The complaints are similar the world over, even from someone like Warren Buffett.
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Wall Street’s Pied Pipers of Performance will have encouraged the futile hopes of the family. The hapless Gotrocks will be assured that they all can achieve above-average investment performance – but only by paying ever-higher fees. Call this promise the adult version of Lake Woebegon.
In 2006, promises and fees hit new highs. A flood of money went from institutional investors to the 2-and-20 crowd (that’s private equity).
For those innocent of this arrangement, let me explain: It’s a lopsided system whereby 2% of your principal is paid each year to the manager even if he accomplishes nothing – or, for that matter, loses you a bundle – and, additionally, 20% of your profit is paid to him if he succeeds, even if his success is due simply to a rising tide.
For example, a manager who achieves a gross return of 10% in a year will keep 3.6 percentage points – two points off the top plus 20% of the residual 8 points – leaving only 6.4 percentage points for his investors.
On a $3 billion fund, this 6.4% net “performance” will deliver the manager a cool $108 million.
He will receive this bonanza even though an index fund might have returned 15% to investors in the same period and charged them only a token fee.
Let me end this section by telling you about one of the good guys of Wall Street, my long-time friend Walter Schloss, who last year turned 90. From 1956 to 2002, Walter managed a remarkably successful investment partnership, from which he took not a dime unless his investors made money.
My admiration for Walter, it should be noted, is not based on hindsight. A full fifty years ago, Walter was my sole recommendation to a St. Louis family who wanted an honest and able investment manager.
Walter did not go to business school, or for that matter, college. His office contained one file cabinet in 1956; the number mushroomed to four by 2002. Walter worked without a secretary, clerk or bookkeeper, his only associate being his son, Edwin, a graduate of the North Carolina School of the Arts.
Walter and Edwin never came within a mile of inside information.
Indeed, they used “outside” information only sparingly, generally selecting securities by certain simple statistical methods Walter learned while working for Ben Graham.
A highlight of Buffett’s letter to shareholders is always the disclosure of his big equity holdings: investments worth $US700 million or more.
Read MoreIt should be an object lesson to company boards and managements.
Read MoreClothing retailer, Just Group, saw demand for its shares yesterday after reporting a modest rise in first half earnings, the retirement of the current chairman and a $65 million share buyback.
Read MoreImagine the Senators doing their homework for the one-day inquiry into the $11.1 billion takeover of Qantas by a group of investors, and the airline’s existing management.
Read More