- Brendan Wood is Chairman of Brendan Wood International, a global intelligence advisory firm. Recently, BWI published the World’s TopGun CEOs as ranked by 2500 institutional investors, which provides insight into the executives in whom shareholders feel the greatest confidence. The opinions expressed are his own. -

The Brendan Wood International’s panel of 2500 institutional investors suffered through last year’s markets believing value would somehow prevail. Those value investing “diehards” indeed died hard.

Conversely, those who correctly read the status of shareholder confidence and acted on it were spared. In short, shareholders that had lost confidence in the system abandoned their value criteria and sold good companies along with lesser ones.

As a result, “value” investors were left holding a bag full of stocks with hidden value. Sadly, the value remained undercover while the price of these stocks plummeted. Many portfolios catapulted through risk tolerance levels and took their investors’ savings along with them. Capital preservation was sacrificed in favor of the mantra “the market always comes back.”

But as advocates of Shareholder Confidence, we ask why take that ride and lose the most important strengths an investor has, namely, capital and a willingness to assume reasonable risk?

If half your life savings or more was lost, what capital or willingness to assume further risk would you have? Shareholder confidence trumps hidden value. If value in a company is credible to those holding the stock, the price will at least remain stable, if not indeed rise.

Should this not be the case, one may be stuck owning the most costly secret in town. This may be so because value investing relies on shareholder confidence coming to the forefront.

ON THE CONTRARY!

A majority of investors classify themselves as contrarians. Surprisingly, they agree with one another about 70 percent of the time. This raises two obvious questions. What is the benefit of contrarianism? Why is it considered a quality? If the majority of investors disagree with you (or you with them), the future of a portfolio relies upon them changing their minds. How much success can an investor expect via changing other people’s minds? Are contrarians delusional about being contrarians? It appears so. Like it or not, the success of contrarians depends on consensus, that is, other contrarians agreeing with them. BWI may have thus uncovered the “quiet contrarian majority”.

SHAREHOLDER CONFIDENCE AND THE CURRENT MARKET

Prior to the 2008 downturn, the number of companies at the top of the Shareholder Confidence Index approached 33 percent. Since the dramatic weakening of markets, that number has been running at 17-18 percent. With no change in the recent quarter, investors remain wary and are not yet ready to assert top levels of confidence (i.e. buying behavior) except in the Top 18 percent.

If investors were to follow the example of Brendan Wood International’s panel, they would only be buying the best of the best.

You have to hand it to Barclays. The reported sale of BGI, its fund management arm, to BlackRock for $13 billion is probably the best way that the bank could bolster its capital ratio.

It looks like it will end up with around $8 billion in cash and a fifth of the enlarged asset manager.
The gain on the sale would lift its equity tier 1 ratio to 6.8 percent from just over 6 percent, according to Nomura.

Combined with the strong earnings coming through from BarCap, its investment bank, this should be high enough for Barclays to survive both the further losses on legacy assets that it has so far resisted and recessionary write-downs.

The terms of the sale have not yet been disclosed, but they look like they will be much better for Barclays than April’s proposed sale of iShares, the most attractive part of BGI, to CVC, a private equity group.

An astute go-shop clause, which expires on June 18, has enabled Barclays to exploit rising markets to drive a harder bargain. The proposed iShares deal would have been 80 percent vendor-financed, on pretty appealing terms, by Barclays.

This time it looks like the purchasers are raising cash themselves. Larry Fink, the BlackRock boss, is reported to have sought backing for the deal from the same Middle Eastern wells of capital — Abu Dhabi and Qatar — which invested so successfully in Barclays last November, as well as the Kuwait Investment Authority.

By taking a 20 percent stake in an enlarged BlackRock, Barclays retains exposure to the stable asset management business that it had declared to be “core” before it realised it needed to raise some capital.

Even if Barclays’ voting rights are capped, it will have a say through its two expected board seats. One of those seats is likely to be filled by Bob Diamond, president of Barclays.

Diamond looks set to receive around $21 million from the deal (not all of which is profit because he paid for his existing stake and must also pay to exercise options he holds).

Barclays insists that — as with the iShares deal — Diamond has not been involved in the talks.

However, he is clearly the architect of the strategy to sell BGI, and the negotiations have been led by Rich Ricci, one of his closest colleagues. Some shareholders might find Diamond’s payout unpalatable. Others may be simply relieved that he has played a difficult hand with some skill.

– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –

Barclays’ hasty deal to sell iShares in April served its purpose. The $4.4 billion price-tag boosted the bank’s capital, thereby allowing it to dodge the government’s insurance scheme. Barclays should now seek better terms on the deal.

A month is a long time in the markets. Barclays sensibly agreed with the purchaser, the private equity firm CVC Capital Partners, a “go shop” clause, allowing it to seek higher bids before June 18.
Several other parties have now entered the fray. With the markets storming higher, it should be possible for Barclays to improve on the CVC deal.

One way to do this would be to get a higher price, and this should be possible. But Barclays should also negotiate better financing terms. The current terms hark back to the “cov-lite” days of private equity, where banks extended credit without strict covenants.

Barclays is lending CVC 81 percent of the amount that the bank itself will receive.

By contrast, the employee-shareholders, who include Bob Diamond, head of Barclays Capital, are eligible to pick up a big part of their $520 million share of the sale in cash — in Diamond’s case, $9.8 million.

Barclays is going to have to whistle for some years.

Moreover, barely a quarter of the loan is secured. And almost half of the advance is a vendor loan that rolls up at just 7 percent — pretty juicy terms for an unsecured loan with a 10-year term.
Barclays has also pledged to keep more than half of this debt on its own books, (rather than syndicating it to other banks), for at least five years.

Even though credit markets are a little looser, Barclays can now get better returns on an advance of $3 billion than this deal offers.

– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –
Barclays thinks the insurance it has against its “impaired assets” is worth twice as much as RBS seems to believe. It’s hard to see how both could be right.
On May 7, Barclays said that it expects to get 76 percent of any claim made against its “monoline” insurers. The following day, RBS said fat chance — we think it’s 35 percent. They may not have the same insurers, but they are also coming from the problem from different angles.
Unlike Barclays, RBS is already attached to the government teat. Because RBS has taken a huge capital injection from the state, chief executive Stephen Hester had much less to lose than his counterpart at Barclays John Varley in admitting that things are looking grim.
For Barclays, it makes more sense to take losses only as fast as you earn enough to cover them.
Moreover, RBS has also already agreed to join the government insurance scheme. RBS said that around 75 or 85 percent of the 4.9 billion pound headline hit in the first quarter was to assets that will end up in the government’s Asset Protection Scheme (APS). RBS has to take 19.5 billion in losses before it calls on the government purse. These numbers show that it has already chalked up around 4 billion of that first loss.
Moreover, that huge figure excludes 755 million pounds of trading asset write-downs. That means the bank’s total losses for the quarter were 5.6 billion pounds.
RBS’s 51-page report also reveals the details of another banking farce. It has 31 billion pounds-worth of bonds outstanding. The market is sceptical about RBS’s ability to repay this, and has marked the bonds down accordingly. In this quarter alone, that market write-down equates to more than 1 billion pounds. RBS has taken this as a “profit”.
Hester himself rightly flags up that there are more headwinds to come. There will be further losses as the recession deepens.
Net interest margins are likely to remain compressed. While the banks may get away with what they term asset pricing (higher interest charges on our loans), it will be a while — if ever — before their funding costs return to pre-crunch levels.
Longer term, regulators will demand that banks set aside more capital against the loans that they make, thus depressing equity returns.
Hester may think there is mileage in being frank. But he should be careful. After all, RBS has not agreed final terms on the APS with the government. Having seen these numbers, it may decide that RBS should be forced to pay harsher terms.