- 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.

– Neil Collins is a Reuters columnist. The views expressed are his own –

Shareholders in Rio Tinto would very much like to buy a bond yielding 9 percent, convertible into ordinary shares at $45, a tiny premium to today’s price of 29.30 pounds.

Unfortunately, if their board gets its way, they won’t get the chance, since the bonds are all being bought by the state-owned Aluminium Corporation of China (Chinalco).

Assuming the Australian authorities can be squared, shareholders in both the UK and Australia will be invited to rubber-stamp a deal which looked panicky at the time it was struck in February, but looks downright daft today.

The deal would give the Chinese a further 9 percent of Rio’s equity to add to the 9 percent they bought at the top of the market last year, but the $7.2 billion raised is nothing like enough to meet bond repayments of $8.9 billion due this year and $10 billion next.

In the depths of the financial winter, Rio’s directors also agreed to sell minority stakes in nine of its best aluminium, copper and iron ore mines to raise $12.3 billion. Chinalco also gets two seats on the Rio board. Given the recent track record of the directors, this might be the only positive aspect.

The principal justification for the deal was that there was no alternative. But since it was done, copper prices have rebounded — in good part, thanks to Chinese stockpiling — and, more to the point, the capital markets are re-opening.

Investors who were recently obsessing about liquidity are now falling over themselves to subscribe to new share issues wherever there is a plausible story to support them.

Fortunately, it’s not too late for the Rio shareholders to ditch this deal, even if the board cannot be seen to be helping them. If they vote it down, then it collapses, and they are even spared the $195 million break fee.

The timetable, though, is getting tight. The original target of this month for the meeting has slipped, and it will be July before shareholders get the chance to vote, leaving just three months to execute Plan B.

There are big advantages in greater Chinese involvement with Rio, not least the prospect of favourable treatment to explore the Middle Kingdom itself. There is scope, here, for something better, if the directors and Chinalco can find a face-saving way to back down.

The recovery in Rio’s share price has taken its market value to 30 billion pounds, comfortably high enough to support a 10 billion pound rights issue, and make the balance sheet look reassuring to potential new lenders. Rio’s shareholders own a world-class asset whose output is always going to be needed.

Voting this deal through would effectively give it away.