Footsie clunkers of 2011

Having had a quick shufti at the best performing FTSE 100 stocks of 2011, it is time to have a look at the clunkers.

Indian reservations

The curious thing about duff performers in the top-share index is that they don't stay in the Footsie if their share price decline continues for too long. As an example, I give you Yellow Pages publisher Yell Group. It was once a member of the FTSE 100, and now it would need to double in price to have a sniff of a chance of even getting back into the FTSE 250.

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Bearing that in mind, it is impressive that the likes of Essar Energy, Lloyds Banking Group, Vedanta Resources, Man Group and Royal Bank of Scotland have maintained their positions in the top flight, despite losing half their value or more this year.

Platinum producer Lonmin would have been in that list of shame as well, but after losing half its stock market value this year it was ejected from the FTSE 100 earlier this month, along with Inmarsat and Investec.

Clearly, the moral of the story is, do not invest in companies with names that start or end with "IN" ...

India-focused integrated energy company Essar Energy has lost more than two-thirds of its value this year, as the company has become increasingly embroiled in an investigation into suspect goings-on relating to the allocation of mobile phone spectrum space in India.

On December 21st the company Chairman, Ravi Ruia, said he would temporarily give up the big comfy chair (while remaining a director of Essar) while the investigation by India's Central Bureau of Investigation (CBI) into Ruia's alleged involvement in the Loop Telecom scandal proceeds.

The CBI is investigating allegations that Ruia, along with certain other executives of the Essar Group, and Essar Teleholdings Limited - an Indian company belonging to the Essar Group - had suppressed facts relating to the extent of the equity holding of Essar Group in Loop Telecom Limited.

The allegations relate principally to a certification given by Loop Telecom at the time of the granting of mobile telecom licences that Loop was in compliance with Clause 8 of the guidelines under which such licences were issued; Clause 8 prohibits any shareholder company (directly or through its associates) from holding 10% or more equity shareholding in more than one mobile licensee company.

Essar Energy is maintaining its innocence, and may well be justified in doing so. However, the market does not like uncertainty and so the share price has been hammered.

There is a school of thought which says buying intrinsically sound companies in times of crisis is a good way of making money; an example might be BP, which is now trading at about 450p, having slumped as low as 304p in June of last year, at the height of the furore over the Macondo oil well tragedy.

Timing is key, however, and it would be a brave investor who would call the bottom on Essar's shares right now; the shares are down more than a fifth over the last month and more than one-tenth over the last week.

Lenders surrender

The second worst performing FTSE 100 stock of 2011 is part-nationalised lender Lloyds Banking Group, which has performed even worse than the other taxpayer-owned bank, Royal Bank of Scotland (RBS).

Exposure to the Eurozone sovereign debt crisis has done for both banks in 2011, but Lloyds suffered an additional blow late in the year when its inspirational workaholic chief executive, Antnio Horta-Osrio, had to take a prolonged leave of absence to recover from exhaustion.

The Portuguese is set to return to his desk in January, and the company has reorganised its command structure so he has far fewer people reporting directly to him, but the market is likely to remain sceptical about Horta-Osrio's ability to delegate more authority to his team.

The shares are down 61% on the year so far.

As for RBS, the shares are down 48% on the year, and the long-suffering British tax-payer's enforced investment in the "bank that Sir Fred Goodwin broke" is still a long way under water.

There is a good chance that this time next year RBS could look like a very different beast, with the grapevine buzzing with reports of the bank's plans to undertake a restructuring of its Global Banking and Markets (GBM) division, in an operation which would see the units balance sheet rapidly reduced from £450bn to less than £200bn.

The possibility also exists that it might offload its brokerage unit, the once mighty Hoare Govett, before a complete closure of its equity business.

Vedanta clause is coming to town

For the third worst performing stock of 2011, we have to return to India, and mining giant Vedanta, described by the Financial Times (FT) as "a ragbag of assets, funded by a lot of debt and not a lot of their own equity."

The shares have lost three-fifths of their value in a year in which the company handed over $5.5bn to Scottish oil firm Cairn Energy for 40% of Cairn India, giving Vedanta a controlling stake in the Indian oil company.

Cairn promptly sank more than half a billion quid of that into its thus-far fruitless drilling campaign off the coast of Greenland, but that's another story ...

As the Lex team at the FT pointed out, taking a controlling interest without taking full ownership of assets is a feature of Vedanta's make-up.

"Seeking control but not full ownership is a good way of boosting consolidated earnings before interest, tax, depreciation and amortisation. But what good does that do to investors in Vedanta when, as in the first six months of this financial year, 95 per cent of after-tax profit gets attributed to minority interests? And, when lenders have a much bigger investment (net debt of about $10.5bn, post-Cairn India) than Vedanta's own shareholders ($4.6bn at the end of September), the latter are entitled to wonder who is really calling the shots," the Lex team wrote, in an orgy of grammar rules-breaking.

The Descent of Man

The other member of the five Footsie stocks you did not want to be holding at the beginning of the year is hedge fund manager Man Group.

The shares are down 58%, as customers withdrew funds in a nervous reaction to excessively volatile markets.

In theory, hedge fund managers are supposed to love volatility, but with the Eurozone at times seeming like it has the survival prospects of a wildebeest approaching a crocodile infested river, markets got a little bit too hairy for many investors this year.

Funds Under Management (FUM) at Man dropped from $71bn at the end of June to $64.5bn by the end of September. This was partly due to a $2.7bn outflow of funds from anxious investors but investment performance was also a drag, losing $1.7bn while currency effects also reduced the FUM figure by a further $2.1bn.

I was trying to work a Christmas pantomime Jack and the Beanstalk reference in there, along the lines of "Fees fly slow FUM", but it was too contrived, even for me.

Faced with the collapse of its share price, management responded by revealing a $150m share buy-back programme. Well, I suppose it was asking a bit much of a hedge fund manager to short the shares ...

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