Haranguing company managers is a lucrative business for those who like to get stuck in.
The skills involved in managing a diverse portfolio of investments are very different from those needed for running a business. So most investment managers, wisely, refrain from telling corporate executives how to do their job. A small number of activist investors, however, seek out mismanaged, under-valued companies abandoned by mainstream investors, with a view to forcing change.
One of the most successful of these is Christopher Mills, chief executive and investment manager of the £500m North Atlantic Smaller Companies Investment Trust (LSE: NAS) since 1982. In that time, the net asset value (NAV, the value of the underlying portfolio) has multiplied 113-fold; in the last five years the share price has more than doubled. This compares well with an 84% return from global equities, yet the shares still trade on a discount to NAV
This lack of confidence from investors at large is not reflected on the board. Mills owns 28% of the company, and chairman Peregrine Moncreiffe a further 3%. The shares trade at a discount because “investors think Nascit is complicated and don’t make the effort to understand it, but it provides a margin of safety for those who do”.
Mills makes a virtue of his unconventional tactics. Given that his grandfather once offered a reward of £10,000 to anyone who could bring the Loch Ness monster to his circus, this appears to be a family trait. What makes him a dangerous person to cross is that his focus is sometimes on securing “victories” rather than investment returns. He once succeeded in pushing out the CEO of engineering company Tomkins despite not owning any shares in it.
“Someone had to do it,” he says. Besides, victories create goodwill with other investors and “make people realise that when we get involved, we mean business”. In the past, Mills, unlike activists who relied on aggression only, was ready to use a combination of the carrot and the stick, rewarding managements who implemented his plans.
Nowadays, “it is easier to get things done, as investors are more inclined to support activists, but don’t want to do it themselves. In small, illiquid companies, activism is the only way out for larger investors”.
With more focused lists of shareholders, “it may only take five calls to get something done. Nowadays, companies don’t even fight.” Mills seems to regret this as he clearly relishes confrontations, reeling off tales of potential targets and misbehaving executives he would like to have a go at just for fun.
A profitable portfolio
The portfolio is a mixture of direct, quoted investments in the US and UK, holdings in funds managed alongside Nascit, private-equity investments and US Treasury bills, which account for 20% of assets. With a conservative balance sheet, Mills can move quickly into new opportunities, of which he never seems to have a shortage.
The largest holding is a 56% stake in Oryx International, a Guernsey investment trust also managed by Mills, which accounts for 11% of assets. This is followed by Ten Entertainment, the UK’s second largest operator of ten-pin bowling alleys, M J Gleeson (urban housing regeneration and strategic land trading) and Polar Capital (fund management).
Mills is a director of Oryx, Ten Entertainment and Gleeson, but not of Polar Capital, where he appears supportive of the management. He says he intends to continue “for as long as it’s fun”. As long as he does, the wrong end of the league table of corporate governance and competence has much to fear, and investors in Nascit should go on making money.
An activist fund has “stepped up the pressure” on Barclays, saying it is “engaging with the bank” on its search for a replacement chairman, says Martin Arnold in the Financial Times. Edward Bramson’s Sherborne fund, which owns 5% of the bank, is also discussing capital, earnings and costs with it.
By listing the succession process and the mandate of the future chairman among his priorities, Bramson “appears to be laying down a marker that… he wants to have a long-term impact on the bank’s strategy”. The activist is likely to call for Barclays to return to shareholders much of the £26bn of capital tied up in its corporate and investment-banking division by shrinking the unit, according to “one person who knows him well”.
Short positions… GAM to liquidate bond funds
• Asset manager GAM will liquidate its CHF11bn (£8.7bn) absolute-return bond fund range following the suspension of its top bond-fund manager a fortnight ago, says Laurence Fletcher in The Wall Street Journal. After suspending Tim Haywood for conduct “of significant concern”, GAM was forced last week to block withdrawals after investors holding more than 10% of assets in the range demanded their money back.
The boards of nine of its funds have now decided to put them into liquidation (ie, sell the assets and return the money), subject to approval from regulators and shareholders. The affected funds include the Absolute Return Bond, Absolute Return Bond Plus and the Unconstrained Bond funds. Investors should receive their cash “as it becomes available throughout the liquidation process”, according to GAM. It is also working on alternative vehicles for investors who want to remain invested.
• Charles Stanley Direct, one of the cheapest stockbrokers in the market, will increase its platform fee from 0.25% to 0.35% owing to “growing costs related to digitalisation”, says Laura Dew in Investment Week. The higher fees are expected to come into force from Monday 10 September, and will apply to holdings of both funds and shares.
Costs have increased for the broker in recent years as customer numbers have grown, thanks in particular to cybersecurity and systems to combat fraud, said the broker. Having launched a new app for Apple and Android devices in the past year, it also wants to continue to put money back into the business, it said.