November 2008


Information has become vital in the fast-moving market environment. Some managers feel that companies are hindering investment decisions with their secrecy, reports Nick Fitzpatrick Hedge funds are furious with Porsche, the car manufacturer, after it secretly increased its stake in Volkswagen, resulting in a share price rise that hurt short sellers. Reportedly, hedge funds say that Porsche has been less than clear about its plans for VW after originally indicating that it would not increase its stake in the company significantly, but then doing the opposite. They are said to be considering a complaint to Bafin, the German regulator.

Hedge funds are not alone in accusing companies of being less than candid about their activities. There are signs that fund managers in the broader world are equally concerned.

Colin McLean, founder of SVM, a Scottish-based fund management firm, has called for more transparency from companies regarding their trading and debt situations. He also expects more thought by governments about the timing of announcements relating to capital support for banks.

Where companies are concerned, he says, the information flow about trading and debt needs to be more timely.

“Volatility has, to some extent, been caused by a lack of information in fast-moving markets.   Investors have found it hard to keep up to date with underlying company values,” he says. “It is a key issue, therefore, whether investors are getting the right information or not, and getting it in a timely manner.”

A lot of companies have had weak trading in August and September, but investors won’t necessarily hear about it until the interim statements. McLean says that sometimes a company’s interim statements are not adequate for giving enough detail to assess the risks for shareholders.

Breach of covenant
“If trading weakens this may trigger the banking covenant between a company and its bank. For some companies that have been more leveraged than in the past, this means that even if they are still paying interest they may still be in breach of covenant if cash flow or profits have fallen below the ratios agreed with the lending bank.”

McLean adds: “We want companies to give out information on their debt quicker. We need to reestablish trust and candour. We need information that is timely and accurate and complete.”

A lot of companies that are exposed to debt have seen extreme volatility compounded by short selling. An example, says McLean, is Punch Taverns, a UK-listed bar chain, which has  witnessed sharp rises in its share price followed by steep falls. Newspaper group Johnstone Press is another, where share price falls ahead of results have subsequently been explained by disappointing news on trading and debt.

These share price patterns can be explained partly by sharp analysts, investors and some hedge funds that have worked out the risks with these companies. Some analysts, says McLean, have consistently called the banking positions quite well.

Handling of the crisis
But the speed of the market sell-off has taken a lot of investors by surprise and they have not had much chance to exit.

To this extent, McLean would probably have sympathy with the hedge funds if they are right about the VW situation. However, McLean has also extended his criticism to governments for their handling of the banking crisis.

“Some of the volatility that’s been witnessed in the banks recently was not necessarily all due to panic. It arose instead from the impact of news that materially affected their balance sheets.

“The authorities are not helping by putting out important information about financial support for banks on a Sunday night. The volatile markets of the Far East get to react to this information first. Share prices will jump in the banking sector, and this trend is in place before Europe and the US opens.” ©2008 Funds Europe

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