STOCKTAKE: THERE'S been much about a new era of shareholder activism after Citigroup shareholders voted down proposals to grant chief executive Vikram Pandit a $15m pay package. In reality, this is more likely a stock-specific issue.
Last month, Citigroup failed the Federal Reserve’s latest stress tests. Among large banks, Citi’s share price performance over the past decade has been the worst. Shares fell 44 per cent last year, and by some 90 per cent since Pandit took over in December 2007. Despite this, he earned 155 times the average pay for all Citigroup workers last year, as well as bagging $165m from the sale of his hedge fund to Citigroup in 2007 (the fund was shut down 11 months later). So it’s easy to see why banking analyst Mike Mayo described Citigroup as one of the “most egregious examples of disconnect” between management and shareholders.
Fund investors are too easily spooked
STOCKS have gone nowhere over the last decade, but US indices have enjoyed decent gains – 7.81 per cent annually – since 1991. But the average fund investor only gained 3.49 per cent annually. Why? They get spooked by market declines and bail out at bad moments. Ned Davis Research notes that there have been 25 bear markets (declines of at least 20 per cent) since 1928, 94 double-digit declines and 294 dips of 5 per cent or more. As a strategist at Dorsey Wright put it, that’s “294 chances to screw up”.
Grantham blames it on fund managers
THOSE unnerving market movements are much greater than they should be, according to investor guru Jeremy Grantham, whose latest quarterly letter to clients was published last week.
Stock markets are “remarkably volatile”, while both GDP growth and indices’ so-called fair value are “remarkably stable”, noted Grantham, who said markets move “19 times more than is justified by the underlying engines”. Why? Career risk. Fund managers who ignore short-term volatility in favour of long-term realities risk being fired, said Grantham, who lost 40 per cent of his clients when he avoided tech stocks in the 1990s. One “must never be wrong on your own”, and this results in herding, driving prices far above or below fair value. This may be the “correct response” for most market players as doing otherwise “is simply too dangerous in career terms”.
Berkshire not yet a buy-back for Buffett
BERKSHIRE Hathaway stock barely moved after chief executive Warren Buffett announced he had prostate cancer. Doubtless, investors were reassured by the fact that the cancer is “not remotely life-threatening”, although it’s fair to say the eventual demise of the 81-year-old Buffett is already priced into the stock. Shares have been flat over the last two years and trade at around 1.2 times book value, compared to an average of 1.6 over the last two decades.
A bargain? Not necessarily. Firstly, Berkshire is too big to enjoy the outsized returns of its early years. Secondly, Buffett’s eventual replacement will find it hard to replicate his record. Nor does Buffett think the stock is extremely cheap. Berkshire buys back its shares when they trade up to 1.1 times book value, so the Sage of Omaha will not be too tempted at current levels.
Nokia burns its cash pile at alarming rate
NOKIA shares have fallen by over 90 per cent since 2007, the year Apple introduced the iPhone, and last week fell to their lowest levels since 1997. It burned €700m in cash in the last quarter, a burn rate that would exhaust its net cash pile by the end of 2013. Credit default swaps to protect against bond default have more than tripled in the past year, and Moody’s has cut its debt rating to one notch above junk. In 1997 Apple was on the verge of failure, only for Steve Jobs to catalyse a recovery. Nokia will be praying that its new smartphone, the Lumia, can do the same.
