Prominent fund manager Steve Johnson says beware the perils of CEOs telling you what you want to hear. Photo: Daniel O’BrienMore often than not, company management is keen to tell investors what they want to hear, even when they are months away from filing for bankruptcy.
This is one lesson Steve Johnson, chief investment officer of Forager Funds, wants to impart to investors from a 2015 many wish to forget.
Forager’s team is now notorious for sifting through Dick Smith’s books in October and declaring Anchorage Capital’s spin-out of the electronics retailer one of the biggest private equity heists of all time, two months before it fell into administration.
Mr Johnson warned investors the dangers of spending too much time talking to management, in his quarterly report looking back on a “treacherous” year on the Australian sharemarket.
His answer, when asked how much time he spends talking with management these days? “Not much.”
The reminder of the perils of company spin came in the form of Norwegian oil services company Dolphin Geophysical. Mr Johnson said he met with the chief executive after its share price fell by two-thirds amid sliding oil prices, only to be told everything was going to be fine.
“Armed with the knowledge that the company has now filed for bankruptcy, the notes from that call are laughable,” he said.
“Management can be a useful part of an investment process – particularly when you have already done a significant amount of research and are tying up loose ends – but they are a relatively small part of ours, and I expect it will stay that way.” Waste of franking credits
In a year where the value fund manager, which targets companies with strong fundamentals that aren’t reflected by an equally strong share price, returned 20 per cent to investors, Mr Johnson also brought into question the waste of franking credits by boards considering international takeover offers.
Companies can choose to pass on franking credits to shareholders on tax they have paid, to reduce or offset tax owed by investors on income and dividends.
“The lack of consideration given to franking credits in takeover bids has been an extremely frustrating theme throughout 2015,” he said.
Vision Eye Institute and Coffey International handed “huge piles” of franking credits to international acquirers to whom they offer little value compared to Australian shareholders, he said.
“Boards make two big mistakes. They assume only a certain percentage of their shareholder base will value them, when we know from past experience that everyone benefits when franking credits are part of the deal,” he said.
“The shares simply trade from shareholders who don’t value them to new ones at a price that benefits both parties.”
Mr Johnson accused investment bankers of ignoring franking credits in their incentive fees because they are of no benefit.
“If they aren’t getting paid for it, the chance of them working hard to find a solution that includes franking credits is zero,” he said.
“Give them a share of the spoils and we are much more likely to get the right result.”