All together now – Neither managers nor governments should be judged on a single investment
The Government will hope the sale of the last of its shares in Lloyds, details of which were announced this week, can dodge the sort of flak that followed the disposal this summer of part of its stake in Royal Bank of Scotland (RBS). In Now and then, The Value Perspective used that episode to consider the broader notion of ‘fair value’; this time, we will consider to what degree all the criticism was justified.
Both Lloyds and RBS were effectively part-nationalised when the UK taxpayer invested in them during the darkest days of the financial crisis. The Government ending up buying a 79% stake in the latter for £45bn – at an average price of 502p per share – so, at first sight, one can understand why the sale of a tranche in August for 330p a share would widely be considered to have constituted a poor investment.
The situation is complicated, however, by the fact that, over the past six years, RBS has returned a lot of money to the Government in the form of fees. As you can see from the following chart, which was assembled by independent financial companies analyst Autonomous using data from various public documents, adjusting for all the different fees and other payments would bring the average investment price down to 437p a share.
* 'HM Treasury Resource Accounts: 2009-10’ p.133
** ONS – ‘Developments to Public Sector Finance Statistics – June 2014 update’
***Based on Table 2 in the Rothschild report published with the Mansion House speech 2015
At that point, of course, the taxpayer still appears to have lost money on the August disposal but, here on The Value Perspective, we would argue two further things need to be borne in mind. The first is that RBS was, of course, not the only financial company for which the Government had to reach for its chequebook in 2009 and, when we consider the total investments made across the sector, it has to date actually made some £14bn in profit.
Now, how you allocate that profit across all the different outlays of taxpayers’ cash is fraught with difficulty. Autonomous, again using publicly-available data, has taken a stab – concluding this would bring the average investment price of RBS down to 200p – but more important than any specific number is our point that the August RBS disposal should not be considered in isolation.
Indeed, no investment should be thought of in that way but, instead, as part of a portfolio. Since 2009, parts of the UK taxpayer’s portfolio of financial investments will have risen in value and parts will have fallen – that is the way of portfolios, no matter how good the manager happens to be. Even Warren Buffett, say, makes losses on some of his investments.
In aggregate, the UK taxpayer has made money from the actions taken to bail out the financial sector during the crisis but not, thus far, on RBS – and the words “thus far” lead us on to our second point. The August disposal merely reduced the Government’s RBS stake to some 73% and it is only once all those shares have been sold off that any meaningful judgement can be made on the financial success of the whole 2009 intervention. We will not prejudge the outcome – however, as always, investment is all about taking a longer-term view.
Fund Manager, Equity Value
I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials. In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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