Digging deeper - It takes more than a good listing to make a good investment
Eurasian Natural Resources Corporation (ENRC) has been receiving a fair degree of media attention in recent weeks – little of it positive. While we do not want to comment on the various details that have now drawn the attention of the Serious Fraud Office (SFO) to the Kazakhstan-focused, FTSE 100-listed miner, a couple of more general investment points can usefully be made.
The first is that, while we like the people in charge to have significant stakes in the businesses we own, it is possible to have too much of a good thing. Most of the time, such stakes will mean the interests of a company’s managers and shareholders will be aligned but there comes a point when excessive ownership by the former means the latter are at risk of abuse.
As such, where a company’s managers own a large stake in the business, investors need to satisfy themselves that appropriately strong oversight, checks and balances are in place – proper corporate governance, an independent board of directors, a shareholder structure that, irrespective of shareholdings, spreads out voting power as broadly as possible and so forth.
ENRC – which is 45% owned by its three founders, with the Kazakh government and natural resources giant Kazakhmys owning another 35% between them – had none of those things. That is not to say you cannot make money from such companies but, when appraising risk and reward, it certainly warrants a big note in the risk column. Unfortunately some investors are too focused on the potential returns on offer to worry about such dry considerations as board composition and voting powers.
Some of you may have spotted in the last paragraph that with five parties owning 80% of ENRC, only 20% of the company could be listed, which is usually below the requirements for entering the FTSE 100. However, the Financial Services Authority, the relevant regulator at the time of the 2007 floatation, made an exception on the grounds ENRC was big enough for its shares to be liquid.
In a story with parallels with one or two other internationally-focused companies, the newly listed ENRC was now able to publish a UK-based annual report and accounts and attract some City grandees to its board, few of whom are still in place today. Most of the points of concern that have happened since and caught the eye of the SFO were not especially hidden but many investors may have overlooked them as ENRC was making them money and offered the assurance of a UK listing.
However, just because a company is listed on a major stock exchange and has a nice, shiny set of report and accounts, investors should not feel that excuses them from undertaking further research to give them a better understanding of whether or not it is suitable as an investment.
Fund Manager, Equity Value
I joined Schroders in 2001, initially working as part of the Pan European research team providing insight and analysis on a broad range of sectors from Transport and Aerospace to Mining and Chemicals. In 2006, Kevin Murphy and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Kevin 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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