Now and then – ‘Fair value’ for an asset today will not always be more than the purchase price


Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

The Government’s sale of its stake in Royal Bank of Scotland (RBS) – effectively part-nationalised when the UK bailed the bank out during the financial crisis with a purchase of £45bn of its shares and the provision of cheap funding – began in earnest last month. The process has provoked a great deal of comment, the tone of which has often been coloured by the political leanings of those offering a view. 

Anyone with any interest in bashing the Government, for example, has focused on the monetary hit that it and the country are taking on the shares and how this loss has made the RBS bail-out a bad deal for the British taxpayer. Whatever the perceived rights and wrongs of this issue may be, however, here on The Value Perspective, we would point out the loss is a simple fact – no more, no less. 

Just because the shares were bought at a higher price a few years ago, it does not necessarily follow that the current price represents poor value. Governments have many powers but having any say in what the market is prepared to pay today for shares bought in the past by a previous administration is not one of them. 

All the Government should really do with its RBS stake is look to obtain a price equal to, or in excess of, the company’s fair value. Unfortunately, there is no rule in investing that states the value of shares will always rise over time or that all investments must end in a nice profit. 

Sometimes the intrinsic value of a company turns out to be less than the price paid for the shares – meaning the investment results in a loss. These situations are obviously unpleasant but are part and parcel of investment life and the best way to deal with them is rarely to hold onto the shares in the hope they will one day rise back above the original ‘in’ price. 

As we are wont to say, value trumps price, and the extent to which parties on both sides of the debate are ‘anchoring’ on the purchase price of the RBS stake rather than the fair value of the shares is a particularly high-profile example of the behavioural forces that make crystallising losses a very difficult thing for humans to do.


Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.

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