24/05/2005 - 22:00

Tim Treadgold: Briefcase - Hot money malaise spreads wider

24/05/2005 - 22:00

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There is nothing new about the sight of hot money looking for a fat profit.

There is nothing new about the sight of hot money looking for a fat profit. But, until now it’s either been a private matter, or a game played by the super-rich with a spare million dollars to have a punt on an obscure investment - pork bellies on the Chicago Board of Trade, or Florida orange juice futures, are two that spring to mind.

Kept that way, the hot money did no harm. The rich either made enough to buy a second Lear jet, or they lost it and sold the spare holiday house in St Tropez.

Times are changing, and not for the better. The hot money phenomena, which Briefcase will simply define as money owned by greedy people seeking super-profits at any cost, is spreading deeper into the world of business, threatening to destabilise the way the entire system works, and potentially pitting business against the people and government.

If this sounds a little extreme consider the emerging evidence of how business is drifting out of step with wider society through the payment of ridiculous salaries, bonuses and stock options. No manager, no matter how good, can justify an annual pay packet of $10 million, and more.

But, what if the bad habits being developed at the sharp end of business start to cost ordinary people their jobs? That is the stuff which starts revolutions, or invites a government crack down.

Briefcase, in a recent study of events overseas, fears it has seen the ugly future through the rise-and-rise of hedge funds, a once benign form of high-risk investment which has suddenly developed teeth.

For anyone unfamiliar with the term, a hedge fund is simply a pile of money invested by rich people and/or institutions, promising to make above average returns by taking above average risk, generally in obscure forms of investment such as currency and commodity markets.

In return for the fat profits, equally fat fees are charged. In many cases it is not unusual for a fund manager to promise returns of 25% to 50% annually, while the manager peels off 10% and more in fees.

The problem, which is easy to see, is that finding investment opportunities which generate returns which are many times above bank interest gets harder as the number of hedge funds grow. In one recent study it was found that several trillion (yes, trillion) dollars was now being managed by hedge funds in Europe and North America.

Now comes the really bad bit. As investments get harder to find two things happen. First, hedge fund managers either (a) start to take silly risks of the type that almost destroyed the global banking system a few years when a hedge fund called Long Term Capital Management collapsed or (b) the managers go on the offensive, forcing change on conventional companies for the sake of short term return.

In the US recently, a fund called K Capital Partners has demanded that OfficeMax, a direct delivery business similar to the Coles Myer division, Officeworks, do more to boost its share price. K Capital, which has $US1.1 billion under management and owns 6 per cent of OfficeMax, also wants the chief executive of OfficeMax to take a pay cut.

A similar game is being played in Britain where another hedge fund called Elliott Associates has snapped up 7 per cent of Woolworths (not related to the Australian firm of the same name) and demands that management do more to lift the Woolworths share price.

Briefcase, using just a small amount of imagination, sees this game of buying a chunk of stock and then demanding a share price rise as similar to that played by the great “greenmailers” of the 1980s. The late Robert Holmes a Court was one of that crew.

But, the 1980s version of the game was played by individuals, the demands were not so blatant, and the time frame a lot longer. This time around there is literally trillions of dollars of hot money demanding to be fed fat profits now, and the danger is that management of target companies will take extreme short-term action, such as sacking staff, simply to deliver what the hedge fund wants.

Shareholder activism is not a bad thing, when it is in the best interests of the company, its owners and employees. Hedge funds, almost by definition, couldn’t give a hoot about the interests of the company and its staff. They are hungry, greedy, a threat to the entire business system and inviting legislative retaliation.

•••

TALKING of unpopular topics it has always been immensely amusing to Briefcase to observe the gap between government-funded anti-smoking campaigns and the share price performance of listed tobacco companies.

While warnings, criticism, legal action and public invective are hurled at cigarette producers, they have been some of the best investments available.

History appears to be repeating itself at James Hardie Industries, with the company at the forefront of anti-asbestos campaigns, and attempting to set up an asbestos compensation fund.

In theory, James Hardie has been playing the part of the villain. On the stock market it’s a different story where two years of share price decline appears to have been reversed and, for the first time in years, buy tips are being attached to the stock.

Goldman Sachs JBWere in a recent note to clients upgraded its short-term advice from marketperform (English translation: hold) to outperform (buy). The reason for the upgrade is that the worst of the asbestos trauma is in the past, a final resolution of the asbestos liability issue is close, and profits are rising.

According to Goldman, James Hardie is on track to lift profit from $203 million this year to $259 million in 2006, and then up to $293 million in 2007.

Briefcase, in an extension of the good work by Goldman, offers another suggestion as to why James Hardie is worth a look. Once the asbestos issue is finalised it will be in a very rare stock in that its future profits will be (almost) guaranteed by government and the unions because they both want profits to flow so the asbestos compensation fund remains topped up.

Funny old world, isn’t it, when a once-reviled company becomes everyone’s favourite.


“PEOPLE never lie so much as after a hunt, during a war, or before an election.”

–        Otto von Bismarck.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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