David Pitt-Watson may seem an unlikely candidate for Hermes Lens Asset Management. His passions are corporate strategy and politics, not stock selection. But then Hermes is no ordinary fund manager. And its pro-shareholder Hermes UK Focus Fund needed someone experienced in business management to develop shareholder activism.
Pitt-Watson cut his teeth as MD of Braxton Associates, the strategy consulting group of Deloitte & Touche,where he spent over 17 years advising boards on issues like shareholder value. More recently, he made his name as finance director of the UK’s ‘new’ Labour Party. Joining in 1997, he soon tightened the purse strings and, by the time he left, the party’s £4.5 mn election debt had been erased.
Now Pitt-Watson can put all the lessons learned from strategic planning, campaigning, politics and academe to use at Hermes UK Focus Fund. He is the strategist in a trio that already includes Sir Peter Butler, Hermes’s head of corporate governance, and investment manager Steve Brown. ‘There’s a huge gulf between the financial and the business communities,’ notes Pitt-Watson. ‘Hermes has tried to bridge that gap. We will not be acting as advisors saying Do this or that; we’ll come in as owners, asking questions and making suggestions.’
Catalytic converter
Pitt-Watson says Hermes’ ultimate objective is to act as a catalyst to help the company realize its potential while creating shareholder value. ‘We will act as responsible shareholders, identifying problems before they appear in the FT.’
That’s poles apart from the approach of most fund managers. ‘Warren Buffet once said fund management is like gin rummy,’ he recalls. ‘If you don’t like a card, you put it down and pick another. But unlike some fund managers, we’re not trying to make a fast buck. Shareholders can no longer afford to be sleeping partners.’
Instead, the Hermes team knocks on doors requesting audiences with management teams and boards. The fund typically take a 3-4 percent stake in underperforming companies in the £500mn-5bn market cap range. Such holdings are big enough for their opinions to count. ‘We’re not trying to buy a 50 percent stake but a small position to allow us to help formulate a policy for joint action,’ says Pitt-Watson. ‘And we’re in it for the long term because we appreciate that change takes time.’
Hermes uses analytical screens to assess strategy, operating businesses, board composition and balance sheet structure. But while others focus on share performance and whether companies have chronically lagged the market, the UK Focus Fund manager may give a company the benefit of the doubt if its share price drops on the back of a one-off profits fall. If the slippage is consistent, the group is put on the watch list.
A company’s relative performance to its peer group is also significant, says Pitt-Watson, as are nitty gritty items like cash flow and return on investment. This differs from their fellow fund managers, who have quarterly horizons and a portfolio of 200 stocks.
Quiet authority
Overall, the Hermes UK Focus Fund is assertive rather than aggressive. But it will flex its muscles if need be. It grabbed headlines by starting the revolt at the Mirror Group, which culminated in the ousting of the newspaper group’s CEO David Montgomery this year. That saga may have unfolded dramatically in the press, but Pitt-Watson stresses that the fund had shareholder support and worked together with the board.
Anyway, most of the work is free of such fanfare – and that’s how Hermes likes it. ‘The Mirror case was the exception rather than the rule,’ says Pitt-Watson. ‘The message we’d like to get across is that shareholder activism is a positive process and that the problems the Mirror Group experienced are common to many companies.’ Other common problems include ill-thought out M&A strategies resulting in collections of expensive businesses that fail to gel. In such cases, Hermes may suggest bringing in external consultants to help formulate a clearer strategy.
Not all companies will greet the Hermes team with open arms. ‘But they’re becoming more receptive,’ says Pitt-Watson. ‘And maybe in two to three years, more will be open to the idea of active shareholders and will even bounce ideas off of them. They can start making a difference now, though,’ he advises. ‘If they see us as large shareholders, IROs should contact us directly and not through their investment banks.’
