Saturday, January 31, 2009

Are Directors Buying Shares In Their Own Companies?

Before deciding whether to buy shares in any given company, there are a number of things I look at. One of things I check out is what the insiders are doing. By this I mean looking at whether the directors of the company I'm interested in have been buying shares recently (or maybe selling shares instead). Since I invest on the Australian stock market, I'm able to find this information fairly easily as companies listed on the Australian Stock Exchange (ASX) are required to report directors transactions to the market.

So why should I care whether the directors are buying or selling shares? Well, the directors of any listed company have (or maybe I should say "should have") a pretty good idea of the prospects of their business. If they're buying shares then it's probably a sign that they are comfortable with the future of the company and see value in its stock at the prevailing market prices. Similarly, if you notice that a director is selling shares in their own company, it could be a sign of trouble to come - maybe they consider the stock to be over valued or they could be anticipating weakness in the business in the future. However, this is by no means foolproof. It's entirely possible that the director is selling just because they need to money for something else.

One of the more interesting Change of Director`s Interest Notice's issued last week was for Harold Mitchell who bought 295 thousand shares in Mitchell Communication Group Limited (ASX Code MCU). Mr Mitchell now holds in excess of 83 million shares in the company. The purchase price was around 45 cents per share and compares to a current price of 33 cents. MCU has traded as high as 99 cents in the last year after peaking at over $1.40 in 2007.

Mitchell Communication Group is a diversified media group and from what I understand, Harold Mitchell is known as a mover and shaker in the media buying industry within Australia. The most recent purchase is one of a number of recent acquisitions of MCU shares by Mr Mitchell.

Sunday, January 25, 2009

Ethical Managed Funds

What is ethical investing and why should you choose an ethical fund manager?

Ethical or socially responsible investing is not an easy term to define. I always considered it to mean not buying shares in companies which operate in sectors such as gambling, tobacco, alcohol and mining of minerals such as uranium which might be considered damaging to society or the environment. So I always figured that an ethical managed fund would be one which holds investments outside of these sectors.

Having done a done a little research on this topic, it seems that this area is more complex than I first thought. According to the Responsible Investment Association of Australasia, there are a number of methods which fund managers (or investors generally I guess) can adopt in their approach to ethical investments.

Broadly speaking, there are 4 different methods. These are Negative Screening, Positive Screening, Best Of Sector and Sustainability Analysis.

Negative screening is essentially what I've already described. The fund manager will simply avoid investing in certain sectors of the stock market like those I mentioned above, but beyond that, they can buy shares in whatever companies they like provided they don't operate in those industries.

Positive screening on the other hand aims to identify specific companies whose operations are likely to have a positive impact on society and the environment. I guess you could consider this a more active approach.

The best of sector approach does not discriminate between industries but rather will seek out investments, within each sector, in a company which is seen to be the most 'ethical' in that sector. So the fund manager may invest in a company within the gambling industry but they would choose the company which could be considered a leader when it comes to sustainability.

Finally, sustainability analysis involves analysis of the entire stock market using information from a broad range of sources then ranking companies based on a set of standard criteria.
Within Australia, the main players in this space seem to be Hunter Hall and Australian Ethical Investment.

Hunter Hall run a number of funds and seem to have a bias towards value investing. According to their website, Hunter Hall employ a negative screen which "restricts investment in companies that derive revenues associated with the sale of armaments or tobacco, gambling, cruelty to animals, destruction of the environment and uranium mining". You can choose from both listed and unlisted funds.

Australian Ethical Investment offer 5 different retail funds and a superannuation fund. As far as I can tell they seem to use the positive screen approach to their investing. And I'm sure I read that both Hunter Hall and Australian Ethical Investment donate a set percentage of profits to charity each year.

An interesting piece of information I picked up during my research is that the name of the Marketing Manager of Australian Ethical Investment is Roger Green. Does anyone else find that amusing?

One thing I kept reading was that ethical managed funds are more likely to underperform the market because they are restricted in what they can invest in. Given the recent resources boom on the Australian stock market, I'd be curious to know how these funds have fared over the past few years when compared to their 'less ethical' peers.

But even if there was evidence of underperformance, I suspect that if, as an investor, you feel strongly enough about social issues or about the environment to choose an ethical managed fund, then wearing a potential performance hit for your beliefs probably wont bother you too much.

Monday, January 5, 2009

Australian Stock Market Floats For 2008

New company floats on the Australian Stock Exchange copped an absolute pasting during 2008. I can't be any more plain than that. Very few companies whose shares listed on the ASX during 2008 ended up which a share price exceeding the issue price.

Float activity was down on previous years as well, as measured by either the number of new issues or by the aggregate amount of capital raised. But this was to be expected. With the All Ordinaries down 43% for the year and panic stricken investors heading for the exits at the first sign of trouble only the very brave or very needy chanced their arm with an IPO. I suspect most executives who had intentions to float in 2008 would have delayed their plans until a calmer mood prevailed over world stock markets.

Measured by the number of new company floats, 2008 was a poor year, with only 72 new listings. This is the lowest since 2002 and is a far cry from the peak in 2007 of 242 new company floats. Also, only 2 billion dollars was raised last year - once again well behind the 9.7 billion dollar figure for 2007.

Of the 72 floats, only 2 finished with their heads above water.
  • Phosphate Australia (ASX:POZ) finished the year at 44 cents after listing in July at an issue price of 20 cents - an impressive 120% gain.
  • Heartware (ASX:HIN) finished up 20% at 60 cents after an Initial Public Offering at 50 cents in November.

An honorable mention should go to Tiaro Coal who have managed to break even by finishing the year at 20 cents - the same as the issue price back in March when the Australian Stock Exchange was first graced with it's presence.

After that it gets ugly. More than two thirds of new listings finished the year at less than 40% of their original issue price. The companies floated were mostly small with lots of mining and exploration plays amongst them. But there is one exception...

BrisConnections floated at the end of July at an issue price of $1.00. Since then it has plummeted like a stone to 0.1 cents - not $0.10, but $0.001 or a tenth of a cent. The company plans to construct a toll road in Brisbane connecting the Airport to some other stuff (I don't know the geography of Brisbane very well). I believe there are lots of tunnels involved.

BrisConnections has so far raised $400M out of its total $1.2B - and this is where it gets interesting. You see the shares (stapled securities to be more accurate) were issued on a partly paid basis with 2 further installments due (each of $1.00) over the next couple of years. This means the the purchase of each one of these securities at the knock down, bargain basement price of $0.001 buys you the obligation to stump up another $2.00 down the track.

I can almost hear your brain ticking over as you ponder that one. Let's say you have a lazy $500 to 'invest'. At the going rate of a tenth of one cent per security, your 500 dollars (plus brokerage of course) will buy you 500,000 of these little beauties. "Not bad!", you say. Then you do the maths and work out that over the next 2 years you'll need to fork out an additional 1 million dollars - that's $1,000,000 - to make the installment payments.

And just to make sure you are in no doubt as to your legal requirement in this matter, the kind folks at BrisConnections sent out a letter to shareholders early last month reminding shareholders of their obligation to make the installment payments. In the letter, they stated that "BrisConnections will take a vigorous approach to collecting any such outstanding payments."

Finally, I should point out that, despite the tone of this article, I don't mean to imply that all of the floats to hit the Australian stock market in 2008 were of poor quality, although I suspect some of them may well have been. Value investors would know that a fall in price does not necessarily mean the company is no good. On the contrary, value investors may well want to pick through the carnage of last year's IPOs to see if there are any hidden gems which may be worthly of closer inspection.

Saturday, January 3, 2009

Australian Stock Market Worst Annual Return Ever?

The Australian stock market gave investors a wild ride during 2008. It was not a year for the fainthearted. An investment in Australian shares as measured by the All Ordinaries index is down by almost 43% - that really hurts!

Graph of Australian shares for 2008Australian Stock Market Chart - 2008

The All Ords started out the year at 6,462.8 and finished at 3,659.3. Along the way it touched a high of 6,462.8 on the first trading day of the year before plunging to a low of 3,201.5 on 21 November. As far as I can tell, this is the worst performance recorded since 1900.

Australian Shares Not All Bad News...

Unless you've had to sell shares, the good news is that this is only a paper loss. Granted, it might be some time before the sharemarket regains the levels it was at in 2007, but if you have a long term view and focus on the fundamentals of the businesses you're invested in, there should be light at the end of the tunnel.

Even better, if you have cash available, there are some screaming bargains on offer at the moment. I think that prudent and discerning investors will do very well in Australian shares over the medium term. But I suspect there could be more volatility on the way.

The All Ordinaries has recovered slightly from it's low point in November but as we've seen in recent months fear and panic can wipe out any tentative gains in the blink of an eye. Baring any more catastrophes (by that I mean large corporate collapses or bailouts) the next interesting time will be when listed companies start reporting their financial results to the ASX in a month or two.

Until now, the market has been anticipating the impact of the global slowdown in economic activity. Once we start seeing some actual financial results, we'll have a much better idea of how the various sectors, and the individual companies within those sectors are faring.