Saturday, 18 January 2014

Institutional Investors get it wrong too!

Just a quick reflection on institutional investor's and how they can also get things dramatically wrong when it comes to averaging down sometimes. Max Petroleum's (MXP) ii holdings were over 85% of shares in issue not that long ago (according to published notifications). We've had several ii notifications since the poor update on the 30th December. Henderson's and UBS have both been selling significant volumes of shares since then, all of them at a loss.

Henderson's have sold 108 million shares and UBS 46 million in the space of 2 weeks. This follows them stake building over the previous 3 years. Between them they owned over half a billion shares and swops in Max by the end of 2013.
Max Petrol Share Graph

The share price has been between 4p and 5p over the past 18 months but prior to that was between 10p and 18p. So let's speculate that they paid an average of 5p for their shares. That works out at around £22m invested between them.

Seven holdings RNS' have been released since the New year and we see they have sold 108m shares. UBS even increased their holding a little after the first few days of falls, only to sell them again since. But during that time the share price has done nothing but fall, so I think they "caught the falling knife" and dropped it again!

The overall ii holding now looks in the region of just under 80% of the free float, but that is still extremely high and could spell trouble for the SP if they continue to sell at the pace they have done recently.

There is a new CPR expected by the end of January which should see an increase in 2P, but if they use that as an opportunity to shift another 100m the spike will be small and very short lived.

Averaging down is a conundrum. Some swear never to do it, and others swear by it. Personally I have done it very effectively, notably on Xcite to get my average to 84p. I also did it with Lochard and that was the only way I managed to sell half my Parkmead recently at a good profit. Recently I've bought a lot more Bowleven at 36p and am very happy to have done so. But I tried it with Max and recently cut all the losses and sold out. So it's is a mixed experience. Averaging down after short term sentiment driven price falls can be successful if fundamentals remain the same, but averaging down on a company where the fundamentals are deteriorating just to feel better that your average is lower is a recipe for disaster.

I asked the question why ii's had previously bought MXP shares in such volume here and an investor tweeted me suggesting that maybe the whole company will be taken private at some point. I guess the fact that ii's are now selling out again in volume suggests this conspiracy theory is less likely and the truth is probably far more insignificant...... the ii's were averaging down just like the rest of us and on this occasion it looks like they also made a poor decision. A nice little example of schadenfreude for the weekend :)

Updated ii holdings as of 17th January 2014: (click on image to expand)

Definition of a debt for equity swap courtesy of investopedia
"A debt/equity swap is a refinancing deal in which a debt holder gets an equity position in exchange for cancellation of the debt. The swap is generally done to help a company continue to operate (after all, an insolvent company can't pay its debts or improve its equity standing). However, sometimes a company may simply wish to take advantage of favorable market conditions."

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