Carillion: A shareholder fail?

The publication this week of correspondence between major institutional shareholders and the chairs of the joint parliamentary inquiry into the collapse of Carillion has shed some light on this mystery.

First, as several asset managers told the committees, passive managers need to hold stocks that are still in the relevant index.

And then there are some of the investment banks that held Carillion shares simply as a hedge - holding a neutral or very small position when netted off against opposite positions they had elsewhere.

But what about active asset managers? Surely they should have seen the crisis coming? Well, some, it appears did - and it wasn't just the hedge funds taking the short positions that saw something wasn't quite right at Carillion.

Take Standard Life (now Standard Life Aberdeen), which held 10.8% of the issued share capital of Carillion in December 2015, before embarking on a "deliberate process of gradual divestment" following engagement with the business, which left it with a stake 2.1% by the end of 2016 and no shares at all by July 2017.

The asset manager said there were a number of interconnected reasons for this divestment - including concerns over the Carillion's strategy; its vulnerability to worsening market conditions; and financial management, including the strength of its balance sheet.

It added: "The board showed no inclination to drive the management to change."

Others also cut back their holdings - with Brewin Dolphin gradually reducing its shareholding during 2017, accelerating its sell-off after Carillion's 10 July profit warning.

However, there were a number of active managers that failed to divest in time.

Carillion was clearly a company where it was difficult to get a true sense of its value. But some fund managers clearly had a better idea than others.

A question we all need to ask as shareholders, however, is whether the issues at Carillion could have been spotted earlier had there been more engagement and more proper analysis of the business.

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