Colchester, Essex -- Let me declare my position first, before you start this article. That way you'll know it's biased and not have to guess. I am a carpetbagger, and I am not particularly fond of the management of mutual companies.
As a very small policyholder in Standard Life I received their first defence letter last week and used it as a basis for an article on the site. As a consequence of that, and the Standard Life discussion board, the Fool was invited to meet Mr Woollard, the Aussie carpetbagger who is trying to get Standard Life to demutualise. Not surprisingly, I got to go.
I spent an hour and a half with him, and I am not ashamed to say developed an enormous respect for him and his abilities. He was younger than I expected, open-faced with a discernible Aussie accent. I started off by asking him about his association with Danny Hill, a noted stock market operator of the early eighties with something of a reputation. Fred was his London-based analyst and clearly made a lot of money out of his association. Enough to retire to Monaco and live on the proceeds. I pretended not to be jealous.
Despite this gulf we quickly struck up a rapport as we discovered that we both held more or less the same mutuals. The other difference is that he admits he will make more than £100,000 if Standard Life demutualises. I suspect he is being modest.
A value investor
Woollard claims to be a value investor. His special interest is in situations with complex capital structures that are under-researched and illiquid. Very often, he says, this can lead to substantial mis-pricing. His goal is a low-risk investment that offers between 5% and 10% return as a worst case scenario. He had long been interested in insurance companies and was therefore naturally drawn to the TEPs (traded endowment policies) market. Over the last two years he has been an active buyer in the auctions (he used Foster and Cranfield) and, as a result, owns several hundred thousand pounds worth of secondhand policies. He spent a lot of time trying to value these policies and put a price on them. Buying these policies on a regular basis allowed him to build an extensive database that helped this process enormously. But the market is not large; he estimates it has an annual turnover of £400m, of which 15% to 20% is Standard Life policies. Buying into these policies, he reckoned, would generate a situation where if it was heads he would get a small return and if it was tails he would get a lot.
What he is doing in this campaign is helping the coin turn in his favour. The cost of the exercise is about £100,000, but he is not funding that. Standard Life Members Action Group is. The big backer of this organisation is BGI, Barclays Global Investors, who stand to make £8m out of their £17m investment in these policies. That could add 10% to the company's net asset value, so it's well worth it from its point of view. Against that, though, is ranged the might of Standard Life, which has mounted a £10m campaign to maintain the status quo. Whether policyholders want their money spent that way is another matter.
On top of that Standard Life has also adopted what Woollard calls the Cap'n Bob technique: threaten to sue, like the infamous Robert Maxwell did whenever he thought he was threatened. Ned Cazalet, an authoritative insurance analyst, published a document that Standard Life did not like in the course of the debate about valuation. It said it would issue a writ on the Monday. No writ ever arrived, but the press all heard about the threat and has been very circumspect ever since. As an aside, Woollard pointed out the irony that Standard Life maintains a Corporate Action Department in its investment management division. Its role is to ginger up underperforming companies. But perhaps it thinks there is one rule for them and another rule for everybody else.
Much of the debate has of course revolved around valuation. This has generated the bizarre and, to my knowledge, unique situation where a company is actually trying to talk down its value. That particular aspect may rebound on the company, as we will discuss later.
