ValueLine: Safe but slow utilities
They are favoured by financial advisers and brokers as defensives because of their reliable revenues, but their performance does not justify their prices. Read Roger’s article at www.eurekareport.com.au.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Lloyd Taylor
:
Roger,
I find that an interesting learning aspect to AGK is that of the “utility rate of return” management culture.
It seems that the leadership management of this company, for several generations, has set their sights so low that they repeatedly overpay for everything and are blind to risk and risk management.
This is possibly evident in the history of some former managers who on leaving the company then join the boards of (usually smaller) companies and influence strategic decisions that fail to address business risk and are framed around a very a low rate of return on investment, with the consequence that the company concerned either blows-up, or struggles for years on the back of a flawed strategy. There are examples of this on the record. They find that what could be tolerated (rather buried) in a large balance sheet, proves fatal in the small enterprise.
I think it was Buffett that said words to the effect that “When bad management [culture] encounters a good business, it is the business that suffers.” Never more applicable than in the case of “the utility rate of return management culture”.
Regards
Lloyd
Roger Montgomery
:
Thanks Lloyd,
Do you have any examples in mind?
Lloyd
:
Roger,
There is a book in this subject. Let me just say connect the dots between these few examples:
New Zealand’s now extinct NGC -Natural Gas Corporation
Energy Developments
Everest Financial Group
Jack Green
Between the first and the last a common overriding theme, a failure of business risk management. Let me just say that if you go long customers and short generation you’d better have a good way to manage the risk of being held hostage by competitors long in generation.
One final dot yet to be connected (?):
Santos
Regards
Lloyd
PS By way of disclaimer I should say I know two of these business very well and I was responsible for selling a controlling stake in one of them at a share price that was never seen again.
Roger Montgomery
:
Hi Lloyd,
Thanks for the confirmation and for the qualification for everyone else’s benefit. I am content that I don’t need to be the vendor to see what I would like to make obvious to everyone. One ratio above all others…