LONDON -- What do European investment pro Karl Van Horn, British pension manager Alastair Ross Goobey, U.S. corporate governance activist Robert A.G. Monks and Swiss financier Andre Baladi have in common? They're launching new funds designed to jump on the trend toward creating shareholder value in Europe.
While many European corporate managements espouse the cause of creating shareholder value, most experts believe companies have a long way to go. And with the impending introduction of the euro expected to generate greater convergence of economies and corporate practices, some think the trend will continue for a long time to come.
Three new funds aim to take advantage of this theme. Each joins forces of some of the best-known names in money management and corporate governance. But the funds take a variety of approaches.
The funds are:
* The European Renaissance Fund Ltd., an open-end fund with an initial target of 100 million European currency units ($109 million), is a joint effort between Mr. Van Horn's Arlington Capital Management Ltd. and Taube Hodson Stonex Partners Ltd., headed by Nils Taube, one of England's best-known investors.
* The Hermes UK Focus Fund, formed by London-based Hermes Pensions Management Ltd., manager of the U.K.'s British Telecommunications PLC and Post Office pension funds; and Lens Investment Management, Washington, chaired by Mr. Monks, longtime corporate governance activist and former Labor Department pension czar.
* ABF Euro V.A., representing a teamup between Mr. Baladi, Geneva-based co-founder of the International Corporate Governance Network, and Pierre-Henri Leroy, founder of the Paris-based corporate governance firm Proxinvest. The open-end fund has raised 240 French francs ($39 million) so far -- investors include Commercial Union PLC and Electricite de France. It is managed by ABF Capital Management, a unit of the Lagardere Group, Paris.
EUROPE'S REBIRTH
The European Renaissance fund represents a joining of efforts by Mr. Van Horn and Mr. Taube, both of whom have had celebrated careers.
Mr. Van Horn is credited with introducing U.S. pension funds to international markets during his tenure running J.P. Morgan Investment Management's London operation. He later formed American Express Asset Management and Arlington Capital Management.
The Estonian-born Mr. Taube -- who founded the U.K.'s Society of Investment Analysts in 1955 -- created Bishopsgate Unit Trust Group (later renamed St. James' Place Unit Trust Group). He runs the U.K. pooled pension fund (with property) for Jacob Rothschild Assurance.
The pair hope to combine their talents: Mr. Taube for picking undervalued midcap and large-cap stocks where companies are striving to add value for shareholders, and Mr. Van Horn for selecting smaller companies where a more activist approach is warranted.
The Cayman Islands-based fund will target small- to large-cap public companies across Europe, developing a portfolio of 20 to 30 stocks.
While the fund's target for its initial closing in late May is only 100 million ECU, Mr. Van Horn believes the fund could grow to $500 million to $1 billion.
EURO CHANGES
The rationale for the fund is that removal of restrictions on capital movements and introduction of the euro will cause far-reaching changes across European capital markets.
"Because of the single currency, there is a huge amount of rationalization to be done," said John Hodson, a principal with Taube Hodson Stonex.
This process should lead to the return on equity of continental European stocks catching up with those of U.S. companies, Mr. Van Horn said. Return on equity on U.S. stocks is about 26%, while it lags at 14% to 16% in continental Europe.
Ten years ago, however, the ROE for U.S. companies was about 10% to 14%, he said.
DIFFERENT APPROACH
Arlington Capital officials figure they can add value by exhorting portfolio companies to improve returns and abandon the "stakeholder" philosophy that caters to a variety of constituencies well beyond shareholders.
In some situations, Arlington -- as the fund's investment manager -- will communicate specific business strategies to boards of portfolio companies. In other cases, the firm might take a seat on a board and get directly involved in corporate management.
Meanwhile, Taube Hodson Stonex will pick larger-cap companies where they can piggyback on strategic changes geared to enhance shareholder value. For example, the manager already owns one-third of the minority interest in Cologne Reinsurance Co., in which General Reinsurance Corp. took a controlling stake in 1994 and now is revamping the business.
Prices of shares have nearly trebled to 2,100 deutsche marks since the manager bought its stake around 750 marks. Mr. Taube believes prices could go to 6,000 marks.
Taube Hodson Stonex officially serves as the fund's consultant, to avoid U.S. legal hassles, but Mr. Van Horn said the firms will work as a single team and will meet at least once every two weeks to hash out strategy.
Messrs. Van Horn and Taube expect the portfolio eventually will consist of 25% large-cap stakes, 25% smaller active investments and 50% investments in companies in which the fund takes a seat on the board. The percentage of stakes controlled by Mr. Taube will be higher until fund officials identify suitable situations for more activist roles.
While offering private equity-type returns -- expected somewhere in the high teens -- the fee structure is midway between a typical portfolio management fee and the high fees often charged by private equity funds. Charges are a flat 1.75% a year, eschewing the 20% carried interest that often jacks up fund charges.
HERMES LENS FUND
The Hermes Lens fund will be even more concentrated -- investing in only five to 10 medium to large stocks in the Financial Times-Stock Exchange 350 index of U.K. companies.
Down the road, a continental European fund might be created, but it is too soon now, said Peter Butler, chief executive of Hermes Lens Asset Management Ltd., the joint venture managing the fund that is 75% controlled by Hermes and 25% by Lens.
The Hermes Lens fund has initial commitments exceeding œ100 million, largely from the British Telecommunications PLC pension fund -- owner of Hermes. Mr. Monks said officials would like the fund to hit 500 million pounds.
The time is ripe in Britain for this kind of fund because of a more open attitude under the Labor government, good investment prospects and a U.K. market that doesn't require the type of house-cleaning that was needed in the United States, he said.
The fund represents a teaming of two of the world's leading corporate governance activists: Mr. Monks, who put the issue on the map as the Labor Department's pension administrator in 1984, and Mr. Ross Goobey, who has advocated corporate governance issues in Britain.
Fund officials stress they will seek to work with management, but confrontation might be necessary at times.
"How it will work with the U.K., I just don't know," Mr. Monks said. "We will try to avoid the mistakes we've made in the past six years," when Lens Fund officials perhaps exaggerated difficulties in communicating with management.
Mr. Butler said the fund will target companies that fall in the bottom rankings for returns to shareholders over one-, three- and five-year periods. Fund officials will apply corporate governance screens and then check if there is value to be realized in companies on their list.
Taking stakes of between 2% and 10% of a company's capitalization, fund officials also will seek support from fund investors who have additional holdings in target companies, Mr. Butler said.
ABF EURO FUND
The ABF Euro Fund uses an index-fund-based strategy tilted in favor of companies that meet corporate governance criteria.
ABF Capital Management will structure the portfolio to limit risk. The open-end fund will invest in 180 stocks, seeking to outperform the FT Europe index (ex-Switzerland) by about five percentage points a year (in French francs), while limiting tracking error to about three percentage points. Fees run a hefty 1% of annual net asset value plus 20% of outperformance relative to the benchmark. Subscription and redemption fees also may apply.
Messrs. Baladi and Leroy will chair an advisory committee that will pick securities offering shareholder value. Criteria include corporate communications, voting rights, board composition, corporate strategy, corporate performance, compensation, shareholder returns, and stock price.
Favorably rated stocks will be overweighted, while those rated poorly will be underweighted.
