It has been an interesting 18 months for Midas with mergers, rumours of possible insolvency /bankruptcy, a plummeting share price and poor performance in the Midas funds.
Let me deal with the well publicised corporate troubles first. It was reported in January that Midas had breached certain banking covenants. Despite the company trading profitably and generating cash, the share price took a nosedive amid speculation about the group’s future. Don’t forget that, at this time, New Star’s much publicised restructuring was taking place and companies with perceived high levels of debt were viewed as ripe for failure.
Although Midas’ debt was manageable, breaching the covenant meant renegotiation with the bank was necessary. Some of the debt was the legacy of the merger with MitonOptimal in late 2007.
Fast-forward four months and it now looks as if the future of the company has been assured as its banker (Bank of Scotland) has agreed in principle to swap debt for equity and preference shares. It will end up owning just under 20 per cent of the large group, enough of a percentage to make a difference, but not too much to hinder the management in running the business effectively.
This will be painful for shareholders, but necessary. Directors and staff at Midas will also feel the cost in their pocket as they own just over 40 per cent of the company but it ensures the long-term future of the business.
Turning to more important issues, that is, fund performance, it is fair to say that Midas got it wrong last year. Luckily for the group, Midas’ other arm, Miton – based in Reading – got it right.
Today, I will be concentrating on the Liverpool operation and the funds managed by Simon Edwards and Alan Borrows.
The Midas balanced growth and Midas balanced income funds originated as multi-asset strategy pension funds 14 years ago with basically the same team managing them today. Having true diversification is difficult but Midas has generally proved better than most at achieving it.
Midas’s multi-asset approach effectively encompasses anything. It invests in UK equities, overseas equities, fixed interest, alternative investments, structured products, property and venture capital.
To be fair to Alan Borrows, he is not hiding behind the corporate troubles as a way of explaining the poor performance. He believes they simply were not cautious enough last year. The defensive investments chosen did not defend. Effectively, the multi-asset approach did not work. Borrows also believes they did not do enough stress- testing of the worst-case scenario. They do believe their decisions will ultimately prove to be correct but that the positions just have not worked yet.
One of the key problems they encountered was having any sort of leverage within the portfolio. Investments that were geared underperformed significantly. Another point they made about leverage was that in future they will pay more attention to who else is invested. When many hedge funds deleveraged last year, share prices in many investments plummeted. Therefore, being aware beforehand of your fellow investors may avoid this kind of situation.
It is not all bad news. It did make some decent calls last year. For example, moving out of UK property at the end of 2007 and moving into overseas property – asset values have been far better in overseas but discounts have still widened. An example of this is Speymill Deutsche, which, according to Borrows, has widened to a large discount to NAV.
I think Midas generally does have a different approach to fund management that has won it many admirers both in and out of the City. It lost some focus due to the merger with Miton and the subsequent debt issues that followed have not helped the situation. However, I think that things are now back on an even keel with the company and the funds. I think it has genuinely learnt from its experiences in 2008.
Midas has an innovative range of funds, both managed by its Liverpool team of Borrows and Edwards and also in the Reading office with Martin Gray and Sam Liddle and if you are looking for a long-term buy and hold fund I would definitely look at its range of funds.
Ben Yearsley is investment manager at Hargreaves Lansdown