Most of the financial press over the last few days has concentrated on the sharp fall in share value of Babcock & Brown Limited (BNB) and its related entities. Much of the commentary has turned to the underlying strategies of the B&B model and the huge levels of debt involved. Some blame has been placed at the feet of those nasty hedge funds and short selling but it would appear, as has been the case with the other major casualties so far this year, that the real story is about the level of debt being carried by the organisation and in Babcock's case the debt involved with the entities from which it draws its impressive fees.
The fall in shareholder value is a intersting point of discussion, especially for holders of these investments, but of greater interest to us has been how the expert advisers - the financial analysts - prepared their clients for and protectedthem against the fall of B&B share prices. We took a look at the analyst recommendations provided by E*Trade, a well known online trading provider, as of the 13th of June (Friday). To our astonishment (not really) we found that of the eight analyst opinions, 1 was a strong buy, 3 were moderate buys and 4 held hold opinions. The analysts included - UBS, Credit Suisse, Merrill Lynch, Deutsche Bank, Wilson HTM, Baillieu Stockbroking, Citigroup and ABN Amro. Overall a fairly positive view of Babcock. If you were an investor and subscribed to this analysis you would most probably still be invested. BNB has fallen from $11.16 at close of trade on the 6th of June and was valued at $5.25 at close of trade on the 13th, a 53% fall in value.
What this points out is that the experts, with all their research efforts, and capabilities, have not been able to predict this significant collapse in shareholder value. It provides more anecdotal evidence of the failure of an active investment approach based on supposed expert advice.
For more details on why and how an active approach to investing is not a good strategy take a look at two pages on our website - Active Managers Underperform and Our Research Based Approach - Active Fund Managers Underperform.