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Wednesday 19 January, 2011

Sherborne Investors

Letter to Shareholders of F&C

RNS Number : 7012Z
Sherborne Investors GP LLC
19 January 2011

Sherborne Investors GP, LLC


Sherborne Investors

Letter to Shareholders of F&C Asset Management plc



Sherborne Investors GP, LLC ("Sherborne Investors") is today writing to shareholders of F&C Asset Management plc ("F&C") urging them to vote in favour of all of the resolutions to be tabled at the general meeting of F&C to be held on Thursday 3 February 2011.  


The text of Sherborne Investors' letter is set out below.



19 January 2011



Dear Fellow Shareholder,


We are writing to you to ask for your support of all of the resolutions to be proposed at the forthcoming shareholder meeting of F&C Asset Management plc ("F&C" or the "Company") to be held on Thursday 3 February 2011.


At the date of this letter, associates of our firm, Sherborne Investors GP, LLC ("Sherborne Investors" or "Sherborne"), own 93,851,788 shares in F&C, representing more than 17% of the Company's total shares outstanding and we, like you, have a very substantial interest in the long-term success of the Company.  We believe that F&C's many strengths have not been reflected in the performance of its share price, and that is why we are proposing certain changes to the Company's board of directors, to bring a fresh perspective on what we believe to be in shareholders' best interests.


Our analysis of the reasons for F&C's under-performance and our strategy for bringing about improvements are set out below.



Sherborne Investors


Many readers of this letter will not have previous experience with our firm so we would like to offer a few words on our background.  Sherborne Investors has its antecedents in the mid-1970's.  Our principal investment focus has always been on companies where we felt that revisions to operations or strategy would benefit the company and all of its shareholders.  Typically, one or more of our partners has joined the board of companies in which we have invested.  Over the course of some 35 years this approach has proven to be good for these companies and, generally, rewarding for their shareholders.  Our partners have experience in several asset classes, including both private and public equities and we manage our funds for absolute, not relative, returns.

Sherborne Investors is based in New York but, since 2002, we have been actively involved with several companies that are, like F&C, listed on the London Stock Exchange.  We manage funds on behalf of institutions and do not advertise to or solicit investment funds from the general public.  More information on our firm, its investment approach and the performance of our UK investments is contained in the Admission Document of our publicly listed associated company, Sherborne Investors (Guernsey) A Limited, which may be found at



Recent performance of F&C


As part of our investment process, before buying shares in F&C we compared its performance to a peer group of comparable asset management companies: Aberdeen Asset Management plc, Henderson Group plc and Schroders plc (collectively, its "Peer Group").


Over the one and three year periods preceding the public announcement on 17 August 2010 of Sherborne Investors' shareholding in the Company, the comparisons were as follows1:



3 year % change


1 year % change












Underlying earnings per share







Dividend per share2







Price per share








Since the public announcement of Sherborne Investors' shareholding in F&C, its share price has risen by 80% compared to a 39% rise for its Peer Group over the same period.



Valuation of F&C


We have reviewed the comparative valuation of the Company, which was below that of its Peer Group, on various bases, including the ratio of the sum of stock market value and net indebtedness ("Enterprise Value") to revenues.  We consider this ratio to be particularly relevant to assessing the potential for increase in value for a company with a relatively low stock market rating, such as F&C.  For F&C and its Peer Group, just prior to the announcement of our shareholding, the valuation measures were as follows:








Enterprise Value / revenue




Price / earnings






Based on approximately equivalent reporting periods.
2 Assumes that the F&C 2010 final dividend is reduced by the same percentage (50%) as its interim dividend.


Stockbrokers' research reports have frequently attributed the relatively low valuation of the Company's shares to concerns about the non-renewal of insurance related asset management contracts, which generally expire between October 2013 and October 2015.  Our pro forma analysis of the effect on F&C, if none of these contracts were to be extended, indicated that the valuation accorded to F&C's shares was far lower than could be explained by this issue alone.  Therefore, we believe that other investor concerns also contribute to the consistently low valuation placed on F&C's shares in recent years.


In discussions with representatives of the Company's management and its board of directors we sought to learn why, in their view, investors who are well aware of the Company's strategy and plans for the future have consistently placed such a low valuation on the Company's shares.  Neither management nor the board provided a clear response, but they expressed optimism that investors would eventually come around to the board's way of thinking.  We believe that the low share rating can be directly attributed to issues such as those described below, and that, in the absence of fundamental change, investors' perceptions are, in fact, unlikely to improve.



Existing strategy


The board's stated strategy is to add to revenues in areas that have higher gross fees than those in F&C's traditional businesses.  We assume that the board has established criteria for net profit margins or other financial measures and that it has assessed F&C's comparative advantages in these areas in order to ensure that they will add to shareholder value, although these criteria have not been stated publicly, to the best of our knowledge.


The Company's principal source of revenue growth in recent years has been the acquisition of two asset management companies, REIT in 2008 and Thames River Capital in 2010.  Both acquisitions appear to have brought with them well regarded management teams which will, we hope and expect, bring rewards to F&C in the future.  Our review of the related public acquisition circulars indicates that the results of both businesses are more reliant on 'performance' or other non-recurring fee streams than F&C's traditional businesses which  predominantly rely on less volatile management fee income.  Based on management fee income alone, both acquisitions appear to have been only modestly profitable.


We believe that investors typically ascribe lower valuation multiples to earnings from more volatile sources, such as performance fees, than to those from more recurrent sources, such as annual management fees.  The board's strategy is therefore, in our opinion, diverting the Company's capital and other resources away from activities that are accorded high valuations by the market towards riskier activities that the market does not value highly.  Such a strategy does not appear to be a formula for maximisation of shareholder value, however well it may be implemented.






Implementation of strategy


Given F&C's relatively low share rating, expansion via acquisition rather than organic growth risks major dilution to the interests of current shareholders.  The Company's acquisition of REIT involves the investment of up to £160 million and its acquisition of Thames River Capital involves the further investment of up to approximately £180 million, including contingent payments and substantial expenses incurred in the transactions.  The combined resulting cost of these two acquisitions could amount to approximately £340 million, which is greater than the entire stock market value of F&C, approximately £270 million, at the date Sherborne's shareholding was made public.  Clearly, the total amount of growth that it is practical to acquire in this manner is severely limited, as the combined assets under management ("AUM") of REIT and Thames River Capital amounted to only 8% of F&C's total AUM.  Even if the acquired businesses turn out to have significantly higher profit margins than F&C's traditional businesses, it seems to us that they are likely to prove to be highly dilutive to shareholders' interests, especially if these profits incorporate a large element of volatile performance or other non-recurring fees which carry a lower market rating.


Potentially equally damaging is that if performance fees were to decline in the year after F&C has made all of the contingent payments to the sellers, shareholders' interests would be very materially harmed.



Financial policy


Borrowings arising from acquisitions have caused the net indebtedness of the Company to more than double over the period from 2006 to 2010.  Contingent payments of up to £100 million to the sellers of REIT in the future could cause net borrowing to double again.


The credit rating on the Company's senior debt is BBB-, which is the lowest level for securities to be considered 'investment grade'.  As the Company's borrowings and financial risk levels increase, dividend payments may be further jeopardised, with a consequent impact on the share price.


In September 2009, the board authorised a debt exchange.  This exchange resulted in F&C reporting a one-time accounting gain, but entailed higher interest payments, and shortened the maturity of £135 million of the Company's indebtedness by 10 years, such that it now must be repaid in 2016.  In its circular (the "F&C Circular"), the board cites its "strategy of strengthening its balance sheet ahead of the 2016 refinancing deadline" as a reason for its second dividend cut in 3 years.  Until the board's debt exchange, only 11 months prior to this dividend cut, there were no borrowings that required refinancing in 2016.  We therefore conclude that the dividend cut, which was not well received by investors, became inevitable at the time of the debt exchange.  We believe that the Company's financial policy, of which this is an example, has caused reductions in shareholder value that were avoidable.


If elected to the board, our nominees would expect to pursue more conservative financial policies in the future.


Sherborne Investors' nominees


Edward Bramson


Mr. Bramson is currently a partner of Sherborne Investors and chairman of Nautilus, Inc.  He previously served as chairman of Spirent Communications plc, Elementis plc, 4imprint Group plc and Ampex Corporation.


Ian Brindle


Mr. Brindle was UK chairman of PricewaterhouseCoopers and deputy chairman of the Financial Reporting Review Panel.  He currently serves as chairman of Sherborne Investors (Guernsey) A Limited and as a non-executive director on the boards of Spirent Communications plc, Elementis plc and 4imprint Group plc.


Derham O'Neill


Mr. O'Neill was formerly a senior partner of Clifford Chance LLP where he founded, developed and managed the private equity practice over a period of 17 years.  He has also served as a member of the Appeals Committee of the London Stock Exchange's AIM market.  Mr. O'Neill was previously a non-executive director of Cedar plc, Georgica plc and Schroder Venture Managers Limited.  He was also chairman of SCOTTY Group plc and Storeys Group Limited.  Since February 2008, Mr. O'Neill has been chairman of Schroder Asian Property Managers Limited, a fund management company.


All of our nominees are experienced in financial and business matters and are, we believe, fully capable of understanding the issues confronting F&C and participating in a responsible and constructive way in the deliberations of its board of directors.



A proven approach to strategy development


In its previous UK investments, Sherborne's nominees have followed the same procedure as we propose to adopt for F&C.


First, our nominees would work with the board to conduct a thorough review to identify the elements of strategy or operations that are harmful to shareholders' interests and put a halt to further damage.


Once this has been accomplished, our nominees would work co-operatively with the other directors and with management to identify the Company's most valuable comparative advantages and to develop a strategy and operational plan to bring the long-term focus of the Company's people and its other resources to the areas that will be most highly valued by investors.  This focus will, we believe, also result in enhanced opportunities for F&C employees and clients.  Once the plan has been agreed to, we would expect the board to present and explain it to shareholders in significant detail, as has been the case in our previous UK investments.


This more considered and inclusive approach to strategy development has worked well at other companies in which Sherborne has invested and has proven to be rewarding for shareholders.  We have discussed this method of proceeding with the F&C board and they have not advanced any information that explains why it should not be expected to work again in this case.



Corporate governance


The Company has pointed out that the service of our nominees on the board or the appointment of Mr. Bramson as chairman of the board may not be in compliance with the provisions of the UK Corporate Governance Code (the "Governance Code").  The Governance Code generally provides for boards to comply with it or explain, to shareholders, the reasons why they have not done so.  If our nominees are elected to the board, it is, as stated in the F&C Circular, also an implicit outcome of the shareholder vote that Mr. Bramson should be appointed as chairman by the reconstituted board.  Therefore, the required explanation to shareholders who have already expressed themselves in favour of the resolutions should be relatively straightforward.


Mr. Bramson, if elected, intends to offer himself for re-election to the board annually rather than at the three year interval set for the other directors, so that if shareholders' desires should change in the future it would be easier for them to remove him from the board.  In three previous situations at London Stock Exchange listed companies to which Mr. Bramson and other Sherborne nominees have been appointed in similar 'comply or explain' circumstances, shareholders have not subsequently expressed an adverse opinion.





As the board pointed out in the F&C Circular, some good progress has been made in a few areas, particularly investment performance, and we propose no changes to things that are working well.  As shareholders, we are delighted to acknowledge these successes and to give full credit to the employees and to any board members who contributed to them.  Sadly, any benefit of these efforts to shareholders appears to have been negated by the board's strategy and financial policy.  A strategy that employs large amounts of shareholders' capital and expensive borrowings to pay for high-priced acquisitions, in areas that the markets do not value highly, seems flawed in principle and in practice.


Despite differences in detail, the businesses of F&C and Sherborne Investors are quite similar, in that both of our firms invest funds for our clients in marketable securities.  We have many years of experience in the investment field and, therefore, fully appreciate the great importance of its people to F&C, and indeed to any business.


The board's level of concern over the impact that three new directors would have on a board totalling, if all of the resolutions are passed, nine members seems excessive, particularly since our approach has worked well before.  Our nominees would simply encourage the board to apply sound business principles in a consistent manner.  This is not something that employees, clients or shareholders need to fear.

Our proposals do not imply any personal criticism of the current directors, including Messrs. MacAndrew and Larcombe.  We propose to remove them solely because they are, respectively, the chairman and the longest serving independent director, other than the senior independent director, of the Company.  We believe that the board members have acted diligently in what they consider to be the best interests of shareholders.  We respectfully disagree with their view of how best to represent those interests and believe it is, therefore, appropriate for shareholders to express their wishes, directly, in a shareholder meeting.


A shareholder meeting may be somewhat disruptive in the short-term, which we regret.  However, the continuation of current policies could lead to far worse consequences in the future.  As a major shareholder in the Company, we have a significant interest in the long-term success and prosperity of F&C, which is fully aligned with that of all other shareholders.  We sincerely believe that a fresh perspective on the board is now called for and respectfully ask you to vote IN FAVOUR OF all of the resolutions.


Yours faithfully,



Sherborne Investors GP, LLC





Financial Dynamics                                                                                            +44 (0)20 7269 7170

Jonathon Brill

Billy Clegg





By now you should have received a notice of general meeting of F&C ("GM") to be held at 11 a.m. on Thursday 3 February 2011 at the offices of JP Morgan Cazenove, 20 Moorgate, London EC2R 6DA, United Kingdom ("Notice of GM").

You will find enclosed with the Notice of GM, a form of proxy for use at the GM ("Form of Proxy").  Whether or not you intend to attend the GM, Sherborne Investors would urge you to complete the Form of Proxy to vote IN FAVOUR OF all of the resolutions and to appoint Edward Bramson as your proxy for the GM.

The Form of Proxy must be completed and signed and sent or delivered, together with any power of attorney or other authority (if any) under which it is signed, so as to reach F&C's registrars, Equiniti, at Aspect House, Spencer Road, Lancing BN99 6GQ, United Kingdom as soon as possible but in any event no later than 11 a.m. (UK time) on Tuesday 1 February 2011.  The return of the completed Form of Proxy will not prevent you from attending the GM and voting in person if you wish to do so.

You may also vote or lodge your proxy electronically via the internet.  To vote or lodge your proxy electronically, you should access the online voting service, "sharevote", offered by F&C's registrar, Equiniti, at  The deadline for voting or lodging a proxy via sharevote is 11 a.m. (UK time) on Tuesday 1 February 2011.  To use the sharevote service you will need to use the unique personal identification details (Voting ID, Task ID and Shareholder Reference Number) that are printed on your Form of Proxy.

CREST members may also appoint a proxy or proxies through the CREST electronic proxy appointment service by utilising the procedures described in the CREST Manual (  CREST Personal Members or other CREST Sponsored Members, and those CREST members who have appointed (a) voting service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf.



If you are in any doubt about the action you should take, you are recommended to seek your own financial advice immediately from your stockbroker, bank manager, solicitor, accountant or other independent professional adviser duly authorised under the Financial Services and Markets Act 2000.

The contents of this announcement should not be construed as legal, investment or tax advice, nor should it be construed as an invitation to purchase or sell any of your shares in F&C.  This announcement is being circulated to shareholders of F&C by Sherborne Investors for the purpose of supporting resolutions proposed by Pershing Nominees Limited (for and on behalf of Sherborne Investors and its associates) as a member of F&C pursuant to section 303(2)(a) of the Companies Act 2006.

Sherborne Investors believes that certain statements in this announcement may constitute "forward-looking statements".  Forward-looking statements are necessarily based on estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and risks, many of which are subject to change.  As a consequence, current plans, anticipated actions and future financial condition and results may differ from those expressed in any forward-looking statements made by or on behalf of Sherborne Investors.  Additionally, forward-looking statements speak only as of the date they are made and Sherborne Investors undertakes no obligation to release publicly the results of any future revisions or updates it may make to forward-looking statements to reflect new information or circumstances after the date of this announcement or to reflect the occurrence of future events.


- Ends -

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