Neil Woodford, Wm. Morrison Supermarkets plc And How Investors Are Being Mislead

So, you’ve read a company’s annual report and are delighted to see your favourite fund manager, or management house, listed as a major shareholder. Hold your horses! All may not be as it seems.

The current disclosure rules, in practice, far from increasing transparency, are misleading unwary investors.

At the extremes, a fund manager listed with a 4.99% shareholding in a company’s annual report may, in fact, hold no shares at all — while, conversely, a manager not listed as a major shareholder may actually have a stake of up to 4.99%. And no-one — aside from the management house — is any the wiser.

Disclosure rules

To explain the anomaly, I’ll have to leave out the complexities and technical language of the Disclosure Rules and Transparency Rules (DTR) of the Financial Conduct Authority (FCA).

Essentially, a person must notify a company (and the company must notify the market) if the person’s interest in the company reaches 3%, and as certain thresholds above that level are reached. In the case of investment managers, such as Invesco Perpetual, the starting threshold for notifying the company is 5%.

The mischief arises when a management group with a notifiable holding reduces its stake back below the 5% disclosable level.

I’m going to give you a concrete example of how a below-5% notification can make a mockery of the list of major shareholders in a company’s annual report by looking at the recently published report of Wm. Morrison Supermarkets (LSE: MRW).

Morrisons’ major shareholders

For a number of years, Invesco Perpetual had an above-5% holding in Morrisons of about 133 million shares. The vast majority were held in star manager Neil Woodford‘s Income and High Income funds.

Last October it was announced that Woodford would be leaving Invesco this spring, and ‘transitioning’ the funds to new manager Mark Barnett. In November came a disclosure that Invesco’s holding in Morrisons had fallen by 22 million shares to 111 million (4.75%).

Invesco could have simply stated that its holding had gone below 5%, without detailing the new level. However, because the shareholding was given, Invesco appeared as the fifth-largest of eight major shareholders in Morrisons’ annual report (p. 73) as at 12 March 2014.

Now, because Invesco’s holding had gone below 5% in November, any further trades (aside from back above 5%), were not required to be notified under the rules. At the time I explained to Motley Fool readers that Woodford’s successor, Barnett, wasn’t a fan of Morrisons, and that I wouldn’t be surprised if Woodford got shot of the supermarket from the funds.

I’ve just dug down into the recently published annual report of the High Income fund, and found that Woodford ditched all 68 million shares between June and December. I wouldn’t be surprised if he’d also sold the 53 million shares that were held by the Income fund at the end of September, but I can’t be sure of that, because the latest report of the Income fund has yet to be published.

In theory, far from being a top shareholder, with a stake of a little below 5%, per Morrisons’ annual report, Invesco could hold no shares at all. My best guess, though, is that the holding is somewhere around the 1% mark, because one fund manager at Invesco — Ciaran Mallon — has been keen on the company.

The position of Invesco in Morrisons’ annual report can be contrasted with that of another fund manager, BlackRock, whose shareholding in the supermarket also went below 5% at the backend of last year.

In contrast to Invesco, BlackRock simply notified its stake had passed below the disclosable threshold, without revealing any further details. As such, BlackRock doesn’t appear on the list of major shareholders in Morrisons’ annual report. In reality, it’s perfectly possible that BlackRock could hold a 4.99% stake, and thus be one of the supermarket’s top four shareholders.

So, there you have it: don’t put too much store in the lists of major shareholders in company annual reports!