A few years back, when the collapse of Carillion was a major news story, an interesting investment angle on it was that BlackRock had been shorting the company, at the same time as it managed assets for the Carillion pension fund.
When I dug into it a bit I found that BlackRock had also shorted a few other companies whose pension funds it ran money for, including the AA, Kingfisher, Serco and Pearson. The last one had a personal interest for me, as I’m a beneficiary of the Pearson pension scheme, so I wrote the trustees to complain about it.
I’d forgotten all about the issue until I was poking about in the annual report of Devonport Royal Dockyard pension scheme, as you do, which is linked to Babcock. I noticed that Marshall Wace (of Paul ‘GB News’ Marshall fame) was on the roster of investment managers employed by the scheme, having been appointed in October 2018.
I remembered that all the public sector contractors (Kier, Interserve etc) were favourites to short around that point, so I thought I’d have a look to see what Marshall Wace disclosed. Sure enough both Marshall Wace and Marshall Wace Asia had a short position in the company through 2018 and 2019, peaking around the start of 2019. The chart below is based on FCA data. The firm was also shorting Kier and Interserve at different points during the same period.
With hedge funds I do basically think ‘you pays your money…’. If you think you can generate sustainable returns this way it’s hard to complain if you end up on the wrong end of a short. Quite possibly a company like Babcock would also find its shares in one of its other managers’ portfolios on the long side. I’m sure firewalls need to be strong, since pension fund discussions can stray into issues like the strength of the employer covenant.
The stewardship questions get a bit more interesting when an investor is both long and short the same company. If your long holding is a low-fee index holding but your short is in a more expensive strategy, what is your interest in the success (or otherwise) of the target company, and what stewardship activity flows from it?